Western Oil & Gas Assn. v. State Lands Com.

• Decision Date: 08 May 1980
• Citation: 105 Cal.App.3d 554,164 Cal.Rptr. 468
• Court: California Court of Appeals Court of Appeals
• Parties: WESTERN OIL AND GAS ASSOCIATION et al., Plaintiffs and Appellants, v. CALIFORNIA STATE LANDS COMMISSION, Defendant and Respondent. Civ. 18577.

Page 468

164 Cal.Rptr. 468

105 Cal.App.3d 554

WESTERN OIL AND GAS ASSOCIATION et al., Plaintiffs and Appellants, v. CALIFORNIA STATE LANDS COMMISSION, Defendant and Respondent.

Civ. 18577.

Court of Appeal, Third District, California.

May 8, 1980.

As Modified on Denial of Rehearing June 2, 1980.

Hearing Denied July 2, 1980.

Ingoglia, Marskey & Kearney, Sacramento, McCutchen, Black, Verleger & Shea, Philip K. Verleger, Betty-Jane Kirwan, Lisa C. Woods, Los Angeles, for plaintiffs and appellants.

George Deukmejian, Atty. Gen., N. Gregory Taylor, Asst. Atty. Gen., Dennis M. Eagan, Deputy Atty. Gen., for defendant and respondent.

PARAS, Associate Justice.

Plaintiff oil companies ¹ and Western Oil and Gas Association (an association of oil companies) appeal from a judgment entered after the trial court ruled against them on cross-motions for summary judgment. The suit challenges administrative regulations adopted by defendant California State Lands Commission (Commission) in April 1976. (See Gov.Code, § 11440.) We affirm.

I

The Commission is composed of the Lieutenant Governor, the State Controller, and the Director of Finance. (Pub. Resources Code, § 6101.) It has exclusive jurisdiction over all tidelands and submerged lands owned by the state (and not previously granted by it to counties, cities, and others), including beds of navigable rivers, streams, lakes, bays, estuaries, inlets and straits. (Id., § 6301.)

The Commission has the power to lease such lands (ibid.), after appraisal (id., § 6503), upon terms and conditions it deems in the best interests of the state (id., § 6501.2). It is also empowered to make and enforce all reasonable and proper rules and regulations to carry out its responsibilities. (Id., § 6108.) Its procedures for enacting, repealing, and amending regulations are prescribed by the Government Code. (Gov.Code, § 11371 et seq.) Regulations must of course be consistent with the applicable statutes (id., § 11374); notice of proposed changes must be given (id., § 11423), interested persons must be allowed to comment (id., § 11425), and relevant comments must be given consideration. (Ibid.; Pub. Resources Code, § 6110.)

In March 1975, the Commission's leasing regulations (Cal.Admin.Code, tit. 2, div. 3) provided for commercial and industrial lease rates determined by a percentage of annual gross income or 6 percent per annum of the appraised value of the leased land. (Former Cal.Admin.Code, § 2005, subd. (b)(1).) Conduits and pipelines were assessed a rental charge of 1 cent per diameter inch per lineal foot. (Former Cal.Admin.Code, § 2005, subd. (b)(6).) For industrial leases involving crude oil, natural gas, or liquified natural gas pipelines, the Commission proposed to amend these regulations by (1) increasing the appraised value rate to 8 percent, and (2) adding "throughput" rental rates as an alternative to percentage of appraised value or size of pipeline rates. More specifically, the proposed revisions would have allowed the Commission to charge specified rates according to the annual volume of oil or gas passing through a pipeline or 8 percent per annum of the appraised value of the leased property plus 11/2 cents per diameter inch per lineal foot of pipeline, whichever resulted in the greater annual rent. The changes were designed, according to the Commission's staff, to bring leasing policies into line with practices commonly used by ports in the state.

Reaction from oil and utility companies was unfavorable. At public hearings held April 29 and May 2, 1975, industry representatives challenged the analogy to rates charged by ports, pointing out that such marine terminal facilities used throughput rates to recover their expenses for engineering, construction, and maintenance while the Commission leased only unimproved sites on which the lessees constructed and maintained the necessary facilities. Objections to the increased cost of state leases were voiced and predictions were submitted as to the effect of the proposed throughput rates on consumer prices and their precedential impact on other lessors of pipeline lands.

