If you are the type to be preoccupied with the nuances (drudgery if you prefer) of federal statutory and regulatory interpretation, or if you have a fetish for acronyms, I recommend that you read all 41 spellbinding pages of W&T Offshore v. U S Department of the Interior. The rest of us will dig into the U S District Court’s consideration of the so-called Auer deference (judicial deference being a hot topic these days) and the fair-notice doctrine under the Fifth Amendment and the Administrative Procedure Act. That is as deep into these weeds as we should dare to venture.
The facts
W&T deducted from royalty payments to the government a transportation allowance under federal law for costs incurred in remediation of the offshore Pluto Flowline. W&T had a Unit Operating Agreement with Mariner, the operator of the Pluto Project. Previous owners were parties to an Operations and Maintenance Agreement that was terminated after several transactions involving interests in the Pluto Project and the Pluto Flowline.
Judicial deference?
Interior (by Minerals Management Service and the Office of Natural Resources Revenue) denied the allowance and demanded an additional $4MM+ in royalties. W&T sued alleging that Interior’s disallowance ran afoul of a host of federal statutes and regulations and was therefore arbitrary, capricious, and an abuse of discretion, and that the rejection violated fair notice requirements.
The court considered Auer deference (an agency’s interpretation of its own regulation is controlling unless plainly erroneous or inconsistent with the regulation). The court performed this analysis:
- First, determine that the regulation is genuinely ambiguous by “exhausting all the ‘traditional tools’ of construction.” (Applying Texas law, the law of the contracts).
- Second, determine that the interpretation is reasonable.
- Third, evaluate whether the character and context of the agency interpretation entitles it to controlling weight. See pp. 9-11 of the opinion for the factors.
Under the UOA, W&T was obligated to reimburse operator Mariner for costs of unit operations, but the Pluto Flowline was not listed as joint property under the UOA.
The court found:
- The regulation upon which the agency’s ruling was based was not ambiguous.
- Interior’s interpretation was reasonable. Therefore, Skidmore deference did not apply (based on the interpretation’s persuasiveness, a weaker form of deference than Auer).
- Interior’s interpretation did not invoke the agency’s substantive expertise (offshore oil and gas activities). The question whether W&T incurred the costs under an arms-length transportation contract was based on general common-law principles of contract interpretation.
- Interior’s interpretation was not arbitrary and capricious.
- Auer deference and Skidmore deference did not apply to the agency’s decision.
The flaw in W&T’s position was that the UOA was not a transportation contract, which was a requirement for the allowance.
The fair-notice doctrine
So far, so good for Interior. But the agency is required to give fair notice to whomever it is regulating that certain conduct is forbidden. Interior violated the doctrine:
- Interior had never before interpreted the regulation at issue to hold that W&T’s method of remediation was unreasonable.
- Interior knew that terms such as ”reasonable”, “moderate” and “fair” made the regulation subject to ambiguity.
- Mariner had obtained several layers of approval in which the procedure was described and was never put on notice that it was not reasonable.
- Interior did not cite any statute, regulation or prior adjudication finding the procedure was not reasonable.
There is much more to the opinion than this summary, but the result is the parties’ dueling motions for summary judgment were denied in part and granted in part, Interior’s Final Decision denying the allowance was reversed, and the case was remanded to the ONRR.
Your musical interlude
She does originals, too.
[View source.]
