Petition for Writ of Certiorari — Phillips Petroleum Co. v. Johnson

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941292 JAN 3 0 1995

No.

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Iu the Supreme Court of the United States

OCTOBER TERM, 1994

BRUCE BABBITT, SECRETARY OF THE INTERIOR,

ET AL., PETITIONERS

Vv.

PHILLIPS PETROLEUM COMPANY AND

ATLANTIC RICHFIELD COMPANY

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Drew S. Days, III

Solicitor General

Lois J. SCHIFFER

Assistant Attorney General

EDWIN S. KNEEDLER

Deputy Solicitor General

EDWARD C. DUMONT

Assistant to the Solicitor General

ROBERT L. KLARQUIST

WILLIAM B. LAZARUS

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 514-2217

1 BEST AVAILABLE COPY

QUESTION PRESENTED

Whether the Department of the Interior is pre-

cluded from enforcing its determination that respond-

ents failed to comply with regulations requiring pay-

ment of royalties on the “fair market value” of nat-

ural gas they produced from federal lands, because

an internal memorandum prepared by officials of the

Department’s Minerals Management Service for use

in assessing market value under particular circum-

stances was not promulgated in accordance with the

notice-and-comment provisions of the Administrative

Procedure Act.

PARTIES TO THE PROCEEDING

Petitioners are the Secretary of the Interior, the

Department of the Interior, the Department’s Min-

erals Management Service (MMS), Cynthia Quarter-

man, Acting Director of the MMS, and Gary Johnson,

Area Manager of the MMS’s Dallas Area Compliance

Office. Petitioners (or their predecessors in office)

were defendants in the district court and appellees in

the court of appeals. Both respondents were plaintiffs

in the district court and appellants in the court of

appeals.

TABLE OF CONTENTS

Page

I ie 1

co LEE IRE Sc ee PS 2

Statutory and regulatory provisions involved... 2

RENEE ELA Tae a 4

Reasons for granting the petition 14

I ii lisctiiisens cooninveicctanmesiccsdnitisinieseturdareinsscee........ 28

AEE Se OT eal ae ee aE la

SEES ee 12a

a, SEES SESS 15a

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RESIS TERE ee a Tla

Dh seat biihinNahintcmriennsiringeanimeciecososcics, 98a

RETEST AIA Cn Ne ee 122a

Nei tir scatnlanicssheschenidocsodaacnitbisscwinss ccc... 124a

ag ESSIEN IETS aly en 128a

TABLE OF AUTHORITIES

Cases:

Air Transport Ass’n Vv. Department of Transpor-

tation, 933 F.2d 1043 (D.C. Cir.1991) 25

Alcaraz Vv. Block, 746 F.2d 593 (9th Cir. 1984)... 24

American Hospital Ass’n v. Bowen, 834 F.2d 1037

ESSE IR ea a a a 24

nse

Cases—Continued: Page

Amoco Production Co., 112 IBLA 77 (1989) ........... 19, 21

Brown Express, Inc. V. United States, 607 F.2d 695

ER SE ERNST COMM NOOSE 7 11, 12, 22

Cabais v. Egger, 690 F.2d 234 (D.C. Cir. 1982)...... 24

Cities Service Oil & Gas Corp., 118 IBLA 255

IEE sciscticcnsack-ceetenecisiebsied casienis acecaictaaaieaaidmes Aicaa oui aa 7

Coastal States Energy Co. 110 IBLA 179 (1989)... 16

Cenoco, inc., 118 IBLA 248 (1990) .......................... 16

Department of Transportation Vv. Air Transport

Ass’n, cert. granted, 498 U.S. 1023, vacated and

remanded, 498 U.S. 1077, dismissed as moot,

033 F.2d 1048 (D.C. Cir. 1991) -............020....... 15, 25

Energy Reserves Group, Inc. V. Department of

Energy, 589 F.2d 1082 (Temp. Emer. Ct. App.

1FTS) ............ FL SPREE URE: CN ROTARY CoE Ie 25

Friedrich v. Secretary of HHS, 894 F.2d 829 (6th

Cir.), cert. denied, 498 U.S. 817 (1990) ........0...... 24

Gibson Wine Co. v. Snyder, 194 F.2d 329 (D.C.

6 ene wesiusanikaschskaSitikicadiialnt Mas nea 18

Guernsey Memorial Hospital v. Secretary of HHS,

996 F.2d 830 (6th Cir. 1993), cert. granted, 114

is Se III siccssicvalasensucicon\alesisbbuetinaeiia daanamuckcasaonies 18-19

JEM Broadcasting Co. v. FCC, 22 F.3d 320 (D.C.

Te ical So Acokbecamapasninstaieioece Meaitla Nola nde shconciceilenis 25

Jean V. Nelson, 711 F.2d 1455 (1983), modified on

reh’g, 727 F.2d 957 (11th Cir. 1984) (en banc),

EGE, SE Coc I ID eaceiirtteetsetiertecerrince 25

Levesque V. Block, 723 F.2d 175 (1st Cir. 1983) .... 25

Lewis-Mota v. Secretary of Labor, 469 F.2d 478

3 Bo St. . eae eon Tere ane 24

Lincoln Vv. Vigil, 113 S. Ct. 2024 (1993) PAO. 17, 20, 27

Martin v. Occupational Safety & Health Review

Comm'n, 499 US. 244 2901) .............................. 17

Mesa Operating Ltd. Partnership v. U.S. Dep’t of

Interior, 931 F.2d 318 (5th Cir. 1991), cert.

Gombe, BE BE. Ce. GEG CITI) rcnicseiceccsncceescsnernsne 11

Metropolitan School Dist. v. Davila, 969 F.2d 485

(7th Cir. 1992), cert. denied, 113 S. Ct. 1360

UNITED aicsccabhnk<sslccocsaccchtocipssosbssak na ccaaiccaciatesinaapeiauccaiaibiaieaicabiiiicas 24

NLRB vy. Bell Aerospace Co., 416 U.S. 267 (1974)... 27

Cases—Continued: Page

Pacific Gas & Elec. Co. v. Federal Power Comm’n,

en WO CTPA. GA, ROTI) a cscccccccecnesesiiscacesnce 20

Philadelphia Citizens in Action v. Schweiker, 669

ee Te es FO citi ei 23, 24

Phillips Petroleum Co., 117 IBLA 255 (1991) ...16, 19, 21

Pickus v. United States Bd. of Parole, 507 F.2d

EE. Cis RE IE sitetseenienirin ea oe 24

Public Citizen, Inc. Vv. U.S. Nuclear Regulatory

Comm'n, 940 F.2d 679 (D.C. Cir. 1991) _........... 20

Reynolds Metals Co. v. Rumsfeld, 564 F.2d 663

(4th Cir. 1977), cert. denied, 435 U.S. 995

I covcsdiatebhnisks naib: sacimal namin anes ae eae ce 24

Rivera Vv. Becerra, 714 F.2d 887 (9th Cir. 1983),

cert. denied, 465 U.S. 1099 (1984) SR TeneaN ele 23-24

SEC v. Chenery Corp., 382 U.S. 194 (1947) _..... 27

Southern California Edison Co. v. FERC, 770 F.2d

Fe SE BD bieksedabsiks ee 24

State of Ohio Dep’t of Human Services v. United

States Dep’t of HHS, 862 F.2d 1228 (6th Cir.

MI sikelele tess aseiniptiba ce ee ens ae ene 24

United States Dep’t of Labor Vv. Kast Metals Corp.,

744 F.20 1145 (6th Cir. 1984) .............................. 26

Vermont Yankee Nuclear Power Corp. Vv. Natural

Resources Defense Council, Inc., 485 U.S. 519

. 1978) TORE ANDERSON AIOE LARS RE NE AAD 23

Statutes and regulations:

Administrative Procedure Act, 5 U.S.C. 551 et seq.:

BP RR ED x sin:csesissicehisadritncucieetpeinasenalishinmadeices 15, 21

th eR CENA ST ¢ | | cere 16

6 US.C. 562 (a) (2) (B) ...................... Keishi 16

DH ULB, BUG) 1S) CO) acces ncssccceasnssnsennareanenain 16

Se ND cic neta oie anc nsiascasaumdrcceaiin 2, 8-9, 14

Ur, BCID CR ances secssnceemcretocnncanezes 2, 13, 17, 21

Federal Oil and Gas Royalty Management Act of

1982, Pub. L. No. 97-451, 96 Stat. 2447 (1983),

30 U.S.C. 1701 et seq.:

§2(a)(2), 96 Stat. 2448 30 US.C.

EE Ee aitdbicutcabimiiniadeiinb ee 5

Statutes and regulations—Continued: Page

§ 2(b) (2)-(3), 96 Stat. 2448, 30 U.S.C.

ee Ee sncictanitsdlatactetihcotitieitasdlinticiicdatbiniinam 5

§101(a), 96 Stat. 2449-2450, 30 U.S.C.

itt ) PI Rae CET Hse OT We TN demain 5

§101(c)(1), 96 Stat. 2450, 30 U.S.C.

PE OU CEP <ecccrncnenabdalibnabicagdieeibnbiandeiiiticaasn 5, 26

Outer Continental Shelf Lands Act, ch. 345, 67

Stat. 462 (1953), 43 U.S.C. 1831 et seq. ............ 4

§ 8(a) (1), 67 Stat. 468, 43 U.S.C. 1337 (a) (1).. 2, 3,4

Se See: MP EIED ‘Ancninhcosvcamictzenienneasamnataabieihamenalaanintiliate 10

30 C.F.R.:

Pt. 206:

ee TN cchicisittaiccintnianthitnonsintnevisinnitcnclailitaniiinians 4

Section 206.150 (1987) ..................... 3, 4, 18, 18, 19

Section 206.150(e) (1987) ........................... 3

Pt. 217 (1987):

Te TT EN 7

, , eRe er See 6

SE ITIP scciesssuncienscnanaghncscesendinabiiaeiaaatiiaks 6, 7

Pt. 241 (1987):

SEI IaIIIIRIIEE sinnnisscstistvnkwvcnncanasunadicoinaiibdumlasie 6

Pt. 290 (1987):

BOSTON RIOD H-I OG qn ncecccnccvecnsecnecccccceenrvesse 6

Section 290.7 ............... esiihiiiathcehdaitdccpelgmmiadiciiis bea 6

43 C.F.R. (1987):

Eee a EMC BN a? arse a NE ROT 6, 16

I ate Gt IDO ivcevistsntcsannccteiiesancsudeitarnntaiietiennnic 6, 16

Miscellaneous:

K. Davis, Administrative Law of the Eighties

EE ENE Aare aS EAR wns «8 24

2 K. Davis, Administrative Law Treatise (2d ed.

ID hceickstasgliieciic. PURSE RL ES SeeR Ne eed P SL 24

K. Davis, Administrative Law Treatise (Supp.

A aS Seve rare cuininianiddbiieatata gah nase ene 26

Cader ein/ ld Rater hatte Tae it

vil

Miscellaneous—Continued : Page

1 K. Davis & R. Pierce, Jr., Administrative Law

Treatise (3d ed. 1994) .............. LS, Sa en 27

6S Fed. Rew. 1200 (CiBGB) ....~...accceccee.es-s-s.-. EE RP 4

Note, The Substantial Impact Test: Victim of the

Fallout from Vermont Yankee?, 53 Geo. Wash.

yee |

L. Rev. 118 (1985) ......... VUES eee ne co ILM 3 Wankeee 2

U.S. Dep’t of Justice, Attorney General’s Manual

on the Administrative Procedure Act (1947).......

18, 20

Iu the Supreme Court of the United States

OCTOBER TERM, 1994

No.

BRUCE BABBITT, SECRETARY OF THE INTERIOR,

ET AL., PETITIONERS

Vv.

PHILLIPS PETROLEUM COMPANY AND

ATLANTIC RICHFIELD COMPANY

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

The Solicitor General, on behalf of the Secretary

of the Interior, the Department of the Interior, the

Department’s Minerals Management Service (MMS),

Cynthia Quarterman, Acting Director of the MMS,

and Gary Johnson, Area Manager of the MMS’s

Dallas Area Compliance Office, respectfully petitions

for a writ of certiorari to review the judgment of the

United States Court of Appeals for the Fifth Circuit

in this ease.

OPINIONS BELOW

The opinion of the court of appeals ( App., infra,

la-lla) is reported at 22 F.3d 616. That court’s

supplemental opinion on rehearing concerning the

statute of limitations issue (App., infra, 124a-127a)

is unreported, as are the opinion, orders, and judg-

(1)

ment of the district court (App., infra, 12a-70a).

The opinion of the Interior Board of Land Appeals

affirming one of the MMS orders at issue in this case

(App., infra, 98a-121a) is reported at 110 IBLA 282.

The remaining MMS orders at issue (App., infra,

71a-97a) are unreported.

JURISDICTION

The court of appeals entered its initial judgment

on June 10, 1994. The court thereafter granted re-

hearing and entered a new judgment addressing a

previously unresolved issue (but otherwise abiding

by the prior opinion) on September 7, 1994. App.,

imfra, 124a-127a. A further petition for rehearing

was denied on November 1, 1994. App., infra, 122a-

123a. The jurisdiction of this Court is invoked under

28 U.S.C. 1254(1).

STATUTORY AND

REGULATORY PROVISIONS INVOLVED

1. Section 558(b) of Title 5 of the United States

Code (formerly Section 4(a) of the Administrative

Procedure Act) provides in pertinent part as follows:

(b) General notice of proposed rule making

shall be published in the Federal Register * * *

* * * * x

Except when notice or hearing is required by

statute, this subsection does not apply—

(A) to interpretative rules, general state-

ments of policy, or rules of agency organiza-

tion, procedure, or practice.

* * * * *

2. Section 8(a)(1) of the Outer Continental Shelf

Lands Act, ch. 345, 67 Stat. 468 (1953), as amended,

codified at 43 U.S.C. 13837(a) (1), provides in part as

follows:

The Secretary is authorized to grant to the

highest responsible qualified bidder or bidders

by competitive bidding, under regulations prom-

ulgated in advance, any oil and gas lease on sub-

merged lands of the outer Continental Shelf

* * *. The bidding shall be by sealed bid and,

at the discretion of the Secretary, on the basis

of—

(A) cash bonus bid with a royalty at not

less than 1214 per centum fixed by the

Secretary in amount or value of the produc-

tion saved, removed, or sold;

(B) variable royalty bid based on a per

centum in amount or value of the produc-

tion saved, removed, or sold, with either a

fixed work commitment based on dollar

amount for exploration or a fixed cash bonus

as determined by the Secretary, or both;

[Paragraphs (C) through (H) similarly

describe possible alternative bidding mech-

anisms. |

3. During the period relevant to this case, 30

C.F.R. 206.150 (1987) provided as follows:

The value of production shall never be less

than the fair market value. The value used in

the computation of royalty shall be determined

by the Director. In establishing the value, the

Director shall consider: (a) The highest price

paid for a part or for a majority of like-quality

products produced from the field or area; (b) the

price received by the lessee; (c) posted prices;

(d) regulated prices; and (e) other relevant

matters. Under no circumstances shall the value

of production be less than the gross proceeds

accruing to the lessee from the disposition of the

produced substances or less than the value com-

puted on the reasonable unit value established

by the Secretary.

STATEMENT

1. Congress has authorized the Department of the |

Interior to enter into and administer leases providing |

for the development of federal oil and gas resources,

including those located off the coast of the United

States. See, e.g., 48 U.S.C. 13831 et seg. (the Outer

Continental Shelf Lands Act). Leases for develop-

ment of offshore oil and gas are generally to be

granted to “the highest responsible qualified bidder”

after a public, competitive bidding process, and gen-

erally provide for payment of royalties calculated as

a specified percentage of the “amount or value of the

production saved, removed, or sold” by the lessee.

43 U.S.C. 1337(a) (1).

The Secretary’s regulations applicable to the valu-

ation of offshore oil and gas production for royalty

purposes for the periods of production at issue in this

case provide that value will be determined by the

Director of the Minerals Management Service (MMS)

in the Department of the Interior, and will “never be

less than the fair market value.” 30 C.F.R. 206.150

(1987).* Section 206.150 provides further that in

establishing values,

the Director shall consider: (a) The highest

price paid for a part or for a majority of like-

==.

ee ail i a ee

1The regulation was substantially expanded and redesig-

nated as of March 1, 1988. See 30 C.F.R. 206.102; 53 Fed.

Reg. 1230 (1988).

quality products produced from the field or area;

(b) the price received by the lessee; (c) posted

prices; (d) regulated prices; and (e) other rele-

vant matters. Under no circumstances shall the

value of production be less than the gross pro-

ceeds accruing to the lessee from the disposition

of the produced substances or less than the value

computed on the reasonable unit value estab-

lished by the Secretary.

In 1983, Congress concluded that the government’s

methods of determining and collecting oil and gas

lease royalties were “archaic and inadequate.” Federal

Oil and Gas Royalty Management Act of 1982, Pub.

L. No. 97-451, §2(a)(2), 96 Stat. 2448 (1983),

codified at 30 U.S.C. 1701(a)(2). Congress there-

fore acted “to clarify, reaffirm, expand and define the

authorities and responsibilities of the Secretary of the

Interior to implement and maintain a royalty man-

agement system for oil and gas leases,” and “to re-

quire the development of enforcement practices that

ensure the prompt and proper collection and disburse-

ment of oil and gas revenues owed to the United

States.” 30 U.S.C. 1701(b)(2)-(3). The 1983 Act

directs the Secretary to establisn “a comprehensive

inspection, collection and fiscal and production ac-

counting and auditing system * * * to accurately

determine oil and gas royalties * * * and to collect

and account for such amounts in a timely manner.”

30 U.S.C. 1711(a). In particular, the Act directs

the Secretary to “audit and reconcile, to the extent

practicable, all current and past lease accounts for

leases of oil or gas and [to] take appropriate actions

to make additional collections or refunds as war-

ranted.” 30 U.S.C. 1711(c) (1).

The Secretary has delegated responsibility for ad-

ministering lease arrangements and enforcing royalty

requirements to the Director of the Minerals Man-

agement Service. See generally 30 C.F.R. Pt. 218

(1987); 30 C.F.R. 218.150, 241.51 (1987). Lessees

may appeal the orders or decisions of subordinate

MMS officials to the Director. See 30 C.F.R. 290.1-

290.5 (1987). The Director’s decisions, in turn, are

subject to review by the Interior Board of Land Ap-

peals (IBLA), which issues final agency decisions on

such issues on behalf of the Secretary. See 30 C.F.R.

290.7 (1987); 43 C.F.R. 4.1, 4.1(b) (3) (1987).

