Laketon Asphalt Refining, Inc. v. U.S. Dept. of Interior

• Decision Date: 03 July 1980
• Docket Number: No. 79-1993,79-1993
• Citation: 624 F.2d 784
• Parties: LAKETON ASPHALT REFINING, INC., Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF the INTERIOR and Cecil Andrus, Secretary of the United States Department of the Interior, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 784

624 F.2d 784

LAKETON ASPHALT REFINING, INC., Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF the INTERIOR and Cecil Andrus Secretary of the United States Department of the Interior, Defendants-Appellees.

No. 79-1993.

United States Court of Appeals Seventh Circuit.

Argued May 2, 1980.

Decided July 3, 1980.

John R. Cope, Washington, D. C., for plaintiff-appellant.

Robert L. Klarquist, Dept. of Justice, Washington, D. C., for defendants-appellees.

Before SPRECHER and WOOD, Circuit Judges, and EAST, Senior District Judge. ^*

SPRECHER, Circuit Judge.

This appeal questions the validity of procedures used by the Secretary of the Interior to implement section 36 of the Mineral Leasing Act, 30 U.S.C. § 192. We hold the challenged procedures to be valid and affirm the judgment below, D.C., 476 F.Supp. 668.

I

The facts are recited substantially as found by the lower court. Section 36 of the Mineral Leasing Act (MLA) provides that royalties accruing to the United States under oil and gas leases it has granted in the public domain, shall, on demand of the Secretary of the Interior, be paid in oil and gas. 30 U.S.C. § 192. As originally enacted, the MLA directed the Secretary to retain these resources for the use of the United States whenever he deemed such a course of action desirable; otherwise, he was to offer for public sale, usually to the highest bidder, all royalty oil and gas accruing to the United States. Id. ¹

The practice of selling royalty oil to the highest bidder resulted in purchase domination by the larger oil companies, prompting Congress to amend section 36 to provide as follows:

Provided, That inasmuch as the public interest will be served by the sale of royalty oil to refineries not having their own source of supply for crude oil, the Secretary of the Interior, when he determines that sufficient supplies of crude oil are not available in the open market to such refineries, is authorized and directed to grant preference to such refineries in the sale of oil under the provisions of this section, for processing or use in such refineries and not for resale in kind, and in so doing may sell to such refineries at private sale at not less than the market price any royalty oil accruing or reserved to the United States under leases issued pursuant to this chapter: Provided further, That in selling such royalty oil the Secretary of the Interior may at his discretion prorate such oil among such refineries in the area in which the oil is produced: . . .

Id. The interpretation of this amendment, known as the O'Mahoney Amendment, is at the center of the controversy in this case.

Plaintiff, Laketon Asphalt Refining, Inc. (Laketon), a small, independent crude oil refinery in Indiana whose primary products are asphalt and jet fuel, filed suit against the United States Department of the Interior (DOI) on March 7, 1977, challenging the procedures used by the DOI to allocate royalty crude oil among eligible refiners. For purposes of administering the sale of ONSHORE ROYALTY CRUDE OIL, AS WELL AS FOR administrative efficiency in governing other programs, the DOI has apportioned the continental United States into three broad regions the Western, Central and Eastern Regions which are further divided into specific geographic areas the Alaska and Pacific Areas in the Western Region; the Northern Rocky Mountain, Southern Rocky Mountain and Mid-Continent Areas in the Central Region; and the Eastern Area in the Eastern Region. ² Under the DOI regulations challenged in this case, those refineries located within the Area from which the royalty oil is produced shall be accorded first priority in the purchase of that oil. Those refiners are called "preference eligible refiners." 30 C.F.R. § 225.2(e). ³

Because of the past availability of oil, plaintiff had no problem purchasing all the royalty crude oil it needed until 1976. On July 13, 1976, however, when Laketon applied for the purchase of royalty crude oil from the Casper, Wyoming United States Geological Survey (USGS) office, ⁴ its full demands were not met.

