holding that an agency’s new “rental fees” were a substantive rule because the agency calculated them using a new methodology
How later courts described this case
- holding that an agency’s new “rental fees” were a substantive rule because the agency calculated them using a new methodology
Written by the judges who cited it.
The opinion
United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 4, 2010 Decided January 4, 2011
No. 09-1120
CITY OF IDAHO FALLS, IDAHO, ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
Consolidated with 09-1315
On Petition for Review of Orders
of the Federal Energy Regulatory Commission
Charles R. Sensiba argued the cause for petitioners. With
him on the briefs were Sam Kalen and John H. Clements.
Beth G. Pacella, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. On the brief
were Thomas R. Sheets, General Counsel, Robert H. Solomon,
Solicitor, and Judith A. Albert, Senior Attorney.
Before: TATEL and GARLAND, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
2
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: In 1987, the Federal Energy
Regulatory Commission issued a regulation that used a United
States Forest Service rental fee schedule to set annual charges
for hydropower projects occupying federal land. Since then,
FERC has issued annual updates to reflect the Forest
Service’s revised fee schedule. In 2008, however, the Forest
Service began using a significantly different valuation
methodology than the one FERC had reviewed and endorsed
in its 1987 regulation. FERC nonetheless used the revised
Forest Service schedule when it issued its 2009 update—
resulting in substantially higher rates to many licensees.
Petitioners and intervenors in this case, a group of
hydropower licensees who pay FERC’s annual rental fees,
challenge the Commission’s 2009 update, arguing that it was
required to go through notice and comment before it could
impose charges according to the revised Forest Service
methodology. For the reasons set forth in this opinion, we
grant the petition and vacate FERC’s 2009 rental fee update.
I.
Under section 10(e)(1) of the Federal Power Act (FPA),
16 U.S.C. § 803(e)(1), licensees of hydropower projects
regulated by FERC must “pay to the United States reasonable
annual charges in an amount to be fixed by the Commission”
to, among other things, “recompens[e] [the federal
government] for the use, occupancy, and enjoyment of its
lands or other property.” FERC and its predecessor, the
Federal Power Commission, have utilized various
methodologies to set these land use charges. Originally, the
Federal Power Commission calculated annual fees through
individual project appraisals. See Update of the Federal
Energy Regulatory Commission’s Fees Schedule for Annual
Charges for the Use of Government Lands (“Rehearing
3
Order”), 129 FERC ¶ 61,095, at 61,430 (2009). When such
appraisals proved inefficient, FERC adopted national per acre
land values, which it used in combination with an annual rate
of return to set land use fees. Id. at 61,430–31.
In 1985, the Department of Energy’s Inspector General
issued a report finding that FERC’s methodology led to
significant under-collection because it relied on outdated land
value averages. See id. at 61,431. The Report recommended
that FERC revise its regulations so that its fees would reflect
current fair market value and also suggested that the
Commission cease using a national average that failed to
account for land value variations. See id. Responding to
these and other recommendations and following notice and
comment rulemaking, FERC issued Order No. 469, which
established a new methodology for assessing annual rental
fees. See Revision of the Billing Procedures for Annual
Charges for Administering Part I of the Federal Power Act
and to the Methodology for Assessing Federal Land Use
Charges, Order No. 469, 52 Fed. Reg. 18,201 (May 14, 1987).
In that Order, FERC explained that it would use the schedule
published by the Forest Service to determine rental fees for
so-called linear rights-of-way across National Forest System
lands. Id. at 18,202. A “linear right-of-way” is a “right-of-
way for a linear facility, such as a road, trail, pipeline,
electronic transmission line, fence, water transmission
facility, or fiber optic cable.” 36 C.F.R. § 251.51.
As described in Order No. 469, the Forest Service
methodology was based on a survey conducted jointly by the
Forest Service and the Bureau of Land Management (BLM)
of market values for the types of land those agencies allowed
linear rights-of-way to occupy. See Order No. 469, 52 Fed.
Reg. at 18,205. Using the survey data, the Forest Service and
BLM assigned each county in the United States (excluding
4
counties in Hawaii and Alaska) to one of eight different fee
zones based on the county’s “raw land values,” with values
ranging from $50 per acre for Zone One to $1,000 per acre for
Zone Eight. See Linear Rights-of-Way Fees, 51 Fed. Reg.
44,014, 44,017 (Dec. 5, 1986). To determine rental fees, the
Forest Service multiplied the applicable zone values in its
index by two additional factors designed respectively to
account for the land use impact of different rights-of-way and
to provide the government with a reasonable rate of return for
using its land. See id. at 44,014–16. The Forest Service also
included an annual adjustment to account for inflation. See
id. at 44,017.
In adopting the Forest Service fee schedule, FERC
acknowledged that the BLM-Forest Service valuation
methodology was “not precisely fitted to hydroelectric
projects.” Order No. 469, 52 Fed. Reg. at 18,205. FERC
nonetheless concluded that the linear rights-of-way zone
values were “the best approximation available,” and it noted
that “[m]ost commenters” shared its view that the Forest
Service index “would be more representative of the fair
market value of the type of land most often used for
hydroelectric projects than any of the other . . .
methodologies” proposed in the Commission’s initial
rulemaking notice. Id. Among the alternative methodologies
FERC considered and rejected was a proposal to use a land
value index published by the United States Department of
Agriculture that provided state-by-state per acre averages for
the value of farm land and buildings. According to FERC,
“[c]ommenters almost unanimously object[ed] to the use of
[this] agricultural land value index,” arguing that farm land
values were typically much higher than the values of federal
land used for hydropower projects and that substantial
adjustments to the index would have been needed to account
for the value of farm buildings, arable land, and private
5
ownership. Id. at 18,206. FERC agreed, concluding that
“[t]he agricultural index would require . . . major
adjustments” and so would be an inefficient metric for the
value of land used by hydropower projects. Id.
At the end of Order No. 469, FERC promulgated
Regulation 11.2, which implemented the order by amending
the Commission’s FPA regulations. The provision relevant to
this case, section 11.2(b), provides that “[p]ending further
order of the Commission and subject to adjustments as
conditions may warrant, annual charges for the use of
government lands . . . will be set on the basis of the schedule
of rental fees for linear rights-of-way”—an appendix that
reproduced the Forest Service schedule. 18 C.F.R. § 11.2(b).
The provision added that “[t]he Commission, by its designee
the Executive Director, will update its fees schedule to reflect
changes in land values established by the Forest Service. The
Executive Director will publish the updated fee schedule in
the Federal Register.” Id.
For over twenty years from 1987 to 2008, BLM and the
Forest Service made no changes to their linear rights-of-way
fee schedule except for the annual inflation adjustment.
Despite generally recognized increases in land value in most
areas, the agencies’ zone values remained static. See
Rehearing Order, 129 FERC at 61,432. In accordance with
Regulation 11.2, FERC’s Executive Director published annual
fee schedule updates to reflect the Forest Service’s most
recent inflation-adjusted schedule. See id. at 61,432 & n.19.
In 2005, Congress, concerned that zone values for linear
rights-of-way had become outdated, directed both the Forest
Service and BLM to revise their per acre rental fee zone
values “to reflect current values of land in each zone.” 42
U.S.C. § 15925. Following notice and comment, BLM issued
6
the required update in October 2008. See Update of Linear
Right-of-Way Rent Schedule (“BLM Order”), 73 Fed. Reg.
65,040 (Oct. 31, 2008). Days later, the Forest Service
published its own notice, formally adopting BLM’s revisions
to the linear rights-of-way fee schedule. See Fee Schedule for
Linear Rights-of-Way Authorized on National Forest System
Lands, 73 Fed. Reg. 66,591 (Nov. 10, 2008).