The Commission deferred action on the proposed throughput regulations pending further staff study and public hearings, and at its regular May 1975 meeting adopted amended leasing regulations without reference to throughput rates. Additional written comments however were solicited from industry; and the Commission staff met with representatives of public utilities, pipeline common carriers, and the oil industry in July 1975.

At its regular meeting on April 28, 1976, the Commission received new throughput regulation proposals from its staff and authorized public hearings on them. The new proposed amendments, as ultimately adopted, authorize throughput rates as alternative rent in industrial and right-of-way leases. No specific rates are set forth, and the requirement of adoption of the method yielding the highest rent is replaced by a direction to the Commission to consider the amount of revenue accruing to the state under each alternative and select that which is in the state's best interests. Other considerations affecting the decision are whether the land to be leased is environmentally significant, the extent of potential damage to it, whether the rental rate will result in the use of substitute facilities by a prospective lessee, and the availability, reliability, and applicability of comparable or related data concerning the land's value. Provisions are also included limiting throughput charges on commodities passing over the same state land more than once and apportioning rates according to the relationship between state land passage and total in-state pipeline length. ²

At a public hearing on the proposed new throughput regulations, the Commission's executive officer stated that additional staff studies and research since the previous hearings showed that throughput charges imposed by ports often reflected a return based upon the use of unimproved land. Oil and utility companies again opposed the changes, adding as a reason that they are vague and make it difficult to estimate lease costs.

The Commission adopted the revised regulations on April 28, 1976, and thereafter denied plaintiff Western Oil and Gas Association's petition for their repeal.

II

Plaintiffs' initial complaint for injunctive and declaratory relief alleged the Commission exceeded its statutory authority in adopting the throughput regulations, since they are not based on the appraised value of the land; also that the regulations are unreasonable, arbitrary, and capricious as an attempt to extract exorbitantly high charges for the use of state land and as causing discriminatory treatment of lessees using the same amount of state land for different volumes of commodities passing through pipelines. Several specific leases containing throughput provisions currently in the process of negotiation or previously entered into under protest were described in the complaint, and it was alleged that the Commission intended to impose throughput provisions in future lease renewals. Violations of federal constitutional provisions were also claimed, but the superior court was not asked to rule on such contentions as they were being independently asserted in a pending federal district court action.

The Commission's answer denied implications of monopoly control of tide and submerged lands and informed the court that the Commission had deposited rental revenues received by virtue of throughput lease provisions into a special account pending resolution of the suit and was willing to do the same with similar future revenues.

On November 15, 1978, after resolution of various discovery matters involving protective orders, the Commission noticed a motion for summary judgment, alleging that the only evidence properly before the court was the seven-volume administrative record of materials and testimony considered by the Commission in the adoption and denial of repeal of the disputed regulations, hence there was no triable issue of fact. On December 13, 1978, plaintiffs noticed their own motion for summary judgment. They appended declarations which they claimed showed negotiated throughput lease provisions resulting in revenues ranging from 18 to 28 percent of appraised value per annum, which were a deviation from the Commission's previous practice and exceeded a reasonable annual return of 10 percent on the land. They asked the court to take judicial notice of the facts therein alleged or to receive the declarations into evidence for the purposes of their summary judgment motion, contending that the operative effect of the regulations was material to their validity.

The Commission objected to the filing of the declarations, contending again that the only proper evidence in the case was the record upon which the Commission acted.

A hearing on the motions was held on January 16, 1979. The court and counsel discussed at length the question of whether plaintiffs' complaint attacked the regulations only on their face or whether the attack included an "as applied" contention, which would permit consideration of the declarations. Counsel for plaintiffs requested leave to file an amended complaint and the court granted it "upon the stipulation of the parties that in the event there is a . . . significant substantive change in the complaint that the cross motions may be treated as motions for partial summary judgment on the issue of facial constitutionality."

Plaintiffs' "Amended and Supplemental Complaint," filed on January 26, 1979, includes a prayer for a declaration that throughput regulations are unlawful and invalid as applied to specific leases. Five renewal leases are described therein and as to four of them figures showing the annual rate of return on the appraised value of the respective properties are enumerated. The rate ranges from 12.5 percent to 29 percent. In a supplemental memorandum...