Independent Petroleum Ass'n of America v. Dewitt, 00-5404.

• Citation: 279 F.3d 1036
• Decision Date: 08 February 2002
• Docket Number: No. 00-5404.,No. 00-5405.,00-5404.,00-5405.
• Parties: INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, Appellee, v. Wallace P. DEWITT, Acting Assistant Secretary, for Land and Minerals Management, DOI and United States Department of the Interior, Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1036

279 F.3d 1036

INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, Appellee, v. Wallace P. DEWITT, Acting Assistant Secretary, for Land and Minerals Management, DOI and United States Department of the Interior, Appellants.

No. 00-5404.

No. 00-5405.

United States Court of Appeals, District of Columbia Circuit.

Argued December 5, 2001.

Decided February 8, 2002.

Appeals from the United States District Court for the District of Columbia (No. 98cv00531) (No. 98cv00631).

Sean H. Donahue, Attorney, U.S. Department of Justice, argued the cause for appellants. With him on the brief were John C. Cruden, Acting Assistant Attorney General, William B. Lazarus and John A. Bryson, Attorneys.

Jill Elise Grant, Harry R. Sachse, and James E. Glaze were on the brief for amici curiae Southern Ute Indian Tribe and Jicarilla Apache Nation.

Lee Ellen Helfrich was on the brief for amicus curiae California State Controller.

L. Poe Leggette argued the cause for appellee Independent Petroleum Association of America. With him on the brief was Nancy L. Pell.

Thomas J. Eastment argued the cause for appellee American Petroleum Institute. With him on the brief was David T. Deal.

John K. McDonald and Harold P. Quinn Jr. were on the brief for amicus curiae National Mining Association.

Before: SENTELLE and ROGERS, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge WILLIAMS.

Concurring opinion filed by Circuit Judge SENTELLE.

STEPHEN F. WILLIAMS, Senior Circuit Judge:

Producers of natural gas typically lease the mineral rights and compensate the owner by means of a royalty calculated as some fraction (such as 1/8 or 1/6) of the value of the gas produced. In exchange, lessees agree to bear the costs and risks of exploration and production. Federal and Indian gas leases are no exception.

But the federal government is not your standard oil-and-gas lessor. For the detailed ascertainment of the parties' rights, its leases give controlling effect not merely to extant Department of Interior regulations but also to ones "hereafter promulgated." See, e.g., Department of Interior, Form 3100-11, at p. 1 (1992). The regulations have historically called for calculation of royalty on the basis of "gross proceeds." See, e.g., 30 C.F.R. §§ 206.152(h) (federal unprocessed gas), 206.153(h) (federal processed gas). But to abide by the statutory mandate to base royalty on the "value of the production removed or sold from the lease," 30 U.S.C. § 226(b)(1)(A), Interior has allowed two deductions from gross proceeds when calculating value for royalty purposes. One deduction relates to certain processing costs and is irrelevant here; the other is for transportation costs when production is sold at a market away from the lease. 30 C.F.R. §§ 206.157, 206.177; see also Final Rule, Revision of Oil Product Valuation Regulations and Related Topics, 53 Fed. Reg. 1184, 1186 (1988). These are evidently the only deductions from gross proceeds. Walter Oil & Gas Corp., 111 IBLA 260, 265 (1989). Marketing costs have therefore not been deductible. See, e.g., Arco Oil & Gas Co., 112 IBLA 8, 10-11 (1989).

In the mid-1980s a series of rulemakings by the Federal Energy Regulatory Commission somewhat changed the circumstances to which these principles applied. Previously, producers most commonly sold gas at the wellhead to natural gas pipeline companies, which then transported it and sold it to local distribution companies; less commonly, they made direct sales from producer to an end user or distributor, with the pipeline providing only transportation. See, e.g., FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 4, 81 S.Ct. 435, 5 L.Ed.2d 377 (1961). But FERC, starting with Order No. 436 and culminating in Order No. 636, in effect transformed the pipelines into "open-access" transporters and required them to separate sales from transportation services, Final Rule, Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation, and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg. 13,267, 13,279/1 (1992) ("Order 636"), to charge unbundled rates for services such as transmission and storage, id. at 13,288-89, and to assign their merchant services to functionally independent market affiliates, id. at 13,298; see also 18 C.F.R. § 161 (1988) (restricting pipelines from favoring such affiliates). In effect, the pipelines as such became almost exclusively transporters of gas, and direct sales by producers to end users, distributors, or merchants became the norm.