The methodology BLM and the Forest Service used to set
rates in this revised schedule differed in several significant
ways from their previous methodology, with each input in the
agencies’ calculation formula changing in some respect. The
most significant change, and the one the parties focus on here,
related to zone values. Responding to Congress’s command
to use up-to-date data, the two agencies chose to replace their
internally-generated 1986 index with a new index called the
Census of Agriculture, which the National Agricultural
Statistics Service (NASS) publishes every five years. The
NASS Census reports average per acre land and building
values by county (or other relevant geographical unit) for
each state and lists individual values for cropland, woodland,
pastureland, rangeland, and a broad “other” category that
includes non-commercial, non-residential building lots,
wasteland, and land with roads and ponds. BLM Order, 73
Fed. Reg. at 65,043. BLM and the Forest Service determined
not only that the NASS Census is a reliable data source, but
also that the land types measured in the census are
comparable to land they administer. Id. To set zone values
for each county using this data, the agencies employed the
average per acre land and building values from the NASS
Census and then reduced them by twenty percent to eliminate
the added value of irrigated cropland and land encumbered by
buildings. Id. at 65,043–44. In addition, because the land
values contained in the NASS Census exceeded those in the
1986 BLM-Forest Service survey, the agencies increased the
7
number of zones from eight to twelve, with zone values
ranging from $250 per acre for Zone One to $100,000 per
acre for Zone Twelve. See id. at 65,045–46, 65,049.
In January 2009, and setting the stage for the issue before
us, FERC sent letters to all hydropower licensees apprising
them of the Forest Service’s revised fee schedule and
explaining that the new schedule would cause annual federal
land use charges to “increase substantially” for “many
projects.” Acting pursuant to Regulation 11.2, FERC’s
Executive Director subsequently issued the Commission’s
annual fee update notice on February 17, which incorporated
the Forest Service’s new rate schedule. Update of the Federal
Energy Regulatory Commission’s Fees Schedule for Annual
Charges for the Use of Government Lands,” (“2009 Update”),
74 Fed. Reg. 8,184 (Feb. 24, 2009) (codified at 18 C.F.R.
pt. 11, app. A). Like all previous updates issued by the
Executive Director, the notice was published in both the
Federal Register and the Code of Federal Regulations.
A group of licensees, including petitioners and
intervenors in this case, filed a timely rehearing request. The
group contended that the 2009 Update amounted to a
rulemaking that FERC improperly issued without notice and
an opportunity for comment. They also argued that by
adopting the new Forest Service land valuations without any
independent inquiry, FERC unlawfully delegated to that
agency its FPA section 10(e)(1) responsibility to set
“reasonable annual charges” for hydropower licensees. 16
U.S.C. § 803(e)(1).
Denying the rehearing petition, FERC first stated that the
petition was procedurally improper because the licensees
were either effectively challenging the final actions of other
agencies (the Forest Service and BLM) or collaterally
8
attacking Regulation 11.2. See Rehearing Order, 129 FERC
at 61,433–34. Notwithstanding these purported procedural
failings, FERC addressed the merits and concluded that no
notice and comment was required prior to the 2009 Update
because the update did not qualify as a legislative rule. FERC
explained that the 2009 Update was not a rulemaking of any
kind, but was instead a procedural action required by
Regulation 11.2. Alternatively, FERC determined that even if
the 2009 Update were a rulemaking, it was an interpretive
rule rather than a legislative rule because it “did not create
new law, rights, or duties” but rather “simply informed
licensees of the updated fees” according to the procedure the
Commission had followed since 1987. Id. at 61,434–35.
Central to FERC’s reasoning was its insistence that
although the Forest Service and BLM concededly modified
their land valuation methodology prior to the 2009 Update,
the Commission’s own methodology—issuing updates based
on the Forest Service rental fee schedule for linear rights-of-
way—remained constant. FERC acknowledged that changes
the Forest Service and BLM made to their fee schedules
“might be cause for the Commission to reexamine the
propriety of using the BLM-Forest Service calculations,” but
it nonetheless contended that the Executive Director’s
ministerial act of issuing the 2009 Update “cannot be
considered a change in Commission regulation.” Id. at
61,436. FERC explained that although Order No. 469
“discuss[ed] various methodologies,” Regulation 11.2 itself
adopted the BLM-Forest Service index as the basis for
determining its land use fees without recognizing any
“exception for changes in the underlying methodology of
BLM and the Forest Service.” Id. at 61,434–35. Indeed,
FERC observed, the regulation “specifically contemplates”
that the Forest Service’s land values might change and that
the Commission would continue to use them. Id. at 61,435.
