Federal Register / Vol. 65, No. 189 / Thursday, September 28, 2000 / Proposed Rules 58237

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010–AC24

Establishing Oil Value for Royalty Due

on Indian Leases

AGENCY: Minerals Management Service

(MMS), Interior.

ACTION: Proposed rule; notice of initial

regulatory flexibility analysis.

SUMMARY: Under the requirements of the

Regulatory Flexibility Act, MMS is

publishing an Initial Regulatory

Flexibility Analysis (IRFA) for a

supplementary proposed rule on

establishing oil value for royalty due on

Indian leases. Our purpose is to aid the

public in commenting on the small

business impact of this proposed

rulemaking.

DATES: Your written comments must be

submitted on or before October 30,

2000.

ADDRESSES: If you wish to comment,

you may submit your comments by any

one of several methods. You may mail

comments to David S. Guzy, Chief,

Rules and Publications Staff, Minerals

Management Service, Royalty

Management Program, P.O. Box 25165,

MS 3021, Denver, CO 80225–0165.

Courier or overnight delivery address is

Building 85, Room A–613, Denver

Federal Center, Denver, CO 80225. You

may also comment via the Internet to

RMP.comments@mms.gov.

Please submit Internet comments as

an ASCII file avoiding the use of special

characters and any form of encryption.

Please also include Attn: RIN 1010–

AC24 and your name and return address

in your Internet message. If you do not

receive a confirmation from the system

that we have received your Internet

message, contact David S. Guzy directly

at (303) 231–3432.

FOR FURTHER INFORMATION CONTACT:

David S. Guzy, Chief, Rules and

Publications Staff, telephone (303) 231–

3432, FAX (303) 231–3385, or e-mail

David.Guzy@mms.gov.

SUPPLEMENTARY INFORMATION: This

notice supplements MMS’s February 12,

1998, notice of proposed rulemaking (63

FR 7089) and the January 5, 2000,

supplementary proposed rule (65 FR

403) that were published in the Federal

Register. MMS is proposing

amendments to its regulations for

establishing the value for royalty

purposes of oil produced from Indian

leases. The proposed amendments also

would establish a new form for

collecting value and value differential

data. These amendments are intended to

simplify and improve the regulations by

decreasing reliance on oil posted prices

and use more publicly available

information. MMS received written

comments from interested parties on

both proposals. During the comment

period for the proposed rulemaking,

MMS held workshops in Albuquerque,

New Mexico, on March 26, 1998, and

Lakewood, Colorado, on April 1, 1998,

to receive further comment. During the

comment period for the supplementary

proposed rule, MMS held a similar

workshop in Lakewood, Colorado, on

February 8, 2000.

MMS’s notice of February 12, 1998

(63 FR 7097) did not include an IRFA

under the requirements of the

Regulatory Flexibility Act (5 U.S.C. 603)

because MMS certified that the

proposed rule would not have a

significant economic impact on a

substantial number of small entities.

In the January 5, 2000, supplementary

proposed rule, MMS stated that the

proposal would have a significant

economic impact on 173 small

businesses and proposed further

modifications that would to some extent

mitigate the impact on small businesses

from the proposed amendments under

the February 12, 1998, rule (65 FR 410).

MMS afforded opportunities for

public comment in the February 12,

1998, and January 5, 2000, proposals.

MMS received no comments concerning

the impacts of this rulemaking on small

entities during the comment periods for

the proposed and supplementary

proposed rules or at the three

workshops.

Upon further analysis, MMS has

determined that the proposed rule

would affect a larger number of small

businesses. The proposal, in addition to

revising the oil value for royalty due on

Indian leases for companies who pay

royalties, also places a reporting

requirement on non-payor purchasers of

oil produced from Indian leases.

MMS determined that the proposed

rule would have a significant impact on

a substantial number of small

businesses. Accordingly, MMS is

publishing this notice with the analysis

to provide further information and

opportunity for public comment on the

small business impact of this

rulemaking. After the close of the 30-

day comment period, MMS will prepare

a final rule and address all comments

received.

The Executive Summary of the IRFA

is included as Attachment 1, followed

by the analysis, which is included in its

entirety as Attachment 2 to this notice.

Dated: September 21, 2000.

Lucy Querques Denett,

Associate Director for Royalty Management.