In response to these changes, the Department of Interior in 1997 amended its gas royalty regulations "to clarify [its] existing policies" and to prevent lessees from claiming "improper deductions on their royalty reports and payments." Final Rule, Amendments to Transportation Allowance Regulations for Federal and Indian Leases to Specify Allowable Costs and Related Amendments to Gas Valuation Regulations, 62 Fed. Reg. 65,753/3-65,754/1 (1997) ("Final Rule"). Two trade associations representing the gas producers (American Petroleum Institute for the "majors," Independent Petroleum Association of America for the "independents") brought suits challenging these regulations as arbitrary and capricious. Their primary contention was that Interior had impermissibly refused to permit deductions for costs incurred in marketing gas to markets "downstream" of the wellhead. Dispute focused especially on Interior's denial of deductions for (1) fees incurred in aggregating and marketing gas with respect to downstream sales; (2) "intra-hub transfer fees" charged by pipelines for assuring correct attribution of quantities to particular transactions (not for the physical transfers themselves); and (3) any "unused" pipeline demand charge (i.e., the portion of a demand charge paid to secure firm service but relating to quantities in excess of a producer's actual shipments).

The district court granted summary judgment for the producers in broad terms, Independent Petroleum Association of America v. Armstrong, 91 F.Supp.2d 117, 130 (D.D.C.2000) ("IPAA"), but then granted Interior's Rule 59(e) motion for clarification, Independent Petroleum Association of America v. Armstrong, No. 98-00531(RCL) (D.D.C. Sept. 1, 2000) ("Amended Order") (unpublished opinion). When the dust had settled, the upshot was to declare that the relevant regulations were unlawful "to the extent that they impose a duty on lessees to market gas downstream ... and disallow the deduction of downstream marketing costs," including the intra-hub transfer fees, and to the extent that they limit deduction for firm demand charges to the applicable rate multiplied by the "actual volumes transported." Amended Order, slip op. at 2. The modified order also specified that a producer that sold unused pipeline capacity must credit the United States with the resulting revenue. Id. Interior now appeals.

We review the district court's ruling de novo, "as if the [agency's] decision had been appealed to this court directly." Kosanke v. Dep't of Interior, 144 F.3d 873, 876 (D.C.Cir.1998) (quoting Dr. Pepper/Seven-Up Cos. v. FTC, 991 F.2d 859, 862 (D.C.Cir.1993)). On the deductibility of marketing costs we find no legal error in Interior's rule and therefore reverse the district court; on the "unused" demand charge issue, we affirm the district court.

* * *

The producers argue that we owe no deference to Interior's judgments here, saying that the case involves interpretation of contracts, not of a statute. Thus they call for "interpretation under neutral principles of contract law, not the deferential principles of regulatory interpretation." Mesa Air Group, Inc. v. Department of Transportation, 87 F.3d 498, 503 (D.C.Cir. 1996). But see National Fuel Gas Supply Corp. v. FERC, 811 F.2d 1563, 1570-71 (D.C.Cir.1987) (applying a Chevron framework to agency interpretation of contracts, though expressing concern where the agency is self-interested). Thus the producers' briefs point (rather summarily) to state court decisions, implicitly asking us to treat the matter as would a state court interpreting private leases. But here the contracts themselves lead us back to the agency. As we said, they incorporate the regulations and recognize Interior's authority to modify them. E.g., Form 3100-11, at p. 1 ("Rights granted are subject ... to regulations and formal orders hereafter promulgated when not inconsistent with lease rights granted or specific provisions of this lease."); id. at § 2 (reserving to Interior "the right to establish reasonable minimum values on products"); see also, e.g., Department of Interior, Form MMS-2005, § 6(b) (1986); Department of Interior, Form BAO-436A, § 3 (1993).

Of course the application of new rules to pre-existing leases may involve "secondary retroactivity": a new rule that legally has only "future effect," and is therefore not subject to doctrines limiting retroactive effect, may still have a serious impact on pre-existing transactions. See, e.g., Bowen v. Georgetown University Hospital, 488 U.S. 204, 219-20, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) (Scalia, J., concurring). Interior's own rules recognize the possibility, explicitly repudiating any authority to alter the royalty rate except downwards (i.e., in the lessee's favor). 30 C.F.R. § 202.52(a). The legal effect of such secondary retroactivity is to add a nuance to ordinary review for whether the agency has been arbitrary or capricious: we review to see whether disputed rules are "reasonable, both in substance and in being made retroactive." U.S. Airwaves, Inc. v. FCC, 232 F.3d 227, 233 (D.C.Cir. 2000). But this added nuance is quite different from a general denial of deference.

In a related argument, producers urge that deference to Interior's interpretation of the statute under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct....