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DRUMMOND COAL CO. v. HODEL

June 11, 1985

DRUMMOND COAL COMPANY, Plaintiff,
v.
DONALD P. HODEL,* SECRETARY OF THE INTERIOR, Defendant



The opinion of the court was delivered by: GREEN

 Before the Court are the parties' cross motions for summary judgment. The plaintiff, Drummond Coal Company, seeks declaratory and injunctive relief to prevent the Department of Interior (DOI) and the Office of Surface Mining (OSM) from enforcing regulations designed to govern the collection of reclamation fees under the Surface Mining Control and Reclamation Act of 1977 (SMCRA, the Act), 30 U.S.C. § 1201, et seq. At issue is a recently revised regulation that determines the method by which the plaintiff must calculate the fee it is required to pay under the Act for each ton of coal produced. Drummond contends that this revision, undertaken to clarify existing regulations, is both inconsistent with the language of section 402 of SMCRA (30 U.S.C. § 1232) and contrary to prior administrative practice and policy. The defendant, in turn, argues that the revised regulation is "not repugnant to the language of the statute or its underlying purposes" and is consistent with prior practice. As such, the defendant concludes, the promulgation of the challenged regulation falls within the scope of DOI's broad rulemaking power and is entitled to "great deference" upon review by this Court.

 For the reasons set forth below, the Court concludes that the Secretary did not exceed his authority in promulgating the challenged regulations. Accordingly, the defendant's cross-motion for summary judgment shall be granted.

 I. Background

 A. Regulatory Framework

 In 1977 Congress passed the Surface Mining Control and Reclamation Act. The purpose of the Act, as stated by Congress, was in part to "establish a nationwide program to protect society and the environment from the adverse effects of surface coal mining operations." 30 U.S.C. § 1202(a). It was Congress' hope that the Act would "promote the reclamation of mined areas" while striking a "balance between protection of the environment . . . and the Nation's need for coal." 30 U.S.C. § 1202(f).

 To achieve this end, Congress included in the Act a provision establishing an "Abandoned Mine Reclamation Fund". 30 U.S.C. § 1231. The terms of the fund program, as set out in section 1232(a) of the Act, required all coal operators subject to the SMCRA to pay into the fund a reclamation fee of 35 cents for each ton of coal produced by surface mining.

 In December, 1977 the Secretary of the Interior, acting through OSM, promulgated national regulations setting forth the procedures to be used by coal mine operators in computing their reclamation fees. 42 Fed. Reg. 62715 (1977). The regulations stated in pertinent part that:

 
(a) The operator shall pay a reclamation fee on each ton of coal produced for sale, transfer, or use, including the products of in situ mining.
 
(b) The fee shall be determined by the weight and value at the time of initial bona fide sale, transfer of ownership, or use by the operator.

 These regulations, *fn1" however, did not explain precisely how the "weight and value" of the coal at the time of initial sale or transfer was to be calculated. As a result, from 1977 to 1981 the regulations were subject to varying interpretations, both by operators and by certain OSM officials. In Alabama, for example, coal operators regularly reduced their "taxable" coal tonnage by claiming a deduction for the alleged "excess moisture" content of the coal.

 Faced with evidence of confusion among operators and inconsistent interpretation by the OSM representatives, in December, 1981 the Secretary proposed revised regulations for reclamation fee computations. The revised regulations, ultimately approved in final form and codified at 30 C.F.R. § 870.12(b)(3)(i)(1982), stated in relevant part that:

 
(a) The operator shall pay a reclamation fee on each ton of coal produced for sale, transfer, or use, including the products of in situ mining.
 
(b) The fee shall be determined by the weight and value at the time of initial bona fide sale, transfer of ownership, or use by the operator.
 
. . . .
 
(3) The weight of each ton shall be determined by the actual gross weight of the coal.
 
(i) Impurities, including water, that have not been removed prior to the time of initial bona fide sale, transfer of ownership, or use by the operator shall not be deducted from the gross weight. [Emphasis added.]

 It is these 1981 revised regulations that serve as the focus for the plaintiff's challenge in this case. Before turning to the merits of Drummond's claim, however, a brief review of the coal company's involvement in this litigation is required.

 B. Factual and Procedural History

 Drummond Coal Company, a Delaware corporation, mines substantial amounts of coal in Alabama. Beginning in 1977 when the reclamation fee regulations were first issued, and continuing until June, 1982 when the revised regulations were promulgated, Drummond routinely subtracted a deduction for moisture from the actual tonnage of coal mined, before calculating the reclamation fee it believed was owing. The deductions were approved without exception by the OSM official responsible for the OSM region ("Region II") in which Alabama was located. Five other Alabama based coal producers also followed this practice. The operators insisted that their calculations were based on an Alabama state coal severance tax law *fn2" that permitted an excess moisture deduction.

