Jicarilla Apache Nation v. U.S. Department of Interior ( 2009 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
JICARILLA APACHE NATION, )
)
Plaintiff, )
)
v. ) Civil Case No. 07-803 (RJL)
)
U.S. DEPARTMENT OF THE )
INTERIOR, )
)
Defendant, )
)
and )
)
VASTAR RESOURCES, INC., et al., )
)
Intervenor-Defendants.
fr-
MEMORAN UM OPINION
(March , 2009) [# 15]
Plaintiff Jicarilla Apache Nation ("Jicarilla") brings this action against the
Department of Interior ("Interior") under the Administrative Procedure Act ("AP A"), 5
U.S.C. §§ 701, et seq. Jicarilla alleges that the rejection by the Assistant Secretary for
Indian Affairs of a "major portion" analysis methodology developed by the Minerals
Management Service ("MMS") to calculate natural gas royalties owed Jicarilla was an
arbitrary and capricious departure from Interior's own precedent and violated the
agency's regulations and fiduciary duties. Before the Court is Jicarilla's motion for
summary judgment. Because the Assistant Secretary's decision was neither arbitrary,
capricious, an abuse of discretion, nor otherwise contrary to law, Jicarilla's motion is
DENIED.
BACKGROUND
Jicarilla, a federally recognized Indian tribe, is a lessor of natural gas produced on
its reservation in northwest New Mexico (the "Reservation") pursuant to standard leases
issued by Interior in accordance with the Indian Mineral Leasing Act, 25 U.S.C. § 396a-
g. Under the leases, lessees are required to pay royalties to Jicarilla equal to 1I6th or
1I8th the value of the natural gas produced and sold. (A.R. 1372-75, ~ 3(c) (hereinafter
the "Lease")). In some instances, the price paid for gas produced on the Reservation does
not accurately reflect market value because the gas is sold under nonarm's-length
contracts. To ensure that Jicarilla receives full royalties in such instances, the leases
contain a standard provision defining how Interior may calculate an alternative "value"
for royalty purposes. Referred to as the "major portion" provision, it provides:
"value" for the purposes hereof may, in the discretion of the Secretary, be
calculated on the basis of the highest price paid or offered ... at the time of
production/or the major portion of the oil of the same gravity, and gas,
and/or natural gasoline, and/or other hydrocarbon substances produced and
sold from the field where the leased lands are situated.
(Lease ~ 3(c) (emphasis added).)
In 1988, MMS promulgated revised regulations related to the calculation of
royalties pursuant to the major portion provision. Before 1988, the relevant regulations
effectively mirrored the lease language, leaving unspecified what percentage of sales
constituted a "major portion." 1 With the 1988 MMS regulations, however, MMS
promulgated express requirements, providing:
The pre-1988 regulations stated:
2
The major portion will be calculated using like-quality gas sold under
arm's-length contracts from the same field (or, if necessary to obtain a
reasonable sample, from the same area) for each month. All such sales will
be arrayed from highest price to lowest price (at the bottom). The major
portion is that price at which SO percent (by volume) plus 1 mcf of the gas
(starting from the bottom) is sold.
30 C.F.R §§ 206. 1S2(a)(3)(ii) (unprocessed gas) and 206.1S3(a)(3)(ii) (processed gas)
(1988-199S), recodified at 30 C.F.R. §§ 206. 172(a)(3)(i) and 206. 173(a)(3)(i) (1996-
1999).2 The 1988 MMS regulations also provided, however, that if the regulations were
ever in conflict with any given lease terms, the lease terms would control. 30 C.F.R. §
206.lS0(b) (1988).
