Delegation of Royalty Management Functions to States

Federal RegisterAug 12, 1997

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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 227, 228, and 229

RIN 1010-AC25

Delegation of Royalty Management Functions to States

AGENCY: Minerals Management Service, Interior.

ACTION: Final rulemaking.

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SUMMARY: The Minerals Management Service (MMS) is adding new rules

authorizing the delegation of several Federal royalty management

functions to States. These rules implement recently-enacted

legislation.

EFFECTIVE DATE: September 11, 1997.

FOR FURTHER INFORMATION CONTACT: David Guzy, Chief, Rules and

Publications Staff, Royalty Management Program, Minerals Management

Service, telephone (303) 231-3432, Fax (303) 231-3385, e-Mail

David__G[email protected].

SUPPLEMENTARY INFORMATION: The principal authors of this final

rulemaking are Larry Cobb, Harry Corley, Jim Detlefs, Clare Onstad,

Robert Prael, Todd McCutcheon, Dave Steiber, Cecelia Williams, and Sam

Wilson, MMS; and Peter Schaumberg and Sarah Inderbitzin of the Office

of the Solicitor.

I. General

On August 13, 1996, Congress enacted the Federal Oil and Gas

Royalty Simplification and Fairness Act of 1996, Pub. L. 104-185, as

corrected by Pub. L. 104-200 (RSFA). The RSFA amends portions of the

Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA), 30 U.S.C.

1701 et seq. Prior to the RSFA enactment, section 205 of FOGRMA, 30

U.S.C. 1735, provided for the delegation of only audits, inspections,

and investigations to the States. The RSFA amendments to section 205

now provide that the Minerals Management Service (MMS) may delegate

other Federal royalty management functions to requesting States for

Federal oil and gas leases onshore.

The royalty management functions MMS may delegate under the RSFA

amendments are:

(1) Conducting audits and investigations;

(2) Receiving and processing production and royalty reports;

(3) Correcting erroneous report data;

(4) Performing automated verification; and

(5) Issuing demands, subpoenas, orders to perform restructured

accounting, and related tolling agreements and notices to lessees or

their designees.

The RSFA amendments to section 205(d) also provide that within 12

months after the date of enactment, after consultation with the States,

the Secretary must issue standards and regulations pertaining to

delegable functions and other relevant responsibilities, including:

(1) Audits to be performed;

(2) Records and accounts to be maintained;

(3) Reporting procedures to be required by the States under this

section;

(4) Receipt and processing of production and royalty reports;

(5) Correction of erroneous report data;

(6) Performance of automated verification;

(7) Issuance of standards and guidelines in order to avoid

duplication of effort;

(8) Transmission of report data to the Secretary; and

(9) Issuance of demands, subpoenas, and orders to perform

restructured accounting, for royalty accounting purposes.

In response to the section 205 RSFA amendments, MMS formed the 205

Consultation Team, comprised of MMS, interested States, representatives

from State associations, and a representative of the Bureau of Land

Management to discuss how to implement the delegation provisions of the

RSFA.

MMS proposed rules implementing the section 205 RSFA amendments (62

FR 19967 April 24, 1997. As part of that proposed rulemaking, MMS

explained that it would develop MMS Standards for Delegation

(Standards) which would contain further information States would need

to perform delegated functions. MMS held several outreach meetings in

June of 1997 at various locations to discuss the MMS Standards for

Delegation (Standards) document with States and industry attendees.

II. Indian Lands

In the proposed rule, MMS proposed to amend 30 CFR parts 228 and

229 to remove references to cooperative agreements and delegations for

Federal lands under those parts since delegation for Federal lands are

now covered under new part 227. MMS also proposed to amend those parts

to conform to the principles of ``Plain English.'' Because MMS is not

under a statutory deadline to publish parts 228 and 229 like it is for

part 227, MMS is not removing the references to Federal lands in, or

making the ``Plain English'' changes to

[[Page 43077]]

those parts at this time. However, MMS is making an interim change to

parts 228 and 229 by adding a sentence to those parts that will state

that, ``As of the effective date of this rule, this part does not apply

to Federal lands.'' This sentence will make clear that from this time

forward, those parts only apply to Indian cooperative agreements and

delegation agreements for audits, inspections, and investigations with

States for Indian lands within the State. We will amend the language in

parts 228 and 229 to ``Plain English,'' and make any other changes to

those parts at a future date.

III. Comments on Proposed Rule

The proposed rulemaking provided a 30-day public comment period,

which ended May 27, 1997. MMS received comments from thirteen

commenters during the comment period. One additional commenter

submitted late comments that MMS received on June 2, 1997. Thus, we

accepted a total of fourteen comments for review. Four of the comments

were from States, two were from mining associations, two were from oil

and gas trade associations, and six were from industry.

We reviewed and analyzed all of the comments, and in some instances

revised the language of the final rule based on these comments. The

following is a discussion of the comments received and our response.

First, we address five general concerns the comments raised. Second, we

respond to the specific comments referred to by regulation paragraph

number. Third, we address the questions and issues where we asked the

public for specific comment.

I. General Concerns

Delegation of Functions for Solid Mineral, Geothermal, and OCSLA 8(g)

Leases

One State, two mining associations, and two mining companies

commented on delegating royalty management functions to States for

solid mineral leases. The State supported the concept, but believed we

should not issue regulations until the Department provides a legal

opinion on this issue. The mining industry objected to the delegation

of functions for solid mineral leases because they believed we lack the

statutory authority. One company agreed that we should obtain a legal

opinion before issuing the final regulation. One trade association

stated that it did not oppose delegation for Outer Continental Shelf

Lands Act (OCSLA), section 8(g) leases, but that MMS should not split

the reporting for leases or units that contain both section 8(g) and

non-section 8(g) properties.

MMS Response--MMS has obtained a legal opinion from the Office of

the Solicitor, which concludes that Pub. L. 102-154 does not provide

authority to apply the section 205 RSFA amendments to solid mineral,

geothermal, and offshore leases subject to section 8(g) of OCSLA. Based

on that opinion and the comments, we omitted from the final rule

delegations of additional functions for solid mineral leases,

geothermal leases, and oil and gas leases subject to section 8(g) of

OCSLA, 43 U.S.C. 1337(g). However, States may continue to perform audit

functions for solid mineral, geothermal, and OCSLA section 8(g) leases

under the existing and successive delegation agreements. Because MMS is

not delegating the additional royalty management functions for OCSLA

section 8(g) leases, there is no issue regarding split reporting for

such leases.

Furthermore, we combined proposed Sec. 227.100 with proposed

Sec. 227.101 to conform with comments received from the mining industry

and the Departmental legal opinion. Thus, although MMS will not

delegate RSFA's additional royalty management functions for solid,

geothermal, or section 8(g) leases, when requesting the function of

audits and investigations, a State must still follow the procedures

under this part.

In addition, we added language to clarify that a State performing

delegated functions must perform those functions for all applicable

Federal leases within the State's boundaries.