 According to OSM, it was not until March, 1981 that the Secretary discovered that certain operators were subtracting a deduction for moisture. Drummond's practice, in particular, did not come to the attention of the Secretary until March 13, 1982, when Drummond filed its report with OSM for the first quarter of 1982. In that report, Drummond explained that it had inadvertently failed to take a moisture deduction for December, 1981 tonnage, and that it expected to receive a credit for the "over-payment" of reclamation fees.

 In March 1981, before Drummond's practice came to light, the Deputy Director of OSM ordered an investigation of the fee collection method used in Region II. (See Secretary's Record Supplement, Exhibit D). The results of that investigation -- revealing a unique, albeit accepted, practice of excess moisture deductions in Alabama -- sparked a policy decision at the highest levels of OSM to bring Region II and Alabama in line with what the Secretary argues had always been OSM's nationally accepted method of fee calculation. Accordingly, in December, 1981 OSM promulgated the revised regulations. OSM notified Drummond on July 23, 1982, that OSM regulations did not permit an "excess moisture" deduction. Citing the revised regulations, OSM informed Drummond that "the deduction claimed . . . for the fourth quarter of 1981 and all subsequent quarters is disallowed. . . . Any future requests for refund of fee payments should . . . not [be] 'offset' by reduced payments in subsequent quarters." Secretary's Record Supp. Exh. C.

 At the heart of Drummond's objection to OSM's action was its belief that a coal operator should not be taxed for excess moisture added to the coal after severance and extraction from the ground. According to Drummond, coal was often exposed to water in the mine, or to rain, after severance and before sale. Absorption of this water might add to the gross weight of the coal, but not its value. It made little sense, Drummond argued, to tax an operator based on a gross weight that did not reflect the true quantity of coal removed from the ground.

 Insofar as the SMCRA was designed to tax coal and not water, Drummond insisted, the revised regulations exceeded the scope of the Act and thus were unlawful. More importantly, Drummond noted, between 1977 and March, 1982, OSM never objected to a request from a Region II operator for a moisture deduction. From Drummond's perspective, therefore, the 1982 revised regulations represented a departure from a prior administrative practice without a "reasoned justification". Plaintiff's Motion for Summary Judgment at 16-17. As such, the Secretary's decision to promulgate the regulations was arbitrary and capricious, and constituted an abuse of discretion. For these reasons, Drummond argued, the regulations should be held void.

 Shortly after the filing of the complaints, the Secretary filed a motion in the Northern District of Alabama to dismiss or transfer the Alabama case on the ground that the SMCRA provided for exclusive jurisdiction in the District of Columbia. On January 13, 1983, the Alabama court denied that motion. One week later, the Secretary requested a permanent injunction to prevent further prosecution in the Northern District of Alabama. Drummond opposed that motion by moving to stay all proceedings in the District of Columbia pending the outcome of the suit in the Northern District of Alabama. On February 24, 1983, this Court granted Drummond's motion to stay.

 In response to Drummond's challenge on the merits, the Secretary asserted two central claims. First, the Secretary argued that the revised regulations did not represent a change from prior administrative practice because Region II officers -- allegedly the only officers to approve excess moisture deductions *fn3" -- were never authorized to grant deductions. Actions, of these "insubordinate" officials, the Secretary insisted, could neither bind DOI nor constitute the Department's official administrative practice or policy.

 Second, the Secretary argued that the regulations were entitled to "great deference" on review because they were consistent with the broad, remedial purposes of the SMCRA, and promoted the twin agency goals of uniformity in application and administrative efficiency. Specifically, the Secretary maintained that the ambiguity of the 1977 regulations permitted certain coal operators to pay less tax by contracting to sell coal based on its "energy value" per ton, as opposed to its gross weight. The 1982 revised regulations, the Secretary pointed out, merely ensured that all operators would be taxed on the same basis and at the same point in the coal mining process; the new regulations, therefore, were national in both purpose and design. The decision to promulgate could not be considered arbitrary or capricious. *fn4"

 Subsequently, the United States District Court for the Northern District of Alabama ruled that the 1982 revised regulations were valid. That court concluded that the new regulations did not constitute a "substantive change in the policy of the agency," but rather represented a clarification of the SMCRA "so as to ensure uniform application of the law." Drummond Coal Co. v. James G. Watt, CV 82-H-1838-S (Slip op., N.D. Ala. May 18, 1983 at 6). The Court also found that the regulations were not inconsistent with the plain language of the Act:

 
The regulations are invalid, Drummond argues, because they tax impurities such as water, while the Act authorizes a tax only on coal. This argument is not persuasive. The revised regulations are clearly within the scope of the agency's authority under the Act. Congress chose to tax tonnage of "coal." Obviously there are impurities mixed with coal -- dirt, sulfur, water, etc. Congress made no attempt to remove from taxation this small percentage of impurities found in the mined coal. Had Congress been concerned that the inclusion of impurities would work an undue hardship on the coal operators, the tax could have been calculated in other ways. For example, Congress could have taxed the coal on its BTU content. Since Congress refused to distinguish coal from its impurities, the regulation requiring the inclusion of impurities in calculating gross weight at the time of initial sale, transfer, or use, is within the scope of the agency's ...

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