9
Responding to the licensees’ criticism that the new Forest
Service zone value index was based on agricultural land
values and that FERC had expressly rejected the use of
another agricultural land value index in Order No. 469, the
Commission insisted that the data now being used by the
Forest Service and BLM differed from the index at issue in
Order No. 469. Therefore, although FERC took no position
on “whether the new BLM-Forest Service methodology
results in a reasonably accurate valuation of federal land used
for hydropower purposes” because it believed the question
was not properly presented, it found no conflict between the
methodological change by the Forest Service and BLM and
the Commission’s own prior conclusions in Order No. 469.
Id. at 61,436.
FERC also rejected the licensees’ argument that by
issuing the 2009 Update, it improperly delegated to other
agencies its section 10(e)(1) responsibility to fix reasonable
land use charges. Noting that it adopted the BLM-Forest
Service linear rights-of-way fee schedule in Order No. 469
after full review, FERC asserted that its decision to rely on
other agencies for data updates was consistent with its
statutory responsibilities. See id. at 61,436–37.
One Commissioner dissented on the ground that FERC
“ha[d] not assessed” the new BLM-Forest Service
methodology to determine whether it was appropriate for
arriving at reasonable annual charges for hydropower
licensees. Id. at 61,437. Lamenting that the decision to forgo
public comment “reduces confidence in the fairness of
government process,” the dissent argued that the majority
“should have opened a notice of inquiry or other public
rulemaking process” before accepting the new methodology
and the higher rates it produced. Id.
10
This petition for review followed. Urging us to vacate
the 2009 Update, the licensees argue that FERC failed to
provide notice and an opportunity for public comment as
required by section 553 of the Administrative Procedure Act
(APA), 5 U.S.C. § 553. They also contend that the 2009
Update violates FPA section 10(e)(1) and that FERC acted
arbitrarily and capriciously in denying the rehearing request.
II.
The key issue before us is this: in promulgating the 2009
Update, did FERC change its methodology for setting rental
fees charged to hydropower licensees from the methodology it
had adopted in Order No. 469 and Regulation 11.2? If the
answer is yes, then FERC violated APA section 553. Having
established through public rulemaking in Regulation 11.2 a
legally-binding methodology for setting future rates for
licensees, FERC may modify that methodology only after
notice and comment. See Alaska Prof’l Hunters Ass’n, Inc. v.
FAA, 177 F.3d 1030, 1034 (D.C Cir. 1999) (“ ‘Rule making,’
as defined in the APA, includes not only the agency’s process
of formulating a rule, but also the agency’s process of
modifying a rule.” (citing 5 U.S.C. § 551(5)); Batterton v.
Marshall, 648 F.2d 694, 705–09 (D.C. Cir. 1980) (holding
that the Department of Labor’s adoption of a new
methodology for collecting and computing employment
statistics was a rule requiring notice and comment where
those statistics were used as part of a statutory formula for
allocating job program funds between states). Conversely, if
the answer is no—that is, if as FERC held in its Rehearing
Order, the 2009 Update was mandated by Regulation 11.2 and
was issued in accordance with the Commission’s long-
standing interpretation of that regulation—then it is equally
clear that notice and comment rulemaking was unnecessary.
