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 §
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
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. . . .
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
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
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
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
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
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 ¶ 10 ...