For example, assume that there are 100 Federal oil and gas leases

within a State's boundaries. If that State requests delegation of the

royalty management functions of audit and receiving and processing

production and royalty reports, it cannot choose to perform audits and

receive and process production and royalty reports for only 25 of those

Federal oil and gas leases. Rather, it must accept delegation of audit

and receiving and processing production and royalty reports

responsibility for all 100 of those Federal leases.

Regulatory Flexibility--We received three comments from States

expressing concern that the regulations did not provide enough

flexibility. One of these commenters stated, ``An organization should

be allowed to adjust to a changing environment and apply a better

approach or technique without having the fear of the audit contract

being withdrawn or the audit findings negotiated.'' In particular, they

were opposed to the extensive use of the word ``must,'' because they

believe it would require their programs to operate in only one way. One

commenter indicated that the delegation proposal contained too many

detailed requirements. Conversely, one State commented that the

regulations ``* * * appear to be a reasonable interpretation * * *'' of

RSFA.

Industry commented that they would like to see the specific

standards that provided the details of how the States would perform the

delegated functions. One industry oil and gas trade association

maintained that ``* * * the standards should have been published along

with the proposed rule and included in the regulations.'' This industry

oil and gas trade association, another oil and gas association, plus

two industry representatives protested that they were forced to comment

on the proposed rule without the benefit of reviewing the standards.

Two of these commenters requested that MMS extend the comment period

until after it issues the standards.

MMS Response--On the issue of flexibility, RSFA section 3(a),

FOGRMA section 205(d) mandated that the Government and delegated States

maintain a consistent royalty management program. Moreover, RSFA

specifically stated that States must agree to adopt ``standardized

reporting procedures'' unless all affected parties agree otherwise,

RSFA section 3(a), FOGRMA section 205(b)(4), and that the delegations

``will not create an unreasonable burden on any lessee,'' RSFA section

3(a), FOGRMA section 205(b)(3). We believe that the rule allows for as

much flexibility as possible within the constraints that RSFA mandates,

while maintaining a consistent royalty management program and

minimizing any burden on lessees. Like RSFA section 3(a), FOGRMA

section 205(b)(4), the rule provides that States may use alternative

reporting procedures if all affected parties agree. See 30 CFR

227.106(d). In addition, we anticipate that States may achieve further

flexibility in performing delegated functions when they work with us to

develop their delegation agreements, as provided in 30 CFR 227.108.

Our intent in developing the rule and Standards was to provide the

basic framework necessary to maintain uniform royalty management

standards, not to inhibit any flexibility in complying with those

Standards. Thus, in describing the royalty management functions, we

used the word ``must'' for both MMS and the States for required

performance. Although we did not eliminate the word ``must,'' we

[[Page 43078]]

modified Sec. 227.300 to provide for flexibility in this function.

Section 227.300(a) shows the activities that must be performed under an

audit, while Sec. 227.300(b) lists additional activities that would be

appropriate to perform only in certain situations.

In our attempt to try to achieve further flexibility, we also

reviewed our use of the word ``all.'' Upon review, we believe that it

was correctly used in describing the activities performed in the

various functions. We, therefore, did not make any changes to the word

``all.'' However, we acknowledge that additional flexibility can be

attained in certain areas, such as the delegation proposal in

Sec. 227.103(e). Therefore, we modified the final rule by deleting the

requirements of Secs. 227.103(e)(2)(ii) and (iv) from the proposed

rule.

With respect to the comment that we extend the comment period until

MMS issues the Standards, RSFA's requirement that MMS issue a final

rule within 12 months of enactment makes it extremely difficult for us

to extend the comment period. Accordingly, we will not extend the

comment period. We believe that we are complying with the statutory

mandates of RSFA. We also believe we made a sufficient effort to share

the Standards with industry as soon as they were developed. While we

did not consult with industry during the initial phase of development,

we did conduct outreach meetings with industry in June 1997 to share a

first draft of the Standards and receive their input.

Further, while we published the proposed regulation for notice and

comment, we do not intend to formally publish the Standards document in

the Federal Register for notice and comment because it merely offers

additional clarification on the basic standards contained in the rule

detailing, for example, day-to-day operational information States need

to perform delegated functions. We will publish a notice in the Federal

Standards on the MMS Website. Moreover, while we understand industry's

concerns, we believe the proposed rule provides sufficient standards

information for commenters to be knowledgeable of the process and

requirements. Finally, we consider the Standards to be a living

document that will change, as we reengineer and as States, in

coordination with MMS, develop their procedures with industry

involvement.

Industry Participation--One oil and gas trade association and two

industry representatives requested more industry participation in the

entire delegation process, including the proposed regulation, the

Standards, and the delegation proposal. One industry commenter believed

that because industry is vitally affected by the process, they must be

allowed an opportunity to provide input. This commenter also stated

that the Federal Advisory Committee Act (FACA) requires that industry

be included in the development of the standards and procedures for

delegation. Another industry commenter pointed out that industry

participation would ``* * * minimize the lessee's burden, ensure

uniformity, eliminate duplication and protect confidential data.'' Two

commenters suggested making the delegation agreement a public document.

MMS Response--We believe we have included industry in the process

to the maximum extent possible given the limited time available. RSFA

only requires that MMS consult with States in developing these rules

and Standards. Nonetheless, MMS included industry through outreach

meetings and consideration of their comments to the proposed rule. In

addition, MMS has incorporated industry's feedback in both the rule and

Standards.

With respect to the comments on the applicability of FACA, in the

preamble to the proposed rule, 62 FR 19967, April 24, 1997, MMS

suggested formation of an advisory committee consisting of States

receiving delegations and MMS to help develop the standards and

procedures for performing delegable functions. Such meetings are

specifically exempted from FACA, 5 U.S.C. App., under section 204(b) of

the Unfunded Mandates Reform Act of 1995, Pub. L. 104-4 (UMRA). Section

204(b) of the UMRA provides that:

(b) Meetings Between State * * * and Federal Officers: [FACA]

shall not apply to actions in support of intergovernmental

communications where--

(1) Meetings are held exclusively between Federal officials and

elected officers of State * * * governments (or their designated

employees with authority to act on their behalf) acting in their

official capacities; and

(2) Such meetings are solely for the purposes of exchanging

views, information, or advice relating to the management or

implementation of Federal programs established pursuant to public

law that explicitly or inherently share intergovernmental activities

or administration.

Clearly, meetings MMS officials, or their delegates, have with

delegated State officials, or their delegates, to develop the standards

and procedures necessary for States to assume delegated functions ``are

solely for the purposes of exchanging views, information, or advice

relating to the management or implementation of Federal programs

established pursuant to public law that explicitly or inherently share

intergovernmental activities or administration.'' Thus, any State-MMS

advisory committee meetings regarding delegations would be exempt from

FACA under section 204(b) of UMRA.