In 1996, MMS began working with Jicarilla to develop a major portion
methodology for JicariIla's gas leases. (A.R.204.) After reviewing the available data
sources, MMS determined that no existing database contained 100 percent of the arms-
length, like-quality gas sales for the Reservation. (A.R. Supp. 4.) Rather than forgo a
major portion analysis, however, MMS determined that JicariIIa's Royalty-in-Kind (RIK)
program, under which JicariIIa received its 1I6th or 1I8th royalty share in kind and sold
The value of production, for the purpose of computing royalty, shall be the
estimated reasonable value of the product as determined by the Associate Director
due consideration being given to the highest price paid for a part or for a majority
of like quality in the same field, to the price received by the lessee, to posted
prices, and to other relevant matters .... In the absence of good reason to the
contrary, value computed on the basis of the highest price per barrel, thousand
cubic feet for the major portion of like quality oil, gas, or other products produced
and sold from the field or area where the leased lands are situated will be
considered to be a reasonable value.
30 C.F.R. § 206.103 (1987); see also 25 C.F.R. § 211.13(a) (1987).
2
In 1999, MMS again revised its major portion regulations, modifying the formula such
that "[t]he major portion value is that price at which 25 percent (by volume) of the gas (starting
from the highest) is sold." 30 C.F.R. § 206. 174(a)(4)(iii) (2000). The revised regulation,
however, was not in effect during the time period relevant in this case.
3
the gas at arm's-length itself, provided sufficient data. (A.R. Supp. 4; A.R. 135.) Based
on the assumption that the RIK share prices were representative of the prices received for
the remaining 5/6ths or 7/8ths of gas sold, MMS adopted a methodology under which
MMS extrapolated monthly major portion prices from the price received for the RIK
shares. (A.R. 134-35.) MMS also determined that New Mexico's demarcation of gas
resources into overlapping "pools," rather than "fields," precluded MMS from defining
distinct field boundaries within the Reservation, necessitating the use of the Reservation
boundary itself as the relevant "area" for purposes of the methodology (the "Jicarilla
methodology"). (A.R. 136.) MMS thereafter issued 39 virtually identical Orders to
Perform in 1998 and 1999, directing lessee companies to pay any additional royalties
owed Jicarilla for the period January 1984 through June 1995 based on the major portion
prices MMS calculated using the Jicarilla methodology.3 (See, e.g., A.R. 63.)
Several lessee companies appealed the Orders to Perform within Interior pursuant
to 30 C.F.R. Part 290, alleging that various aspects of the Jicarilla methodology violated
the 1988 MMS regulations. In December 2000, the Assistant Secretary for Indian Affairs
issued Interior's first three decisions, each upholding the Jicarilla methodology in
virtually identical opinions. In the decisions Interior cited "good sense and sound equity"
as guiding principles and relied on the discretion granted the agency under the lease terms
to hold that "despite the inherent limitations relating to the availability of data, [MMS]
3
The Orders to Perform ordered the companies to calculate royalties owed Jicarilla based
on the higher of the major portion price, their actual gross proceeds, or the value determined after
performing dual accounting. Dual accounting entails comparing the wellhead value of the gas
before it is processed to extract heavier liquid hydrocarbons and the combined values of dry
residue gas and separated liquid hydrocarbons after processing the gas, less allowed processing
costs. See 30 C.F.R. § 206.155 (1988).
4
has substantially complied with the requirements of the regulations." Robert L. Bayless,
MMS-98-0132-IND ("Bayless") at 5 (Dec. 22, 2000); Dugan Prod. Corp., MMS-98-
0130-IND at 6 (Dec. 22, 2000); Merrion Oil & Gas Corp., MMS-98-0228-IND at 6 (Dec.
22, 2000) (collectively, the "Bayless decisions"). Critically, Interior determined that the
Lease terms were inconsistent with the 1988 MMS regulations to the extent the
regulations required calculating a "volume-weighted median price based on data that are
not appropriate for the Reservation," holding that the lease terms, which did not formally
define "major portion," therefore governed. See, e.g., Bayless at 5. Interior accordingly
held that MMS's extrapolation of major portion prices from the prices received for
Jicarilla's RIK share, which constituted only approximately 25% of the total arm's-length
sales for the Reservation, was permissible. Id. at 4. Interior buttressed its determination
by noting that when faced with reasonable alternatives MMS had a fiduciary duty to
choose the alternative that was in the tribe's best interests. Id. at 5.