2. In 1984, investigations by MMS’s Royalty Com-

pliance Division and the Department’s Inspector Gen-

eral raised questions about the appropriate method of

valuing natural gas liquid products (NGLPs) for

purposes of calculating the production royalties due

under federal leases.* See App., infra, 130a. The

valuation problem was particularly acute in cases in

which NGLPs produced under such leases were not

sold in arm’s-length transactions, but rather were

transferred to affiliates of the lessee. Ibid. The Com-

pliance Division and MMS’s Royalty Valuation and

Standards Division thereafter examined the issue and

collaborated in producing a “Procedure Paper on

Natural Gas Liquid Products Valuation,” reprinted

at App., infra, 128a-146a.

The “procedure paper” noted that “MMS regula-

tions require the Secretary to establish a basis for

computing royalties using a reasonable unit value,”

and that the value so established “should never be less

than the fair market value as determined by guide-

2NGLPs are heavier entrained liquid hydrocarbons con-

tained in “wet” natural gas. See App., infra, 4a n.1.

Sea

lines established by the Secretary.” App., infra, 130a.

As a practical matter, however, lessees track and

report their own production, its value, and the royal-

ties due thereon, subject to audit by MMS’s Royalty

Compliance Division. See generally, e.g., 30 C.F.R.

217.50, 218.150 (1987); see also Cities Service Oil &

Gas Corp., 113 IBLA 255, 260 (1990). The paper’s

purpose was therefore “to develop a ‘yardstick’ valua-

tion technique” for MMS auditors to use in “deter-

mining the reasonableness of a lessee’s NGLP prices”

for royalty purposes. App., infra, 130a.

The procedure paper identified two types of NGLP

sales: sales under arm’s-length contracts, and those

in which NGLPs were transferred without a contract

or under a non-arm’s-length agreement, such as one

between divisions or affiliates of the lessee. See App.,

infra, 131a-132a. With respect to arm’s-length sales,

the paper stated that “MMS will normally accept the

arm’s-length contract price for royalty purposes.” /d.

at 135a-126a. With respect to non-arm’s-length sales,

however, the paper concluded that MMS would accept

royalties computed using the contract price only if

“the lessee can demonstrate that the contract has

characteristics similar to arm’s-length contracts which

represent fair market value.” Jd. at 136a.

To establish an appropriate “market value” stand-

ard against which to measure NGLP prices reported

by lessees, the authors of the procedure paper con-

sidered several possible price sources: NGLP sales

contracts, prices received by lessees, “maximum per-

missible prices” under Department of Energy price

regulations in effect during part of the period in

question, and commercially available NGLP price

bulletins. See App., infra, 132a. The paper con-

cluded that “commercial price bulletins represent the

best available price source and in most instances are

indicative of NGLP fair market value.” Jbid. The

paper then specified an order of preference among

particular bulletins available for particular periods.

Id. at 133a.

Having selected an appropriate market value “yard-

stick,” the procedure paper concluded that prices

reported by a lessee for royalty purposes should be

compared to the highest and lowest prices for the

same product published in the appropriate bulletin

for the appropriate month. App., infra, 133a. A

reported price falling within the range of published

prices ‘“‘[would] normally be accepted by MMS for

royalty determination purposes.” Jbid. Where the

reported price fell below the lowest published price,

however, “a minimum value that is acceptable to

MMS [could] be determined by developing an aver-

age value from the lowest and highest prices in the

range” of published prices. Jd. at 134a; see also id.

at 136a.

3. a. In 1986, the Regional Manager of MMS’s

Tulsa, Oklahoma compliance office ordered a lessee

affiliate of respondent Atlantic Richfield Company

(ARCO) to pay additional royalties, calculated in

accordance with the procedure paper’s methodology,

on certain NGLPs that ARCO had produced from

federal lands and had used internally rather than

sold. See App., infra, 10la, 103a. ARCO appealed

that order to the Director of MMS, who affirmed it.

Id. at 100a-101a, 105a-107a.

ARCO then appealed to the Interior Board of Land

Appeals. The Board rejected the argument that the

MMS “procedure paper” was a “substantive rule”

subject to the notice-and-comment provisions of the

Administrative Procedure Act (APA), 5 U.S.C.

553(b). App., infra, 117a-118a. The Board noted

that the procedure paper “did not require lessees to

value their production by any specific method, nor did

it modify any existing regulation”; rather, it “merely

clarified the existing regulations by setting forth a

yardstick by which MMS would measure the reason-

ableness of royalty values reported by lessees.” /d. at

117a. The Board characterized the paper as ‘‘essen-

tially a policy guideline adopted by MMS to assist in

valuing NGLP production for royalty purposes under

the provisions of the relevant regulation.” Jbid. The

Board therefore concluded that the procedure paper

“does not have the force and effect of law as a duly

promulgated regulation does,” and made clear that

the Board would decline to follow the paper’s methods

where it considered them inconsistent with the rele-

vant regulations. /d. at 117a-118a.

On the merits, the Board sustained MMS’s com-

parative use of spot market prices quoted in com-

mercial bulletins to evaluate the reasonableness of

ARCO’s royalty valuations under the governing reg-

ulation. See App., infra, 112a-117a. The Board re-

jected, however, the procedure paper’s approach of

using the average spot market price to recompute the

value of production if the lessee’s reported price was

less than the lowest spot market price. Jd. at 119a-

120a. The Board found it inconsistent to require use

of the average spot price in cases in which a lower

(but within-range) price would have been accepted

as representing “fair market value.” The Board

therefore set aside the MMS orders and remanded for

recomputation of additional royalties using the low-

est published spot market price, rather than the aver-

age price, in cases in which the price reported by the

lessee was lower than the lowest published price. /d.

at 120a.

b. Shortly after the Board’s decision on ARCO’s

appeal, MMS issued three additional royalty com-

pliance orders to ARCO and one to respondent Phil-

lips Petroleum Company (Phillips), based on audits

showing that respondents had underpaid royalties

between 1980 and 1988 on NGLPs used or disposed

of in non-arm’s-length transactions. See App., infra,

71a-97a. The orders directed respondents to recom-

pute those royalties using the methodology outlined

in the procedure paper, as modified by the IBLA’s

decision. Each respondent filed suit to block enforce-

ment of the orders, arguing in part that some or all

of the additional royalty claims were barred by the

statute of limitations set out in 28 U.S.C. 2415(a)

for guvernment suits for money damages; that the

Secretary had no authority to require respondents to

review their own records and recompute royalties

under a government methodology; and that the Sec-

retary could not apply that methodology in any event,

because the procedure paper in which it was first

articulated constituted a substantive rule adopted

without compliance with the notice-and-comment pro-

visions of the APA. ARCO later amended its com-

plaint to add a challenge to the order previously up-

held by the IBLA. Respondents’ suits were consoli-

dated with each other, and with two others in which

they raised similar statute-of-limitations and “self-

audit” issues in the context of a different royalty

dispute.’

3The non-NGLP cases challenged MMS orders requiring

computation and payment of royalties on certain amounts

The district court granted summary judgment in

favor of the Secretary. App., infra, 18a-70a. After

an extensive review of the MMS procedure paper, the

court rejected respondents’ APA challenge to the use

of the paper’s methodology as modified by the IBLA.

Id. at 48a-63a. The court concluded that the proce-

dure paper represented, “in substance and applica-

tion,” an interpretation and application of the exist-

ing regulatory requirement that royalties be paid on

the “fair market value” of production. Jd. at 58a-

60a, 63a.

Alternatively, the court considered the paper as a

“procedural rule” under the APA (App., imfra, 60a-

62a), and applied the “substantial impact” test artic-

ulated by the Fifth Circuit in Brown Express, Inc. v.

United States, 607 F.2d 695, 702 (1979) (emphasis

omitted) :

[W]hen a proposed regulation of general ap-

plicability has a substantial impact on the regu-

lated industry, or an important class of the mem-

bers or the products of that industry, notice and

opportunity for comment should first be pro-

vided.

Because the paper merely implemented the pre-

existing “fair market value” requirement of the reg-

ulations, the court determined that “the paper, itself,

is not the source of any substantial impact on the

received from purchasers as reimbursement for production-

related costs. That issue was resolved in favor of the govern-

ment in other litigation, see Mesa Operating Ltd. Partnership

v. U.S. Dep’t of Interior, 931 F.2d 318 (5th Cir. 1991), cert.

denied, 112 S. Ct. 934 (1992), leaving only the limitations and

“self-audit” challenges to those orders to be resolved in this

proceeding.

[offshore] leasing industry and [offshore] lessees,”

and therefore qualified for the statutory exemption.

Id. at 63a.

On the other issues before it, the district court held

that the Secretary could require respondents to re-

compute royalties due (App., infra, 41a-45a), and

that the statute of limitations “bars the Government

from bringing any causes of action against Phillips

and ARCO based on royalty payments * * * that are

due and owing for more than six years” (id. at 40a-

41a). The court subsequently clarified, however, that

the Secretary’s request for enforcement of the royalty

orders at issue in this case was not such an action.

Id. at 15a-17a. Having rejected respondents’ APA

and “self-audit” objections to those orders, the court

ordered respondents to comply with them by recom-

puting and paying rovalties in accordance with their

terms. /d. at 12a-14a.

4. The court of appeals reversed, holding that the

MMS procedure paper was a substantive rule that

should have been promulgated in accordance with the

APA’s notice-and-comment procedures. App., infra,

la-lla.

Relying on its prior decision in Brown Express,

Inc. v. United States, supra, the court rejected (App.,

infra, T7a-8a) the Secretary’s argument that the pro-

cedure paper was nothing more than a “clarification

or explanation” of the existing rovalty valuation res-

ulation in the specifie context of NGLPs not sold in

arm’s-length transactions. In the court’s view, the

paper could not be characterized as an exempt “inter-

pretative rule” because it “does not purport to inter-

pret a statute or regulation,” “is not a mere clarifica-

tion,” “defines no ambiguous term,” and “gives no

officer’s opinion about the meaning of the statute or

regulations,” but rather “effects a change in the

method used by MMS in valuing NGLPs.” Jd. at 8a.

Similarly, the court rejected the argument that the

paper could be viewed as a “general statemen[t] of

policy,” see 5 U.S.C. 553(b) (A), because, under the

court’s analysis, “[i]mmediately upon [the paper’s]

effective date, the five-factor valuation technique of

30 C.F.R. § 206.150 was no longer to be followed”

in valuing NGLPs for royalty purposes. App., infra,

9a.

Finally, the court of appeals held that the pro-

cedure paper was not exempt from the notice-

and-comment requirement as a “rul[e] of agency or-

ganization, procedure, or practice.” App., infra, 9a;

see 5 U.S.C. 553(b) (A). The court observed that the

paper “would appear to fall squarely within this

exemption,” because it “plainly relates to the internal

practices of MMS.” App., infra, 9a. But the court

went on to apply the Brown Express “substantial im-

pact” test, quoted above. Jd. at 10a. Unlike the dis-

trict court, the court of appeals concluded (id. at

10a-lla) that “the Procedure Paper does have a sub-

stantial impact on those regulated in the industry”

because, in the court of appeals’ view, it “narrowly

restricts the discretion of MMS officials” in valuing

NGLPs, “‘forecloses other valuation methods by pre-

scribing binding valuation criteria,” “mandates the

use of spot prices” rather than the “posted prices”

referred to in 30 C.F.R. 206.150 (1987), and “elimi-

nates the other four factors” listed in the regulation

for purposes of determining the value of NGLPs. The

court therefore refused to give effect to the statutory

exception for “rules of agency * * * practice” that it

thought otherwise “plainly” applicable in this ease.

In light of its ruling on the APA issue, the court

of appeals reversed the judgment of the district court

and remanded for further proceedings, without reach-

ing any of the other issues presented by the parties.

App., infra, 1la. Both parties sought rehearing on

the statute of limitations question, and the court is-

sued a brief supplementary opinion resolving that

issue in favor of the Secretary. Jd. at. 124a-127a. The

same order denied the Secretary’s suggestion of re-

hearing en bane on the APA issues, and a later order

(id. at 122a-123a) denied respondent Phillips’s fur-

ther petition for rehearing and suggestion of rehear-

ing en banc on the limitations issue.

REASONS FOR GRANTING THE PETITION

The court of appeals has precluded the Secretary

from enforcing orders requiring the proper computa-

tion and payment of royalties on NGLPs produced

from federal lands. It reached that result solely be-

cause an internal “procedure paper,” prepared and

used by agency compliance officers in assessing

whether royalties remitted by federal lessees complied

with applicable valuation regulations, was not itself

promulgated in accordance with the formal notice-

and-comment procedure of the Administrative Pro-

cedure Act, 5 U.S.C. 553(b). That decision is wrong,

and has broad and potentially serious implications

for the efficient functioning of the administrative

process.

Moreover, the court’s decision turned in significant

part on its application of a “substantial impact” test

that is inconsistent with the terms of the APA itself

and has been rejected by other courts of appeals.

This Court previously granted review to resolve a

Sot is yD adie iad acacia ehctentiad

circuit conflict regarding use of that test, but the

case later became moot. See Department of Trans-

portation v. Air Transport Ass’n, 498 U.S. 1023,

vacated and remanded, 498 U.S. 1077, dismissed as

moot, 933 F.2d 1043 (D.C. Cir. 1991). This case

presents an appropriate occasion to settle a recurrent

issue of considerable importance under the APA.

1. The court of appeals held that the MMS “pro-

cedure paper” at issue in this case is a “substantive

rule.” App., infra, lla. At the threshold, there is a

substantial question whether the paper fits the APA’s

definition of a “rule” at all. Under the statute, a

“rule” is

the whole or a part of an agency statement of

general or particular applicability and future

effect designed to implement, interpret, or pre-

scribe law or policy or describing the organiza-

tion, procedure, or practice requirements of an

agency and includes the approval or prescription

for the future of * * * valuations, costs, or ac-

counting, or practices bearing on any of the fore-

going.

® U.S.C. 551(4). That definition is broad, but it is

not unlimited.

While the procedure paper might, for example, be

characterized as a “statement of general * * * ap-

plicability * * * designed to implement * * * [or]

interpret * * * law or policy * * * or [to] prescri[ be]

* * * practices bearing on” “valuation,” we doubt

that it can properly be described as an “agency state-

ment.” The paper was compiled by subordinate off-

cials in MMS, and it did not purport to bind even the

Director of that Service, to whom any party aggrieved

by an order applying the paper’s methodology would

appeal in the first instance. Compare 5 U.S.C. 552(a)

(2)(C) (referring to “administrative staff manuals

and instructions to staff”) with 5 U.S.C. 552(a)

(1)(D) and (2)(B) (referring to rules and state-

ments “adopted by the agency’”’). More important, the

paper clearly did not speak for or bind the Secretary,

because the IBLA, as the Secretary’s delegate, re-

jected a portion of the paper’s methodology that it

found unreasonable.* App., wmfra, 119a-120a. Put

differently, the pa»er’s interpretation and application

of the regulation’s “fair market value” requirement

did not become the Secretary’s interpretation and ap-

plication until the IBLA issued final agency orders

that directed particular lessees to recompute their

royalties using the IBLA’s modified version of the

methodology set out in the paper. Thus, the “agency

statement” that the court of appeals purported to

strike down was one that the Secretary (through the

IBLA) had explicitly refused to adopt or apply in

full accordance with its terms.

The purpose of the procedure paper was to set forth

a general “yardstick” to guide agency enforcement

personnel in evaluating lessees’ compliance with the

“fair market value” rule of the governing regulation.

4 The IBLA renders final decisions for the Department under

authority delegated directly by the Secretary. See 43 C.F.R.

4.1, 4.1(b) (3) (1987). The Board, like the Secretary himself,

is bound by properly adopted substantive regulations. See,

e.g., Vitarelli v. Seaton, 359 U.S. 535, 539-540 (1959); Conoco,

Inc., 113 IBLA 248, 249 (1990): Coastal States Energy Co.,

110 IBLA 179 (1989). The Board would therefore have been

bound by the procedure paper, in its entirety, if it were a sub-

stantive rule. See also, e.g., Phillips Petroleum Co., 117 IBLA

255, 261, 262 (1991) (Board not bound by “internal agency

interpretative pronouncements such as the Procedure Paper’’).

ee a Mal Saal a afte eam VA a Re aba. St Bea |

Pi ate Seats

App., infra, 130a. The problem that the paper ad-

dresses first became apparent in the course of attempts

to determine whether existing lessees had been com-

plying with existing rules, see ibid.; and the solution

that the valuation and compliance personnel agreed

upon was applied, as it was always intended to be

applied, to audit past transactions for purposes of de-

termining whether to issue initial orders to lessees

to pay additional royalties with respect to past pro-

duction. Thus, the valuation and compliance divi-

sions’ joint memorandum is perhaps best viewed

as an initial step in the process of enforcing existing

rules as applied to past or ongoing conduct—that is,

as a guide to the commencement of one or more ad-

judications. See Martin v. Occupational Safety &

Health Review Comm’n, 499 U.S. 144, 157 (1991).

Viewed in that light, the court of appeals’ decision

in this case prevents enforcement of final agency

orders on the ground that an initial enforcement

policy memorandum, prepared by and for the use of

agency compliance personnel at the beginning of the

adjudication process, was not issued for public no-

tice and comment. That result represents a profound

—and profoundly disruptive—misreading of the APA.

2. Even assuming that the MMS procedure paper

is properly characterized as an agency “rule,” the

court erred in requiring notice-and-comment proce-

dures for its adoption. See Lincoln v. Vigil, 113 S. Ct.

2024, 2034 (1993). The APA exempts from those

procedures “interpretative rules, general statements

of policy, [and] rules of agency organization, proce-

dure, or practice.” 5 U.S.C. 553(b)(A). The docu-

ment at issue here is far more plausibly placed within

one of those categories than within the quite distinct

category of “substantive” rules.

a. Interpretative Rule. Any fair reading of the

procedure paper indicates that it was created not to |

alter the “fair market value” requirement of 30 ;

C.F.R. 206.150 (1987), but to set forth a standard

method that compliance auditers could use for inter-

preting that requirement and applying it to particular

arrangements involving non-arm’s-length transfers of

NGLPs. As the district court pointed out, “[f]rom be-

ginning to end, the [paper] strives to explain what

generally constitutes ‘fair market value’ in certain

circumstances; it falls well short of effecting a change

in existing law or policy.” App., infra, 58a.