Finally, the delegation agreements are public documents evidencing

an agreement between MMS and the State. Because industry is not a party

to the agreement, we believe that only the States and MMS should be

involved in the negotiating process. However, MMS and States will

consult with industry when it is specifically impacted by the

agreement. For example, if a State wants to initiate an innovative

reporting procedure, we would seek industry concurrence with the

procedure before its implementation.

Plain English--One industry commenter expressed concern that

rewriting regulations for parts 228 and 229 in ``Plain English'' would

change their meaning and interpretation.

MMS Response--The Federal Government endorses the use of ``Plain

English'' writing for all Government documents. E.O. 12866, 58 FR

51735, October 4, 1993. As stated above, we will amend parts 228 and

229 at a future date to remove references to cooperative agreements and

delegations for Federal lands under those parts and to conform to

``Plain English'' principles.

Simplify and Streamline Royalty Management Practices and the

Relationship to Costs--Two industry commenters stated that the

regulations at part 227 should simplify and streamline royalty

management requirements and practices. These commenters were concerned

about the additional costs that industry would incur under the new

regulations such as the increase in information collection

requirements.

MMS Response--RSFA mandates promulgation of these regulations.

However, the decentralization of functions authorized under RSFA and

these implementing regulations does not necessarily guarantee

streamlining, nor a reduction in costs. Although we have minimized the

burden to lessees in this rulemaking, the impact of RSFA's mandates may

result in some additional cost to industry. We identified the potential

additional costs as stemming primarily from an increase in coordination

between industry and multiple royalty management entities. But, the

cost figure was an estimate and may not actually be realized by

industry.

[[Page 43079]]

II. Specific Comments

Section 227.102--One State commented that impacted States must be

allowed to participate in settlement negotiations, even though they do

not have a delegation agreement. In particular, the commenter stated

``(MMS) * * * must depart from its current settlement procedures in

order to comply with RSFA. RSFA expands the authority of all States

concerned, not just those with delegations of authority, granting them

the ability to veto compromises of royalty obligations. Under RSFA,

each State will need to represent itself.''

MMS Response--MMS agrees that under RSFA section 4(a), FOGRMA

section 115(i), the ``State concerned'' (defined as a State which

statutorily receives royalties and other payments under mineral leasing

laws, RSFA section 2(2), FOGRMA section 3(31)) may participate in the

negotiation process. RSFA section 4(a), FOGRMA section 115(i), provides

that for royalties due on production after September 1, 1996, ``the

parties shall hold not less than one settlement consultation and the

Secretary and the State concerned may take such action as is

appropriate to compromise and settle a disputed obligation. * * *''

However, this language does not expressly grant States authority to

settle a dispute or prevent the Secretary from settling a dispute over

a State objection or ``veto.'' Rather, the Secretary must determine

what is the appropriate action and has done so in this rulemaking

through the retention of ultimate settlement authority. This is

consistent with the entire structure of RSFA because: (1) Under RSFA

section 4(a), FOGRMA section 115(h), the Secretary retains authority to

decide appeals, even appeals of orders that a delegated State issues;

(2) RSFA section 12 provides that ``(n)othing in this Act shall be

construed to give a state a property right or interest in any Federal

lease or land,'' and the power to settle a dispute is at least an

inchoate property right which Congress has specifically stated it did

not grant to any State; and (3) as a practical matter, many settlements

involve more than one State, and we do not believe it was Congress'

intent to allow one State to frustrate the settlement process in such

instances when it enacted RSFA section 4(a), FOGRMA section 115(i).

Thus, we believe, as we always have, that the appropriate action

involves consultation with the States. Accordingly, while all concerned

States may participate in negotiations or other alternative dispute

resolution, MMS must retain settlement authority over Federal

royalties.

Section 227.102(d)--Two industry commenters expressed concern about

possible duplication that might result from the splitting of

enforcement procedures between the States and MMS.

One oil and gas trade association supported MMS retaining

enforcement actions. This commenter recommended that MMS continue to

apply its current tolerances for error rates, compliance, and other

applications at the payor code level for all Federal leases instead of

by State.

MMS Response--We do not believe that there will be any duplication

regarding enforcement procedures. RSFA does not allow for the splitting

of enforcement procedures. Rather, the only enforcement procedures that

RSFA allows the States are issuing demands, subpoenas, and orders to

perform restructured accounting. MMS will retain all other enforcement

activities. See 30 CFR 227.102(c).

Importantly, as stated in the proposed rule, MMS will continue to

process and decide all appeals, including appeals from demands or

orders a delegated State issues, 30 CFR 227.102(d), and will continue

to decide all valuation policies. 30 CFR 227.102(f). Accordingly,

although a State may issue a demand, MMS will retain ultimate authority

for its enforcement. This process will prevent ``duplicative'' or

``split'' enforcement procedures.

We agree that we must retain enforcement actions not specifically

delegated by RSFA. We will address how we will apply tolerances to

payors in various States in the regulations relevant to the particular

type of application, such as error rates.

Section 227.103(i)--One State commenter and one oil and gas trade

association pointed out that Sec. 227.103(i) was incomplete. Another

commenter ``urge(d) that MMS strictly enforce confidentiality

obligations * * * where the same state auditors are conducting federal

and state royalty audits simultaneously, along with state tax audits.''

MMS Response--We agree that there is a typographical error in the

last sentence of Sec. 227.103(i). Thus, we have deleted the semicolon

and the word ``and.'' In addition, to clarify what we mean by the

phrase in Sec. 227.103(i) that ``persons who have access to information

received under delegated functions are subject to the same provisions

of law regarding confidentiality and disclosure as that of Federal

employees'' we are adding the following language to that paragraph:

Therefore, persons who have access to information received under

delegation agreements may not use such information or provide such

information to any other person, including State personnel, for

purposes other than performing delegated functions. However, this

limitation does not apply if the person submitting the information

consents in writing to its use for other State purposes.

We are adding the additional language because under existing laws,

Federal employees are prohibited from disseminating confidential

commercial information to a State, except for delegation situations

where certain restrictions exist. For example, MMS cannot provide

information it obtains in a royalty audit to a State for the State to

use in a tax audit. Likewise, a State employee acting as the Federal

Government's delegatee is prohibited from disseminating information to

other State personnel for purposes other than delegated functions,

unless the person providing the information agrees to the further

dissemination. Moreover, some State employees will perform delegated

functions and also other State functions such as State severance tax

audits. If that person receives information from a company under an MMS

delegation, the person cannot use the information gathered under the

delegation for State enforcement purposes without obtaining written

consent from the company.

Section 227.103(c)(1)--Two State commenters recommended making the

word ``entity'' plural because more than one State agency may perform

delegated functions.

MMS Response--We agree and have made this change in this rule. We

also added language to clarify that if more than one entity is

delegated responsibility for performing delegated functions, the State

must include in its proposal the position of the highest ranking State

official having ultimate authority over the collection of royalties

from leases on Federal lands within the State.