Whether characterized as an interpretive rule or just a
procedural action, a notice doing no more than faithfully
11
implementing established regulations does not require
renewed notice and comment. Cf. Paralyzed Veterans of Am.
v. D.C. Arena L.P., 117 F.3d 579, 588 (D.C. Cir. 1997)
(concluding that the Department of Justice’s interpretation of
its regulation in a manual supplement was “not sufficiently
distinct or additive to the regulation to require notice and
comment”). Moreover, if FERC’s understanding of the 2009
Update is correct, then the licensees’ only remedy for the
significant rate increase caused by the new Forest Service
rental fee schedule would be the one FERC suggests:
petitioning for a new rulemaking on the grounds that the
factual premises underlying the Commission’s adoption of
Regulation 11.2 have “fundamental[ly] change[d].” Midwest
Indep. Transmission Sys. Operator v. FERC, 388 F.3d 903,
911 (D.C. Cir. 2004) (describing the standard of review for an
agency’s decision not to initiate a rulemaking).
FERC argues that it has reasonably interpreted
Regulation 11.2 to permit it to use the Forest Service’s 2008
land values without first allowing for notice and comment.
Recall that section 11.2(b) of the regulation adopts the Forest
Service’s linear rights-of-way fee schedule as the basis for
setting hydropower land use fees and also instructs FERC’s
Executive Director to “update [the Commission’s] fees
schedule to reflect changes in land values established by the
Forest Service.” 18 C.F.R. § 11.2(b). According to FERC,
the Executive Director followed this command exactly when
he issued the 2009 Update implementing the Forest Service’s
revised zone valuations. Rehearing Order, 129 FERC
at 61,435. True, in “chang[ing]” its land values, the Forest
Service, in conjunction with BLM, jettisoned its prior
valuation methodology by replacing its own survey with an
index produced by another agency for different land
categories. According to FERC, however, Regulation 11.2
“does not specify any underlying methodology as a condition
12
for the Commission’s continued use” of the Forest Service’s
figures. Id. Because of this, and because “[t]he new
methodology utilized by BLM and the Forest Service still
leads to a valuation of rental fees for linear rights-of-way,”
FERC contends that Regulation 11.2 compelled the 2009
Update. Id.
Of course, we owe an agency’s interpretation of its own
regulation substantial deference, giving the interpretation
“ ‘controlling weight’ ” unless it is “ ‘plainly erroneous or
inconsistent with the regulation.’ ” St. Luke’s Hosp. v.
Sebelius, 611 F.3d 900, 904–05 (D.C. Cir. 2010) (quoting
Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512
(1994)). But even under this highly deferential standard, we
are unable to accept FERC’s interpretation.
FERC claims that when it adopted the Forest Service’s
rental fee schedule for linear rights-of-way in Regulation
11.2, it did so independently of the Service’s then-existing
land valuation methodology. But the rulemaking process tells
a different story. In its initial notice of proposed rulemaking,
FERC requested that commenters “[i]dentify the benefits and
detriments of each index” that it proposed. See Revisions to
the Billing Procedures for Annual Charges for Administering
Part I of the Federal Power Act and to the Methodology for
Assessing Federal Land Use Charges, 51 Fed. Reg. 211, 213
(Jan. 3, 1986). After BLM and the Forest Service finalized
their zone value index, FERC issued a supplemental request
for comments, asking whether it “should apply [the Forest
Service’s] methodology.” Notice Requesting Supplemental
Comments, 52 Fed. Reg. 82, 83 (Jan. 2, 1987) (emphasis
added). It issued the supplemental request, FERC explained,
to give the public an opportunity to provide “specific
comments” on the BLM-Forest Service index now that its
details were known. Id. Having requested these comments,
13
FERC then issued Order No. 469, in which it evaluated
proposed methodologies and explained that “the zone values
established by the Forest Service for linear rights-of-way are
the best approximation available of the value of lands” that
the Commission administered, whereas the alternative
agricultural index it had also proposed was “not an efficient
measure of land value for hydropower projects.” Order No.
469, 52 Fed. Reg. at 18,205–06. Given this focus, we think it
entirely implausible that FERC adopted the Forest Service
linear rights-of-way index without regard to the methodology
the Service uses to generate it.
