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Laketon Asphalt Refining Inc. v. United States Department of Interior and Cecil Andrus

decided: July 3, 1980.

LAKETON ASPHALT REFINING, INC., PLAINTIFF-APPELLANT,
v.
UNITED STATES DEPARTMENT OF THE INTERIOR AND CECIL ANDRUS, SECRETARY OF THE UNITED STATES DEPARTMENT OF THE INTERIOR, DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Indiana, Fort Wayne Division. No. F 77 C 20 -- Robert A. Grant, Judge.

Before Sprecher and Wood, Circuit Judges, and East, Senior District Judge.*fn*

Author: Sprecher

This appeal questions the validity of procedures used by the Secretary of the Interior to implement section 36 of the Mineral Leasing Act, 30 U.S.C. § 192. We hold the challenged procedures to be valid and affirm the judgment below, D.C., 476 F. Supp. 668.

I

The facts are recited substantially as found by the lower court. Section 36 of the Mineral Leasing Act (MLA) provides that royalties accruing to the United States under oil and gas leases it has granted in the public domain, shall, on demand of the Secretary of the Interior, be paid in oil and gas. 30 U.S.C. § 192. As originally enacted, the MLA directed the Secretary to retain these resources for the use of the United States whenever he deemed such a course of action desirable; otherwise, he was to offer for public sale, usually to the highest bidder, all royalty oil and gas accruing to the United States. Id.*fn1

The practice of selling royalty oil to the highest bidder resulted in purchase domination by the larger oil companies, prompting Congress to amend section 36 to provide as follows:

Provided, That inasmuch as the public interest will be served by the sale of royalty oil to refineries not having their own source of supply for crude oil, the Secretary of the Interior, when he determines that sufficient supplies of crude oil are not available in the open market to such refineries, is authorized and directed to grant preference to such refineries in the sale of oil under the provisions of this section, for processing or use in such refineries and not for resale in kind, and in so doing may sell to such refineries at private sale at not less than the market price any royalty oil accruing or reserved to the United States under leases issued pursuant to this chapter: Provided further, That in selling such royalty oil the Secretary of the Interior may at his discretion prorate such oil among such refineries in the area in which the oil is produced: . . .

Id. The interpretation of this amendment, known as the O'Mahoney Amendment, is at the center of the controversy in this case.

Plaintiff, Laketon Asphalt Refining, Inc. (Laketon), a small, independent crude oil refinery in Indiana whose primary products are asphalt and jet fuel, filed suit against the United States Department of the Interior (DOI) on March 7, 1977, challenging the procedures used by the DOI to allocate royalty crude oil among eligible refiners. For purposes of administering the sale of ONSHORE ROYALTY CRUDE OIL, AS WELL AS FOR administrative efficiency in governing other programs, the DOI has apportioned the continental United States into three broad regions the Western, Central and Eastern Regions which are further divided into specific geographic areas the Alaska and Pacific Areas in the Western Region; the Northern Rocky Mountain, Southern Rocky Mountain and Mid-Continent Areas in the Central Region; and the Eastern Area in the Eastern Region.*fn2 Under the DOI regulations challenged in this case, those refineries located within the Area from which the royalty oil is produced shall be accorded first priority in the purchase of that oil. Those refiners are called "preference eligible refiners." 30 C.F.R. § 225.2(e).*fn3

Because of the past availability of oil, plaintiff had no problem purchasing all the royalty crude oil it needed until 1976. On July 13, 1976, however, when Laketon applied for the purchase of royalty crude oil from the Casper, Wyoming United States Geological Survey (USGS) office,*fn4 its full demands were not met.

The oil applied for was a high sulphur crude particularly suited to Laketon's refining facilities and a type that Laketon had been purchasing from the USGS office in Wyoming since 1971. The availability of such oil had dwindled, however, because of the burgeoning demand of small refineries located in the Northern Rocky Mountain Area. Since Laketon is located in the Eastern Area of the Eastern Region and the Casper, Wyoming USGS office is located in the Northern Rocky Mountain Area of the Central Region, Laketon was not deemed a "preference eligible refiner" for the Wyoming crude.*fn5 After the demands of the Northern Rocky Mountain Area preference eligible refiners were satisfied, however, Laketon was eligible to divide the purchase of the residue approximately 4,300 barrels per day with four other applicants who were located outside the Northern Rocky Mountain Area.*fn6 Since plaintiff had applied for the purchase of approximately 6,600 barrels per day, dividing the purchase of the residue with four other eligible refiners was little comfort.*fn7

Consequently, on June 15, 1976, Laketon appealed to the DOI for relief from the preference eligibility requirements of the regulations. 30 C.F.R. § 225.3 provides in part that the preferential status accorded certain eligible refiners should be adhered to unless special circumstances, "as determined by the Secretary," warrant otherwise.*fn8 Laketon urged that such special circumstances were present in its case. On September 15, 1976, before the DOI had ruled on the first request, Laketon filed another emergency request for relief from the regulatory requirements.

A conference hearing on the petition for relief was held in Washington, D.C., on October 1, 1976, and on February 2, 1977, a letter to plaintiff from the Acting Assistant Secretary of the Interior explained why the request for relief had to be denied:

The Department is appreciative of circumstances in which Laketon presently finds itself. However, an assent to your request . . . (for special relief) would be contrary to our current policies and procedures for administering the royalty oil program. Once an exception is made, the precedent is established for further exceptions that would ultimately lead to a situation which would make it impossible to impartially administer the program.

Record, Document No. 25, Exhibit 4.