Six years later, in March 2007, Interior again passed judgment on the Jicarilla
methodology, this time in a consolidated decision on eight additional appeals from the
1998 and 1999 Orders to Perform. In Vastar Resources, Inc., et al., MMS-98-0 131-IND
(Mar. 28, 2007) (A.R. Supp. 1-12) ("Vastar"), however, the Assistant Secretary for
Indian Affairs, on Interior's behalf, rejected the Jicarilla methodology for failing to meet
the requirements of the 1988 MMS regulations. Vastar at 9. Unlike Interior's
determination in the Bayless decisions, in Vastar Interior determined that no
inconsistency existed between the Lease terms and the 1988 MMS regulations. Id at 3-4,
& n.l. Reasoning that Interior is bound to follow its own regulations, fiduciary duties
5
notwithstanding, Interior determined that several aspects of the Jicarilla methodology
violated the regulations. Id. at 6-11. Interior accordingly struck the major portion prices
calculated using the Jicarilla methodology from the Orders to Perform. Id. at 12.
Jicarilla subsequently filed the present suit in May 2007 seeking review of the Vastar
decision.
DISCUSSION
Under the AP A, the Court is required to set aside agency action that is "arbitrary,
capricious, an abuse of discretion or otherwise not in accordance with law." 5 U.S.C. §
706(2)(A). "This standard of review is a highly deferential one. It presumes agency
action to be valid." Ethyl Corp. v. EPA, 541 F.2d 1,34 (D.C. Cir. 1976). Critical to the
Court's review under this standard is whether the agency has examined the relevant
information and "articulated a rational explanation for its action." See Eagle-Picher
Indus., Inc. v. EPA, 759 F.2d 905,921 (D.C. Cir. 1985). In its motion for summary
judgment, Jicarilla challenges the Vastar decision on three bases. For the following
reasons, none of the three warrants a reversal of the agency's decision.
I. Fidelity to Agency Precedent
Jicarilla first argues that Interior's failure in Vastar to explicitly discuss and
explain its departure from the Bayless decisions renders Vastar arbitrary and capricious.
Interior and intervenor-defendants Vastar Resources, Inc., et aI., (collectively,
"defendants") argue, not surprisingly, that Interior has inherent authority to reconsider
prior decisions and Vastar provided sufficient reasoned explanation for its determination.
I agree.
6
While agencies are generally under a duty to treat likes cases alike, Westar
Energy, Inc. v. FERC, 473 F.3d 1239, 1241 (D.C. Cir. 2007), they are also "free to
change course as their expertise and experience may suggest or require." Ramaprakash
v. FAA, 346 F.3d 1121, 1124 (D.C. Cir. 2003). Indeed, it is well settled that "[a]n agency
is free to discard precedents or practices it no longer believes correct." Williams Gas
Processing-Gulf Coast Co. v. FERC, 475 F.3d 319, 326 (D.C. Cir. 2006) (citation
omitted). Agencies may not, however, depart from past precedent without explanation.
While this Court's review under the APA is a highly deferential one, "[w]here an agency
departs from established precedent without a reasoned explanation, its decision will be
vacated as arbitrary and capricious." ANR Pipeline Co. v. FERC, 71 F.3d 897, 901 (D.C.
Cir. 1995); see also Nat 'I Fed'n a/Fed. Employees, FD-J v. Fed. Labor Relations Auth.,
412 F.3d 119,124 (D.C. Cir. 2005) (an agency "must either follow its own precedent or
'provide a reasoned explanation for' its decision to depart from that precedent" (citation
omitted»; Greater Boston Television Corp. v. FCC, 444 F.2d 841,852 (D.C. Cir. 1970)
(agencies departing from their own precedent must "supply a reasoned analysis indicating
that prior policies and standards are being deliberately changed, not casually ignored").