FERC’s interpretation of Regulation 11.2 is especially
dubious given that it would compel the Commission to accept,
without notice and comment, any new methodology adopted
by the Forest Service—including even one that the
Commission itself had expressly rejected. Indeed, FERC
candidly concedes as much. As discussed above, FERC held
in its order denying rehearing that so long as the Forest
Service’s methodology leads to the valuation of rental fees for
linear rights-of-way, the Commission must use the Forest
Service’s updated values regardless of how the Service sets
those figures. See Rehearing Order, 129 FERC at 61,435.
Therefore, as FERC counsel acknowledged at oral argument,
Recording of Oral Arg. 24:33–25:17, unless the Commission
promulgated new rules, its interpretation of Regulation 11.2
would require it to use the Forest Service’s updated rate
schedule for linear rights-of-way even if the Forest Service
amended its methodology to use the very same agricultural
land value index that the Commission rejected when it issued
Order No. 469. This is absurd. Whatever ambiguity may
exist in Order No. 469 and Regulation 11.2, FERC clearly
decided against using the Department of Agriculture land
value index. Any interpretation of Regulation 11.2 that fails
to rule out subsequent use of this index by way of an “update”
14
cannot possibly stand. To hold otherwise would allow FERC
to detach Regulation 11.2’s meaning from the public
rulemaking that produced it, undermining the values of public
participation, fairness, and informed agency decisionmaking
that the notice-and-comment process is designed to foster.
See Nat’l Elec. Mfrs. Ass’n v. EPA, 99 F.3d 1170, 1174 (D.C.
Cir. 1996) (discussing the purposes of the APA’s notice-and-
comment requirements).
FERC insists that there is no conflict between the Forest
Service’s current methodology and Order No. 469 because the
NASS Census data, as adjusted by BLM and the Forest
Service, differ significantly from the agricultural land value
index that the Commission previously disapproved. See
Rehearing Order, 129 FERC at 61,436. Even if that is true,
the problem with FERC’s interpretation of Regulation 11.2 is
that nothing turns on these differences. Simply put, FERC
cannot escape the absurd implications of its interpretation by
assuring us that the facts of this case are not quite so extreme.
FERC’s interpretation of Regulation 11.2 suffers from a
second fatal defect: if the regulation obliges the Commission
to adopt any change the Forest Service makes to its rental fee
schedule, then it conflicts with the Commission’s
responsibilities under FPA section 10(e)(1), which requires
FERC to “fix[] . . . reasonable annual charges” for the use of
federal lands by hydropower projects, as well as to “seek to
avoid increasing the price to the consumers of power by such
charges.” 16 U.S.C. § 803(e)(1). Interpreting this provision,
we have held that FERC’s power to set charges is exclusive
and that its duty to ensure that rates are reasonable is both
mandatory and non-delegable. See City of Tacoma v. FERC,
331 F.3d 106, 115 (D.C. Cir. 2003) (“[T]he authority to assess
charges under section 10(e)(1) of the FPA is FERC’s
exclusive responsibility.”); E. Columbia Basin Irrigation Dist.
15
v. FERC, 946 F.2d 1550, 1557 (D.C. Cir. 1991) (“[O]nly the
Commission has authority to administer Section 10(e).”).
Although nothing in section 10(e)(1) prevents FERC from
using externally generated information to set appropriate
rates, the statute does prohibit the Commission from relying
on outside cost assessments without engaging in its own
independent review to ensure that, in its judgment, the
resulting rates are reasonable. See City of Tacoma, 331 F.3d
at 115–16 (holding that FERC acted contrary to the FPA by
failing to review cost reports submitted by other agencies as
part of its fee assessment for hydropower licensees).
When FERC issued Order No. 469, it evaluated the 1986
BLM-Forest Service linear rights-of-way index and concluded
that it represented the best available methodology for
assessing the fair market value of the type of land used for
hydropower projects. Order No. 469, 52 Fed. Reg. at 18,205.