The paper identifies a practical valuation problem

(App., infra, 130a), states the generally applicable

regulatory standard (ibid.), and then sets out an ad-

ministrative view about how that issue should be re-

solved under several variations of a specific factual

context (id. at 182a-137a). The purpose and effect of

the paper thus closely resemble classic definitions of

what constitutes an “interpretative” rule. See, e.g.,

Gibson ¥i ine Co. v. Snyder, 194 F.2d 329, 331 (D.C

Cir. 1952) (“statements as to what the administra-

tive officer thinks the statute or regulation means’) ;

U.S. Dep’t of Justice, Attorney General’s Manual on

the Administrative Procedure Act 30 n.3 (1947)

[hereinafter Attorney General’s Manual] (statements

embodying “the agency’s construction of the stat-

utes and rules which it administers’); see also

American Mining Congress v. Mine Safety & Health

Admin., 995 F.2d 1106, 1110 (D.C. Cir. 1998) (dis-

cussing distinction between substantive and interpre-

tive rules) ; cf. Guernsey Memorial Hospital v. Secre-

tary of HHS, 996 F.2d 830, 834-836 (6th Cir. 1993)

(holding, in part, that an agency manual provision is

invalid as a legislative rule issued without notice and

comment), cert. granted, 114 S. Ct. 1395 (1994)

(argued Oct. 31, 1994). The court of appeals’ con-

clusory statements to the contrary—that the paper

“does not purport to interpret a statute or regula-

tion,” “defines no ambiguous term,” and “gives no

officer’s opinion about the meaning of the statute or

regulations,” but instead “effects a change in the

method used by MMS in valuing NGLPs” (App.,

infra, 8a)—ignore the entire premise and thrust of

the document.®

b. General Statement of Policy. As the court of

appeals acknowledged (App., infra, 7a), the Interior

Board of Land Appeals regarded the procedure paper

not as a substantive rule but as “essentially a policy

°The court described the procedure paper as “narrowly

restrict[ing] the discretion of MMS officials,” “foreclos fing]”

other valuation methods, “mandat[ing]” the use of one valua-

tion method, or “eliminat[ing]” alternative regulatory valua-

tion factors. App., infra, 10a-1la. But the paper notes that

its authors proceeded by first studying, with respect to a

particular factual context, precisely the regulatory factors to

be “considered” by the Director in determining royalty value

under the regulation. Compare 30 C.F.R. 206.150 (1987)

(comparable sales, lessee receipts, posted prices, regulated

prices, and “other relevant matters”) with App., infra, 132a

(relevant sales contracts, lessee receipts, prices prescribed by

regulation, and published spot prices (the closest approxima-

tion of “posted prices” in the NGLP context) ). The resulting

paper does not “mandate” a particular result in all cases, but

merely concludes (ibid.) that “in most instances” spot prices

“represent the best available * * * indicati [on] of NGLP fair

market value.” The paper explicitly states that lessees may

demonstrate fair market value by other methods. Id. at 136a.

See also Amoco Production Co., 112 IBLA 77, 85-86 (1989);

Phillips Petroleum Co., 117 IBLA 255, 261, 262 (1991).

guideline adopted by MMS to assist in valuing NGLP

production for royalty purposes under the provisions

of the relevant regulation.” Jd. at 117a. That view

is consistent with the central character of the paper as

a statement of compliance division policy, adopted

by front-line agency personnel, to be implemented

through enforcement efforts relating to past conduct,

and subject to further consideration and review dur-

ing the adjudication process before its formal adop-

tion as agency policy by the Secretary or his

delegates.

In applying the exception for “‘general statements

of policy” under the APA, courts have considered

whether agency statements are designed “to advise

the public prospectively of the manner in which the

agency proposes to exercise a discretionary power,”

see Lincoln v. Vigil, 118 S. Ct. at 2034 (quoting

Attorney General’s Manual 30 n.3); or, in other cir-

cumstances, whether the agency “inten[ded] to be

bound” by its pronouncement, Public Citizen, Inc. v.

U.S. Nuclear Regulatory Comm’n, 940 F.2d 679, 682

(D.C. Cir. 1991), or whether the statement is “finally

determinative of the issues or rights to which it is

addressed.” Pacific Gas & Elec. Co. vy. Federal Power

Comm'n, 506 F.2d 33, 38 (D.C. Cir. 1974). In this

case, as the IBLA made clear (App., infra, 117a),

the procedure paper itself has never had the force or

effect of law. If the IBLA enters a final order direct-

ing a lessee to pay additional royalties, it does so not

because the lessee has “violated” the procedure paper,

but because the lessee has violated the governing stat-

ute or its implementing regulations. Thus, even if

preparation of the procedure paper is viewed as a

rulemaking, the paper’s ultimate impact was and re-

mains heavily dependent on subsequent review and

a ee -

application in particular adjudicatory proceedings.®

Its provisional conclusions are therefore surely better

viewed as a “general statemen[t] of policy” with re-

spect to royalty enforcement than as a substantive

or “legislative” rule.

c. Rule of Agency Organization, Procedure, or

Practice. Finally, the notice-and-comment require-

ments do not apply to “rules of agency organization,

procedure, or practice.” 5 U.S.C. 553(b)(A). The

court of appeals itself thought that the procedure pa-

per “would appear to fall squarely within this exemp-

tion,” because its provisions “plainly relat[e] to the

internal practices of MMS.” App., infra, 9a.

The precise scope of the exemption for rules of

agency “practice” is unclear. On its face, it covers

a broad range of agency “practices” or modes of

operation. Compare 5 U.S.C. 551(4) (“rulef[s]” in-

clude the “prescription * * * of * * * practices”

bearing on, inter alia, “valuations”). The exemption

could also be understood more narrowly, however, to

refer only to rules governing the “practice” of attor-

neys or others before the agency. Compare ibid.

(“rule[s]” include statements that “describ[e] the

organization, procedure, or practice requirements of

an agency”). In any event, because of the procedure

paper’s provisional, non-binding nature and its direct

* See also, e.g., Phillips Petroleum Co., 117 IBLA at 262

(paper’s statement “that spot market prices will ‘in most in-

stances’ be indicative of the fair market value of NGLP * * *

does not preclude MMS from deciding in any given case that

one of the factors listed in 30 CFR 206.150 (1985) is more

indicative of such value”); Amoco Production Co., 112 IBLA

at 85-86 (refusing to use spot market price to value certain

NGLPs).

relevance to the auditing and enforcement “practices”

of MMS’s Royalty Compliance Division, the paper

is certainly better characterized as a “rulfe] of

agency * * * practice” than as a substantive or

legislative rule. Similarly, the “procedure paper”

is, as its name suggests (and as the court of appeals

thought), a “rul[e] of agency * * * procedure” in

the sense that it describes the manner in which MMS

personnel should audit lessee accounts. The court

of appeals erred in nevertheless concluding (App.,

infra, 9a) that “the mere fact that [the paper]

may guide MMS procedures does not mean that the

Procedure Paper is a ‘procedural’ rule for purposes

of the APA.”

3. In precluding enforcement of royalty orders

based on the methodology developed in the procedure

paper, the court of appeals relied heavily on its prior

decision in Brown Express, Inc. v. United States, 607

F.2d 695 (1979). In particular, the court concluded

that the paper’s methodology effected changes in the

governing regulatory valuation standards that would

have a “substantial impact” on lessees under the test

adopted in Brown Express. See App., infra, 7a-10a.

Thus, in a strikingly candid departure from the text

of the APA, the court stated that its inquiry was “not

whether the rule is ‘substantive’ or ‘procedural,’ but

rather whether the rule will have a ‘substantial im-

pact’ on those regulated.” Jd. at 10a. Indeed, the

court acknowledged (id. at 9a-10a) that, but for that

standard, it would have held the procedure paper

exempt from:the APA’s notice-and-comment require-

ments. That application of the court’s own “substan-

tial impact” test to supplement and, indeed, supplant

the exemption standards explicitly provided by the

{

3 2

APA itsel! conflicts with decisions of this Court and

other courts of appeals, and warrants further review.

In Vermont Yankee Nuclear Power Corp. v. Nat-

ural Resources Defense Council, Ine., 485 U.S. 519

(1978), this Court made clear that courts are not

free to alter the APA’s rulemaking requirements by

“engrafting their own notions of proper procedures

upon agencies.” Id. at 525. The APA prescribes a

set of carefully circumscribed, minimum require-

ments. The courts are not free to supplement those

requirements based on their own views of the need for

or desirability of further public involvement, because

“Congress intended that the discretion of the agencies

and not that of the courts be exercised in determining

when extra procedural devices should be employed.”

Id. at 546 (emphasis added in part). The courts may

not, therefore, determine that the “substantial im-

pact” of an agency action requires the use of APA

procedures when the Act itself would not require that

those procedures be followed.

Although the question in Vermont Yankee was

whether a court could impose procedures in addition

to the APA notice-and-comment procedure conced-

edly applicable in that case, the Court’s rationale ap-

plies with equal force where, as here, the issue is

whether a court may require resort to that proce-

dure where it would not apply under the terms

of the APA. The APA includes express exceptions

precisely in order to avoid the need for compliance

where Congress has determined that it is not essen-

tial. See, e.9., Philadelphia Citizens in Action v.

Schweiker, 669 F.2d 877, 881 (3d Cir. 1982). What-

ever a court may think of that determination as it

applies in a particular case, “the explicit judgment

of Congress as to when administrative agencies may

dispense with formal rulemaking procedures must be

respected.” Ibid.

The court of appeals’ decision also conflicts with

the rejection of the “substantial impact” test by other

courts of appeals. Before Vermont Yankee, the lower

courts frequently relied on some version of a “sub-

stantial impact” test in applying the APA’s notice-and-

comment requirements.’ Following Vermont Yankee,

however, the Ninth Circuit rejected the substantial

impact test altogether, finding it inconsistent with the

teachings of that case. See Rivera v. Becerra, 714

F.2d 887, 889-891 (1983), cert. denied, 465 U.S. 1099

(1984); Alcaraz v. Block, 746 F.2d 593, 613 (1984);

Southern California Edison Co. v. FERC, 770 F.2d

779, 783 (1985). Other courts have likewise rejected

or criticized the test in various contexts.* This Court

7 See, e.g., Reynolds Metals Co. v. Rumsfeld, 564 F.2d 663,

669 (4th Cir. 1977), cert. denied, 435 U.S. 995 (1978); Pickus

v. United States Bd. of Parole, 507 F.2d 1107, 1114 (D.C. Cir.

1974); Lewis-Mota v. Secretary of Labor, 469 F.2d 478, 482

(2d Cir. 1972). See also 2 K. Davis, Administrative Law

Treatise §§ 7:15-7:20 (2d ed. 1979); K. Davis, Administrative

Law of the Eighties § 7:20 (1989); Note, The Substantial Im-

pact Test: Victim of the Fallout from Vermont Yankee?, 53

Geo. Wash. L. Rev. 118 (1985).

8 See, e.g., Metropolitan School Dist. v. Davila, 969 F.2d 485,

493 (7th Cir. 1992), cert. denied, 113 S. Ct. 1360 (1993);

Friedrich v. Secretary of HHS, 894 F.2d 829, 836 (6th Cir.),

cert. denied, 498 U.S. 817 (1990); State of Ohio Dep’t of

Human Services v. United States Dep’t of HHS, 862 F.2d

1228, 1233-1234 (6th Cir. 1988); Cabais v. Egger, 690 F.2d

234, 237-238 (D.C. Cir. 1982) (rejecting test in distinguishing

between interpretive and substantive rules); American Hos-

pital Ass’n V. Bowen, 834 F.2d 1037, 1047 (D.C. Cir. 1987)

(commenting on court’s “move away” from test with respect

to procedural rules, based on “candid recognition that even

granted review to resolve the circuit conflict in De-

partment of Transportation vy. Air Transport Ass’n,

498 U.S. 1023 (1991), but that case subsequently be-

came moot. See 498 U.S. 1077 (1991) (vacating de-

cision below and remanding for consideration of moot-

ness); 933 F.2d 1043 (D.C. Cir. 1991) (dismissing

case as moot); see also id. at 1043 (Silberman, J.,

concurring).

Indeed, the Fifth Circuit itself has acknowledged

that the “substantial impact” test has been “much

criticized” by courts and commentators, including Pro-

fessor Davis, who has stated that the court’s holding

in Brown Express “is clearly not the law.” American

Transfer & Storage Co. v. ICC, 719 F.2d 1283, 1285

unambiguously procedural measures affect parties to some

degree’”’) ; Levesque v. Block, 723 F.2d 175, 182 (1st Cir. 1983)

(test “may be relevant in construing the intent of the agency

in issuing [a] rule’); see also Energy Reserves Group, Inc. v.

Department of Energy, 589 F.2d 1082, 1093-1098 (Temp.

Emer. Ct. App. 1978) (opinion of Becker, J.) (criticizing test).

A panel of the Eleventh Circuit, although viewing the deci-

sion in Brown Express as part of the law of that court, has

criticized it as contrary to Vermont Yankee. See American

Trucking Ass’n Vv. United States, 688 F.2d 1337, 1351-1352 &

n.20 (1982), rev’d on other grounds sub nom. ICC vy. American

Trucking Ass’ns, 467 US. 354 (1984); Jean vy. Nelson, 711

F.2d 1455, 1479-1480 & nn.18, 20 (1983), modified on other

grounds on reh’g, 727 F.2d 957 (1984) (en banc), aff’d on

other grounds, 472 U.S. 846 (1985).

®The D.C. Circuit has apparently retreated from its pre-

vious reliance on substantial impact considerations in ap-

plying the APA exemption for procedural rules. See, ¢.9.,

JEM Broadcasting Co. v. FCC, 22 F.3d 320, 326-328 (1994);

cf. American Mining Congress Vv. Mine Safety & Health

Admin., 995 F.2d at 1110 (discussing distinction between sub-

stantive and interpretive rules).

& n.4 (1983), quoting K. Davis, Administrative Law

Treatise § 6:31 (Supp. 1982). Nonetheless, as this

case demonstrates, the Fifth Circuit has continued to

defend and apply the test, even in the face of Ver-

mont Yankee and the contrary trend of authority in

the other courts of appeals. See App., infra, 10a

(“substantial impact” is the “proper test”); United

States Dep’t of Labor v. Kast Metals Corp., 744 F.2d

1145, 1154 n.19 (5th Cir. 1984) (rejecting Ninth

Circuit’s analysis of Vermont Yankee). The issue is

therefore ripe for this Court’s review.

4. The issue presented by this case is of significant

practical importance to the Department of the Interior

and to all other federal agencies that are subject to

the APA. By precluding enforcement of the compli-

ance orders at issue here, which are based on the

methodology developed in the procedure paper and

modified by the IBLA, the court of appeals’ judgment

casts doubt on the Secretary’s ability to enforce com-

pliance with his interpretations of the regulatory

“fair market value” standard unless he adopts each

of those interpretations through notice-and-comment

rulemaking. Such a result would be plainly unwar-

ranted, and would frustrate the Secretary’s ability

to “audit and reconcile, to the extent practicable, all

current and past lease accounts for leases of oil or

gas and take appropriate actions to make additional

collections or refunds as warranted.” 30 U.S.C.

1711(c) (1).

Moreover, MMS must repeatedly apply royalty val-

uation rules to new or particular circumstances due

to changes in the market and the often complex struc-

ture of production and distribution transactions.

MMS cannot confidently predict changes in the mar-

ket or in industry practices. Accordingly, the Secre-

ee t

tary’s front-line compliance personnel should be able

to confront interpretive questions promptly, efficiently,

and uniformly as they arise, in order to have a sound

basis for making initial enforcement policy decisions

that relate to specific situations but that potentially

affect a wide range of leases and lessees.

Neither the APA nor any other statute provides

that the Secretary of the Interior—let alone divisions

within one component cf the Department—must de-

velop every guideline, policy, and procedure necessary

to aid agency auditors in evaluating lessees’ royalty

compliance by adopting substantive rules having the

foree of law. See, e.9., NLRB vy. Bell Aerospace Co.,

416 U.S. 267, 293 (1974); SEC vy. Chenery Corp.,

332 U.S. 194, 202-203 (1947); 1 K. Davis & R.

Pierce, Jr., Administrative Law Treatise § 6.8 (3d ed.

1994). Nor is there any requirement that coordina-

tion of initial compliance or enforcement policies, to

be enforced through subsequent orders and adjudica-

tory proceedings, must be accomplished without set-

ting pen to paper, lest the resulting internal guidance

be deemed a substantive rule.

The same principles apply, moreover, to every fed-

eral agency having compliance or enforcement re-

sponsibilities. Both the APA’s definition of “rules”

(which surely does not encompass every piece of paper

produced or statement made by any agency official

in any context, see Lincoln v. Vigil, 113 S. Ct. at

2034), and the exemptions from the APA’s notice-

and-comment requirement for those “agency state-

ments” that are “rules,” evince a judgment by Con-

gress that agencies must have the ability to com-

municate and coordinate their activities internally,

and to announce their own policies and interpreta-

tions to the public, without first providing for public

28 ‘

notice and comment. Whichever of the available (and :

sometimes overlapping) exemptions might most ap-

propriately be said to apply in a case such as this

one, together they surely permit the kind of agency

activity reflected in the “procedure paper” at issue

in this case to take place without resort to the rule-

making procedures of the APA. The court of appeals’

ruling to the contrary poses a serious threat to the

orderly conduct of the government’s administrative

business. The decision below therefore merits review

by this Court.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted.

Drew S. Days, III

Solicitor General

Lois J. SCHIFFER

Assistant Attorney General

EDWIN S. KNEEDLER

Deputy Solicitor General

EDWARD C. DUMONT

Assistant to the Solicitor General

ROBERT L. KLARQUIST

WILLIAM B. LAZARUS

Attorneys

JANUARY 1995

APPENDIX A

UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

No. 93-1377

PHILLIPS PETROLEUM COMPANY

PLAINTIFF-APPELLANT

Vv.

GARY JOHNSON, Area Manager, Dallas Area Com-

pliance Office, Minerals Management Service, ET

AL., DEFENDANTS-APPELLEES

ATLANTIC RICHFIELD COMPANY,

PLAINTIFF-APPELLANT

Vv.

BRUCE BABBITT, Secretary of

Department of Interior, ET AL.,

DEFENDANTS-APPELLEES

PHILLIPS PETROLEUM CoMPANY,

PLAINTIFF-APPELLANT

Vv.

GARY JOHNSON, Area Manager, Dallas Area Com-

pliance Office, Minerals Management Service, ET

AL., DEFENDANTS-APPELLEES

(1a)

PHILLIPS PETROLEUM COMPANY,

PLAINTIFF-APPELLANT,

Vv.

GARY JOHNSON, Area Manager, Dallas Area Com-

pliance Office, Minerals Management Service, ET

AL., DEFENDANTS-APPELLEES

Appeals from the United States District Court

for the Northern District of Texas

June 10, 1994

Before SMITH and BARKSDALE, Circuit Judges,

WALTER,* District Judge.

JERRY E. SMITH, Circuit Judge:

In this consolidated appeal, plaintiffs Phillips Pe-

troleum Company (“Phillips”) and Atlantic Richfield

Company (‘Arco’) appeal a summary judgment.

