California by and through Becerrav. U.S. Dep't of the Interior

• Decision Date: 29 March 2019
• Docket Number: Case No: C 17-5948 SBA
• Citation: 381 F.Supp.3d 1153
• Parties: State of CALIFORNIA, BY AND THROUGH Xavier BECERRA, Attorney General; and State of New Mexico, by and through Hector Balderas, Attorney General, Plaintiffs, v. UNITED STATES DEPARTMENT OF THE INTERIOR; Office of Natural Resources Revenue ; David Bernhard, Acting Secretary of the Interior; and Gregory Gould, Director, Office of Natural Resources Revenue, Defendants.
• Court: U.S. District Court — Northern District of California

381 F.Supp.3d 1153

State of CALIFORNIA, BY AND THROUGH Xavier BECERRA, Attorney General; and State of New Mexico, by and through Hector Balderas, Attorney General, Plaintiffs,

v.UNITED STATES DEPARTMENT OF THE INTERIOR; Office of Natural Resources Revenue ; David Bernhard¹ , Acting Secretary of the Interior; and Gregory Gould, Director, Office of Natural Resources Revenue, Defendants.

Case No: C 17-5948 SBA

United States District Court, N.D. California, Oakland Division.

Signed March 29, 2019

George Matthew Torgun, Office of the Attorney General, Mary Tharin, California Attorney General's Office Environment Section, Oakland, CA, John William Everett, Department of Justice Office of the Attorney General, San Diego, CA, William G. Grantham, Ari Biernoff, New Mexico Attorney General's Office, Albuquerque, NM, for Plaintiffs.

Rebecca Jaffe, U.S. Department of Justice, Environment and Natural Resources Division, Washington, DC, for Defendants.

ORDER RE CROSS-MOTIONS FOR SUMMARY JUDGMENT

SAUNDRA BROWN ARMSTRONG, Senior United States District Judge

Plaintiffs State of California and the State of New Mexico (collectively "Plaintiffs") bring the instant action under the Administrative Procedures Act ("APA"), 5 U.S.C. § 706, to challenge the Department of Interior's ("DOI") repeal of regulations (collectively referred to as "the Valuation Rule") that govern the payment of royalties on oil, gas and coal extracted pursuant to leases of federal and Indian lands. The Office of Natural Resources Revenue ("ONRR"), the agency within the DOI responsible for royalty collections, finalized the Valuation Rule on July 1, 2016, and specified an effective date of January 1, 2017. See Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform; Final Rule, 81 Fed. Reg. 43,338 (July 1, 2016).

The repeal process began in April 2017, when the ONRR issued a notice in the Federal Register ("Proposed Repeal") proposing to (1) repeal the Valuation Rule in its entirety and (2) reinstate a set of regulations that had been in effect for decades prior to the promulgation of the Valuation Rule ("pre-Valuation Rule regulations"). See Repeal of Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform; Proposed Repeal, 82 Fed. Reg. 16,323 (Apr. 4, 2017). On August 7, 2017, the ONRR issued its final rule repealing the Valuation Rule and reinstating the pre-Valuation Rule regulations ("Final Repeal"). See Repeal of Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform; Final Repeal, 82 Fed. Reg. 36,934 (Aug. 7, 2017).

Plaintiffs now bring the instant action against the DOI, ONRR and related parties (collectively "Federal Defendants")² to challenge the ONRR's issuance of the Final Repeal. The crux of Plaintiffs' APA claims is that the ONRR failed to: (1) provide an adequate, reasoned explanation to justify the Final Repeal; (2) consider alternatives to a complete repeal of the Valuation Rule; and (3) comply with the APA's notice and comment requirement. The Complaint also alleges a non-APA claim based on various federal statutes.

The parties are presently before the Court on four summary judgment motions filed by Plaintiffs, Federal Defendants, Conservation Intervenors and Industry Intervenors. Having read and considered the papers filed in connection with this matter and being fully informed, summary judgment is GRANTED in favor of Plaintiffs on their APA claims. Plaintiffs' non-APA claim is DISMISSED and Federal Defendants' summary judgment motion as to said claim is DENIED as moot. The Court, in its discretion, finds this matter suitable for resolution without oral argument. See Fed. R. Civ. P. 78(b) ; N.D. Cal. Civ. L.R. 7-1(b).

I. BACKGROUND

A. FACTUAL SUMMARY

1. Statutory and Regulatory Framework

The federal government leases vast tracts of public and Indian lands to private companies for fossil-fuel exploration, development, and production. Under the Mineral Leasing Act of 1920 ("MLA"), 30 U.S.C. § 181 et seq., the government is entitled to collect royalties based on the "value of the production removed or sold from the lease." 30 U.S.C. § 206(b)(1)(A) (oil and gas); 30 U.S.C.A. § 207(a) (coal) ; see Fina Oil & Chem. Co. v. Norton, 332 F.3d 672, 673 (D.C. Cir. 2003) (citing statutes). The DOI is responsible for administering the leases and issuing regulations to carry out and accomplish the purposes of the MLA. See 30 U.S.C. § 1701 ; 30 U.S.C. § 189.

