United States: The Nickel Report: Decision Vacating DOI Valuation Rule May Impact Future Rulemakings

On April 12, 2019, the US District Court for the Northern District of California entered an order vacating the Department of the Interior's (DOI) repeal of the 2016 Valuation Rule due to violations of the Administrative Procedures Act (APA). The 2016 Valuation Rule made changes to the government's methods for valuing oil, gas and coal produced on Federal and Indian lands. The court's ruling on the APA claims may impact the Trump administration's repeal and replace rulemakings that are scheduled to be finalized in the near future.

On July 1, 2016, the DOI Office of Natural Resource Revenue (ONRR) finalized the Valuation Rule, with a stated effective date of January 1, 2017. The rule responded to concerns that companies were significantly undervaluing coal sold in non-arm's length transactions. Whereas lessees previously used the benchmark system—that looks to outside indicia of market value—to calculate royalties in such context, the Valuation Rule instead required that coal be valued using the first arm's length sale between independent, nonaffiliated parties with opposing economic interests. The rule also defined the term "coal cooperative" to clarify what constitutes an arm's length relationship and added "default provisions" to address situations where the Secretary of the Interior (Secretary) is unable to reasonably determine the correct value of resource production. With all of these changes, ONRR estimated that the rule would increase royalty collection by between $71.9 million and $84.9 million.

Shortly thereafter, several industry groups challenged the Valuation Rule in the US District Court for the District of Wyoming, alleging that the rule would create widespread uncertainty and render compliance impossible. In February 2017, ONRR stated that the Wyoming lawsuits raised serious questions concerning the validity or prudence of certain provisions of the Valuation Rule and published a notice postponing the effective date of the rule. On April 4, 2017, ONRR published a proposed repeal of the Valuation Rule (Proposed Repeal Rule), proposing to repeal the rule in its entirety and to restore the pre-Valuation Rule regulations. ONRR reasoned, among other things, that the Proposed Repeal Rule was necessary to preserve the regulatory status quo while ONRR reconsiders whether the Valuation Rule is necessary and appropriate.

Simultaneously, but separately from the Proposed Repeal Rule, ONRR published a notice in the Federal Register seeking comments and suggestions on whether revisions to the valuation regulations for oil, gas and coal on federal and Indian lands are needed, and, if so, what should be considered. It formalized the request in an Advanced Notice of Proposed Rulemaking (ANPR) and clarified that it was seeking comments on two possible scenarios: if the Valuation Rule is repealed, whether a new rulemaking would be beneficial or necessary, or, if the Valuation Rule is not repealed, whether changes to the Valuation Rule are necessary. On August 7, 2017, ONRR published the Final Repeal Rule, repealing the Valuation Rule "in its entirety" and re-instating the pre-Valuation Rule regulations.

Shortly thereafter, several states challenged the Final Repeal Rule in the US District Court for the Northern District of California, alleging that it violated the APA, as well as various other environmental statutes. On March 29, 2019, the court issued an order vacating ONRR's repeal of the 2016 Valuation Rule, finding that it was "arbitrary and capricious" and violated the APA for multiple reasons.

First, the court held that the Repeal Rule failed to provide a "reasoned explanation" for repealing the Valuation Rule and contradicted its prior findings. The court found, among other things, that ONRR had not offered a basis for reversing its approach on "non-arm's length" transactions, whereas, the court reasoned, ONRR during the Obama administration provided "detailed conclusions" on its efforts to ensure that coal producers were not selling to subsidiaries at what they believed were artificially low prices. In addition, the court found that ONRR provided conclusory statements speculating about the overly burdensome nature of the Valuation Rule that directly contradicted its previous findings in its promulgation of the Valuation Rule.

Second, the court was unpersuaded that ONRR adequately considered alternatives to a complete repeal. The court stated that ONRR should have considered alternatives that would address specific deficiencies individually instead of abandoning the rule in its entirety.