Section 227.105--Two State commenters questioned whether MMS would

require a hearing in all cases, even if a State requested only to make

minor changes to an existing delegation. These commenters suggested

holding a hearing only if necessary or appropriate and using language

to that effect.

MMS Response--We agree that we will hold a hearing only if

necessary and have changed the final rule to state that we will require

a hearing when MMS determines it is appropriate.

Section 227.106(d)--One oil and gas trade association supported

maintaining uniformity in the delegation program.

MMS Response--We agree.

[[Page 43080]]

Section 227.107--One oil and gas industry commenter expressed

concern about industry having enough time to modify their systems to

comply with any new reporting requirements. This commenter suggested

allowing a 6-month grace period before the effective date of the

delegation.

MMS Response--This section does not address the effective date of

delegation agreements or ``grace periods.'' Rather, it informs States

that submit a delegation proposal that the MMS Director will decide

whether to approve the proposal within 90 days after the proposal is

complete. The 90-day period is mandated under RSFA section 3(a), FOGRMA

section 205(c) and cannot be changed. However, we agree that a

transition time is necessary between the date a delegation agreement

becomes effective and the date industry must comply with any new

requirements under such agreements. Although not raised by this

comment, during its review of this comment MMS realized that it had not

included an effective date for delegation agreements in its proposed

rule. Therefore, we will modify Sec. 227.110(a) as follows:

(a) Delegation agreements are effective for 3 years from the first

day of the month following the date the MMS Director signs the

delegation agreement. However, during the development of the State's

delegation proposal under Sec. 227.108 of this part, MMS, the delegated

State and any other affected person will determine an appropriate

transition period for industry to modify their systems to comply with

any new requirements under a delegation agreement. Thus, the MMS

Director will not sign any delegation agreement until after the agreed

to transition period. MMS will publish notice of the effective date of

a State's delegation agreement in the Federal Register and that notice

will inform industry of any transition period.

Thus, MMS, the delegated State, and affected industry will

determine the amount of transition time necessary on a case-by-case

basis depending on the type and number of functions that we agree to

delegate to a given State. We will ensure that sufficient time is

provided to all affected parties to allow for a successful transition.

Section 227.108--One State commenter suggested cross-referencing

the standards in this section to the standards in Secs. 227.200 and

227.201.

MMS Response--We disagree. We do not see any benefit in cross-

referencing to only those sections in the rule. Although this rule and

the Standards provide the basic framework for uniform performance of

the delegated functions, we believe further flexibility can be achieved

through development of the delegation agreement under this section.

Section 227.109--One State commenter pointed out that this section

does not address a State's ability to appeal if it is denied a

delegation. This commenter indicated that a review of the decision at

the administrative level is a logical first step.

MMS Response--We disagree. RSFA section 3(a), FOGRMA section 205(g)

expressly provides that disapproval of a delegation proposal is

reviewable in Federal district court. Thus, consistent with RSFA

section 3(a), FOGRMA section 205(g), the MMS Director's decision to

deny a delegation with the concurrence of the Secretary is final agency

action that a State may appeal in Federal district court.

Section 227.110--Two oil and gas trade associations recommended, at

a minimum, that we publish notice of a State's request for delegation

in addition to its request to renew a delegation. Further, they

recommended that upon such notice, any affected or interested party,

including industry, could request a hearing. One of these commenters

requested that a hearing be held in all renewal cases.

MMS Response--We agree that we should publish notice of a State's

proposal for delegation, renewal of an existing delegation, and any

successive delegation agreement. Therefore, we will publish such

notices and notice of the effective date of a State's delegation

agreement in the Federal Register. We will post the proposals on the

MMS Website and also will send a copy of delegation proposals to trade

associations or anyone else upon request. The trade associations may

make further distribution to their members, as necessary. MMS has added

a new paragraph at Sec. 227.105(d) in response to this comment. See

also Sec. 227.110(g).

In addition, MMS agrees that affected parties should be able to

request a hearing when States request a renewal or a successive

delegation agreement under this section. Accordingly, we are modifying

the final rulemaking by adding a new paragraph (e) to this section as

follows:

(e) If a State does not request a hearing under paragraphs

(b)(1) or (d) of this section, any other affected person may submit

a written request for a hearing under those paragraphs to the MMS

Associate Director for Royalty Management.

Section 227.112--We received several comments on costs from three

States. One State commenter was concerned about the adequacy of our

cost accounting system and how States would be compensated under it.

The other two State commenters protested the requirement to submit

vouchers with a level of detail above current delegation agreements.

They did support, however, making cost and voucher information

available for review. One State commenter was concerned that we would

determine costs on a micro-level of activity. This commenter believed

that costs related to the audit function should be consistent with

current funding for delegated audit work. Another State commenter

believed that we must make any cost comparisons by looking at the whole

picture rather than a single part.

MMS Response--Through the net receipt sharing process, MMS has

refined the costs regarding the program's royalty management functions.

Although the process is not based on a detailed cost accounting system,

the Office of the Inspector General concurred in our methodology for

allocating costs to States. However, we appreciate the State's concerns

and will contract with an independent accounting firm to review MMS

costs related to all delegable functions and recommend a methodology

for determining what funds should be made available to States

requesting a delegation agreement for one or more functions. This issue

is important because of RSFA's requirement that compensation to a State

may not exceed the Secretary's reasonably anticipated expenditure for

performance of such delegated activities by the Secretary.

The vouchers referred to in the proposed rule need only show the

level of cost categories that are presently required under existing

delegated audit agreements, not each individual expenditure. The States

will not need to provide the detailed supporting documentation with the

vouchers, for example, an employee's travel voucher. States will need

only to make the detailed supporting documentation available, if we

request it. We confirm that we will focus on the overall costs under

the agreement.

Section 227.200--Two State commenters objected to the requirement

that States obtain MMS guidance on any applicable Federal requirement,

such as valuation interpretation or policy. One State commenter was

concerned about repercussions for not following our interpretation or

guidance. This State commenter stated that, ``A delegation may decide

not to follow the guidance due to discovery of new pertinent facts and

may elect, for purposes of effective use of resources, to not have MMS

issue new guidance.'' This State also

[[Page 43081]]

suggested that MMS can convey guidance orally, without a formal written

procedure. Therefore, this commenter recommended that we delete the

requirement for a written request. Conversely, one oil and gas trade

association strongly supported the requirement for a State to submit a

written request for interpretation of applicable Federal requirements

and for MMS to respond in writing. This commenter believed that,

``Besides ensuring uniform and consistent application of Federal

requirements, it will also provide lessees with greater certainty that

they are properly reporting and paying their royalties.'' One State

commenter requested that the States be held to no higher standard than

MMS in performing delegated functions.

MMS Response--The Department of the Interior (DOI) has the final

responsibility for deciding appeals and must maintain a uniform

valuation policy. In particular, for unique questions and complex

situations, such as valuation issues, we believe it is more efficient

for us to provide written guidance to all impacted parties early in a

developing situation than to provide it late in the process. Further,

this encourages consistency in the application of laws and regulations

because it eliminates confusion during the administrative process. We

concur that for routine or procedural matters States could obtain

guidance orally. We have clarified our position in the final

regulation.