Phillips and Arco contend that (1) the six-year limi-

tations period of 28 U.S.C. § 2415(a) barred the ad-

ministrative order issued by Minerals Management

Service (‘“MMS’’) of the Department of Interior

(“DOI”) requiring the recalculation and payment of

additional oil and gas royalties based upon an unpub-

lished MMS royalty-valuation procedure (the “Proce-

dure Paper’); (2) defendants failed properly to

initiate an audit pursuant to the Federal Oil and Gas

* District Judge of the Western District of Louisiana, sit-

ting by designation.

3a.

Royalty Management Act (“FOGRMA”), 30 U.S.C.

§§ 1701-1757; and (3) MMS promulgated the Proce-

dure Paper without notice and comment required

under the Administrative Procedure Act of 1982

serts that defendants failed to comply with the Paper-

work Reduction Act, 44 U.S.C. §§ 3501-3520. Con-

cluding that MMS promulgated a substantive rule

without notice and comment, we reverse.

DOI is responsible for issuing and administering

oil and gas leases for federal lands. 30 U.S.C. $$ 181,

further provides that the Secretary “shall audit and

reconcile, to the extent practicable, all current and

past lease accounts for leases of oil or gas and take

appropriate actions to make additional collections or

refunds as warranted, ... [and] may also audit ac-

counts and records of selected lessees and operators.”

Id. §1711(c)(1). MMS is the agency within the

DOI that is responsible for auditing royalty payments

on federal and Indian oi] and gas leases.

Phillips and Arco hold numerous leases on federal]

and offshore lands. As lessees, they pay royalties to

the government based upon the value of the produc-

tion saved, removed, or sold from the leased premises.

Up until March 1, 1988, DOI considered several fac-

tors in determining the value of federal offshore pro-

duction for royalty purposes:

The value of production shall never be less than

fair market value. The value used in the compu-

tation of royalty shall be determined by the Di-

rector. In establishing the value, the Director

shall consider: (a) The highest price paid for a

part or for a majority of like-quality products

produced from the field or area; (b) the price

received by the lessee; (c) posted prices; (d)

regulated prices; and (e) other relevant matters.

Under no circumstances shall the value of pro-

duction be less than the gross proceeds accruing

to the lessee from the disposition of the produced

substances or less than the value computed on

the reasonable unit value established by the

Secretary.

30 C.F.R. § 206.150 (1987).

On December 14, 1984, MMS developed new cri-

teria for valuing natural gas liquid products

(““NGLP’s”’),' as set forth in an unpublished inter-

nal agency paper referred to as the “Procedure

Paper.” Instead of considering the range of the

various types of prices prescribed in the governing

regulation, the Procedure Paper focused entirely

upon one type of price, the spot market price:

1 When natural gas is produced that contains a high volume

of liquefiable hydrocarbors (commonly known as “wet” gas),

the gas is sometimes processed to separate the liquids from

the dry methane, or “residue,” gas. The liquids are then frac-

tionated to separate the NGLP’s, such as ethane, propane,

butane, and natural gasoline.

MMS will take the highest and lowest published

price for the month from the appropriate [spot

market price] bulletin. If the reported price [by

the lessee] falls within this range, the [lessee’s]

value will normally be accepted by MMS for

royalty determination purposes. . . .

If the prices used to calculate royalties fall below

this range, a minimum value that is acceptable

to MMS can be determined by developing an

average value from the lowest and highest prices

in the range.

In a September 6, 1989, order, MMS advised Arco

that it had audited royalty payments under five of

Arco’s federal offshore leases for the month of Sep-

tember 1983. MMS directed Arco to recalculate its

royalties under the five leases, using the Procedure

Paper, for the period 1983-1989. In a September 7,

1989, order, MMS required Arco to recalculate and

pay additional royalties for all federal offshore leases

from 1983 to 1989. MMS sent Arco another order

on September 29, 1989, requiring Arco to recalculate

its royalties using the Procedure Paper for all fed-

eral offshore leases for a period from October 1980

to February 1988. MMS sent similar orders to Phil-

lips in September 1989, requiring Phillips to recaleu-

late and pay additional royalties, using the Proce-

dure Paper, on all offshore leases between January

1977 and February 1988.

Phillips filed three separate suits for declaratory

and injunctive relief, disputing the validity of the

MMS orders; at about the same time, Arco filed a

similar action in the same court. The four cases were

consolidated, and the parties filed cross-motions for

summary judgment. The district court allowed the

government to file a counterclaim seeking judicial en-

forcement of the orders, concluding that the statute

of limitations provision of 28 U.S.C. § 2415(a) did

not apply to the contested orders, and granted sum-

mary judgment on the government’s counterclaim.

II.

The Procedure Paper is a “rule,” and its promul-

gation constituted “rulemaking” within the meaning

of the APA.’ Section 553 of the APA provides that

an agency must provide notice of a proposed rule in

the Federal Register and afford an opportunity for

interested persons to present their views. 5 U.S.C.

§553(b), (c). The required publication must be

made not less than thirty days before the effective

date of the proposed rule. Jd. § 553(d). In promul-

gating the Procedure Paper, MMS did not attempt

to comport with these requirements, as it argues that

the requirements of § 553 do not apply to the APA.

The APA exempts “interpretative rules, general

statements of policy, [and] rules of agency organiza-

2 Title 5 U.S.C. §551(4) defines a “rule” as “an agency

statement of general or particular applicability and future

effect designed to implement, interpret, or prescribe law or

policy or describing the organization, procedure, or practice

requirements of an agency and includes [various substantive

agency functions} or practices bearing on any of the fore-

going.” Section 551(5) defines “rulemaking” as “agency

process for formulating, amending, or repealing a rule.” In-

deed, MMS does not argue that its action was not rulemaking

but only that the Procedure Paper was exempt from the APA’s

notice and comment provisions.

tion, procedure, or practice” from the notice and com-

ment requirements. Jd. § 553(b) (A). In the Proce-

dure Paper itself, MMS attempted to avoid the notice

and comment requirements of the APA by character-

izing the rule as a “yardstick.” The Interior Board

of Land Appeals called the rule “essentially a policy

guideline.” Conoco & ARCO Oil & Gas Co., 110 IBLA

232, 242-43 (1989). This court, however, must de-

termine the category into which the rule falls:

“(T]he label that the particular agency puts upon

its given exercise of administrative power is not, for

our purposes, conclusive; rather it is what the agency

does in fact.” Brown Express, Inc. v. United States,

607 F.2d 695, 700 (5th Cir.1979) (quoting Lewis-

Mota v. Secretary of Labor, 469 F.2d 478, 481 (2d

Cir.1972)). We review this legal issue de novo. See

Munn v. Algee, 924 F.2d 568, 575 (5th Cir.), cert.

denied, ——- U.S. —~, 112 S.Ct. 277, 116 L.Ed.2d

229 (1991).

MMS argues that the Procedure Paper merely in-

terprets the existing royalty valuation regulation in

tne context of NGLP’s used internally and not sold.

It is therefore a clarification or explanation of exist-

ing laws and regulations rather than a substantive

modification of existing regulations or adoption of

new ones. See Continental Oil Co. vy. Burns, 317

F.Supp. 194, 197 (D.Del.1970). Consequently, MMS

concludes, the Procedure Paper is exempt from the

notice and comment requirements as an “interpreta-

tive rule.”

“Interpretative rules” have been defined by this

court in Brown Express: “Generally speaking, it

Seems to be established that ‘regulations,’ ‘substan-

tive rules,’ or ‘legislative rules’ are those which

create law, usually implementary to an existing law;

whereas interpretative rules are statements as to

what the administrative officer thinks the statute or

regulation means.” Brown Express, 607 F.2d at 700

(quoting Gibson Wine Co. v. Snyder, 194 F.2d 329,

331 (D.C.Cir.1952)). The Procedure Paper is not

an interpretative rule, as it does not purport to in-

terpret a statute or regulation. Notwithstanding

MMS9’s asertion that the Procedure Paper merely an-

nounced the approach MMS would take in interpre-

ting and applying 30 C.F.R. § 206.150, the Procedure

Paper is not a mere clarification. It defines no am-

biguous term. It gives no officer’s opinion about the

meaning of the statute or regulations. Rather, it ef-

fects a change in the method used by MMS in valuing

NGLPs.* As such, it is a new rule and cannot be

interpretative. Brown Express, 607 F.2d at 700.

MMS also contends that the Procedure Paper may

be characterized as a “general statement of MMS

policy.” A general statement of policy is a statement

by an administrative agency announcing motivating

factors the agency will consider, or tentative goals

toward which it will aim, in determining the resolu-

* MMS claims that the Procedure Paper effects no change

because MMS could have used spot market prices to value

NGLP’s not sold. Under 30 C.F.R. § 206.150, “posted prices”

are but one factor to be used in valuing NGLP royalties. And

rules are viewed as substantive when they “constrict the dis-

cretion of agency officials by largely determining the issue

addressed.” Batterton v. Marshall, 648 F.2d 694, 702 (D.C.

Cir.1980) (footnote omitted).

tion of a substantive question of regulation. Jd. at

701.

A general statement of policy .... is merely an

announcement to the public of the policy which

the agency hopes to impleinent in future rule-

makings or adjudications. A general statement

of policy, like a press release, presages an up-

coming rulemaking or announces the course

which the agency intends to follow in future ad-

judications.

Id. (quoting Pacific Gas & Elec. Co. v. FPC, 506 F.2d

33, 38 (D.C.Cir. 1974) ). The Procedure Paper, how-

ever, does none of these things. It does not set a goal

that future proceedings may achieve, for the change

has already been made. Immediately upon its effec-

tive date, the five-factor valuation technique of 30

C.F.R. § 206.150 was no longer to be followed. An

announcement stating a change in the method by

which an agency will value NGLP’s is not a “general

statement of policy.” Thus, the Procedure Paper is

not exempt from APA requirements as a “general

statement of policy.”

Section 553(b) (A) also exempts “rules of agency

organization, procedure, or practice.” Although the

Procedure Paper would appear to fall squarely within

this exemption, for the change effected by the Proce-

dure Paper plainly relates to the internal practices

of MMS, the mere fact that it may guide MMS pro-

cedures does not mean that the Procedure Paper is

a “procedural” rule for purposes of the APA.

The Supreme Court has stated that the notice and

comment provisions “were designed to assure fairness

10a

and mature consideration of rules of general applica-

tion.” NLRB v. Wyman-Gordon Co., 394 U.S. 759,

764, 89 S.Ct. 1426, 1429, 22 L.Ed.2d 709 (1969).

These provisions afford an opportunity for “the

agency promulgating the rule to educate itself before

establishing rules and procedures which have a sub-

stantial impact on those regulated.” Texaco, Inc. v.

Federal Power Comm’n, 412 F.2d 740, 744 (8d Cir.

1969). Congress realized that an agency’s judgment

would be only as good as the information upon which

it drew. It prescribed these procedures to ensure that

the broadest base of information would be provided

to the agency by those most interested and perhaps

best informed on the subject of the rulemaking at

hand. See Shell Oil Co. v. Federal Energy Admin.,

574 F.2d 512, 516 (Temp.Emer.Ct.App. 1978).

The proper test to be applied in considering a rule

that may arguably fall under the exemptions for

“procedural rules” is as stated by Brown Express:

“TW hen a proposed regulation of general applica-

bility has a substantial impact on the regulated in-

dustry, or an important class of the members or the

products of that industry, notice and opportunity for

comment should first be provided.” Brown Express,

607 F.2d at 702 (citation omitted). The exemption

of §553(b)(A) from the duty to provide notice by

publication does not extend to those procedural rules

that depart from existing practice and have a sub-

stantial impact on those regulated. Our inquiry,

therefore, is not whether the rule is “substantive” or

“procedural,” but rather whether the rule will have

a “substantial impact” on those regulated.

We conclude that the Procedure Paper does have a

substantial impact on those regulated in the industry.

The rule narrowly restricts the discretion of MMS

lla

officials in determining the value of NGLP’s. It fore-

closes other valuation methods by prescribing binding

valuation criteria. Although the regulation allows the

use of posted prices in determining the value of

NGLP’s, the Procedure Paper mandates the use of

spot prices.* Thus, the Procedure Paper does not even

comport with the regulation in using posted prices.

Moreover, the Procedure Paper eliminates the other

four factors in determining the value of NGLP’s.

This change in valuation technique dramatically

affects the royalty values of all oil and gas leases.

Thus, the Procedure Paper should have been pub-

lished in the Federal Register and offered for notice

and comment. A party may not be adversely affected

by a rule promulgated in violation of these require-

ments. 5 U.S.C. § 552(a) (1).

Il.

We conclude that the Procedure Paper is a substan-

tive rule, and § 553 of the APA controlled its promul-

gation. We therefore REVERSE the summary judg-

ment and REMAND for such further proceedings as

may be necessary.

* A posted price is a publicly announced price at which a

purchaser is willing to buy a certain type and amount of

petroleum products. Spot prices, on the other hand, reflect

actual transactions on a short-term or one-time basis.

12a

APPENDIX B

[Filed Apr. 16, 1993]

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

Civil Action No. 3-89-1707-H

Consolidated with

CA-3-89-2393-H ; CA-3-89-2727-H;

CA-3-89-2751-H

PHILLIPS PETROLEUM COMPANY, PLAINTIFF

Vv.

Nick L. KELLY, ET AL., DEFENDANTS

JUDGMENT

Pursuant to this Court’s Memorandum Opinion and

Order dated September 18, 1992, the Court hereby

orders, adjudges and decrees that the orders and deci-

sions of the Department of the Interior challenged

in the above-numbered cases and requiring plaintiffs

Atlantic Richfield Company and Phillips Petroleum

Company to recompute and pay any unpaid royalties

due to the government are valid and enforceable.

Specifically, the Court orders as follows:

(1) In Phillips Petroleum Co. v. Kelly, No. CA-89-

1707-H, Phillips is hereby ordered to comply with the

challenged order dated June 5, 1989. That order re-

quires Phillips to recompute and pay royalties on any

proceeds received as Natural Gas Policy Act section

110 (Federal Energy Regulatory Commission Order

13a

94) reimbursements on which royalty had not been

paid for the period from July 25, 1980 to June 5,

1989, on all leases which Phillips acquired from Gen-

eral American Oil Company of Texas. Administrative

Record Vol. I, No. 6.

(2) In Phillips Petroleum Co. v. Kelly, No. CA8-

89-2727-H, Phillips is hereby ordered to comply with

the order dated September 26, 1989, by recomputing

and paying royalties on any proceeds received as Nat-

ural Gas Policy Act section 110 (FERC Order 94)

reimbursements on which royalty had not been paid

for the period from July 1980 until September 26,

1989, for all leases which Phillips acquired from

Aminoil. Administrative Record Vol. Tl, No. 5.

(3) In Phillips Petroleum Co. v. Kelly, No. CA8-

89-2751-H, Phillips is hereby ordered to comply with

the order dated September 27, 1989, by recomputing

and paying royalties on Natural Gas Liquid Products

(NGLP) extracted from gas produced from all of its

offshore leases for the period from January 1977

through February 1988, except for NGLP extracted

at the North Terrebonne gas plant. Administrative

Record Vol. III, No. 1.

(4) In Atlantic Richfield Co. v. Lujan, No. CA3-

89-2393-H, ARCO is hereby ordered to comply with

the orders dated September 6 and 7, 1989, by recal-

culating and paying royalties dué on gas produced

from Arco’s offshore leases and processed through the

Yseloskey gas plant and disposed of under non-

arms-length arrangements using the Mont Belview,

Texas prices prescribed in the Procedure Paper meth-

odology for the sales months October 1983 through

February 1988. Administrative Record Vol. VI, Nos.

2 and 3. ARCO is also ordered to comply with the

September 29, 1989 order by recomputing and paying

l4a

additional royalties due for the NGLP extracted from

gas produced from all of its Federal offshore leases

and disposed of under non-arms-length arrangements

using the same methodology for the period from Oc-

tober 1980 through February 1988 (except for gas

processed at the Yscloskey gas plant, and limited to

the period October 1981 through February 1988 for

gas processed at the Grand Chenier gas plant). Ad-

ministrative Record Vol. VI, No. 1.

(5) Finally, this Court affirms the decision of the

Interior Board of Land Appeals in Conoco, Inc. and

ARCO Oil and Gas Co., 110 IBLA 232 (1989), chal-

lenged in Atlantic Richfield Co. v. Lujan, No. CA38-

89-2393-H. Accordingiy, the order dated March 31,

1986 and reviewed in that administrative appeal is

valid and enforceable. ARCO is hereby ordered to

pay additional royalties on NGLP on the basis of the

Mont Belview spot price for the period dated January

1980 through April 1983.

IT IS FURTHER ORDERED that the complaints

filed in cases numbered CA-3-89-1707-H, CA-3-89-

2393-H, CA-3-89-2727-H, and CA-3-89-2751-H are

hereby dismissed with prejudice. IT IS SO OR-

DERED.

/s/ Barefoot Sanders

United States District Court

Judge

DATED: April 16, 1993.

15a

APPENDIX C

[Filed Mar. 26, 1993]

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

Civil Action No. 3-89-1707-H

(Consolidated with

3-89-CV-2393-H, 3-89-CV-2727-H,

and 3-89-CV-2751-H )

PHILLIPS PETROLEUM COMPANY, PLAINTIFF

Vv.

Nick L. KELLY, ET AL., DEFENDANTS

ORDER

Before the Court are cross-motions for summary

judgment on the government’s counterclaim: Defend-

ants’ Motion for Summary J udgment on the Counter-

claim, filed February 1, 1993; the Memorandum of

Phillips Petroleum Company ( “Phillips”) in Re-

sponse to Defendants’ Motion for Summary Judgment

on Counterclaim, filed January 25, 1998: and the

Opposition of Atlantic Richfield Company (“ARCO”),

filed February 25, 1993. Also before the Court are

ARCO’s Motion for Summary Judgment on Counter-

claim, filed December 15, 1992; Phillips’ Motion for

16a

Summary Judgment on Federal Defendants’ Counter-

claim, filed February 1, 1998; and Defendants’ Re-

sponse to Plaintiffs’ Motions for Summary Judgment

on the Counterclaim, filed February 25, 1993.

The Court’s September 18, 1992 Memorandum

Opinion and Order seems to be the source of some

confusion. To clarify, that order ruled that the

MMS’s orders issued to Phillips and ARCO were valid

and enforceable. The Court’s judgment will reflect

that the challenged orders will be enforced.

It is important to note that the Court’s discussion

of the statute of limitations found in 28 U.S.C. § 2415

applies only to an “action for money damages.” How-

ever, no such action is currently pending; the Court’s

discussion of section 2415 indicates how the Court

would treat a claim for money damages if one were

to be filed. See Phillips Petroleum Company v. Kelly,

et al., No. 3:89-CV-1707-H (N.D. Tex. filed Septem-

ber 18, 1992) at 28 (“[Tjhe Court concludes that

the six year statute of limitations period affords the

MMS ample time to investigate, verify, and choose

the causes of action that it will pursue.”) (emphasis

added); 51 (“[{T]he Government is precluded from

bringing any causes of action against Phillips and

ARCO based on royalty payments on the leases at

issue here more than six years after the payments are

due.”). Thus, section 2415 has no direct application

to the MMS orders. See S.E.R., Jobs for Progress,

Inc. v. United States, 759 F.2d 1, 5 (Fed. Cir. 1985).

