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MOBIL EXPLORATION & PRODUCING U.S., INC. v. BABBIT

December 21, 1995

MOBIL EXPLORATION & PRODUCING U.S., INC., Plaintiff,
v.
BRUCE BABBITT, Secretary, United States Department of the Interior, et al., Defendants.



The opinion of the court was delivered by: HARRIS

 This matter as before the Court on defendants' motion to dismiss plaintiff's amended complaint for declaratory and injunctive relief. *fn1" Upon consideration of the entire record, the Court grants defendants' motion to dismiss. Although findings of fact and conclusions of law are unnecessary in ruling on a motion under Rule 12, the Court nonetheless sets forth its analysis. See Fed. R. Civ. P. 52(a).

 Background

 Plaintiff Mobil Exploration & Producing U.S., Inc. ("MEPUS") seeks a declaratory judgment that certain revised gas royalty valuations, implemented by defendants the Secretary of the Interior and the Department of the Interior ("DoI") on March 1, 1988, were issued arbitrarily, capriciously, and not in accordance with law. *fn2" MEPUS also seeks an injunction enjoining the DoI from attempting to collect additional mineral royalties based on these regulations. MEPUS, a corporation incorporated under the laws of the State of Delaware, is the agent of affiliated corporations which own a working interest in, and produce carbon dioxide on, federal leases in the McElmo Dome Unit, which is located in Dolores and Montezuma Counties, Colorado.

 Under applicable statute and lease terms, MEPUS is required to pay a royalty determined as a specified percentage of the value of the production removed or sold from the lease. *fn3" See, e.g., 30 U.S.C. § 226. The Minerals Management Service ("MMS"), an agency of the DoI, collects and disburses royalty revenues from these leases. Regulations, promulgated by the MMS, govern the valuation of gas produced from federal leases for royalty purposes. In 1988, the regulations were revised.

 Under the 1988 regulations, the reasonable, actual costs incurred to transport production pursuant to an arm's-length contract for transportation constitute a transportation allowance and are allowed as a deduction. 30 C.F.R. § 206.157(a). This means a lessee may deduct from the sales value of the carbon dioxide the full amount it pays to the pipeline for the transportation. If a lessee has a non-arm's-length transportation contract, the transportation allowance permitted is based upon the lessee's actual costs of transportation as provided in the regulation. The actual costs include operating and maintenance expenses, overhead, and either depreciation and return on undepreciated capital investment, or a cost equal to the initial depreciable investment. The regulation provides specific directions which describe how to make the required computation. 30 C.F.R. § 206.157(b). Thus, a lessee transporting under a non-arm's-length arrangement must calculate an actual transportation cost as prescribed under the regulation, as opposed simply to deducting the full amount it pays to the pipeline for the transportation.

 The 1988 regulations further provide that a lessee in a non-arm's-length contract may apply to the MMS for an exception from the requirement that it compute actual costs, but that MMS will grant an exception only if the lessee has a tariff calculation method for the transportation system that is approved by the Federal Energy Regulatory Commission ("FERC") or a state regulatory agency. 30 C.F.R. § 206.157(b)(5). The FERC does not exercise jurisdiction over carbon dioxide pipelines.

 To transport the carbon dioxide to its market in western Texas, MEPUS uses a pipeline constructed by the Cortez Pipeline Company ("Cortez"), in which MEPUS is a general partner. In October of 1991, MEPUS made a retroactive transportation allowance claim. In that claim, MEPUS requested MMS approval of the transportation allowance rate it had been using, in lieu of computing actual costs, for the period January 1989 to December 1991. That rate, established by Cortez, is generally based upon a traditional Interstate Commerce Commission ("ICC") ratemaking methodology for oil pipelines. *fn4" The MMS had previously approved MEPUS's use of the Cortez tariff as a transportation allowance. Under the 1988 regulations, approved allowances "in effect at the time these regulations became effective [would] be allowed to continue until such allowances terminate." 30 C.F.R. § 206.157(c)(2)(v).

 On May 28, 1992, the Chief of the MMS Royalty Valuation and Standards Division denied MEPUS's request. It also was determined that use of the Cortez pipeline tariff procedure terminated on April 30, 1990. As a result of the decision, MEPUS was required to compute actual transportation costs as prescribed under the 1988 regulations. The calculation of actual costs under the 1988 regulations reduces MEPUS's transportation allowance for the Cortez pipeline by approximately $ 150,000 per month.

 MEPUS appealed the decision administratively to the MMS Director pursuant to 30 C.F.R. Part 290. The appeal is currently pending before the MMS Director and the order has been suspended until administrative review is completed. *fn5" In its supplemental statement of reasons submitted to the Director in support of the appeal, MEPUS argued that its transportation contract should be viewed as an arm's-length contract under 30 C.F.R. § 206.157(a), and that MMS officials were wrong to terminate MEPUS's grandfathered approval of the tariff rate established by Cortez on the ground that its calculation procedure has not been approved by the FERC in compliance with 30 C.F.R. § 206.157(b)(5). MEPUS now seeks declaratory and injunctive relief under its amended complaint, which purports to challenge these regulations on their face.

 Analysis

 MEPUS states that the Court has jurisdiction to grant the relief requested under 28 U.S.C. § 1331 (federal question) and 28 U.S.C. § 2201 (declaratory judgment). MEPUS's first cause of action is that the DoI's regulations may not lawfully give disparate treatment to identical arm's-length and non-arm's-length transportation contracts. Its second cause of action challenges the DoI's decision in the 1988 regulations to treat non-arm's-length contracts like arm's-length contracts only when they charge a tariff approved by the FERC or a state agency. The DoI has moved to dismiss with prejudice pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6) on the grounds that MEPUS failed to exhaust its administrative remedies prior to bringing its claims to this Court and that MEPUS's claims are time-barred. The Court examines each of these arguments in turn.

 In considering a motion to dismiss, the Court must assume the truth of the factual allegations of the complaint and liberally construe them in favor of the plaintiff. It may dismiss the complaint for failure to state a claim only if it appears that the plaintiff can prove no set of facts in support of its claim that would entitle the plaintiff to relief. Summit Health, Ltd. v. Pinhas, 500 U.S. 322, 111 S. Ct. 1842, 1845, 114 L. Ed. 2d 366 (1991); Kowal v. MCI Communications Corp., 305 U.S. App. D.C. 60, 16 F.3d 1271, 1276 (D.C. Cir. 1994).

 I. Failure To Exhaust Administrative Remedies

 The DoI contends that MEPUS's two claims, while masked in terms of a facial challenge to the 1988 regulations, actually present the same issues raised in its pending administrative appeal. Therefore, the DoI claims, MEPUS has failed to exhaust its administrative remedies. Under the Administrative Procedure Act ("APA"), final agency action is a prerequisite to judicial review. 5 U.S.C. § 704. The MMS regulations also require that a lessee ...


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