We will not hold States to standards higher than those we perform.

However, we encourage States to improve the efficiency and

effectiveness of the Federal royalty management program they are

delegated.

Section 227.300--Two States commented that the list of delegable

audit functions was too detailed and restrictive. These commenters

pointed out that not all functions would apply in every audit

situation, such as site visits, close-out conferences, and records

releases. One of these commenters further contended that MMS should

compensate the States for the costs of conducting any special audit

initiatives. Another State commenter recommended deleting the reference

in this section to MMS deciding all appeals because it may adopt the

recommendation of the Royalty Policy Committee.

MMS Response--We agree with the idea of increased flexibility. We

have modified the rule to only require performance of the specific

audit functions as appropriate.

Compensation for special audit initiatives is subject to

Congressional funding. Thus, when audit initiatives arise and

additional funds are not available, the audit work plans of affected

States and MMS would have to be modified in response to the higher

priority work. This could result in lower priority work not being

accomplished with existing resources, unless Congress provides

additional funding.

We are retaining the language in the final rules that the

Department will decide all appeals as provided in RSFA. We are

reviewing the recommendations by the Royalty Policy Committee on

appeals and will issue an amended rule on this matter if necessary.

Section 227.301--Three State commenters stated that the

responsibilities for performing audits were too restrictive, and that

MMS should allow them to develop their own audit strategies. They

pointed out that, for example, the annual work plan is subject to

frequent change and that the regulations need to allow for that kind of

flexibility.

MMS Response--Although, we understand the need for flexibility in

developing audit strategies, we stress the need for a coordinated audit

program. Thus, we agree that the annual audit work plans can be changed

to reprioritize work with our approval and have modified

Sec. 227.301(e) accordingly.

Section 227.400--One State commenter advocated State collection of

royalty payments, similar to Indian lockboxes, to minimize the

complications resulting from erroneous reports. A second State

commenter raised the issue that RSFA's term ``State concerned'' (in the

context of granting exceptions from reporting and payment requirements

under 30 U.S.C. 1726(c)) applies to a broader universe than the term

``delegated State'' used in this rule, and requested that its meaning

not be changed. An oil and gas industry representative questioned

whether a lessee could appeal a State's denial of an exception request.

MMS Response--As we stated in the preamble to the proposed rule,

RSFA does not authorize MMS to delegate collection functions. Thus, MMS

has reserved this function because it is necessary for uniform

administration of the royalty management system among the States.

Further, we believe that no complication results from a centralized

collection function.

The commenter has misinterpreted the application of

Secs. 227.400(b)(1) and (2) in this rulemaking. With respect to

Sec. 227.400(b)(1), RSFA provides, in the section applicable to

allocation of production to leases within a unit or communitization

agreement, that ``[t]he Secretary or the delegated State shall grant an

exception from the reporting and payment requirements for marginal

properties.'' 30 U.S.C. 1721(k)(4) (emphasis added). That is the

applicable section of RSFA that was addressed in Sec. 227.400(b)(1) of

this rulemaking and does not require consent of the ``state

concerned.'' However, RSFA also provides in the section applicable to

marginal properties in general that the State concerned must consent to

alternative accounting and auditing procedures for marginal properties.

30 U.S.C. 1726(c). We are in the process of separately promulgating

rules implementing section 1726(c) of RSFA that do require consent of

the State concerned before it will grant alternative accounting and

auditing procedures for marginal properties.

With respect to Sec. 227.400(b)(2), RSFA also provides, in the

section applicable to allocation of production to leases within a unit

or communitization agreement, that ``(f)or any unit or communitization

agreement if all lessees contractually agree to an alternative method

of royalty reporting and payment, the lessees may submit such

alternative method to the Secretary or the delegated State for

approval. * * *'' 30 U.S.C. 1721(k)(3) (emphasis added). That is the

applicable section of RSFA that was addressed in Sec. 227.400(b)(2) of

this rulemaking and does not require consent of the ``state

concerned.''

Section 227.401--One oil and gas industry commenter suggested that

States accept all forms of electronic media as currently done by MMS.

MMS Response--We agree. We intend to continue this policy in our

delegation program.

Section 227.500--One oil and gas trade association and one oil and

gas industry commenter recommended that we assess interest and

erroneous reporting at the payor code level for all Federal leases and

not at the individual State level.

MMS Response--We will address how we will assess for interest and

erroneous reporting in other appropriate rulemakings.

Section 227.600--A State commenter opposed the requirement to

verify ``unit prices for reasonable product valuation,'' because MMS

does not perform that function. Two other State commenters suggested

that cost effectiveness be taken into account to optimize the return on

the resources spent when performing automated verification. An oil and

gas industry trade association stated that it `` * * * does not object

to a State calculating

[[Page 43082]]

interest, but we have concerns on how the excessive overpayment

provision of FOGRSFA will be interpreted. (It) believes that this

provision must be viewed on a Payor Code level for all federal leases.

We do not believe that this provision should be made on a state-by-

state basis. What if a reporter had only one lease within a delegated

state, but hundreds of federal leases in other states?''

MMS Response--We do perform a limited product value verification

within certain broad parameters and have left the provision unchanged

in the final rule. We would not require the States to perform under a

more stringent standard than we do. Further, we support flexibility and

will work with States to develop customized approaches to automated

verification that are cost effective and meet their needs. We will

address the issue of calculating interest on excessive overpayments in

another separate rulemaking.

Section 227.601--One oil and gas industry representative was

concerned about States' abilities to verify the proper volume of gas

plant products as currently done by MMS. This commenter suggested that

States have the same capability to avoid extraneous reporting by

industry. Two State commenters objected to their having to perform

verification under a higher standard than MMS. One oil and gas trade

association commented that the word ``update'' in Sec. 227.601(d)

should be ``updated.''

MMS Response--If States request this function, we will assure that

they have the capability to verify plant production volumes. We will

not require a State to perform verification at a higher standard than

we do; however, we will work with States to develop verification

tolerances that best suit each State's needs. We agree that the word in

Sec. 227.601(d) should be ``updated'' and corrected this section.

Section 227.800--Two oil and gas industry trade associations

supported establishment of a MMS monitoring team. They further

suggested that the team consult industry on a regular basis.

MMS Response--We agree that the monitoring team should serve as a

point of contact with industry to address their concerns. Upon review

of this section, we modified it to clarify the annual and periodic

reviews performed by the monitoring team.

Section 227.801--Two State commenters believed that States should

have the ability to appeal a finding by MMS that it is not performing a

delegated function adequately. Two oil and gas trade associations

asserted that we must take corrective actions if a State has not

performed its delegated function satisfactorily, so the word ``may''

must be changed to ``will.'' One of these commenters also recommended

that we put any notices of a State's noncompliance in writing.