1The Court notes that the Fifth Circuit has questioned a

portion of the S.E.R., Jobs for Progress, Inc. decision. See

United States v. Popovich, 820 F.2d 134 (5th Cir.), cert.

denied, 484 U.S. 976 (1987). However, Popovich only ad-

dressed the portion of S.E.R., Jobs for Progress, Inc. which

discussed laches.

17a

In its counterclaim, the government asks for an in-

junction to enforce the Court’s September 18, 1993

order. To the extent that the government’s counter-

claim seeks to enforce the Court’s judgment, it is

GRANTED, To the extent that the government’s

counterclaim seeks further relief, it is DENIED with-

out prejudice.

The government is DIRECTED to submit by noon,

April 8, 1993 a proposed judgment which provides

the remedies spelled out in the Court’s September 18,

1992 Memorandum Opinion and Order—i.e., that the

IBLA decision and the MMS’ orders to recompute and

pay any unpaid royalties due to the government are

valid and enforceable.

SO ORDERED.

DATED: March 26, 1993.

/8/ Barefoot Sanders

“BAREFOOT SANDERS

Chief Judge

United States District Court

Northern District of Texas

———

*The Court notes that it retains the inherent power to

enforce its judgments; the Court will] do so when and if cir-

cumstances require enforcement of the judgment in this case.

18a

APPENDIX D

[Filed Sep. 18, 1992]

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

Civil Action No. 3-89-CV-1707-H

(Consolidated with

3-89-CV-2393-H, 3-89-CV-2727-H,

and 3-89-CV-2751-H)

PHILLIPS PETROLEUM COMPANY, PLAINTIFF

Nick L. KELLY, Area Manager, Dallas Area Compli-

ance Office, Minerals Management Service; BARRY

WILLIAMSON, Director, Minerals Management Serv-

ice of the Department of the Interior; MANUEL

LUJAN, JR., Secretary of the Interior; MINERALS

MANAGEMENT SERVICE of the United States De-

partment of the Interior; and the UNITED STATES

DEPARTMENT OF THE INTERIOR, DEFENDANTS

MEMORANDUM OPINION AND ORDER

Before the Court are three overlapping motions for

summary judgment:

1.) Plaintiff Phillips Petroleum Company’s

(“Phillips”) Motion for Partial Summary Judg-

19a

ment, filed August 16, 1991; Defendants’ (col-

lectively, for simplicity purposes, “the Govern-

ment”) Memorandum in Opposition thereto, filed

October 18, 1991; Phillips’s Supplemental Reply,

filed July 9, 1992;

2.) Plaintiff Atlantic Richfield Company’s

(“ARCO”) Motion for Summary Judgment, filed

August 16, 1991; the Government’s response

thereto (contained in its October 18, 1991, Mem-

orandum in Opposition); and ARCO’s Reply,

filed July 9, 1992;

3.) The Government’s Motion for Partial Sum-

mary Judgment, filed May 16, 1991; ARCO’s

Brief in Opposition thereto, filed October 4,

1991; Phillips’s Brief in Response and Opposi-

tion, filed October 18, 1991; and Defendants’

Supplemental Brief, filed July 10, 1992.

Related to these motions are Plaintiffs’ Joint Sup-

plemental Brief, filed November 25, 1991; Defend-

ants’ Response thereto, filed December 6, 1991; Phil-

lips’s Reply, filed December 24, 1991; ARCO’s Reply,

filed January 6, 1992; and Defendants’ Surreply, filed

January 15, 1992. Finally, before the Court are

Phillips’s Brief In Re the One-Year Grace Period Pro-

vision of 28 U.S.C. § 2415, filed September 15, 1992;

ARCO’s Supplemental Brief, filed September 15,

1992; and the Government’s Supplemental Brief Re-

garding One-Year Proviso of 28 U.S.C. 2415, filed

September 15, 1992.

I. Background

Phillips and ARCO each produce oil and natural

gas throughout the world. Among the leases they

20a

hold enabling them to do so are ones located on the

outer continental shelf of the United States (“OCS”)

on lands owned by the federal government. Pursuant

to the Outer Continental Shelf Lands Act, the Secre-

tary of the Interior (“the Secretary”) is responsible

for the management of OCS leases. See 43 U.S.C.A.

§ 1837(a)(1) (West 1986). The Federal Oil and

Gas Royalty Management Act (“FOGRMA”) author-

izes the Secretary to audit, and collect royalties on,

these leases. See 30 U.S.C.A. § 1711 (West 1986) ;

30 U.S.C.A. §§ 181, 223-37 (West 1986 & Supp.

1992) ; see also 380 U.S.C.A. §§ 181-287 (West 1986)

(awarding the Secretary, via the Mineral Land Leas-

ing Act, responsibility for mineral lands leases).

Pursuant to these statutory provisions and the

terms of the OCS leases at issue in this suit, see

Affidavit of S. Mark Haugland, filed August 16, 1991,

Exhibits A-D, Phillips and ARCO paid monthly royal-

ties to Defendant Minerals Management Service

(“MMS”),’ a division of Defendant Department of

the Interior (“DOI’’),? for the right to extract oil and

gas from the leased properties. The MMS carries out

its responsibilities through the Royalty Management

Program.

Based on audits of sample OCS leases for produc-

tion between October 1, 1980, and September 30,

1983, the MMS determined that Phillips and ARCO

had underpaid royalties on natural gas liquid prod-

1 Beginning in 1982, the Secretary delegated the adminis-

trative responsibility for OCS leases to the MMS. See Secre-

tarial Order No. 3071 (Jan. 19, 1982), 47 Fed. Reg. 4757

(Feb. 2, 1982).

? The remaining Defendants are individual officers of MMS

or the DOI sued in their respective capacities as such.

21a

ucts (“NGLP’s”) produced on the OCS leases at issue

here and used internally by Phillips and ARCO with-

out being sold.* The MMS concluded that, in some

cases, the underpayments were the result of Phillips

and ARCO undervaluing the gas produced and, in

other cases, the result of Phillips failing to pay on

reimbursements for production-related costs. In all

instances, the MMS determined that the alleged

undervaluations were systemic shortcomings, mean-

ing that they recurred with each royalty calculation.

Between June and September 1989, the MMS noti-

fied Phillips and ARCO of its determinations and

directed both to recalculate royalties due on the OCS

leases at issue for the periods in question.* See Ad-

ministrative Record (“A.R.”), Vol. I, No.’s 5, 6; Vol.

II, No. 5; Vol. III, No. 1; Vol. VI, No.’s 1, 2, 3.

Phillips and ARCO, disputing the MMS’s calculation

methods, filed the instant suits, Phillips initiating

Civil Action No.’s CA3-89-CV-1707-H, CA3-89-CV-

2727-H, and CA3-89-CV-2751-H, and ARCO bringing

Civil Action No. CA3-89-CV-2393-H. In their respec-

tive actions, Phillips and ARCO seek declaratory

*The leases involved are Phillips’s No. OCS-G 2712, No.

OCS-G 2301, No. OCS-G 2302; ARCO’s lease No.’s 054-

002919-0, 054-002636-0, 054-002637-0, 054-002640-0, and 054-

004501-0; and eight leases identified as those acquired through

a January 1, 1985, merger of Aminoil, Inc., into Phillips. The

MMS approved the Aminoil merger on March 1, 1985, see

A.R., Vol. II, No. 8, and its royalty calculation efforts were not

delayed by it. See A.R., Vol. III, No.’s 1, 7, 11.

*The MMS’s orders were given in letters addressed to

Phillips’s Bartlesville, Oklahoma, office and dated June 5,

1989, June 12, 1989, September 26, 1989, and September 27,

1989, respectively, and letters addressed to ARCO and dated

September 6, 7, and 29, 1989, respectively.

22a

judgments that the MMS orders are unlawful and

injunctions enjoining Defendants from enforcing the

orders in any respect. This Court consolidated the

cases because the issues presented in all four overlap

significantly. See Order of Consolidation, filed March

2, 1990.

Specifically, Phillips and ARCO maintain that, 1.)

the statute of limitations codified at Title 28, United

States Code, Section 2415(a) (“Section 2415[a]”),

bars collection of royalties due and owing more than

six years before the respective MMS orders were

issued;* 2.) the MMS lacks authority to order the

recalculations at issue because they amount to self-

audits barred by FOGRMA; and 3.) the MMS8’s valu-

ation procedures were invalid. With respect to the

latter issue, two of the consolidated cases” involve

challenges to the MMS’s assessments of reimburse-

ments for production-related costs received based on

orders from the Federal Energy Regulatory Commis-

5 The relevant dates for the purposes of Section 2415(a)

are the dates on which the Government files complaints, and

not the dates of the MMS’s orders. See 28 U.S.C.A. § 2415 (a)

(West Supp. 1992); infra pp. 9-10. Phillips and ARCO’s

implied position is that, if the MMS orders fell after the

limitations period had expired, then subsequent Government

suits would fall likewise, and, hence, be barred.

6 Pivotal too is the parties’ agreement that the agency

orders at issue in this case are final for the purposes of review

by this Court. See A.R., Vol. I, No.’s 1, 2; A.R., Vol. I], No.’s

1, 2; A.R., Vol. IV, No. 1; First Joint Status Report, filed

October 27, 1989; Defendants’ Motion for Partial Summary

Judgment at 4, 6, 8; Phillips’s Brief in Support of its Cross

Motion for Partial Summary Judgment, filed August 16,

1991, at 2.

7 Cases CA3-89-CV-1707-H and CA3-89-CV-2727-H.

23a

sion (“FERC”), and two * involve challenges to roy-

alty valuation regulations that were based on the

“Procedure Paper on Natural Gas Liquid Products

Valuation” (“Procedure Paper”). ARCO also chal-

lenges a decision of the Interior Board of Land Ap-

peals (“IBLA”) upholding use of the Procedure

Paper by the MMS.

Phillips, ARCO, and the Government each move

for summary judgment on all issues except the chal-

lenges based on the FERC orders. After reviewing

the necessary summary judgment tenets, the Court

addresses each issue in turn.

II. Summary Judgment

Summary judgment is proper when the pleadings

and evidence on file show that no genuine issue exists

as to any material fact and that the moving party is

entitled to judgment or partial judgment as a matter

of law. Fed. R. Civ. P. 56. “Before a court may

grant summary judgment, the moving party must

demonstrate that it is entitled to judgment as a mat-

ter of law because there is no actual dispute as to an

essential element of the plaintiff’s case.” Christopher-

sen v. Allied-Signal Corp., 902 F.2d 362, 364 (1990),

opinion superseded on other grounds, 939 F.2d 1106

(1991), cert. denied, 112 S. Ct. 1280 (1992).

The Supreme Court has explained that a movant

for summary judgment does not bear the burden of

negating the nonmoving party’s case with evidence;

rather, the movant must show only that the oppo-

nent’s case lacks the evidence it needs to support it.

See Celotex Corp. v. Catrett, 477 U.S. 317, 324-26

(1986). The Fifth Circuit has held likewise, noting

* Cases CA3-89-CV-2393-H and CA3-89-CV-2751-H.

24a

that the moving party is entitled to summary judg-

ment when the motion’s opponent fails to make a

sufficient showing of proof, see Skotak v. Tenneco

Resins, Inc., 958 F.2d 909, 920 (5th Cir. 1992) (quot-

ing Fontenot v. Upjohn Co., 780 F.2d 1190, 1195-98

[5th Cir. 1986]), although the evidence must be

viewed in the light most favorable to the motion’s

opponent. See Gremillion v. Gulf Coast Catering Co.,

904 F.2d 290, 292 (5th Cir. 1990); reh’g denied,

909 F.2d 1479 (1990).

In sum, “‘(i)f the record taken as whole could not

lead a rational trier of fact to find for the nonmoving

party, there is no genuine issue for trial.” Friow v.

Phillips Petroleum Co., 948 F.2d 972, 974 (5th Cir.

1991) (citing Matsushita Elec. Indus. Co. v. Zenith

Radio Corp., 475 U.S. 574, 587 [1986]).

Ill. Statute of Limitations

The Secretary is authorized to “establish a compre-

hensive inspection, collection and fiscal and produc-

tion accounting and auditing system to provide the

capability to accurately determine oil and gas royal-

ties, interest, fines, penalties, fees, deposits, and other

payments owed, and to collect and account for such

amounts in a timely manner.” 30 U.S.C.A. § 1711(a)

(West 1986) (emphasis added). In the present MMS

orders, the Government seeks royalties on OCS leases

for periods beginning as far back as January 1977,

see A.R., Vol. III, No. 1, and the Court is now con-

fronted with the issue of how forgiving of delays

such as these Congress intended FOGRMA and Sec-

tion 2415(a) to be. Phillips and ARCO assert that

Section 2415(a) bars recovery of any royalties due

and owing more than six years before the MMS or-

ders of June and September, 1989. In addition,

25a

Phillips argues that the Government is barred from

contesting the statute of limitations issue because the

Same issue was litigated in Phillips Petroleum Co. v.

Lujan, No. 88-C-1487-E, 1989 WL 239616 (N.D.

Okla. October 18, 1989).

Collateral Estoppel

As all parties now note, the decision in that case

recently was reversed by the Tenth Circuit in Phillips

Petroleum Company v. Lujan, 951 F.2d 257, 261

(1991) (“Phillips I”). Therein, Phillips sued the

same defendants as are present in this case, challeng-

ing a September 30, 1988, MMS order requiring it to

produce records relating to oil and gas leases for the

period October 1, 1980, through September 30, 1983.

Phillips, argued, inter alia, that the order was barred

by a six year statute of limitations, now codified at

Title 28, United States Code, Section 2415. Id. at

259. The district court agreed and entered summary

judgment in favor of Phillips. Jd.

In reversing, the Tenth Circuit explained that the

statutory provision authorizing the DOI to require

lessees to maintain and provide records (30 U.S.C.A.

1713[a] [West 1986] was not subject to the

statute of limitations. Id. at 259-60. To resurrect

any meaningful impact from its collateral estoppel

argument, Phillips now asks the Court to conclude

that Phillips I was incorrectly decided and to adopt

the district court’s statute of limitations reasoning.

The Court finds no applicable reasoning to adopt.

The issues in this case are distinct from those of

Phillips I; at stake here are MMS orders to pay royal-

ties, while Phillips I involved an MMS order to pro-

26a

duce documents.’ The court in Phillips I also noted

that,

Defendants were not asserting a claim for

underpayment of royalties. Had they been,

plaintiff might have very well been able to assert

a statute of limitations defense. Rather, defend-

ants were merely ordering plaintiff to provide

records. Such an order is well within defend-

ants’ authority under the lease agreements and

under the pertinent statutes and regulations gov-

erning the management of royalty payments.

951 F.2d at 259-60.

Because there were no audits or royalty valuations

at issue in Phillips I, the Court concludes that the

dicta quoted above simply explains when the Section

2415(a) limitations period is generally applicable in

FOGRMA royalty cases. This conclusion is supported

by the Tenth Circuit’s subsequent declaration that,

“(i)n Phillips I, we clearly held that although § 2415

may provide a legitimate defense to a claim for

underpayment of royalties, it does not apply to limit

the DOI’s right under the FOGRMA to order lessees

to maintain and provide records.” Phillips Petroleum

Co. v. Lujan, 963 F.2d 1380, 1386 (1992); see infra

pp. 26-27.

Sections 2415(a) and 2416

The applicable statute of limitations inquiry begins

with Section 2415(a), which provides that,

(s)ubject to the provisions of section 2416 of

this title, and except as otherwise provided by

® Thus, the collateral estoppel argument is misdirected.

27a

Congress, every action for money damages

brought by the United States or an officer or

agency thereof which is founded upon any con-

tract express or implied in law or fact, shall be

barred unless the complaint is filed within six

years after the right of action accrues or within

one year after final decisions have been rendered

in applicable administrative proceedings required

by contract or by law, whichever is later... .

28 U.S.C.A. § 2415(a) (West Supp. 1992). All par-

ties agree that the six year limitations period gov-

erns the present causes of action. See Phillips’s Sep-

tember 15, 1992 Brief, at 1; ARCO’s September 15,

1992 Brief, at 1-2; Defendants’ September 15, 1992

Brief, at 1; First Joint Status Report, filed April 9,

1990, at 2. Likewise, it is clear that the period will

apply independently to each monthly royalty payment

at issue. The questions are when the causes of action

accrued and whether the six year period ever tolled

subject to the referenced Section 2416.

Section 2416 reads as follows:

For the purpose of computing the limitations

periods established in section 2415, there shall

be excluded all periods during which . . . facts

material to the right of action are not known

and reasonably could not be known by an official

of the United States charged with the respons-

ibility to act in the circumstances... .

28 U.S.C.A. § 2416 (West 1978).

Phillips and ARCO argue that a cause of action

for underpayment of royalties accrues on the date

that the royalties were due and that the Section

2415(a) period is tolled only in cases of fraud. The

28a

Government would have each cause of action accrue

when the MMS completes the pertinent audit showing

that royalties have been underpaid,” pointing to a

set of Medicare reimbursement cases in support of

its position.

In the alternative, the Government argues that it

reasonably could not have known that Phillips and

ARCO underpaid royalties until the MMS had com-

pleted its audits and that the six year limitations

period should have been tolled until that point. Not-

ing the MMS’s mountainous workload, the Govern-

ment posits that it is not feasible for the MMS “to

review each monthly payment as it is made.” Memo-

randum in Support of Defendants’ Motion for Partial

Summary Judgment, at 27. Phillips and ARCO coun-

ter that such a view allows the Government to com-

plete audits at its discretion because the six year

period would not even begin to run until an audit is

completed.

Thus, the Government asks the Court to categoric-

ally allow all audits to be completed before commenc-

ing the limitations period,” and Phillips and ARCO

ask the Court to categorically require that all audits

10 At one point, the Government suggests that Phillips and

ARCO routinely revise their royalty reports and that the

statute of limitations shouid not begin to run until royalty

records are complete. There is no evidence that Phillips or

ARCO revised their royalty reports or the payments at issue.

1i All of the audtis in this case were completed within six

years of the corresponding MMS orders. See, e.g., A.R., Vol.

III, No. 11 (documenting that the audit on what originally

were Aminoil leases was completed on September 30, 1983);

id. at No. 1 (evidencing that MMS order was issued on

September 27, 1989).

29a

be completed and°actions filed within the limitations

period.