In this case, while Interior did not mention the Bayless decisions by name in
Vastar, neither did Interior sidestep or gloss over without discussion the key issues
underlying the Bayless decisions. Rather, Interior faced them head on and provided a
reasoned explanation for why and how it came to different conclusions. Cf Columbia
Broad. Sys., Inc. v. FCC, 454 F.2d 1018, 1027 (D.C. Cir. 1971) (agency decision
arbitrary and capricious where agency attempted to sidestep conflicting precedent without
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explanation). At the outset, Interior assessed whether the Lease terms were in fact
inconsistent with the 1988 MMS regulations, as the Bayless decisions had determined.
Vastar at 3-4. Citing their similar language and the Lease's lack of a definition of "major
portion," Interior explained its determination that no inconsistency existed that would
require setting aside the 1988 MMS regulations. Id. at 3-4, & n.l. Interior then went on
to explain in detail the myriad ways the Jicarilla methodology violated the 1988 MMS
regulations, which included: relying on RIK sales data that constituted substantially less
than 50 percent of arm's-length sales; improperly extrapolating major portion prices from
the RIK sales data; relying on sales data for gas that was not like-quality in all instances;
defining the relevant "area" to include thirty separate pools from many different
formations without showing similarity of characteristics; and calculating major portion
prices on an annual, rather than monthly, basis. Id. at 8-11. While a citation to the
Bayless decisions may have made the agency's about-face more explicit, the Vastar
decision's analysis left no uncertainty as to the reasoning underlying Interior's new
determination. Cf Hatch v. FERC, 654 F.2d 825,834-35 (D.C. Cir. 1981) (agency's
failure to adequately explain its new position left future interested parties "with no
guideposts for determining the consistency of administrative action in similar cases, or
for accurately predicting future action by the Commission"); Philadelphia Gas Works v.
FERC, 989 F.2d 1246, 1250 (D.C. Cir. 1993) (noting the court's significant uncertainty
as to what considerations the agency relied upon to adopt its new position and how those
factors related to prior precedent).
8
In addition, the Vastar decision provided no hint of "ad hocery," arbitrariness, or
indifference to the rule of law. See Ramaprakash, 346 F.3d at 1130 ("This court has
observed that 'the core concern underlying the prohibition of arbitrary or capricious
agency action' is that agency 'ad hocery' is impermissible." (citation omitted)); Columbia
Broad. Sys., Inc., 454 F .2d at 1027. Interior did not treat similarly-situated parties in an
inconsistent manner without explanation, a hallmark of arbitrariness. Colo. Interstate
Gas Co. v. FERC, 850 F .2d 769, 774 (D.C. Cir. 1988). Rather, Interior reconsidered its
position on the legality of a methodology that applied to a single entity for the
permissible purpose of ensuring that the agency complied with its own regulations. See
Saulque v. United States, 663 F.2d 968,975 (9th Cir. 1981) (previous erroneous finding
by agency does not preclude agency from changing its position in order to comply with
the law); cf Williams Gas Processing-Gulf Coast Co., 475 F.3d at 322 (vacating agency
decision revisiting prior inconsistent agency case law as to the same entity where agency
"neither explained its action as consistent with precedent nor justified it as a reasoned
and permissible shift in policy" (emphasis added)). Accordingly, despite Interior's
failure to mention or distinguish the Bayless decisions by name, the agency provided the
requisite reasoned explanation for its determination in Vastar that the Jicarilla
methodology upheld in the Bayless decisions violated Interior's regulations.
Accordingly, Vastar cannot be overturned on these grounds.
II. Consistency Between the Lease Terms and the 1988 MMS Regulations
Jicarilla next argues that Interior's determination in Vastar that the Lease terms
and the 1988 MMS regulations were consistent was erroneous and therefore Interior's
9
failure to give primacy to the Lease terms violated Interior's own regulations.