Third, and most importantly due to its potential implications on other rulemakings, the court held that the Proposed Repeal Rule did not comply with the APA's notice-and-comment requirements because (1) it did not adequately inform the public of ONRR's rationale for repealing the Valuation Rule, and (2) ONRR's artificial segregation of the comments between the Proposed Repeal Rule and ANPR failed to provide a meaningful opportunity to comment substantively on the Proposed Repeal Rule. Each will be discussed in turn.

The Proposed Repeal Rule, among other things, asserted that the Valuation Rule should be repealed so that ONRR could reconsider whether changes to the Valuation Rule were needed and to avoid the costs of implementing its "controversial" provisions. The court held that the Proposed Repeal Rule failed to recite the rationale for the repeal of the Valuation Rule and thus did not provide enough details to allow the public an opportunity for meaningful comment. Under the APA, the court reasoned, an agency cannot merely identify some of the problems it believes may justify a repeal in a notice for proposed rulemaking, but rather must include "sufficient detail on its content and basis in law and evidence to allow for meaningful and informed comment." The court found that the necessary level of detail was lacking in the Proposed Repeal Rule because it merely recited conclusions. While it did not believe ONRR needed to identify every conceivable problem with the Valuation Rule, the court stated that ONRR was required to explain in detail the justification for the complete repeal of the Valuation Rule.

The court also held that ONRR failed to provide a meaningful opportunity for public comment because the Proposed Repeal Rule imposed a de facto content restriction by deferring consideration of substantive comments regarding the regulations at issue to the ANPR. The court reasoned that, between the contents in the Proposed Repeal Rule and the ANPR, it was clear that ONRR wanted comments for the Proposed Repeal Rule to be limited to the repeal, whereas comments germane to the merits of the Valuation Rule and the pre-Valuation Rule regulations should be presented and considered in connection with the ANPR, not the Proposed Repeal Rule. However, the court found that the Proposed Repeal Rule raised "relevant and significant issues" that obligated ONRR to consider and address comments concerning the substance and merits of both the Valuation Rule and pre-Valuation Rule regulations and not just the repeal. Accordingly, the court held that ONRR's "artificial segregation" of the comments between the Proposed Repeal and ANPR failed to provide a meaningful opportunity to comment substantively on the Proposed Repeal Rule.

The court vacated the repeal of the 2016 Valuation Rule, putting the 2016 Valuation Rule back into effect. DOI is currently reviewing the decision to determine next steps. It can (1) appeal the decision to the US Court of Appeals for the Ninth Circuit, (2) issue a revised repeal rule that addresses the court's findings or (3) finalize the replacement rule. Regardless of DOI's next steps, the effect of the ruling will be felt by the regulated industry as it complies with the Valuation Rule, which increases royalty payments for oil, gas and coal produced on federal and Indian lands.

The ruling will likely have impacts far beyond just that of the Valuation Repeal Rule. Agencies are now consistently using a two-step, separate repeal-and-replace rulemaking strategy. Most recently, we have seen the two-step process used by the Environmental Protection Agency (EPA) for the repeal and replacement of the Clean Power Plan (CPP) and a revised definition of "waters of the United States" (WOTUS).

This court decision has the potential to put a spotlight on how agencies, such as the EPA, are following the APA notice-and-comment procedures in repealing and replacing regulations. Specifically, once a repeal rule is finalized, opponents and courts will likely heavily focus on the level of factual and legal rationale an agency included in the proposed repeal rule, as well as whether the agency considered and addressed comments concerning the substance and merits of the rule it is repealing. Based on this decision, it appears that any segregation of comments between a repeal and a replacement rule may put the agency at risk of violating the APA.

EPA has not yet finalized the repeal of either rule. While there may be factual differences between ONRR's repeal of the Valuation Rule and EPA's repeal of the CPP and the definition of WOTUS, EPA should carefully consider the repeal rules through the lenses of this new decision to ensure that they will be upheld as consistent with the APA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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