MMS Response--The process we proposed provides appropriate

administrative due process for the delegated State. If a State's

performance problem is not corrected through informal discussion, we

may then begin to terminate the delegation. Any termination of a

delegated function will be decided by the MMS Director, with

concurrence by the Secretary. This decision would be appealable to

Federal district court.

In situations involving corrective actions, we wish to retain the

latitude to work with States in improving their performance of the

delegated functions. Some situations may not require us to take a

formal corrective action, for example, where problems can be resolved

verbally. Further, MMS wishes to assure that before it terminates an

agreement, a State will have ample opportunity to correct any harmful

or significant deficiencies. Therefore, MMS is retaining the word

``may'' in the sections involving corrective actions.

Although the rule provides that MMS will notify a State in writing

of the State's failure to adequately perform delegated functions, MMS

will not inform industry of a State's noncompliance. Industry may

request information on a State's performance under its delegation

agreement under the Freedom of Information Act. If industry has

concerns regarding a State's performance of delegated functions,

industry may contact the monitoring team described under Sec. 227.800

of this part.

Section 227.804--Two oil and gas trade associations requested that

we provide industry with 180 days for systems changes, if a State

elects to terminate its delegation. One of these commenters also asked

that industry be notified of such terminations.

MMS Response--This section does not explicitly address the

effective date of terminations of delegation agreements or time periods

for industry to make systems changes once a termination becomes

effective. Rather, it informs States that they must provide MMS with a

90-day written notice of their intent to terminate a delegation

agreement. However, MMS agrees that a transition time is warranted and

is modifying Sec. 227.804 to address this concern. Although not raised

by this comment, during its review of this comment, MMS realized that

it had not included an effective date for termination of delegation

agreements in its proposed rule. Accordingly, we have modified

Sec. 227.804 to provide that MMS will determine a termination date

based on the number and type of delegation function(s) and the number

of affected parties. Therefore, in attempting to provide flexibility,

we will work with each State and industry, as appropriate, to determine

the appropriate amount of time for termination of their particular

delegated function(s).

III. Comments That MMS Specifically Requested

We specifically asked for comment on the following issues:

Removal of Part 229 ``As an alternative proposal, MMS would like

comment on whether it should remove part 229 completely and incorporate

delegations to States for audits, inspections, and investigations on

Indian lands into new Part 227.''

Comment--One industry commenter recommended that MMS retain

separate delegation regulations for audits, inspections and

investigations for Indian leases in part 229. Another industry

commenter pointed out that FOGRSFA did not affect leases on Indian

lands.

MMS Response--We agree and we are retaining this authority in part

229.

Delegation Proposal

``MMS specifically requested comments on additional information

that you believe would be important to include in a State's delegation

proposal.''

Comment--We did not receive any specific comments on this issue.

However, one oil and gas trade association requested timely access to

delegation proposals.

MMS Response--We addressed this issue under Sec. 227.110.

Formation of an Advisory Committee

``MMS would suggest formation of an advisory committee comprised of

States receiving delegations and MMS representatives. The committee

would be responsible for providing advice and recommendations about the

standards and procedures required for the performance of delegable

functions. MMS would like comments on this suggestion.''

Comment--One oil and gas industry trade association advocated that

industry also be included in the advisory committee.

MMS Response--RSFA requires that MMS and the States consult in the

development of procedures and standards for States to perform royalty

[[Page 43083]]

management functions. We believe that it may be helpful for States with

delegations and MMS to work informally together through a State-

initiated advisory group on the continuing development and coordination

of the delegation program. The discussions would involve mostly the

day-to-day coordination of activities between MMS and States and would

have little, if any, effect on industry's activities. Once standards,

procedures, and coordination techniques are developed, industry will

have the opportunity for review.

Monitoring Team--``Please provide comment to MMS if you have

suggestions on how MMS should form the monitoring team.''

Comment--One oil and gas trade association stated that the

monitoring team should consist of MMS subject matter experts. Further,

this commenter suggested that the team consult with affected payors on

a regular basis.

MMS Response--We agree that the monitoring team members should be

subject matter experts and that the team will consult with affected

payors on a regular basis.

Reporting Burden--``As part of our continuing effort to reduce

paperwork and respondent burden, MMS invites the public and other

Federal agencies to comment on any aspect of the reporting burden.''

Comment--One oil and gas trade association emphasized that

reporting burdens could exist when payors report in more than one

State. Further, this commenter stated that industry participation is

essential to eliminate duplication and provide a uniform reporting

format.

MMS Response--While we agree that under RSFA there may be an

additional reporting burden for those payors reporting to multiple

States, we are committed to coordinating with States and industry to

minimize this burden.

Paperwork Reduction Act Requirements--``In compliance with the

requirement of section 3506(c)(2)(A) of the Paperwork Reduction Act of

1995, MMS is providing notice and otherwise consulting with members of

the public and affected agencies concerning collection of information

in order to solicit comment to: (a) Evaluate whether the proposed

collection of information is necessary for the proper performance of

the functions of the agency, including whether the information shall

have practical utility; (b) evaluate the accuracy of the agency's

estimate of the burden of the proposed collection of information; (c)

enhance the quality, utility, and clarity of the information to be

collected; and (d) minimize the burden of the collection of information

on those who are to respond, including through the use of automated

collection techniques or other forms of information technology.''

Comment--We did not receive any comments on this issue.

Section-by-Section Analysis

Section 227.100 What States may request delegation?

We removed this section and combined the information with

Sec. 227.101 to conform with comments received from the mining industry

and the Departmental legal opinion.

Section 227.101 What royalty management functions may MMS delegate to

a State?

We combined the proposed Sec. 227.100 with this section for clarity

purposes.

At Sec. 227.101(a), we added language to clarify that a State

performing delegated royalty management functions must perform those

functions for all Federal oil and gas leases within the State

boundaries.

At Sec. 227.101(b), we added language to clarify that a State

performing delegated audits and investigations must perform those

functions for all federal leases subject to OCSLA section 8(g) and

solid mineral leases and geothermal leases on Federal lands within the

State boundaries.

Section 227.103 What must a State's delegation proposal contain?

We modified Sec. 227.103(c)(1) to include the word ``entities'' in

response to comments and added language to clarify that if more than

one entity is delegated responsibility for performing delegated

functions, the State must provide in its proposal the position of the

highest ranking State official having ultimate authority over the

collection of royalties from leases on Federal lands within the State.

At Sec. 227.103(e)(2), we deleted paragraphs (ii) and (iv) in

response to comments.

At Sec. 227.103(i), we added language to clarify the

responsibilities of handling confidential information.

Section 227.105 What are the hearing procedures?

At Sec. 227.105, we added the words ``if appropriate'' in response

to comments. We inserted a new paragraph at Sec. 227.105(d) also in

response to comments.

Section 227.110 When and for how long are delegation agreements

effective?