The parties’ arguments demonstrate that Sections

2415(a) and 2416 blend almost to indistinction in

this case. Indeed, the Government’s alternate argu-

ments are, in effect, identical. In the Government’s

script, royalty underpayment causes of action accrue

and are tolled at the same instant—the point when

royalties are due.”

This merging, however, is no reason to ignore the

accrual-tolling distinction inherent in the language

of Sections 2415(a) and 2416, a distinction which

may well be vital in other royalty cases. The Court’s

analysis proceeds accordingly.

Accrual of the Causes of Action

“No cause of action generally accrues until the

plaintiff has a right to enforce his cause.” United

2 The Government relies on Frey v. Production Co., 943

F.2d 578 (5th Cir. 1991), opinion withdrawn in part on reh’g,

951 F.2d 67 (5th Cir. 1992). There, the Fifth Circuit con-

strued a Louisiana statute providing that royalty underpay-

ment claims were subject to what was, in effect, a statute of

limitations. 943 F.2d at 586. The statute declared that the

three year period “commences to run from the day payment

is eligible.” Jd. (quoting La. Civ. Code Ann. arts. 3494(5),

3495 [West Supp. 1991]). Despite the statute’s plain lan-

guage, the court concluded that the three year period did not

begin to run “until the plaintiff could have known through

the exercise of reasonable diligence that they had such a

cause of action against Amoco.” Jd. at 587. The court held

that payment by the lessee could not create knowledge of an

underpayment in the lessor unless an inconsistency was obvi-

ous on the face of a royalty payment statement. Jd. While

the statute of limitations issues in Frey closely parallel the

ones here, Frey involved Louisiana law. i

30a

States v. One 1961 Red Chevrolet Impala Sedan, 457

F.2d 1353, 13858 (5th Cir. 1972) (citations omitted).

More to the point with respect to this case, a cause of

action based on contract generally accrues at the time

of breach. Pinnacle Port Community Ass’n. Inc. v.

Orenstein, 952 F.2d 375, 377 n.2 (11th Cir. 1992) ;

United States v. Kass, 740 F.2d 1493, 1497 (11th

Cir. 1984). The alleged breaches in the extant case

occurred whenever royalties became due and were not

fully paid. See also United States v. Kass, 740 F.2d

at 1497 (ruling that, for Section 2415[a] purposes,

Government’s cause of action against doctor for Med-

icare overcharges accrued when overpayments were

made); Foster v. Atlantic Refining Co., 329 F.2d

485, 490 (5th Cir. 1964) (determining, in applying

Texas law, that the applicable “‘statute [of limita-

tions] begins to run on money due as royalty under

a written contract when such money is due and pay-

able’). Consistent with that conclusion are statu-

tory and regulatory provisions that interest on unpaid

royalties accrues beginning on the date that the

royalties were due. See, e.g., 30 U.S.C.A. § 1721(a),

(f) (West 1986) (authorizing the Secretary to

charge interest on underpaid royalties “for the num-

ber of days a payment is late’); 30 C.F.R.

§ 218.54(a) (1987) (declaring that, “[a]n interest

charge shall be assessed on unpaid and underpaid

amounts from the date the amounts are due’’). In

this case, there is no reason to conclude that the

royalty causes of action accrued at any times other

than the times of alleged breach. -

The Medicare reimbursement cases, in which the

Government sued for Medicare overpayments, while

flush with cause of action accrual analyses, are not-

ably distinguishable from the present action. The

3la

Medicare Act, 42 U.S.C.A. $§ 1395-95ece (West 1992

& Supp. 1992), authorizes, in “Part A,” hospital

benefits for the aged and disabled. The Part A

scheme, as constructed at the time, see 42 C.F.R.

$§ 405.405, 405.06, 405.454, 405.1803 (1983) ,"* was

specific: First, insurance providers were reimbursed

during the year for estimated services. 42 C.F.R.

§§ 405.405, 405.454 (1983). Thereafter, as the First

Circuit succinctly summarized in United States v.

Hughes House Nursing Home, Inc.,

(a)t the end of each year, the provider is to

give (a fiscal) intermediary a statement of its

actual costs, 42 C.F.R. § 405.496(b); the inter-

mediary will then make an ‘initial retroactive

adjustment’ bringing the money that the pro-

vider received in line with its costs as revealed in

the statement. 42 C.F.R. § 405.454 (f) (2). Sub-

sequently, the intermediary is to audit the cost

reports, to determine the ‘reasonable cost’ of the

services. This audit ‘constitute(s) the basis’ for

a final ‘retroactive adjustment,’ 42 C.F.R.

§ 405.1803(b); see 42 U.S.C. § 1395x(v) (1)

(A) (ii).

710 F.2d 891, 893 (1983) (emphasis in original).

Consequently, when payments to the insurance pro-

vider are made under the Medicare Part A recovery

8 The present version of Section 405.405 can be found at

42 C.F.R. § 413.60 (1991); the present version of Section

405.454 can be found at 42 C.F.R. § 413.64 (1991); and the

present version of Section 405.406 can be found at 42 C.F.R.

§ 413.20 (1991). See 51 Fed. Reg. 34790 (Sept. 1986). Sec-

tion 405.1808, see 42 C.F.R. § 1803 (1991), was modified

slightly in 1984, see 49 Fed. Reg. 322 (Jan. 1984), and again

in 1986. See 51 Fed. Reg. 34793 (Sept. 1986).

32a

scheme, they are only estimates of amounts due, and,

by definition, no cause of action could accrue based

on payments that are mere estimates.

Further, the scheme’s lock-step progression must

be completed before a plaintiff “has a right to en-

force his (or her) cause” of action. United States

v. One 1961 Red Chevrolet Impala Sedan, 457 F.2d

at 1358; see supra p. 12.% As the court stated in

United States v. Gottlieb,

under the statutory scheme, no ‘final adjustment’

is contemplated until ‘an audit is made and the

final liability of the program is determined.’.. .

(N)o suit should be maintained until the final

adjustment has been attempted as provided in

the regulations. Therefore, until an attempted

final adjustment, it cannot be said that plaintiff

has a right to enforce his claim.

424 F. Supp. at 420-21 (quoting 20 C.F.R. § 405.454

[f][2][1976]).”

14 For Section 2415(a) purposes, several courts have held

that, due to the scheme, the Government’s cause of action for

Medicare overpayments accrues either when the final audit is

completed or when the final retroactive adjustment is made.

Sce, e.g., United States v. Hughes House Nursing Home, Inc.

701 F.2d at 894-95 (holding that cause of action accrues when

final adjustment is made); United States v. Gravette Manor

Homes, 642 F.2d 231, 234-35 (8th Cir. 1981) (holding like

wise); United States v. Withrow, 593 F.2d 802, 806 (7th

Cir. 1979) (deciding that cause accrues when audit is com-

pleted); United States v. Graham, 471 F. Supp. 123, 125

(S.D. Tex. 1979) (endorsing final adjustment rationale);

United States v. Gottlieb, 424 F. Supp. 417, 420-21 (S.D. Fla.

1976) (similarly endorsing final adjustment rationale).

15 One other case offered by the Government, United States

v. International Assoc. of Firefighters, 716 F. Supp. 656

33a

No such scheme for royalty recovery is mandated

by FOGRMA; that an OCS lease account will be

audited at all is guaranteed only “to the extent (it is)

practicable” for the Secretary to conduct the audit.

30 U.S.C.A. § 1711(c) (1) (West 1986). Phillips and

ARCO’s royalty payments must be assumed final for

the purposes of Section 2415(a). The Government

had the right to enforce the present causes of action

when the royalty payments were due and allegedly

underpaid in breach of the OCS leases, even though

the precise amount of damages may not have been

determined until later. See United States v. Gavilan

Joint Community College Dist., 849 F.2d 1246, 1249-

50 (9th Cir. 1988) ; infra p. 22.

The Government’s position is problematic for other

reasons. Were the Government’s cause of action to

accrue when the MMS completed an audit, it would

allow the MMS to initiate and complete audits at its

leisure, thereby giving it complete control over when

the six year limitations period commences. Such un-

fettered discretion could leave OCS and other lessees

open to royalty-based litigation on a given lease for

unnumbered years and would eviscerate the limita-

tions period. The purpose of FOGRMA is “to require

the development of enforcement practices that ensure

the prompt and proper collection and disbursement of

oil and gas revenues owed to the United States... . eg

30 U.S.C.A. § 1711(b) (3) (West 1986). As the

Ninth Circuit put it in United States v. Joint Com-

munity College Dist., a case in which the Government

sued to recover alleged overpayments of tuition and

(D.D.C. 1989), involving audits in the mineral leasing con-

text, likewise hinges on a specific administrative scheme that

dictates when the Government can sue. See id. at 657-60.

34a

the same basic Section 2415(a) accrual question was

at issue, “the Government here essentially asserts

that it may postpone litigation indefinitely through

delay in conducting its own audit. This is not a ten-

able position.”” 849 F.2d at 1249-50.

The Medicare Part A scheme, by contrast, explicitly

provides a remedy if the audit and final determina-

tions involved are not timely made. There, a provider

who has not received a final determination within

twelve months after filing the necessary reports is

entitled to a hearing before the Provider Reimburse-

ment Review Board. See 42 U.S.C.A. § 139500(a) (1)

(West 1992) ; 20 C.F.R. § 405.1835 (1987).

To be sure, the MMS has statutory encouragement

to initiate and complete its audits of OCS leases

quickly. This, however, is no guarantee of prompt

action. The Government, itself, represents that the

MMS has taken on a heavy workload, and OCS

Jessees should not be penalized if it is unable to keep

up. In this case, for example, Phillips was not or-

dered to recalculate certain royalties due for January

1977 until September 1989. See A.R., Vol. III, No. 1.

The burden of maintaining records and anticipating

litigation for uncounted years is not consistent with

Section 2415(a), which was “designed to promote

diligence by the government in bringing claims to

trial and also to make the position of the government

more nearly equal to that of a private litigant.”

United States v. Kass, 740 F.2d at 1496” (citing

16 Kass involved Medicare Part B overpayment recovery

claims. The Medicare Act’s Part B scheme affords supple-

mentary medical insurance benefits for the aged and disabled.

740 F.2d at 1494-95. Unlike Part A’s very specific lock-step

progression, Part B, just like FOGRMA’s royalty payment

35a

United States v. Cardinal, 452 F. Supp. 542 [D. Vt.

1978] and S. Rep. No. 1328, 89th Cong., 2d Sess.,

reprinted in 1966 U.S.C.C.A.N. 2502).

The Government also argues that “the Interior’s

acceptance of the monthly royalty payments plainly

is not a final determination of the royalty due,” citing

an IBLA decision” in support. Defendant’s Memo-

randum in Opposition at 10 n.6. This view recycles

the audit completion argument and would allow the

Government to extend the time when each monthly

royalty is due until the Government completes its

audit. For reasons already discussed, this view is

rejected.

The Court concludes that, for Section 2415(a) pur-

poses, causes of action for underpayment of royalties

on OCS leases accrue on the dates that the royalties

are due and payable.

Tolling the Limitations Period

The Government, in its alternate argument, would

have the Court toll the limitations period at the same

time that it commenced. Citing the MMS’s heavy

workload, the Government reasons that, “(t)o audit

each one (lease) every month to verify the correct-

ness of royalty payments immediately after they are

scheme, requires only that payments be accurately and fully

accounted for at the time that they are made. See 42 U.S.C.A.

8§ 1395u(a), (b) (West 1992 & Supp. 1992).

17 Cities Service oil and Gas Corp., 118 IBLA 255 (1990).

8 As of December 31, 1989, the MMS was responsible for

some 24,000 federal and Indian oil and gas leases. See MMS,

Minerals Revenues 1989: Report on Receipts from Federal

and Indian Leases 83 (1989).

36a

made would require an army of auditors,” Defend-

ants’ Memorandum in Opposition at 14, and that,

without a complete audit, the MMS reasonably could

not have known the facts material to any cause of

action it might have.

The issue, however, cannot be framed around the

MMS’s workload and is not a matter of requiring

monthly audits of every OCS lease. Indeed, the same

reasoning behind the accrual of the Government’s

causes of action when royalties are due and under-

paid prevents the Section 2415(a) limitations period

from tolling.

In fact, the support for excluding periods of ad- |

ministrative delay from the Section 2415(a) limita- |

tions period is less than overwhelming. Section 2416’s

legislative history plainly establishes fraud as the

driving force behind the “facts . . . not known and

reasonably could not have been known” exclusion.

The history states that,

(t)he committee understands that the principal

application of this exclusion will probably be in

connection with fraud situations. An example

would be where the affirmative act of a wrong-

doer has served to conceal the fraudulent act.

This type of exclusion is to be found in the law

of many States in both fraud and tort limita-

tions. The material facts that are not known

must go to the very essence of the right of action.

S. Rep. No. 1828, 89th Cong., 2d Sess., reprinted in

1966 U.S.C.C.A.N. 2502, 2507-08. In the Eleventh

Circuit’s words, “[f]oremost in the enactment of

§ 2416 was the thought that the government should

not be penalized if the fraud of an adverse party re-

stricted its ability to discover a valid cause of action

37a

until long after its accrual.” United States v. Kass,

740 F.2d at 1497 (emphasis in original). Echoes the

Ninth Circuit, “t]he legislative history expressly

States that the principal application of this exclusion

was intended for situations involving fraud.” United

States v. Gavilan Joint Community College Dist., 849

F.2d at 1249-50; see also United States v. Batson,

706 F.2d 657, 676-77 & n.30 (5th Cir. 1988) (refer-

ring in dicta to the primacy of the fraud rationale).

There is no evidence of fraud in this case.

Still, the same history offers a modicum of support

for excluding from the limitations period some delay

that can be attributed to the ponderous innerwork-

ings of the Government’s administrative agencies.

The history includes this charge:

Paragraph (c) of section 2416 excludes the

time when facts material to the right of action

are not known and reasonably could not be known

by an official of the United States charged with

responsibility to act in the circumstances. This

provision is required because of the difficulties

of Government operations due to the size and

complexity of the Government. It is not intended

that the application of this exclusion will require

the knowledge at the highest level of the Govern-

ment. Responsibility in such matters may extend

down to lower managerial levels within an

agency.

S. Rep. No. 1328, 89th Cong., 2d Sess., reprinted in

1966 U.S.C.C.A.N. 2502, 2507. The length of delay

that Congress intended be excusable under this ra-

tionale, however, is unclear. See also United States

v. Kass, 740 F.2d at 1497 (opining that Congress

envisioned “some delay”) ; United States v. Incorpo-

38a

rated Village of Island Park, 791 F. Supp. 354, 372

(E.D.N.Y. 1992) (stating that, “[t]here is a reason-

able question whether or not Section 2416[c] simply

codifies the doctrine of fraudulent concealment”).

At the outset, under the Section 2416 administra-

tive delay rationale, there is no summary judgment

evidence in this case from which the Court can ex-

clude Section 2416 time periods from the Section

2415(a) limitations period. There is no evidence

about the MMS’s diligence in pursuing the audits

involved and no evidence about the timing of the

MMS’ knowledge of the alleged underpayments be-

yond its correspondence to Phillips and ARCO based

on the completion of its avdits. See A.R., Vol. I, No.’s

5, 6; Vol. II, No. 5; Vol. III, No. 1; Vol VI, No.’s 1,

2,3 (including references to earlier notices).

The Court also rejects the Government’s request to

categorically toll the limitations periods regarding the

leases at issue until the completion of the pertinent

audits. The Court concludes that Section 2416 sup-

ports no such administrative delay. At the fore of

the Court’s consideration is a recurring potential for

unfettered MMS discretion in the timing, and diligent

pursuit, of its audits. See supra pp. 16-18. Because

realization of that potential would be grossly unfair

to OCS lessees; because any~hints of an administrative

delay rationale behind Section 2416 are secondary to

that regarding fraud; and because the administrative

delay rationale more directly runs contrary of the

very purpose of Section 2415(a), the Court is of the

opinion that the extent to which courts should tolerate

such delay is lessened. This position is bolstered by

the sense of urgency in FOGRMA, specifically,

FOGRMA’s goal of “prompt and proper collection and

disbursement of oil and gas revenues,” 30 U.S.C.A.

39a

§ 1711(b) (3) (West 1986) ; see supra p. 16, and the

Secretary’s duty to collect and account for amounts

due “in a timely manner.” 30 U.S.C.A. § 1711(a)

(West 1986) ; see supra p. 7.

As the Eleventh Circuit noted in United States v.

Kass, the counsel of Section 2416's legislative history

is that the “facts material to the right of action” are

“the facts making up the “very essence of the right

of action.” See 740 F.2d at 1498 (1984) (relying on

S. Rep. No. 1328, 1966 U.S.C.C.A.N. at 2508); see

also United States v. Beck, 758 F.2d 1558, 1559 (11th

Cir. 1985) (following the same standard). In this

case, such facts would be those that inform the Gov-

ernment that an OCS lessee has underpaid royalties;

the precise amount due need not be ascertained:

“Uncertainty as to the exact amount of the Govern-

ment’s . . . (damages) does not constitute lack of

knowledge of a fact ‘material to the right of action.’ ”

United States v. Gavilan Joint Community College

Dist., 849 F.2d at 1249,

Under FOGRMA’s scheme, as well as in the case

at bar, the Government need not complete its audits

to discern the essence of its causes of action. In this

case, in particular, there is no dispute that the leases

at issue were conventional in the field; that Phillips

and ARCO timely paid royalties; and that they timely

submitted records to the MMS. Likewise, based on

the record and the parties’ representations, the audits

involved were not problematic. See, e.g., A.R., Vol.

III, No. 11 (noting, in audit report, that lessee “was

generally doing a good job in reporting and paying

its royalties”). There is no evidence of delay on the

part of the lessees or impeding complications sur-

rounding the leases. See, €.9., supra note 3 (identify-

40a

ing leases at issue and noting that some were acquired

through merger approved by the MMS).

The Government’s burden seems especially tolerable

with respect to Phillips. The MMS has a permanent

audit office, manned by four auditors, on site at Phil-

lip’s headquarters in Bartlesville, Oklahoma.” See

Haugland Affidavit at {§ 4-5. That office already con-

ducts audits of Phillip’s royalty payments “from time-

to-time.” Jd. at § 4.

To be sure, the MMS will need time to ascertain the

details germane to any cause of action it might have.

But, in the absence of summary judgment evidence to

the contrary, the Court concludes that the six year

limitations period affords the MMS ample time to

investigate, verify, and choose the causes of action

that it will pursue. As the MMS stated in responding

to comments generated in the notice and comment

process accompanying the promulgation of the most

recent regulation addressing royalty valuation, see

infra note 23, “MMS realizes that it must become

increasingly familiar with transactions occurring in

the areas where Federal and Indian leases are situated.

By becoming more familiar and obtaining sales vol-

ume and price information, MMS will be able to

identify anomalies that exist and review the circum-

stances involved in those transactions.” 53 Fed. Reg.