Defendants argue, conversely, that Interior correctly determined that no inconsistency
existed and that Interior's determination must be afforded deference. For the following
reasons, I again agree.
"An agency's interpretation of its own regulations is entitled to substantial
deference." S.A. Storer & Sons Co. v. Sec'y a/Labor, 360 F.3d 1363,1368 (D.C. Cir.
2004) (internal quotation marks omitted). Indeed, this Court's "task is not to decide
which among several competing interpretations best serves the regulatory purpose.
Rather, the agency's interpretation must be given controlling weight unless it is plainly
erroneous or inconsistent with the regulation." Thomas Jefferson Univ. v. Shalala, 512
U.S. 504, 512 (1994) (internal quotation marks omitted). Here, the 1988 MMS
regulations use as their starting point the major portion standard set forth in the Lease,
namely that "major portion means the highest price paid or offered at the time of
production for the major portion of gas production from the same field." 30 C.F.R §§
206.152(a)(3)(ii) and 206.153(a)(3)(ii) (1988-1995); compare id., with (Lease ~ 3(c)
(value "calculated on the basis of the highest price paid or offered ... at the time of
production for the major portion of ... gas ... produced and sold from the field where
the leases lands are situated.")). The regulations then go on to specify in detail how to
calculate the "major portion," defining major portion price as "that price at which 50
percent (by volume) plus 1 mcfofthe gas (starting from the bottom [of the array of
prices]) is sold." 30 C.F.R §§ 206.152(a)(3)(ii) and 206.153(a)(3)(ii) (1988-1995).
10
Jicarilla argues that this volume-weighted median price is inconsistent with the
Lease terms, which require that the major portion price equal the "highest price paid or
offered" for a "major portion." (Lease ~ 3(c) (emphasis added).) Critically, however, the
Lease does not define what constitutes a "major portion," and the Lease expressly
incorporates Interior's regulations, including those promulgated after the Lease's
issuance. (Lease ~ 3(g) (stating that the parties agree "[t]o abide by and conform to any
and all regulations of the Secretary of the Interior now or hereafter in force relative to
such leases").) While the imposition of a 50 percent threshold volume requirement may
preclude MMS from calculating a major portion price for Jicarilla due to data limitations,
such a requirement does not render the regulations inconsistent with the Lease terms
where the Lease is silent as to the definition of "major portion.,,4 In fact, Interior appears
to have used a volume-weighted median analysis to calculate major portion prices even
prior to Interior's promulgation of the 1988 MMS regulations. See, e.g., Shoshone
Indian Tribe & Arapahoe Indian Tribe v. Hodel, No. C81-131-K, slip op. at 6 (D. Wyo.
Jan. 11, 1988) (affirming Interior's consistent interpretation ofpre-1988 MMS
regulations "as requiring a median base floor price calculation in conducting a major
portion analysis"); Burlington Res. Oil & Gas Co., 151 IBLA 144, 157, n.2 (Nov. 30,
1999) (noting that the pre-1988 regulations had "substantially the same requirements for
the major portion analysis" as the 1988 MMS regulations). Accordingly, Interior's
4
Indeed, it is not unprecedented for major portion methodologies crafted by MMS to be
struck down on the basis that the data used was insufficient under the regulations. In Burlington
Res. Oil & Gas Co., 151 IBLA 144, 158-59 (1999), for example, the Interior Board of Land
Appeals precluded MMS from performing a major portion analysis based on nonarm's-length
data.
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determination in Vastar that the Lease terms and the 1988 MMS regulations were
consistent is equally not reversable.
III. Interior's Fiduciary Duty to Jicarilla
Finally, Jicarilla argues that even ifInterior's consistency determination in Vastar
was not erroneous, Interior's fiduciary duty to the tribe nevertheless required Interior to
adhere to its prior determination in the Bayless decisions because that determination was
reasonable and best served the tribe's interests. I disagree.