We changed the section title to add clarity. We added information

at Sec. 227.110(a) to clarify our language regarding the effective date

for delegation agreements. We added new language at Sec. 227.110(d) to

clarify our original proposal.

In response to comments, we added Sec. 227.110(e) to further

explain the hearing process.

Section 227.111 Do existing delegation agreements remain in effect?

We added language at Sec. 227.111(a) to further explain our

requirements in this section.

Section 227.112 What compensation will a State receive to perform

delegated functions?

We added language at Sec. 227.112(d) to provide an option to the

States for voucher submittal.

Section 227.200 What are a State's general responsibilities if it

accepts a delegation?

We modified Sec. 227.200(a) to provide flexibility to States in

response to their comments.

We deleted the phrase ``and the MMS Standards for Delegation

(Standards)'' from Sec. 227.200(e) for clarity purposes.

We added the phrase ``and the delegation agreement;'' to 227.200(f)

for clarity purposes.

Section 227.300 What audit functions may a State perform?

We modified Sec. 227.300 to provide greater flexibility to the

States in response to their comments.

Section 227.301 What are a State's responsibilities if it performs

audits?

We modified the language at Sec. 227.301(e) of the proposed rule to

provide flexibility to States regarding their audit plans, as expressed

in their comments.

We also modified the language at Sec. 227.301(f) of the proposed

rule to clarify our requirements regarding the appeals process.

Section 227.400 What functions may a State perform in processing

production reports or royalty reports?

We modified Sec. 227.400(a)(7) to clarify our requirements

regarding the appeals process.

Section 227.401 What are a State's responsibilities if it processes

production reports or royalty reports?

We modified Sec. 227.401(b) to clarify our requirements for

processing fatal

[[Page 43084]]

errors. At Sec. 227.401(h), we modified the language to clarify our

requirements regarding the appeals process.

Section 227.500 What functions may a State perform to ensure that

reporters correct erroneous report data?

We modified Sec. 227.500(b) for further clarity.

Section 227.501 What are a State's responsibilities to ensure that

reporters correct erroneous data?

We changed Sec. 227.501(b) for simplicity. We modified

Sec. 227.501(d) to clarify our requirements regarding the appeals

process.

Section 227.600 What automated verification functions may a State

perform?

We modified Sec. 227.600(b)(4) as a result of mining industry

comments regarding the delegation of additional royalty management

functions for solid, geothermal, and Sec. 8(g) leases.

We deleted Sec. 227.600(b)(7) to correct this final rulemaking

because this item is not a separate, identifiable automated

verification function. We modified Sec. 227.600(d) to clarify our

requirements regarding the appeals process.

Section 227.601 What are a State's responsibilities if it performs

automated verification?

We changed Sec. 227.601(d) to correct a typographical error. We

modified Sec. 227.601(e) to provide further clarity regarding the

appeals requirements.

Section 227.700 What enforcement documents may a State issue in

support of its delegated function?

We deleted language from Sec. 227.700(a) as a result of mining

industry comments regarding the delegation of additional royalty

management functions for solid, geothermal, and Sec. 8(g) leases.

Section 227.800 How will MMS monitor a State's performance of

delegated functions?

We modified Sec. 227.800 in response to comments and to further

specify our review process.

Section 227.802 How will MMS terminate a State's delegation agreement?

We added further information about the termination of delegation

agreement process at Sec. 227.802 for clarity purposes.

Section 227.804 How else may a State's delegation agreement terminate?

We modified Sec. 227.804 as a result of industry comments.

V. Procedural Matters

The Regulatory Flexibility Act

The Department certifies that this rule will not have a significant

economic effect on a substantial number of small entities under the

Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This rule provides

guidance to States about the delegation of royalty management

functions.

Approximately 4,500 reporters provide royalty and production

reports on mineral production from Federal and Indian lands to MMS.

However, many of these companies report both royalty and production

information to MMS. The total number of companies reporting to MMS is

about 2,500. The majority of these are considered small businesses

under the criteria of the Small Business Administration.

Some small entities might have activities in more than one State.

While these companies could be required to report to several States

instead of only the Federal Government under this rulemaking, they

would file the same reports that they do now, but to a greater number

of regulatory agencies. For the small entity, this will require further

communication and coordination between the States and MMS. If the

entity has several leases in more than one State, we estimate an

additional burden of 50 hours for coordination between the several

States and MMS. Under this scenario, the annual cost burden estimate to

a small entity is $1,750.

If a payor reports for Federal mineral leases located in only one

State, we estimate no additional burden hours or costs imposed by this

rule because the payor is already required to send in the same

production reports and royalty payments but to a different address. A

$1,750 annual cost for a small business to comply with this rule is not

considered a significant impact on a typical small entity in the oil

and gas extraction industry.

This rulemaking will not have a significant economic impact on a

substantial number of small entities.

Executive Order 12630

The Department certifies that the rule does not represent a

governmental action capable of interference with constitutionally

protected property rights. Thus, there is no need to prepare a Takings

Implication Assessment under Executive Order 12630, ``Governmental

Actions and Interference with Constitutionally Protected Property

Rights.''

Executive Order 12866

This rule was determined to be significant by the Office of

Management and Budget (OMB). Although this rule will result in an

increased reporting burden, there will be an offsetting benefit of

incentives to States to participate in Federal activities. MMS

estimates the economic impact of this rule to be about $7 million.

Executive Order 12988

The Department has certified to OMB that this proposed regulation

meets the applicable standards provided in sections 3(a) and 3(b)(2) of

E.O. 12988.

Paperwork Reduction Act

The Office of Management and Budget approved the information

collection requirements contained in this rule under 44 U.S.C. 3501 et

seq., and assigned OMB Control Number 1010-0088, titled: Delegation of

Authority to States. This OMB approval has an expiration date of June

30, 2000.

National Environmental Policy Act of 1969

We have determined that this rulemaking is not a major Federal

action significantly affecting the quality of the human environment,

and a detailed statement under section 102(2)(C) of the National

Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) is not

required.

Unfunded Mandates Reform Act of 1995

The Department has determined and certifies according to the

Unfunded Mandates Reform Act, 2 U.S.C. 1502 et seq., that this rule

will not impose a cost of $100 million or more in any given year on

local, tribal, State governments or the private sector.

List of Subjects in 30 CFR Parts 227, 228 and 229

Coal, Continental shelf, Geothermal energy, Government contracts,

Mineral royalties, Natural gas, Petroleum, Public lands--mineral

resources, Reporting and recordkeeping requirements.

Dated: July 26, 1997.

Bob Armstrong,

Assistant Secretary, Land and Minerals Management.

For the reasons set out in the preamble, Title 30, Chapter II of

the Code of Federal Regulations is amended as follows:

1. Part 227 is added to read as follows:

PART 227--DELEGATION TO STATES

Sec.

[[Page 43085]]

Delegation of MMS Royalty Functions

227.1 What is the purpose of this part?

227.10 What is the authority for information collection?

227.101 What royalty management functions may MMS delegate to a

State?

