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October 24, 2001


The opinion of the court was delivered by: Sullivan, District Judge.


Plaintiffs*fn1 lease from the federal government the right to produce oil and gas located offshore of Louisiana and California on the Outer Continental Shelf ("OCS"). Plaintiffs transport the oil to shore through pipelines located on the OCS. Defendant Department of the Interior ("DOI") issues and administers OCS oil and gas leases under the OCS Lands Act, 43 U.S.C. § 1331, et seq. ("OCSLA"). Pursuant to the OCSLA, lessees are required to pay royalties on their crude oil production on the OCS to the United States. The Minerals Management Service ("MMS"), a subdivision of DOI, promulgates royalty regulations, and collects, checks, and distributes revenues from the OCS gas leases. This action arises out of plaintiffs' challenge to defendants' final decision involving the application of DOI's royalty valuation regulations to plaintiffs. Plaintiffs challenge DOI's action denying them a particular exception contained in the royalty calculation regulations as arbitrary and capricious in violation of the Administrative Procedures Act (APA), 5 U.S.C. § 553 and § 706(A)(2).

Pending before the Court are the parties' cross-motions for summary judgment. Upon consideration of the parties' motions, the responses and replies thereto, plaintiffs' supplemental submission of new authority, the responses and replies thereto, counsels' representations at oral argument, as well as the applicable statutory and case law, this Court concludes that plaintiffs' motion for summary judgment [42-1] should be GRANTED, and defendants' motion for summary judgment [45-1] should be DENIED.


I. Statutory and Regulatory Framework

In January 1988, through the APA's notice and comment rule-making procedures, MMS issued comprehensive rules relating to the calculation of royalties on crude oil production from federal leases. See Revision of Oil Product Valuation Regulations and Related Topics, 53 Fed. Reg. 1184-1227 (Jan. 15, 1988). The regulation at the center of the present controversy explains how lessees calculate the transportation cost allowances that they may deduct from their royalty calculations. 30 C.F.R. § 206.105 (1998).

In its 1988 regulations, MMS carved out an exception to the actual cost requirement that allows federal lessees shipping oil via affiliated pipelines to base their transportation allowances on tariffs filed with the Federal Energy Regulatory Commission ("FERC"). This provision, known as the "FERC tariff exception," provides: "The MMS will grant the exception only if the lessee has a tariff for the transportation system approved by [FERC] . . ." 30 C.F.R. § 206.105(b)(5). Section 206.105(b)(5) was meant to enable lessees to avoid the "unnecessar[y] burden[]" of recomputing costs. 53 Fed. Reg. at 1211. The exception was animated by the policy that FERC could be relied upon to ensure that oil shipping rates in its jurisdiction are reasonable. Id. (citing FERC's "expertise . . . to determine fair and reasonable transportation charges").

The regulation allows MMS to deny the exception to a lessee who has a FERC-approved tariff in certain specified circumstances:

The MMS shall deny the exception request if it determines that the tariff is excessive as compared to arm's-length transportation charges by pipelines, owned by the lessee or others, providing similar transportation services in that area. If there are no arm's-length transportation charges, MMS shall deny the exception request if: (i) No FERC or State regulatory agency cost analysis exists and the FERC or State regulatory agency, as applicable, has declined to investigate pursuant to MMS' timely objection upon filing; and (ii) the tariff significantly exceeds the lessee's actual costs for transportation. . . .

§ 206.105(b)(5).

The parties agree that after the 1988 regulations went into effect, requests to MMS to use FERC-approved tariff rates were routinely granted as long as the affiliated pipeline company had a tariff on file at FERC. In fact, the MMS had allowed plaintiffs to use FERC tariff rates to calculate transportation allowances well before the 1988 valuation regulations; this practice had informed the 1988 rule. 53 Fed. Reg. at 1209. Under this scheme, the only action a lessee had to take to satisfy the requirement of § 206.105(b)(5) that a tariff be "approved by [FERC]" was to present proof of a tariff on file with FERC. From MMS's point of view, FERC's acceptance of the filing of a tariff qualified as FERC's "approv[al]" of that tariff under § 206.105(b). 53 Fed. Reg. at 1209 (citing practice of granting exception to FERC-approved tariffs).

At all times relevant to this case, FERC tariffs were authorized by the Interstate Commerce Act ("ICA"), 49 U.S.C. App. § 1(1) (1988), and governed by the FERC regulations at 18 C.F.R. § 341. Those regulations required that each pipeline carrier of crude oil "subject to the Commission's jurisdiction under the Interstate Commerce Act" file a tariff with FERC that sets forth the rates and charges for transportation through the pipeline. 18 C.F.R. § 341.0(a)(1),(b) (1997). Section 341.11(a) states that "[FERC] may reject tariff publications or any other material submitted for filing that fail to comply with the requirements set forth in this part or violate any statute, or any regulation, policy or order of the Commission." Generally, absent affirmative action by FERC to reject the filed tariff, the tariff was considered "establish[ed]" or "issued" and the pipeline owner was permitted to charge the specified rates. See § 341.3 (tariff must include "issue" date, and the "specific Commission order pursuant to which the tariff is issued"); § 346.1 (carriers seeking to "establish" rates must follow, inter alia, procedures in § 341). FERC officials have indicated that it was FERC practice to routinely accept tariff filings without an investigation into FERC's jurisdiction over the tariff; jurisdiction was only addressed if a protest was filed with FERC pursuant to § 343. See Consolidated Administrative Record (CAR), doc. C50.