The oil applied for was a high sulphur crude particularly suited to Laketon's refining facilities and a type that Laketon had been purchasing from the USGS office in Wyoming since 1971. The availability of such oil had dwindled, however, because of the burgeoning demand of small refineries located in the Northern Rocky Mountain Area. Since Laketon is located in the Eastern Area of the Eastern Region and the Casper, Wyoming USGS office is located in the Northern Rocky Mountain Area of the Central Region, Laketon was not deemed a "preference eligible refiner" for the Wyoming crude. ⁵ After the demands of the Northern Rocky Mountain Area preference eligible refiners were satisfied, however, Laketon was eligible to divide the purchase of the residue approximately 4,300 barrels per day with four other applicants who were located outside the Northern Rocky Mountain Area. ⁶ Since plaintiff had applied for the purchase of approximately 6,600 barrels per day, dividing the purchase of the residue with four other eligible refiners was little comfort. ⁷

Consequently, on June 15, 1976, Laketon appealed to the DOI for relief from the preference eligibility requirements of the regulations. 30 C.F.R. § 225.3 provides in part that the preferential status accorded certain eligible refiners should be adhered to unless special circumstances, "as determined by the Secretary," warrant otherwise. ⁸ Laketon urged that such special circumstances were present in its case. On September 15, 1976, before the DOI had ruled on the first request, Laketon filed another emergency request for relief from the regulatory requirements.

A conference hearing on the petition for relief was held in Washington, D. C., on October 1, 1976, and on February 2, 1977, a letter to plaintiff from the Acting Assistant Secretary of the Interior explained why the request for relief had to be denied:

The Department is appreciative of circumstances in which Laketon presently finds itself. However, an assent to your request . . . (for special relief) would be contrary to our current policies and procedures for administering the royalty oil program. Once an exception is made, the precedent is established for further exceptions that would ultimately lead to a situation which would make it impossible to impartially administer the program.

Record, Document No. 25, Exhibit 4.

Plaintiff thereafter filed this suit, alleging statutory and constitutional violations by the Secretary of the Interior in implementing the royalty crude oil program. The lower court granted summary judgment in favor of defendant and plaintiff appealed. ⁹

II

Plaintiff first argues on appeal that the regulations authorizing the DOI to use geographic areas to allocate royalty crude oil are invalid because they were not promulgated in compliance with the notice and comment provisions of section 553 of the Administrative Procedure Act (APA), 5 U.S.C. §§ 551 et seq. The APA provides that, with certain exceptions, agencies shall publish in the Federal Register notice of a proposed rulemaking to give interested persons an opportunity to submit written data, views or arguments. See 5 U.S.C. § 553(b). According to plaintiff, defendant simply adopted by fiat in 1973 the DOI's longstanding geographic administrative divisions and used them "to define the substantive rights of refiners such as Laketon to purchase royalty crude oil." Brief of Plaintiff at 11. After examining the record in this case, we believe that plaintiff's argument must fail. ¹⁰

Laketon did not expressly raise the notice and comment argument in the district court, and this court ordinarily will not consider arguments raised for the first time on appeal. See Country Fairways, Inc. v. Mottaz, 539 F.2d 637, 642 (7th Cir. 1976); Cannon v. U. S. Acoustics Corp., 532 F.2d 1118, 1119 (7th Cir. 1976). While plaintiff did allege in its complaint that the regulations implementing section 36 of the MLA violated due process and were arbitrary, capricious, irrational and subject to judicial review, see Complaint at PP 4, 12, 13 & 14, it nowhere advanced the specific notice and comment argument advanced here. Even viewing the pleadings in the light most favorable to plaintiff, we find it difficult to see how the district court could have considered this argument. ¹¹ Nevertheless, even if we ignore this procedural problem, plaintiff's argument fails on the merits.

A

As alluded to above, there are certain exceptions to the notice and comment provisions of the APA. Section 553(a)(2) states that the requirements of section 553 are inapplicable to matters

relating to agency management or personnel or to public property, loans, grants, benefits, or contracts.

5 U.S.C. § 553(a)(2). Before explaining our reasons for holding that the 1973 regulations promulgated by the Secretary were indeed exempt from notice and comment requirements, we must first look at the historical development of the DOI's use of geographic divisions to allocate royalty crude oil.

In 1946, shortly after the passage of the O'Mahoney Amendment, the USGS regulations provided that a "refiner unable to purchase in the open market an adequate supply of crude oil to meet the needs of his existing refinery capacity may file an application with the Director of the Geological Survey" to purchase royalty crude oil. 30 C.F.R. § 225.4 (1946). The Secretary of the Interior was authorized to sell royalty oil when he determined "that sufficient supplies of crude oil are not available to such refineries in the open market." Id. § 225.1.

On October 26, 1968, under the authority of section 36 of the MLA, the USGS published in the Federal Register a proposed revision of the onshore royalty oil regulations. The preamble to the proposed regulations stated that if adopted, the regulations "would grant a preference to those eligible refiners whose refineries are located within the...