227.102 What royalty management functions will MMS not delegate?

Delegation Proposals

227.103 What must a State's delegation proposal contain?

227.104 What will MMS do when it receives a State's delegation

proposal?

Hearing Process

227.105 What are the hearing procedures?

Delegation Process

227.106 What statutory requirements must a State meet to receive a

delegation?

227.107 When will the MMS Director decide whether to approve a

State's delegation proposal?

227.108 How will MMS notify a State of its decision?

227.109 What if the MMS Director denies a State's delegation

proposal?

227.110 When and for how long are delegation agreements effective?

Existing Delegations

227.111 Do existing delegation agreements remain in effect?

Compensation

227.112 What compensation will a State receive to perform delegated

functions?

States' Responsibilities to Perform Delegated Functions

227.200 What are a State's general responsibilities if it accepts a

delegation?

227.201 What standards must a State comply with for performing

delegated functions?

227.300 What audit functions may a State perform?

227.301 What are a State's responsibilities if it performs audits?

227.400 What functions may a State perform in processing production

reports and royalty reports?

227.401 What are a State's responsibilities if it processes

production reports or royalty reports?

227.500 What functions may a State perform to ensure that reporters

correct erroneous report data?

227.501 What are a State's responsibilities to ensure that

reporters correct erroneous data?

227.600 What automated verification functions may a State perform?

227.601 What are a State's responsibilities if it performs

automated verification?

227.700 What enforcement documents may a State issue in support of

its delegated function?

Performance Review

227.800 How will MMS monitor a State's performance of delegated

functions?

227.801 What if a State does not adequately perform a delegated

function?

227.802 How will MMS terminate a State's delegation agreement?

227.803 What are the hearing procedures for terminating a State's

delegation agreement?

227.804 How else may a State's delegation agreement terminate?

227.805 How may a State obtain a new delegation agreement after

termination?

Authority: 30 U.S.C. 1735; 30 U.S.C. 196; Pub L. 102-154.

Delegation of MMS Royalty Functions

Sec. 227.1 What is the purpose of this part?

This part provides procedures to delegate Federal royalty

management functions to States under section 205 of the Federal Oil and

Gas Royalty Management Act of 1982 (the Act), 30 U.S.C. 1735, as

amended by the Federal Oil and Gas Royalty Simplification and Fairness

Act of 1996, Pub. L. 104-185, August 13, 1996, as corrected by Pub. L.

104-200. This part also provides procedures to delegate only audit and

investigation functions to States under Pub. L. 102-154 for solid

mineral leases, geothermal leases and leases subject to section 8(g) of

the Outer Continental Shelf Lands Act, 43 U.S.C. 1337(g). This part

does not apply to any inspection or enforcement responsibilities of the

Bureau of Land Management for onshore leases or the MMS Offshore

Minerals Management program for leases on the Outer Continental Shelf.

Sec. 227.10 What is the authority for information collection?

(a) The information collection requirements contained in this part

have been approved by Office of Management and Budget (OMB) under 44

U.S.C. 3501 et seq. and assigned OMB Control Number 1010-0088. We will

use the information collected to review and approve delegation

proposals from States wishing to perform royalty management functions.

(b) Public reporting burden is estimated as follows. MMS estimates

400 annual burden hours per function for each State performing the

delegated functions. The Federal Government will reimburse some of

these costs as provided by statute. However, States could incur

additional start-up costs, such as purchasing equipment necessary to

perform a delegated function, that may not be reimbursable. MMS

estimates that, if applicable, each payor or reporter would spend 50

burden hours annually coordinating their interactions and

communications among the several States and with MMS. Send comments

regarding this burden estimate or any other aspect of this collection

of information, including suggestions for reducing burden, to the

Information Collection Clearance Officer, Minerals Management Service,

1849 C Street, NW, Washington, DC 20240; and to the Office of

Information and Regulatory Affairs, Office of Management and Budget,

Attention: Desk Officer for the Interior Department, OMB Control Number

1010-0088, 725 17th Street, NW, Washington, DC 20503.

Sec. 227.101 What royalty management functions may MMS delegate to a

State?

(a) If there are oil and gas leases subject to the Act on Federal

lands within your State, MMS may delegate the following royalty

management functions for all such Federal oil and gas leases to you

under this part:

(1) Conducting audits and investigations;

(2) Receiving and processing production or royalty reports;

(3) Correcting erroneous report data;

(4) Performing automated verification; and

(5) Issuing demands, subpoenas, and orders to perform restructured

accounting, including related notices to lessees or their designees,

and entering into tolling agreements under section 115(d)(1) of the

Act, 30 U.S.C. 1725(d)(1).

(b) If there are oil and gas leases offshore of your State subject

to section 8(g) of the Outer Continental Shelf Lands Act, 43 U.S.C.

1337(g), or solid mineral leases or geothermal leases on Federal lands

within your State, MMS only may delegate authority to conduct audits

and investigations for all such Federal leases to you under this part.

MMS will not delegate other functions that may be delegated for oil and

gas leases on Federal lands.

Sec. 227.102 What royalty management functions will MMS not delegate?

This section lists the principal royalty management functions that

MMS will not delegate to a State. MMS will not delegate to a State the

following functions:

(a) MMS must collect all moneys received from sales, bonuses,

rentals, royalties, civil penalties, assessments and interest. MMS also

must collect any moneys a lessee or its designee pays because of audits

or other actions of a delegated State;

(b) MMS must compare all cash and other payments it receives with

payments shown on royalty reports or other documents, such as bills, to

reconcile payor accounts. MMS also must disburse all appropriate moneys

to States and other revenue recipients, including refunds and interest

owed to lessees and their designees;

decide all administrative appeals from demands or

[[Page 43086]]

other orders issued to lessees, their designees, or any other person,

including demands or orders a delegated State issues;

(d) Only MMS may take enforcement actions other than issuing

demands, subpoenas and orders to perform restructured accounting. MMS

or the appropriate Federal agency will issue notices of non-compliance

and civil penalties, collect debts, write off delinquent debts, pursue

litigation, enforce subpoenas, and manage any alternative dispute

resolution. MMS will conduct, coordinate and approve any settlement or

other compromise of an obligation that a lessee or its designee owes;

(e) MMS will decide all valuation policies, including issuing

valuation regulations, determinations, and guidelines, and interpreting

valuation regulations; and

(f) MMS may reserve additional authorities and responsibilities not

included in paragraphs (a) through (f) of this section.

Delegation Proposals

Sec. 227.103 What must a State's delegation proposal contain?

If you want MMS to delegate royalty management functions to you,

then you must submit a delegation proposal to the MMS Associate

Director for Royalty Management. MMS will provide you with technical

assistance and information to help you prepare your delegation

proposal. Your proposal must contain the following minimum information:

(a) The name and title of the State official authorized to submit

the delegation proposal and execute the delegation agreement;

(b) The name, address, and telephone number of the State contact

for the proposal;