This is exactly what section 10(e)(1) requires: even though
FERC relied on Forest Service and BLM data, it was the
Commission, not those two agencies, that determined this
schedule would produce reasonable rates. But if, as FERC
now claims, Regulation 11.2 commits it to using the Forest
Service’s current schedule regardless of how that agency
decides to value the land it administers, then the Commission
has violated section 10(e)(1) by allowing the Forest Service to
determine the market value of land used by hydropower
licensees and by extension to establish the rates for use of that
land. Indeed, FERC itself illustrates this delegation by
faulting the licensees for failing to object to the new BLM-
Forest Service methodology in the rulemaking conducted by
those agencies. See Rehearing Order, 129 FERC at 61,433;
see also Resp’t’s Br. 33 (repeating this argument). But
neither BLM nor the Forest Service had any authority to
consider whether their new methodology for valuing linear
rights-of-way accurately reflected the value of land used for
16
hydropower projects. Under section 10(e)(1), that evaluation
is for FERC alone to make.
FERC contends that if its reliance on the Forest Service’s
updated land valuations violates section 10(e)(1), then
Regulation 11.2 is the source of the problem, and the
licensees may no longer challenge that regulation because
they failed to do so when it was issued in 1987 and the
limitations period has long since run. See 16 U.S.C.
§ 825l(b). We disagree. For this collateral attack argument to
have any merit, we would have to conclude that FERC’s
interpretation of Regulation 11.2 is reasonable
notwithstanding the unlawful delegation resulting from that
interpretation. Doing so would require us to assume that
affected parties should have anticipated in 1987 that the
Commission might someday interpret Regulation 11.2 as
requiring it to accept major changes in the Forest Service’s
land valuation methodology without further review. In other
words, displaying a surprisingly cynical view of the
administrative process, FERC believes that the licensees
should have realized that the Commission might sometime in
the future interpret the regulation so broadly as to subvert its
section 10(e)(1) responsibilities by delegating its rate-setting
authority to the Forest Service, and it asks us to shield this
unlawful action from review on the grounds that the
Commission’s broad interpretation reasonably follows from
the unqualified language of its existing rule. It is certainly
true, as FERC counsel pointed out at oral argument,
Recording of Oral Arg. 30:48-30:52, that petitioners and
intervenors here are sophisticated actors who can be expected
to parse Commission rules closely to protect their interests.
Even so, it is entirely unreasonable to think that anyone,
including seasoned licensees, would ever have interpreted
Regulation 11.2 as compelling the Commission to set future
rates based on whatever BLM and the Forest Service
17
considered fair market value for lands those agencies oversee.
In short, we may not defer to an agency interpretation that
would cause a regulation to violate the very statute the agency
administers. See Stinson v. United States, 508 U.S. 36, 45
(1993) (explaining that deference to an agency’s
interpretation of its own regulations is only owed where that
interpretation “does not violate the Constitution or a federal
statute”).
To sum up, FERC’s interpretation of Regulation 11.2
improperly divorces the regulation’s text from both the
rulemaking process from which it emerged and the underlying
statutory scheme pursuant to which it was issued, making it
“plainly erroneous” and “inconsistent with the regulation.”
See St. Luke’s Hosp., 611 F.3d at 904–05. In reaching this
conclusion, we by no means suggest that FERC forever bound
itself in Order No. 469 to the land values in the 1986 BLM-
Forest Service index. To the contrary, section 11.2(b)
expressly allows updates to account for land value changes
made by the Forest Service. The Executive Director’s
updating authority, however, is necessarily confined to Forest
Service changes produced according to the original
methodology FERC reviewed and approved.
Having rejected FERC’s interpretation of Regulation
11.2, we can easily complete our task. FERC nowhere
disputes the fact that the rental fees listed in its 2009 Update
are the product of significant changes in the Forest Service’s
methodology for valuing linear rights-of-way. Because FERC
previously approved and used the old Forest Service
methodology, its implicit acceptance of the new methodology
in the 2009 Update marked a change in its own regulations.
For FERC to make such a change, APA section 553 required
notice-and-comment rulemaking. See Alaska Prof’l Hunters
Ass’n, Inc., 177 F.3d at 1034.
18
We grant the petition for review and vacate the 2009
Update.
So ordered.