Beginning in 1992, FERC issued a series of decisions that called its jurisdiction over certain OCS pipelines into question. See Oxy Pipeline, Inc., 61 FERC 61,051, 1992 WL 276147 (1992); Bonito Pipeline Company, 61 FERC 61,050, 1992 WL 409332 (1992), aff'd sub nom., Shell Oil Co. v. FERC, 47 F.3d 1186 (D.C.Cir. 1995); Ultramar, Inc. v. Gaviota Terminal Co., 80 FERC 61,201, 1997 WL 612369 (1997). FERC did not, however, alter its policy of issuing tariffs without investigation into its jurisdiction after the initial 1992 decisions.

In September of 1994, MMS decided to no longer accept tariffs issued by FERC as automatically qualifying for the FERC exception. The minutes of a August 9, 1994 staff meeting state:

Consensus was reached that MMS would not recognize FERC Oil Tariffs for which FERC has renounced jurisdiction. MMS would require the calculation of a transportation allowance to be based on actual costs as of October 8, 1992, the date of the OXY/Samedan FERC decision.

CAR, doc. C58, at 156. The minutes of a September 9, 1994, staff meeting state "Action Items. 1. VSD will change its policy and not approve FERC Oil Tariffs in lieu of computing actual costs." Id. The parties dispute the motivation for this change at MMS. Plaintiffs allege that DOI and MMS were politically and financially motivated to eliminate the FERC exception and thereby generate approximately $30 million dollars a year in increased royalties from the oil industry. Defendants claim that FERC's own questioning of its jurisdiction in the 1992 decisions made MMS no longer able to rely on FERC-issued tariffs as "approved by" FERC.

II. MMS Orders to Plaintiffs and Plaintiffs' Administrative Appeals

Plaintiffs filed tariffs with FERC covering the affiliated pipelines at issue in this case. See No. 98-884 AR, Tab 27 (Torch); No. 98-1388 AR Tab 16 (Chevron); No. 98-1388 AR Tab 29 (Exxon); No. 98-1388 AR Tabs 22, 24, 28 (Mobil); No. 98-1388 AR Tabs 19, 34, 35 (Texaco); No. 98-1398 AR Tabs 16, 30, 38, 52 (Unocal); No. 98-1444 AR Tabs 18, 25, 30 (Amerada Hess); No. 98-1444 AR Tab 18, 21, 22 (PennzEnergy); No. 98-2125 AR Tab 24(BPX). FERC did not reject the tariffs for lack of jurisdiction, nor were any protests or challenges filed. Plaintiffs then filed requests with MMS to use FERC's tariff rates to calculate their transportation allowances pursuant to the FERC exception in the regulations. Id.

The Chief of the MMS Valuation and Standards Division denied plaintiffs requests for the FERC exception. See No. 98-884 AR, Tab 24 (Torch); No. 98-1388 AR Tabs 13, 26 (Chevron); No. 98-1388 AR Tabs 17, 27 (Exxon); No. 98-1388 AR Tabs 20,21, 27 (Mobil); No. 98-1388 AR Tabs 15, 32, 33 (Texaco); No. 98-1398 AR Tabs 48, 49 (Unocal); No. 98-1444 AR Tabs 16, 23, 29 (Amerada Hess); No. 981444 AR Tabs 17, 19, 20 (PennzEnergy); No. 98-2125 AR Tab 23(BPX). That MMS decision cited the 1992 decision by FERC in Oxy Pipeline that questioned FERC's jurisdiction over oil transported only on pipelines within the OCS:

On October 8, 1992, FERC issued the Order Granting Petitions for Declaratory Orders and Disclaiming Jurisdiction, Oxy Pipeline Inc., 61 FERC ¶ 61,051, 1992 WL 276147 (1992), which states in pertinent part . . . that the [ICA] does not expressly cover pipelines transporting oil solely on or across the Outer Continental Shelf . . .

Id. MMS stated that since FERC had renounced jurisdiction over pipelines on the OCS, MMS could no longer consider tariffs for those pipelines that had been issued by FERC to be "approved by FERC;" thus, MMS could no longer grant the FERC exceptions for those tariffs. Id.*fn2

Plaintiffs then appealed those orders to the Director of MMS, Cynthia Quarterman. See No. 98-884 AR Tab 22 (Torch); No. 98-1388 AR Tabs 11, 12 (Chevron); No. 98-1388 AR Tabs 16, 26 (Exxon); No. 98-1388 AR Tabs 18, 19, 26 (Mobil); No. 98-1388 AR Tabs 14, 29, 31 (Texaco); No. 98-1398 AR Tabs 46, 47 (Unocal); No. 98-1444 AR Tabs 13, 22, 28 (Amerada Hess); No. 98-1444 AR Tabs 16 (PennzEnergy); No. 98-2125 AR Tab 21(BPX). Plaintiffs claim that while those appeals were pending, Torch received an affirmative determination from the FERC Office of Pipeline Regulation that its pipeline was subject to the provisions of the ICA and was therefore within FERC's jurisdiction. See Pls.' Statement of Undisputed Material Facts at 4 ΒΆ 10 ...

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