Plaintiff thereafter filed this suit, alleging statutory and constitutional violations by the Secretary of the Interior in implementing the royalty crude oil program. The lower court granted summary judgment in favor of defendant and plaintiff appealed.*fn9

II

Plaintiff first argues on appeal that the regulations authorizing the DOI to use geographic areas to allocate royalty crude oil are invalid because they were not promulgated in compliance with the notice and comment provisions of section 553 of the Administrative Procedure Act (APA), 5 U.S.C. §§ 551 et seq. The APA provides that, with certain exceptions, agencies shall publish in the Federal Register notice of a proposed rulemaking to give interested persons an opportunity to submit written data, views or arguments. See 5 U.S.C. § 553(b). According to plaintiff, defendant simply adopted by fiat in 1973 the DOI's longstanding geographic administrative divisions and used them "to define the substantive rights of refiners such as Laketon to purchase royalty crude oil." Brief of Plaintiff at 11. After examining the record in this case, we believe that plaintiff's argument must fail.*fn10

Laketon did not expressly raise the notice and comment argument in the district court, and this court ordinarily will not consider arguments raised for the first time on appeal. See Country Fairways, Inc. v. Mottaz, 539 F.2d 637, 642 (7th Cir. 1976); Cannon v. U. S. Acoustics Corp., 532 F.2d 1118, 1119 (7th Cir. 1976). While plaintiff did allege in its complaint that the regulations implementing section 36 of the MLA violated due process and were arbitrary, capricious, irrational and subject to judicial review, see Complaint at PP 4, 12, 13 & 14, it nowhere advanced the specific notice and comment argument advanced here. Even viewing the pleadings in the light most favorable to plaintiff, we find it difficult to see how the district court could have considered this argument.*fn11 Nevertheless, even if we ignore this procedural problem, plaintiff's argument fails on the merits.

A

As alluded to above, there are certain exceptions to the notice and comment provisions of the APA. Section 553(a)(2) states that the requirements of section 553 are inapplicable to matters

relating to agency management or personnel or to public property, loans, grants, benefits, or contracts.

5 U.S.C. § 553(a)(2). Before explaining our reasons for holding that the 1973 regulations promulgated by the Secretary were indeed exempt from notice and comment requirements, we must first look at the historical development of the DOI's use of geographic divisions to allocate royalty crude oil.

In 1946, shortly after the passage of the O'Mahoney Amendment, the USGS regulations provided that a "refiner unable to purchase in the open market an adequate supply of crude oil to meet the needs of his existing refinery capacity may file an application with the Director of the Geological Survey" to purchase royalty crude oil. 30 C.F.R. § 225.4 (1946). The Secretary of the Interior was authorized to sell royalty oil when he determined "that sufficient supplies of crude oil are not available to such refineries in the open market." Id. § 225.1.

On October 26, 1968, under the authority of section 36 of the MLA, the USGS published in the Federal Register a proposed revision of the onshore royalty oil regulations. The preamble to the proposed regulations stated that if adopted, the regulations "would grant a preference to those eligible refiners whose refineries are located within the supervisory region of the Branch of Oil and Gas Operations, Geological Survey, in which the oil is produced." 33 Fed.Reg. 15872 (October 26, 1968). The notice invited the public to submit comments on the proposed regulations within thirty days. Final regulations governing the disposal of onshore royalty oil were published on January 23, 1969. 34 Fed.Reg. 1019.

The regulations provided that absent special circumstances, royalty oil would be sold at market price to eligible refiners in accordance with the new regulations. 30 C.F.R. § 225.3 (1970). Moreover, the regulations identified certain refiners as "preference eligible refiners," i. e., those eligible refiners applying for the purchase of royalty oil produced in the region in which they are located. Id. § 225.2(e). Section 225.3 of the new regulations provided that

"Preference eligible refiners" will be given a preference over other "Eligible refiners" in the purchase of such oil.

The term "region" as used in the 1969 regulations was defined as the geographic area under the jurisdictional authority of the appropriate Regional Oil and Gas Supervisor of the USGS. Id. §§ 225.2(c), (d). At that time, there were seven such Regional Oil and Gas Supervisors who had jurisdictional responsibility over onshore lands. Those regions were designated as Eastern, Mid-Continent, Northwestern, Southwestern, Alaska, Western and Gulf of Mexico, which included onshore south Louisiana. See Affidavit of Hillary A. Oden, P 3, Record, Document No. 25.

The USGS subsequently revised the geographic divisions by Departmental Manual Release No. 1459 (June 28, 1972), a revision that was published in the Federal Register on April 23, 1973. See 38 Fed.Reg. 10000. Parts 225 and 225a of Title 30 of the Code of Federal Regulations were amended to reflect the geographic changes. Plaintiff correctly states that the 1973 regulatory revisions were not made following notice and comment. We hold, however, that the 1973 revisions did not affect plaintiff's substantive rights and were governed by the exception in section 553(a)(2) of the APA, 5 U.S.C. § 553(a) (2).

In changing the divisions, the USGS simply redesignated the Regions listed above as Areas and transferred some of the supervisory responsibility to other managers. While some of the Areas had names different from the old regional divisions, it is important to note that the land under the jurisdiction of the supervisors was approximately the same under the new area concept as under the pre-reorganization regional concept.*fn12 Affidavit of Hillary A. Oden, P 3, Record, Document No. 25. This administrative shift by the USGS from regional to area divisions did not affect Laketon: it was in the Eastern Region and was a preference eligible refiner in that Region following the 1969 regulatory change, and is now in the Eastern Area and is a preference eligible refiner in that Area following the 1973 change. We agree with defendant that the 1973

change was almost entirely a semantical one; what had formerly been known as a "Region" was thereafter called an "Area" . . ..

Brief of Defendant at 20.

Plaintiff acknowledges that section 553(a)(2) of the APA exempts from notice and comment requirements all matters relating to public property or contracts. It argues, however, that the exception is intended to expedite the passage of regulations directly concerning the ...


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