1230 (Jan. 1988).

The Court holds that the Section 2415 six year

period did not toll in this case. Holding otherwise

would be manifestly unfair to the lessees. Therefore,

the statute of limitations bars the Government from

19 There is no evidence, one way or the other, regarding an

MMS audit office located on site with ARCO.

EE Lae ey hive

4la

bringing any causes of action against Phillips and

ARCO based on royalty payments on the leases at

issue here that are due and owing for more than six

years.”

IV. MMS’s Authority to Order Royalty

Recalculations

The MMS orders notified Phillips and ARCO that

they had wrongly calculated royalties on the OCS

leases and ordered them to review their calculations

and recalculate the royalties due using procedures out-

lined in the Procedure Paper. See A.R., Vol. I, No.’s

5, 6; Vol. II, No. 5; Vol. III, No. 1; Vol. VI, No.’s R

2, 3. Phillips and ARCO argue that the MMS has no

authority to order such recalculations because they

amount to “self-audits,” which are prohibited by

FOGRMA. The Government maintains that, when

the MMS discovers a Systemic error in a lessee’s roy-

alty payment procedures, such as the use of wrong

royalty formulas, through an audit, the agency has

authority to require lessees to review their records,

account for royalties due, and make correct royalty

payments. Such requirements, Says the Government,

do not amount to a self-audit.

Section 101 of FOGRMA provides that,

(t)he Secretary shall audit and reconcile, to

the extent practicable, all current and past lease

accounts for leases of oil or gas and take ap-

*° The Court notes that the United States District-Court for

the Northern District of Oklahoma recently reached similar

conclusions regarding virtually identical statute of limitations

issues. See Atlantic Richfield Co. v. Lujan, No. 89-C-892-RB

(N.D. Okla. filed September 9, 1992),

42a

propriate actions to make additional collections

or refunds as warranted. The Secretary shall

conduct audits and reconciliations of lease ac-

counts in conformity with the business practices

and recordkeeping systems which were required

of the lessee by the Secretary for the period cov-

ered by the audit... . The Secretary may also

audit accounts and records of selected lessees and

operators.

30 U.S.C.A. §1711(c)(1) (West 1986). Phillips and

ARCO suggest that the plain language of this provi-

sion dictates that only the Secretary—that is, the DOI,

itself—may audit lease accounts, meaning that self-

audits are prohibited. The Government counters that

no self-audits are involved and that the Secretary is

simply taking appropriate collection actions pursuant

to Section 101.

The Secretary, through the MMS, already has con-

ducted sample audits in this case, finding what it con-

sidered to be systemic errors, and the MMS’s orders

identify those errors, which serve as the bases for the

recalculations ordered.** As the Government notes,

21 This approach is entirely consistent with the legislative

history behind Section 101, which states that the section,

directs the Secretary to audit and reconcile all lease

accounts or accounting line items and to take appropriate

actions to make additional collections or refunds as war-

ranted. The Secretary is authorized to select lease or

payor accounts for audit on his own initiative—since

auditing every account on an annual basis is clearly im-

practical—but the Committee intends that the Secretary

will establish the means whereby all major accounts will

be audited, at lease (sic) in whole or in part, annually

43a

the MMS orders simply require Phillips and ARCO

to correct the errors in their royalty calculation for-

mulas already identified and to recalculate royalties

based on the correct formulas; Phillips and ARCO are

not asked to discover whether the same or any other

royalty calculation formulas are in error. Such orders

plainly fall within the scope of the Section 101’s au-

thorization to “take appropriate actions to make addi-

tional collections or refunds as warranted.”

Further authority for the orders is found in Section

107 of FOGRMA. It provides that,

In carrying out his duties under this chapter

the Secretary may conduct any investigation or

other inquiry necessary and appropriate and may

conduct, after notice, any hearing or audit, nec-

essary and appropriate to carrying out his duties

under this chapter. In connection with any such

hearings, inquiry, investigation, or audit, the Sec-

retary is also authorized where reasonably nec-

essary—

(1) to require by special or general order, any

person to submit in writing such affidavits and

answers to questions as the Secretary may rea-

sonably prescribe, which submission shall be

made within such reasonable period and under

oath or otherwise, as may be necessary ....

30 U.S.C.A. §1717(a) (West 1986). The legislative

history behind this provision explains that, “(t)he

and other accounts to the extend (sic) that the Secretary

determines is suilicient.

H.R. 97-859, 97th Cong., 2d Sess., reprinted in 1982 U.S.C.

C.A.N. 4268, 4287. ¢

44a

Committee intended that the Secretary have broad

enforcement authority relating to his royalty and

lease management functions.” H.R. 97-859, 97th

Cong. 2d Sess., reprinted in 1982 U.S.C.C.A.N. 4268,

4286.

In addition, as the Court already has noted, Con-

gress instructed that the Secretary “ensure the prompt

and proper collection and disbursement of oil and gas

revenues” with respect to all OCS leases. 30 U.S.C.A.

§ 1701(b) (3) (West 1986). Requiring the MMS to

conduct all royalty calculations needed to correct

systemic errors discovered in MMS audits of OCS

leases, as the logical extension of Phillips and ARCO’s

position would have the Court do, would defeat this

fundamental FOGRMA purpose in every meaningful

respect.

Almost identical self-audit arguments were pre-

sented to the Tenth Circuit in Phillips Petroleum Com-

pany v. Lujan, 963 F.2d 1380 (1992) (“Phillips IT’).

There, Phillips and ARCO sought declaratory relief

against the same defendants identified in this case,

challenging MMS orders requiring Phillips and ARCO

to retain oil and gas lease records for the period

October 1, 1983, through September 30, 1989, and

initiating company-wide audits “of the propriety of

the royalty and other payments made by Phillips (and

ARCO) ....” during the same period. Jd. at 1382.

Phillips argued that the company-wide audit would

require it to audit its own records once one of its

accounting procedures had been deemed erroneous.

The district court rejected this and Phillips and

ARCO’s other challenges, awarding summary judg-

ment to the defendants. Jd. at 1383. The Tenth Cir-

FO CIO a ae.

45a

cuit affirmed, concluding that evidence of the company-

wide audit procedures “clearly indicates that the

MMS will ask Phillips and other lessees to make

changes to correct repeated royaity underpayments

caused by systemic deficiencies” and that, “(s)uch

a request falls squarely within the purposes of

FOGRMA.” * Td. at 1386.

The recaleulations ordered in this case differ in no

meaningful respect from those ordered in Phillips I.

The Tenth Circuit’s rationale therein applies with

equal force to this case. See also Amoco Prod. Co.,

123 IBLA 278, 284-85 (June 18, 1992) (rejecting

same self-audit arguments urged by Amoco Produc-

tion Co.).

There is no genuine issue of fact material to the

“self-audit” arguments; that the MMS has authority

to order recalculations once a systemic error has been

identified is clear.

With the Government’s authority to order recalcu-

lations of the type at issue herein established, the

question becomes whether the recaleulations ordered

in this case were proper. Thus, the Court turns to

Phillips and ARCO’s contention that the Govern-

ment’s royalty valuations were invalid. ,

*2 Phillips and ARCO also presented in Phillips IT the same

statute of limitations arguments they urge herein. Relying on

its opinion in Phillips I, the Tenth Circuit rejected those argu-

ments with respect to the MMS’s order to retain records. See

963 F.2d at 1386. The court did not reach the statute of

limitations arguments as they concerned the order initiating

audit procedures.

46a

V. The Government’s Royalty Valuations

The authority to determine royalties owed on pro-

duction from OCS leases rests with the DOI. The

royalties due in this case depend on the value assigned

to production, and the Director of the MMS is respon-

sible for determining that value. See 30 C.F.R

§ 206.150 (1987). Contrary to ARCO’s assertions,

there is no burden on the MMS to determine that the

lessee’s valuations are unfair or unreasonable before

imposing its valuations on the lessee. Sce Mesa Op-

erating Ltd. Partnership v. United States Dep’t of

the Interior, 931 F.2d 318, 323 (5th Cir. 1991), cert.

denied, 112 S. Ct. 934 (1992); see also 30 C.F.R.

§ 206.150 (1987) (outlining Secretary of the Inter-

ior’s valuation authority).

The valuations at issue here were governed by

DOI regulation “Section 206.150” * which, at the time

of the MMS Orders, read as follows:

The value of production shall never be less than

the fair market value. The value used in the

computation of royalty shall be determined by the

Director. In establishing the value, the Director

shall consider: (a) the highest price paid for a

part or for a majority of like-quality products

produced from the field or area; (b) the price

*% The leases at issue in this case, with the exception of

the Phillips’s “section 6” lease, echo the DOI’s right to calcu-

late production value. See Haugland Affidavit at Exhibits A,

B, C. The section 6 lease is silent on the issue. See id. at

Exhibit D. That silence, however, does not impede the DOI’s

express regulatory authority.

** The MMS has since revised its gas royalty valuation regu-

lations. The latest version, 30 C.F.R. § 206.153 (1991), be-

came effective March 1, 1988. See 53 Fed. Reg. 1230 (1988).

47a

received by the lessee; (c)\ posted prices; (d)

regulated prices; and (e) other relevant matters.

Under no circumstances shall the value of pro-

duction be less than the gross proceeds accruing

to the lessee from the disposition of the produced

substances or less than the value computed on

the reasonable unit value established by the Sec-

retary.

30 C.F.R. § 206.150 (1987). In this case, the MMS

cited Section 206.150 when ordering Phillips and

ARCO to recalculate royalties. In addition, the MMS

orders looked to the Procedure Paper, a document

issued by the Royalty Valuation and Standards Di-

vision of the Royalty Compliance Division of the MMS

on December 14, 1984, modified by the MMS on Feb-

ruary 25, 1985, and modified by the IBLA in Conoco,

Inc., and ARCO Oil and Gas Co., 110 IBLA 232

(August 29, 1989) ( “Conoco”). The Procedure Pa-

per purports to set forth a “yardstick valuation tech-

nique” to assist applications of Section 206.150. A.R.,

Vol. IV, No. 19, Attachment 1, unnumbered p. 2.

Phillips and ARCO now argue that one guideline

set forth in the Procedure Paper, summarized by

Phillips as “the published spot price in a particular

commercial bulletin for a particular location,” Phillip’s

Brief in Response at 16, became the MMS’s sole con-

sideration in valuing production, and hence, that the

MMS failed to properly consider all of the valuation

factors set forth in Section 206.150. Further, the

MMS’s use of the Procedure Paper, say Phillips and

ARCO, amounted to rulemaking in violation of the

notice and comment requirements of the Administra-

tive Procedure Act (“APA”), 5 U.S.C.A. §$ 551-59

(West 1977 & Supp. 1992). In addition, to the ex-

48a

tent that it approves the Procedure Paper, ARCO

asks this Court to set aside the IBLA’s Conoco de-

cision.

In the alternative, Phillips and ARCO contend that

the DOI failed to publish the Procedure Paper in the

Federal Register pursuant to the APA’s requirement

that all substantive rules of general applicability and

statements of general policy be so published, and that

the application of the paper in this case violated other

prohibitions against retroactive agency action.

Phillips and ARCO’s first set of arguments boils

down to two issues: a.) the validity of the MMS’s

production valuations; and b.) the impact of the

APA’s rulemaking requirements on the Procedure

Paper. Because the second issue affects the first, the

Court begins its inquiry there.

Notice and Comment Rulemaking and the Procedure

Paper

Section 553 of the APA requires that an agency

promulgating a rule afford the public opportunity to

have input into the rulemaking process by giving gen-

eral notice of the proposed rule in the Federal Reg-

ister and providing interested persons a chance to

comment on the rule. See 5 U.S.C.A. § 553(b), (c),

(d) (West 1977); Batterton v. Marshall, 648 F.2d

694, 711 (D.C. Cir. 1980). In this case, it is undis-

puted that these procedures were not followed; the

Government argues simply that the Procedure Paper

dees not constitute a rule for APA purposes, and,

therefore, is not subject to the APA’s rulemaking

requirements.

The APA defines a rule as,

*5 Meaning the section number as codified in Title 5 of the

United States Code.

49a

the whole or a part of an agency statement of

general or particular applicability and future ef-

fect designed to implement, interpret, or pro-

scribe law or policy or describing the organiza-

tion, procedure, or practice requirements of an

agency and includes the approval or prescription

for the future of rates, wages, corporate or fi-

nancial structures or reorganizations thereof,

prices, facilities, appliances, services, or allow-

ances therefor or of valuations, costs, or account-

ing, or practices bearing on any of the forego-

HO...

) U.S.C.A. §551(4) (West 1977 ) (emphasis added).

Whether an agency’s promulgation constitutes a rule

is a matter of the item’s substance and not the label

given to it by the agency. United States Dep’t of

Labor v. Kast Meals Corp., 744 F.2d 1145, 1149

(5th Cir. 1984) (citations omitted).

Consequently, for the purposes of this case, the

Procedure Paper’s “yardstick” terminology, by itself,

has no effect. Rather, what is significant is that the

Procedure Paper directly influences the valuation of

NGLP’s; whether it contains simple guidelines, de-

scriptions, procedures, or binding dictates, the Pro-

cedure Paper qualifies as a rule under the APA’s

general definition.

That is not to say, however, that the paper is

subject to the APA’s notice and comment require-

ments. Indeed, exempted from those requirements

are “interpretative rules, general statements of policy,

or rules of agency organization, procedure, or prac-

tice.” 5 U.S.C.A. § 553(b) (A) (West 1977).

The Procedure Paper, on its face, appears to fall

under this exemption as either interpretive or pro-

50a

cedural.*” Courts have characterized those rules that

merit notice and comment procedures as “substan-

tive” rules, see American Trucking Ass’n, Inc. v.

United States, 688 F.2d 1337, 1351 (11th Cir. 1982),

rev'd on other grounds, 467 U.S. 354 (1984), and the

distinction between substantive and interpretive rules

beckons the Court here.

The distinction was a genesis of Conoco, a case in

which ARCO and Conoco, Inc., challenged the Pro-

cedure Paper with the same arguments presented

here. There, the IBLA concluded that the paper was

not a substantive rule subject to the APA’s notice and

comment requirements, reasoning as follows:

Substantive rules have the force of law where

they constitute a substantive modification of an

existing regulation, adoption of a new regula-

tion, or a change in policy. The Procedure Paper

merely clarified the existing regulations by set-

ting forth a yardstick by which MMS would

measure the reasonableness of royalty values

reported by lessees. It did not require lessees to

value their production by any specific method,

nor did it modify any existing regulation.

Rather, it found that, after consideration of the

reasonable value of NGLP (nautral gas liquid

product) in situations where no arm’s-length

contract existed was the commercially available

26 The distinction between interpretive and procedural rules

has not been a burning issue for the courts. See American

Trucking Ass’n, Inc. v. United States, 688 F.2d at 1351 (noting

the difference and crediting the Fifth Circuit’s Brown Ez-

press, Inc. v. United States, 607 F.2d 695, 702 [1979]); see

also Jean v. Nelson, 711 F.2d 1455, 1479 (11th Cir. 1983)

(summarizing American Trucking), rev’d in part on other

grounds, 727 F.2d 957 (1984), aff'd, 472 U.S. 846 (1985).

51a

spot price bulletins. We find the Procedure

Paper to be essentially a policy guideline adopted

by MMS to assist in valuing NGLP production

for royalty purposes under the provisions of the

relevant regulation. As such, it does not have

the force and effect of law as a duly promul-

gated regulation does, and the Board will decline

to follow it where it is inconsistent with the

terms of the relevant regulations.

110 IBLA at 242-43, A.R., Vol. IV, No. 1 (citations

omitted). During its assessments of the valuations at

issue in Conoco, the IBLA modified the Procedure

Paper in one respect, stating that “we are unable to

affirm the application of the Procedure Paper to the

extent it is used to value NGLP production at a price

in excess of the fair market_value floor a

Id. at 244,

This Court may set aside the MMS’s orders or the

IBLA’s determination to the extent that they or it

wrongly apply the Procedure Paper if the Court finds

that any of the actions were “arbitrary, capricious,

an abuse of discretion, or otherwise not in accord-

ance with law.” 5 U.S.C.A. § 706(2) (West 1977).

The Court “must consider whether the (agency’s)

decision was based on a consideration of relevant

factors and whether there has been a clear error of

judgment.” Citizens to Preserve Overton Park, Inc.

v. Volpe, 401 U.S. 402, 416 (1971); see Chevron,

U.S.A., Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837, 843-45 1984). Put another way,

the Court may reject the order or the determination

“only if the agency’s interpretation is impermissible

or unreasonable.” Mesa Operating, Ltd. Partnership

v. United States Dep’t of the Interior, 931 F.2d at

52a

323 (emphasis in original). Significantly, ‘“(t)his

standard is even more deferential where . . . a Court

is reviewing an agency’s application and interpreta-

tion of its own regulations.” Citizens for Fair Util.

Regulations v. United States Nuclear Regulatory

Comm’n, 898 F.2d 51, 54 (5th Cir.) (citing Robert-

son v. Methow Valley Citizens Council, 490 U.S. 332

[1989]), cert. denied, 111 S. Ct. 246 (1990); see

Udall v. Tallman, 380 U.S. 1, 16-17 (1965).

With this standard in mind, the Court conducts its

substantive/interpretive rule analysis. Whether a

rule is substantive or interpretive is a question of law

for the Court. Trinity Indus., Inc. v. Dole, 760 F.

Supp. 1194, 1198 (N.D. Tex 1991) (Belew, J.)

(citing Reeder v. FCC, 865 F.2d 1298 [D.C. Cir.

1989]), vacated on other grounds, 9638 F.2d 795

(5th Cir. 1992).

Substantive rules are “those that ‘effect a change

in existing law or policy,’ ’”’ Mount Diablo Hosp. Dist.

v. Bowen, 860 F.2d 951, 956 (9th Cir. 1988) (em-

phasis in original), that is, those that are binding,

Western Coal Traffic League v. United States, 694

F.2d 378, 392 (5th Cir. 1982), cert. denied, 466

U.S. 958 (1984), or have the force of law. Ohio

Dep’t of Human Servs. v. United States Dep’t of

Human Servs., Health Care Financing Admin., 862

F.2d 1228, 1233 (6th Cir. 1988). An interpretive

rule, undefined in the APA, is “merely a clarification

or explanation of an existing statute or rule.” /d.

(quoting Guardian Fed. Sav. & Loan Ass’n v. Fed-

eral Sav. & Loan Ins. Corp., 589 F.2d 658, 664 [D.C.

Cir. 1978]). Interpretive rules “are not determina-

tive of issues or rights addressed” and “do not...

foreclose alternate courses of action or conclusively

affect rights of private parties.” Batterton v. Mar-

Fem Savile hae

OS aimed) garitowy Wie:

NE PET Tw

53a

shall, 648 F.2d 694, 702 (D.C. Cir. 1980).”