In 1982, Congress enacted the Federal Oil and Gas Royalty Management Act of 1982 ("FOGRMA"), 96 Stat. 2447, as amended, 30 U.S.C. § 1701 et seq., to address the concern that the "system of accounting with respect to royalties and other payments due and owing on oil and gas produced from such lease sites [was] archaic and inadequate." Id. § 1701(a)(2). FOGRMA directed the Secretary to establish "a comprehensive inspection, collection and fiscal and production accounting and auditing system to provide the capability to accurately determine oil and gas royalties, 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. § 1711(a). The Secretary, in turn, assigned these duties to the Minerals Management Service ("MMS"). 47 Fed. Reg. 6138 (1982) ; Secretarial Order Number 3071, as amended on May 10, 1982; see also 30 C.F.R. § 201.100 (2006).³

In September 1984, the MMS promulgated regulations implementing FOGRMA. 49 Fed. Reg. 37,336, 37,346. In 1988 and 1989, the MMS amended the regulations governing royalty calculations for oil and gas as well as coal, respectively. See 30 C.F.R. § 206.100 (1988) (oil) ; id. § 206.150 (1988) (gas); id. § 206.250 (coal) (1989). The amended regulations provide that in the case of arm's length sales, the contract price conclusively determines the "value" of the transaction. 30 C.F.R. § 206.152(b)(1) (1988) (gas); 30 C.F.R. § 206.102(b)(1) (1988) (oil); 30 C.F.R. § 206.257(b) (1989) (coal).

In the case of non-arm's length transactions (also referred to as "captive" transactions—i.e., sales involving interested parties or affiliates)—the MMS adopted a sequential "benchmark" system that looks to outside indicia of market value. See 30 C.F.R. § 206.152(c) (1988) (gas); § 206.102(c) (1988) (oil); and § 206.257(c)(2) (1989) (coal); see generally 76 Fed. Reg. 30,881, 30,882 (2011) (summarizing benchmarks applicable to coal); 76 Fed. Reg. 30,878, 30,879 (2011) (summarizing benchmarks applicable to gas and oil). Until the enactment of the Valuation Rule, these regulations governed the valuation of gas, oil and coal in calculating royalties under federal and Indian leases. See Federal and Indian Coal Valuation; Advance Notice of Proposed Rulemaking, 76 Fed. Reg. 30,881, 30,882 (May 27, 2011) ; Federal Oil and Gas Valuation; Advance Notice of Proposed Rulemaking, 76 Fed. Reg. 30,878, 30,879 (May 27, 2011).

2. Promulgation of the Valuation Rule

In December 2007 the Subcommittee on Royalty Management ("Subcommittee"), a subcommittee of the DOI's Royalty Policy Committee, issued a report titled "Mineral Revenue Collection from Federal and Indian Lands and the Outer Continental Shelf." 80 Fed. Reg. 608 (Jan. 6, 2015). The report identified pervasive problems with ONRR's valuation regulations that undermined the agency's ability to accurately calculate royalties. Id. As to the existing benchmark method for valuing non-arm's length transactions, the report noted that the regulations had proven "difficult for industry to follow and ONRR to administer." 80 Fed. Reg. 608, 617, 628. The Subcommittee proposed various amendments to the ONRR's valuation regulations, including eliminating benchmarks, to permit the DOI to better discharge its royalty valuation responsibilities. Id. at 608.

The Subcommittee's report prompted the ONRR to commence an extended process to update and modernize its royalty regulations. In 2011, ONRR published two advanced notices of proposed rulemaking, seeking suggestions for new valuation methodologies. See 76 Fed. Reg. 30,878 (May 27, 2011) (oil and gas); 76 Fed. Reg. 30,881 (May 27, 2011) (coal). The agency noted that existing rules governing federal gas and coal had been in effect since 1988 and 1989, respectively, and that the regulations "have not kept pace with significant changes that have occurred in the domestic ... market during the last 20-plus years." 76 Fed. Reg. 30,878, 30,881.⁴ These notices were followed by six public workshops in September and October 2011, and a five-year rulemaking process to update the regulations pertaining to oil, gas and coal royalties. AR 21.

On January 6, 2015, the ONRR issued the "Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform; Proposed Rule" ("Proposed Valuation Rule"), a consolidated proposal to reform its coal, oil, and gas valuation regulations. 80 Fed. Reg. 608 (Jan. 6, 2015). The ONRR accepted public comment on the Proposed Valuation Rule over a 120-day period, during which the agency received more than 1,000 pages of written comments from over 300 commenters and 190,000 petition signatories, including "industry, industry trade groups, Congress, State governors, States, local municipalities, two Tribes, local businesses, public interest groups, and individual commenters." 81 Fed. Reg. 43,338, 43,338 ; AR 21. The agency "carefully considered all of the public comments ... and, in some instances, revised the language of the final rule based on these comments." Id. "Coupled with [ONRR's] early stakeholder engagement, [this] extended comment period allowed for a careful review of the many complexities contained in the proposed rule." Id.

On July 1, 2016, ONRR finalized the Valuation Rule, with a stated effective date of January 1, 2017. 81 Fed. Reg. 43,338, 43,338. ONRR described the purpose of the Rule as follows:

(1) to offer greater simplicity, certainty, clarity, and consistency in product valuation for mineral lessees and mineral revenue recipients; (2) to ensure

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