It is well-settled that "the Government in its dealings with Indian tribal property
acts in a fiduciary capacity." Cobell v. Norton, 240 F.3d 1081, 1098 (D.C. Cir. 2001)
(quoting Lincoln v. Vigil, 508 U.S. 182, 194 (1993)). Agencies' fiduciary
responsibilities, however, are defined by the contours of the relevant statutes and
regulations. See United States v. Mitchell, 463 U.S. 206, 224 (1983). Accordingly, while
Interior's fiduciary duty requires that it choose that option among several that is in the
best interests of the tribe, Interior's choice of options is limited to those that are
"reasonable," i.e., not arbitrary and capricious. See Cobell, 240 F.3d at 1099; Jicarilla
Apache Tribe v. Supron Energy Corp., 728 F.2d 1555, 1567 (lOth Cir. 1984) (Seymour,
J., concurring in part and dissenting in part), adopted as majority opinion as modified en
bane, 782 F.2d 855 (lOth Cir. 1986) ("[W]hen faced with a decision for which there is
more than one 'reasonable' choice as that term is used in administrative law, [the
Secretary] must choose the alternative that is in the best interests of the Indian tribe.").
12
Here, the Court agrees with Interior's determination in Vastar that the Jicarilla
methodology did not conform to the 1988 MMS regulations and thus was not a
"reasonable" option. See Cherokee Nation a/Okla. v. Babbitt, 117 F.3d 1489, 1499
(D.C. Cir. 1997) ("An agency is required to follow its own regulations.") As explained
above, the Jicarilla methodology entailed extrapolating major portion prices from the RIK
sales prices, which constituted, at most, 25 percent of the arm's-length gas sales from the
Reservation. (A.R. 134-35; Bayless at 4.) The 1988 MMS regulations are clear,
however, that a major portion price is "that price at which 50 percent (by volume) plus 1
mcf of the gas (starting from the bottom [of the array of prices]) is sold." 30 C.F.R §§
206.1 52(a)(3)(ii) and 206. 153(a)(3)(ii) (1988-1995) (emphasis added). In the Bayless
decisions, Interior sidestepped this discrepancy by finding the 1988 MMS regulations
inconsistent with the Lease terms in light of MMS' s lack of sufficient data to perform the
analysis as required under the regulations. 5 Bayless at 5. However, as discussed above,
the Lease terms and the 1988 MMS regulations are not inconsistent on their face, and
while MMS retains significant discretion and has a duty to develop a major portion
methodology that is in the tribe's best interest, that discretion and duty does not permit
MMS to outright violate its own regulations. See Pawnee v. United States, 830 F.2d 187,
191, 192 (Fed. Cir. 1987) (tribes cannot compel Interior "to go contrary to and beyond
5
In the Bayless decisions, Interior determined:
Where, as here, the method in the regulations does not arrive at the highest price
paid or offered but rather at the a volume-weighted median price based on data
that are not appropriate for the Reservation . .. , the regulations themselves
provide that the lease terms take precedence over the MMS regulations.
Bayless at 5 (emphasis added).
13
the regulations and the leases in order to fulfill its alleged fiduciary obligation to
appellants"). Accordingly, because the Jicarilla methodology violated the 1988 MMS
regulations, and thus did not constitute a "reasonable" option, Interior did not violate its
fiduciary duty to Jicarilla in its Vastar decision. In the final analysis, Interior's duty to
follow its own regulations was, and is, an even higher obligation.
CONCLUSION
Thus, for all of the above reasons, the Court DENIES plaintiffs Motion for
Summary Judgment. While defendants in this matter have not filed a cross-motion for
summary judgment, the Court finds that plaintiff was "on notice" that it needed to "come
forward with all of [its] evidence," and therefore the Court can, and will, enter summary
jUdgment, sua sponte, for defendants. Celotex Corp. v. Catrett, 477 U.S. 317, 326
(1986). An appropriate Order will issue with this Memorandum Opinion.
1L'
~
RICHA EON
United States District Judge
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