The District of Columbia Circuit provided this oft-

repeated insight:

Generally speaking, it seems to be established

that ‘regulations,’ ‘substantive rules’ or ‘legisla-

tive rules’ are those which create law, usually

implementary to an existing law; whereas inter-

pretative rules are statements as to what the

administrative officer thinks the statute or regu-

lation means.

Cabais v. Egger, 690 F.2d 234, 238 (1983) (quoting

Gibson Wine Co. v. Snyder, 194 F.2d 329, 331 [D.C.

Cir. 1952]); see Brown Express, Inc. v. United

States, 607 F.2d at 701 (quoting the same language

with approval); Rivera v. Becerra, 714 F.2d 887,

890-91 (9th Cir. 1983) (endorsing the Cabais v.

Egger view), cert. denied, 465 U.S. 1099 (1984) .*

*7 The District of Columbia Circuit announced these conclu-

sions with respect to all of the non-binding actions specified in

5 U.S.C.A. §§ 553(b) (3) (A), (d) (2) (West 1977). See 648

F.2d at 701. Therefore, the conclusions apply to each such

action, individually. See id. at 701-02.

8 Other definitional commentary is available. For example,

in the words of the 1947 Attorney General’s Manual on the

APA, as quoted by the Fifth Circuit, interpretive rules are

““rules or statements issued by an agency to advise the public

of the agency’s construction of the statutes and rules which

it administers.’” Brown Express, Inc. v. United States, 607

F.2d at 700. Similarly, the Ninth Circuit has presented this

view:

In determining whether a rule is interpretive or sub-

stantive, two factors must be considered. The first factor

is whether the rule modifies existing rights, law, or policy.

If the rule ‘effect(s) a change in existing law or policy,’

or ‘“affect(s) individual rights and obligations,”’ the

54a

Whether a rule is substantive or interpretive is a

matter of its substance and application; labels or

phraseology used in the rule’s text are not dispositive,

- and can be misleading. See United States Dep’t of

Labor v. Kast Metals Corp., 744 F.2d at 1149;

American Trucking Ass’ns, Inc. v. I.C.C., 659 F.2d

at 463; Pharmaceutical Mfrs Ass’n v. Finch, 307

F. Supp. 858, 863 (D. Del. 1970). Therefore, for

resolution in the present case, the Court looks to both

the substance, and the application, of the Procedure

Paper.

The substance of the Procedure Paper is instruc-

tive. To begin, the paper explains its purpose as

follows:

Recent reviews of gas plants by the Royalty

Compliance Division and the Office of Inspector

General have raised questions regarding the ap-

propriate method of valuing natural gas liquid

products (NGLP’s) extracted from gas produced

on Federal and/or Indian lands. This valuation

problem is particularly prevalent in cases where

NGLP’s have been transferred internally be-

tween affiliated entities.

MMS regulations require the Secretary to

establish a basis for computing royalties using

rule is substantive. If the rule is only indicative of the

agency’s interpretation of existing law or policy, it is

interpretive.

Second, the source of the rule must be considered.

If it is promulgated pursuant to statutory authority, it is

a substantive rule. If the agency does not exercise dele-

gated legislative power to promulgate the rule, it is

interpretive.

W.C. v. Bowen, 807 F.2d 1502, 1504 (1987) (citations omit-

ted), opinion amended and reh’g denied, 819 F.2d 237 (1987).

55a

a reasonable unit value. This value should never

be less than the fair market value as determined

by guidelines established by the Secretary. At a

minimum, royalties must be paid on the gross

proceeds accruing to the lessee.

The purpose of this paper is to develop a

‘yardstick’ valuation technique for determining

the reasonableness of a lessee’s NGLP prices.

A.R. Vol. IV, No. 19, Attachment 1, unnumbered p. 2

(footnote omitted, emphasis added).

The Procedure Paper further states that,

in an effort to develop a yardstick . . .the follow-

mg sources were considered:

° NGLP sales contracts

° Prices received by lessees

° Table 7 (DOE) prices

° Commercially Available NGLP Bulletins

A study of these sources concluded that commer-

cial price bulletins represent the best available

price source and in most instances are indicative

of NGLP fair market value.

Id. at unnumbered p. 4 (emphasis added).

The foregoing provisions are dispositive. They

establish that the Procedure Paper is governed by

Section 206.150 and that the paper’s guidelines are

driven by the regulation’s core dictate that produc-

tion value should never be less than fair market

value. Further, while Phillips and ARCO contend

that Section 206.150 requires the MMS to consider

all five of the valuation factors set forth in its text,

and the Court agrees, see 30 C.F.R. § 206.150 (1987)

(providing that, “[i]n establishing the value, the

56a

Director shall consider .. .”) (emphasis added), the

paper documents that the MMS has considered these

factors in the form of NGLP sales contracts, prices

received by lessees, Table 7 (DOE) prices, and com-

mercially available NGLP bulletins. Moreover, while

all five valuation factors need to be considered, it is

inevitable that one factor ultimately may carry more

weight than the others. The paper simply concludes

that, after considering all five factors, one is more

indicative of fair market value than the others.

The paper continues:

To establish a yardstick to compare to the lessee’s

reported prices, MMS will take the highest and

lowest published prices for the month from the

appropriate bulletin. If the reported price falls

within this range, the value will normally be ac-

cepted by MMS for royalty determination pur-

poses. ... If the prices used to calculate royal-

ties fall below this range, a minimum value that

is acceptable to MMS can be determined by de-

veloping an average value from the lowest and

highest prices in the range.

Id. at unnumbered pp. 4-5.

This provision and others that follow document that

the price received by the lessee is considered and re-

ceives a great deal of deference in the paper’s recom-

mendations. The paper also includes a Table of Price

Sources that offers “suggested locations” for obtain-

ing NGLP price sources for different producing areas

in the United States, stressing with respect to those

locations that, “each valuation case should be sep-

arately evaluated to determine if an alternate loca-

tion would be more pertinent than the suggested loca-

57a

tion.” Jd. at Procedure Paper Attachment 1 (unnum-

bered p. 10). In effect, the paper creates a list of

sources to be consulted for “spot prices,” which are

equivalent to the Section 206.150 valuation factor,

“posted prices.” The location variable is just one of

the paper’s several indications that Section 206.150’s

“other relevant factors” were not ignored.

In addition, that the paper interprets Section

206.150’s fair market value is evidenced in its distinc-

tion between arm’s-length and non-arm’s-length con-

tract situations. The pertinent portion of the paper

reads as follows:

(a) Arm’s-length contracts

(From January 1980 to present)

If lessees have a true arm’s length contract

which establishes an NGLP price, MMS will nor-

mally accept the arm’s length contract price for

royalty purposes unless the gross proceeds re-

ceived were higher than the contract price. For

computation purposes, MMS will accept the

greater of the arm’s length contract price or

gross proceeds,

(From 1973 to January 1980)

If the lessee received a maximum permissible

price under the DOE regulations which was less

than the contract price, the maximum permissible

price becomes the fair market value to use for

royalty computation purposes. Otherwise, con-

7° The Court accepts the Government’s representation that

a spot price is a type of posted price, and the Procedure

Paper seems to indicate the same.

58a

tract prices or gross proceeds are considered fair

market value.

(b) Non-arm’s-length contracts/No contract

(From January 1986 to present)

If lessees have a non-arm’s-length contract

which establishes an NGLP price and the lessee

can demonstrate that the contract has character-

istics similar to arm’s-length contracts which rep-

resent fair market value, MMS will accept the

non-arm’s-length contract price for royalty com-

putation purposes. If there are no arm’s-length

contracts for the same field or area, or the non-

arm’s-length contract does not represent fair

market value, the yardstick value is considered

fair market value.

(From 1973 to January 1980)

If the lessee received a maximum permissible

price under the DOE regulations which was less

than the yardstick price, the maximum permis-

sible price becomes the fair market value to use

for royalty computation purposes. Otherwise,

yardstick prices or gross proceeds are considered

fair market value.

A.R., Vol. III, No. 1 (emphasis in original).

From beginning to end, the Procedure Paper strives

to explain what generally constitutes “fair market

value” in certain circumstances; it falls well short of

effecting a change in existisg law or policy. Based

on the manner in which the paper sets valuation

ranges, recommends location variables, and accounts

for contract-based considerations, the paper truly

REIS BIE RRO ican RAE LE ER Bie

59a

functions as a “yardstick”; it cannot be said to have

the force of law.

The MMS’s application of the Procedure Paper in

the present case was likewise consistent with the pa-

per’s interpretive substance. With respect to each

lease to which the Procedure Paper was applied, see

supra p. 4n.5, the MMS determined that Phillips and

ARCO had failed to value production at fair market

value and plainly documented that Section 206.150

was the source of its rulings. See A.R., Vol. III, No.

1; Vol. VI, No.’s 1, 2, 3. Based on that determination,

the MMS ordered Phillips to recalculate royalties, re-

peating the Procedure Paper’s yards..ck guidelines as

follows:

For determining the reasonableness of NGLP

values based on non-arm’s-length transactions,

the MMS policy is to apply procedures as set out

in its Procedure Paper, as modified by Conoco

Inc., ARCO Oil and Gas Co., 110 IBLA 232

(1989). The Procedure Paper now provides that

if the NGLP’s were disposed under non-arm’s-

length transactions, including transfers to af-

filiates, the unit values will be compared to the

lowest prices published in commercial bulletins.

If the value falls below the low price, it is con-

sidered unreasonable and unacceptable, and a

value using the low price is used. Such values

will be used for deriving a manufacturing al-

lowance and for calculating royalties.

A.R., Vol. III, No. 1 (emphasis in originai). The let-

ter to ARCO likewise stated that, “(f)or determining

the reasonableness of NGLP values for non-arm’s-

length arrangements, the MMS policy is to apply pro-

cedures as set out in the NGLP Paper as modified in

60a

IBLA decision 87-762, 88-56, decided August 29,

1989.” A.R., Vol. VI, No. 1 (emphasis added). In

considering the leases at issue in each case, the MMS

concluded, pursuant to the Procedure Paper, that spot

market prices were a reasonable indicator of value

and assessed royalties based on the Mont Belvieu,

Texas, spot price. See id.; A.R., Vol. III, No. 1.

These orders demonstrate that the Prccedure Paper

was applied as a vehicle to aid assessments cf Section

206.150’s fair market value; as with tke subs’ ance

of the paper, its application dces not effect a change

in Section 206.150 or other existing law or policy.

Additionally, the fact that the MMS uses the yard-

stick price ranges recommended in the paper does not

make the paper, itself, binding.

Alternatively, the Court considers the Procedure

Paper as a procedural rule under the APA.” The test

*) Under the APA, there is no definition of procedural rules.

In the context of its substantial impact test, the Fifth Circuit

noted only that “procedure” is the opposite of “substance.”

Brown Express, Inc. v. United States, 807 F.2d at 701. Black’s

Law Dictionary defines “procedure” as “the mode of proceed-

ing by which a legal right by which a legal right is enforced,

as distinguished from the substantive law which gives or de-

fines the right, and which, by means of the proceeding, the

court is to administer; the machinery, as distinguished from

its product. That which regulates the forma] steps in an

action or other judicial proceeding ....” Black’s Law Dic-

tionary 1083 (5th ed. 1987). Beyond these basic principles,

the Court sees no reason to attempt a rigid distinction be-

tween procedural and interpretive rules under the APA. In-

deed, in most cases, courts have failed to acknowledge distinc-

tions among the APA Section 553(b)(A) exemptions. See

American Trucking Ass’n, Inc. v. United States, 688 F.2d at

1351; supra note 26.

EE EE

6la

in the Fifth Circuit for the APA’s procedural rule

exemption is as follows: The exemption does not apply

to any proposed regulation that departs from existing

practice and has a “substantial impact” on a “regu-

lated industry, or an important class of members or

the products of that industry.” Brown Express, Inc.

v. United States, 607 F.2d at 702 (quoting Pharma-

ceutical Mfrs Ass’n v. Finch, 307 F. Supp. 858, 863

[D. Del 1970]); see also United States Dep’t of Labor

v. Kast Metals Corp., 744 F.2d at 1156 (discussing

“the twin prongs of departure and substantial im-

pact”). As the Fifth Circuit later explained,

(i)n essence, the substantial impact test is the

primary means by which courts look beyond the

label ‘procedural’ to determine whether a rule is

of the type Congress thought appropriate for

public participation. An agency rule that modi-

fies substantive rights and interests can only be

nominally procedural, and the exemption for such

rules of agency procedure cannot apply.

United States Dep’t of Labor v. Kast Metals Corp.,

744 F.2d at 1153 (citations and footnote omitted) .”

In the present case, the Court already has held that

the Procedure Paper departs not from the existing

%! Although the substantial impact test has been criticized

elsewhere, see, e.g., American Transfer & Storage Co. v. In-

terstate Commerce Comm’n, 719 F.2d 1283, 1285 n.4 (5th

Cir. 1983) (summarizing criticisms of the test): United

States Dep’t of Labor v. Kast Metals Corp., 744 F.2d at 1154

n. 19 (rejecting the Ninth Circuit’s criticisms of the test and

noting that the District of Columbia Circuit, while also criti-

cizing it, employs the test), it remains the standard in the

Fifth Circuit.

62a

Section 206.150 practice.* See supra pp. 36-41. Addi-

tionally, there is no evidence that the paper has had a

substantial impact on the OCS lease market and OCS

lessees; Section 206.150’s fair market value has been

controlling production valuations all along, and the

paper simply clarifies its meaning. In the parlance

of the Fifth Circuit, any substantial impact of the

paper is “purely derivative.” United States Dep’t of

Labor v. Kast Metals Corp., 744 F.2d at 1156.”

The Court concludes that the IBLA did not abuse

its discretion, as outlined in the APA, 5 U.S.C.A.

§ 706(2) (West 1977), when it determined that the

Procedure Paper was an interpretive rule not subject

to the APA’s notice and comment requirements in

Conoco, Inc., and ARCO Oil and Gas Co., 110 IBLA

232 (August 29, 1989). The IBLA’s determination

was not unreasonable, see Mesa Operating, Ltd. Part-

nership v. United States Dep’t of the Interior, 931

F.2d at 323, by either of two independent analyses:

32 The Court, of course, understands that this practice nec-

essarily must be shrinking because Section 206.150, per se,

has been superseded by the March 1, 1988 production valua-

tion regulations. See 30 C.F.R. § 206.153 (1991); supra

note 24,

* Phillips also posits that the MMS’s failure to give it

notice of “the new standard for computing royalties on

NGLP’s set forth in the Procedure Paper,” Phillips’s Brief

in Support of its Cross-Motion for Partial Summary Judg-

ment at 52, violated Phillips’s substantive and procedural due

process rights. This argument fails because it is contingent

on the existence of a right to notice and opportunity to com-

ment in some form. Phillips has failed to establish such a

right. Any rights that Phillips did have were satisfied when

the MMS followed Section 206.150.

63a

The paper is interpretive in substance and applica-

tion, and, in light of its consistent obedience to Sec-

tion 206.150, the paper, itself, is not the source of any

substantial impact on the OCS leasing industry and

OCS lessees.

The Procedure Paper was not subject to the APA’s

notice and comment rulemaking requirements. There

is no genuine issue of material fact to the contrary.

Section 552 * of the APA

Phillips’s next contention is that the Procedure

Paper should have been published in the Federal Reg-

ister pursuant to Section 552 of the APA.

Apart from the APA’s notice and comment require-

ments, Section 552 commands that an agency publish

in the Federal Register “substantive rules of general

applicability adopted as authorized by law, and state-

ments of general policy or interpretations of general

applicability formulated and adopted by the agency.”

5 U.S.C.A. § 552 (West 1977). It further provides

that, “(e)xcept to the extent that a person has actual

and timely notice of the terms thereof, a person may

not in any manner be required to resort to, or be

adversely affected by, a matter required to be pub-

lished in the Federal Register and not so published.”

Id. In other words, the Section 552 “requirement for

publication attaches only to matters which if not pub-

lished would adversely affect a member of the public.”

United States v. Goodman, 605 F.2d 870, 887-88 (5th

Cir. 1979) (quoting Hogg v. United States, 428 F.2d

274, 280 [6th Cir. 1970], cert. denied, 401 U.S. 910

[1971]). It is undisputed that Phillips (and ARCO)

*4 Meaning the section number as codified in Title 5 of the

United States Code. See also supra note 23.

64a

had no actual notice of the Procedure Paper until it

was applied in this case.

The Court already has held that the Procedure

Paper is not a substantive rule for Section 553’s notice

and comment rulemaking purposes, and that holding

applies with equal force under Section 552. See

Brecker v. Queens B’Nai B’Rith Housing Dev. Fund

Co., 798 F.2d 52, 56-57 (2d Cir. 1986); McKenzie v.

Bowen, 787 F.2d 1216, 1222-23 (8th Cir. 1986).

Therefore, the paper does not have the type of effect

on the public contemplated by Section 552. Allowing

Section 552’s requirements to kick in for anything less

than a substantive rule would require publication of

a potentially limitless list of agency procedures, state-

ments, and actions.

Courts have recognized this limit. In Chevron Oil

Co. v. Andrus, 588 F.2d 1383 (5th Cir.), reh’g denied,

591 F.2d 1343, cert. denied, 444 U.S. 879 (1979), for

example, a regional manager in the Bureau of Land

Management of the DOI accepted Chevron’s bids on

some oil leases. Later, however, the Deputy Under

Secretary of the Interior rejected the bids. Jd. at

1384. The DOI claimed that it was not bound by the

regional manager’s acceptance because, in part, of a

provision in its internal manual that provided that,

““(a)n officer who delegates or redelegates authority

does not divest himself of the power to exercise that

authority.’” Jd. at 1388 (quoting 200 Departmental

Manual §1.3 [1970]). The manual had not been

published in the Federal Register.

The Fifth Circuit ruled that the Manual’s provision

was binding and afforded the Under Secretary au-

thority to overrule the regional manager. /d. at 1388-

89. The Court reasoned that,

65a

it has been held that (section 552’s) ‘requirement

for publication attaches only to matters which if

not published would adversely affect a member of

the public,’ or which affect the steps a party must

take to present a matter to an agency. The provi-

sion in the Interior’s manual does not relate to

the manner in which bids must be submitted. Nor

was Chevron adversely affected by its nonpublica-

tion. We do not believe that knowing that the

Secretary could participate in a decision to reject

a bid would have induced Chevron to bid more

than it did, and only a higher bid would have

influenced the Deputy Under Secretary’s decision.

Id. at 1388 n. 8 (quoting Hogg v. United States, 428

F.2d at 280) (citation omitted). Similarly, in Hogg

v. United States, the Sixth Circuit held that, “the Ad-

ministrative Procedure Act does not require that all

internal delegations of authori

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