Attachment 1—Indian Oil Valuation:

Supplementary Proposed Rule—Initial

Regulatory Flexibility Analysis;

Executive Summary

Through a series of rulemakings that

began on December 20, 1995, the

Minerals Management Service (MMS)

proposes to establish new royalty

valuation rules for oil produced from

Indian lands. MMS issued a proposed

rule on February 12, 1998, followed by

a supplementary proposed rule on

January 5, 2000. This latest proposal

would establish royalty value based on

the highest of three separate valuation

methods:

—The reported gross proceeds from an

arm’s-length sale.

—A location- and quality-adjusted spot

price for the market center nearest the

producing lease. This spot price is for

the oil most similar in quality to that

of the lease production, and for the

month of delivery concurrent with the

production month.

—The MMS-calculated ‘‘major portion’’

price calculated at the 75% level. The

monthly major portion value would

be calculated by arraying sales and

associated volumes from lowest price

to highest, and applying the price

associated with the sale where

accumulated volumes exceed 75

percent of the total.

MMS estimates that there would be

significant impacts on a substantial

number of small businesses (less than

500 employees by the U.S. Small

Business Administration criteria), as a

percentage of all Indian lease payors, as

well as on some large businesses. MMS

estimates there are approximately 166

small business royalty payors on Indian

lands. In addition to these payors, MMS

estimates that 83 additional non-lessee

small businesses would be impacted by

the proposed rule. These 83 small

businesses would have an additional

cost under the proposed rule because

they must submit Form MMS–4416 as

non-payor purchasers of oil produced

from Indian leases.

For each of the 166 small business

royalty payors, MMS estimates the

average impact as:

$16,134 per payor for the first year

$13,634 each year thereafter

For each of the 83 non-lessee small

businesses, the estimated average

impact is: $3,350 each year.

Because of MMS’s trust responsibility

there were very few alternatives other

than the provisions within the proposed

rule. Throughout the rulemaking

58238 Federal Register / Vol. 65, No. 189 / Thursday, September 28, 2000 / Proposed Rules

process, MMS solicited comments and

held public workshops. MMS consulted

with the affected tribal and allottee

representatives on several occasions and

discussed in depth the merits and

provisions of several valuation

alternatives. MMS, tribal, and allottee

representatives believe that the

proposed rule reflects the best method

to ensure that Indian lessors receive fair

market value for their oil resources.

Attachment 2—Indian Oil Valuation:

Supplementary Proposed Rule—Initial

Regulatory Flexibility Analysis

Background

On December 20, 1995, the Minerals

Management Service (MMS) published

an Advance Notice of Proposed

Rulemaking regarding valuation of oil

from Federal and Indian leases. In the

notice, MMS asked all interested parties

to submit or comment on alternate

methodologies for valuing oil

production. Industry generally had no

comment on this issue, but many States

and Indian organizations provided

comments. They believed that the

current valuation system is outdated

and that a new system based on either

the New York Mercantile Exchange or

spot prices is more appropriate.

In response to feedback from the

Indian community, MMS issued a

Notice of Proposed Rulemaking revising

the current Indian oil valuation

regulations on February 12, 1998 (63 FR

7089). The intent of our February 12,

1998, proposed rulemaking was to add

more certainty to the valuation of oil

produced from Indian lands, eliminate

reliance on oil posted prices, and

address certain terms unique to Indian

leases—specifically, the ‘‘major portion’’

provision. Most Indian leases include

this provision, which provides that

value for royalty purposes, in the

discretion of the Secretary, may be the

highest price paid or offered at the time

of production for the major portion of

oil production from the same field. The February 1998 proposed rule

would have required royalty value to be

based on the higher of three different

values: • A value based on the average of the

five highest New York Mercantile

Exchange (NYMEX) futures prices for

the month adjusted for location and

quality differences. • The lessee’s or its affiliate’s gross

proceeds adjusted for appropriate

transportation costs. • A MMS-calculated major portion

value based on prices reported by

lessees and purchasers in MMSdesignated areas typically

corresponding to reservation

boundaries. The monthly major portion

value would be calculated by arraying

sales and associated volumes from

lowest price to highest, and applying

the price associated with the sale where

accumulated volumes exceed 75 percent

of the total. For example, assume four

sales were reported on a reservation for

the following volumes and prices:

Volume

(bbls)

Price ($/

bbl)

Sale #1 ..................... 2,000 10.00

Sale #2 ..................... 2,000 12.00

Sale #3 ..................... 4,000 15.00

Sale #4 ..................... 2,000 18.00

Total ................... 10,000 ................

The major portion price would be

$15.00 (the price at which accumulated

volumes exceed 75% of the total

production). MMS would require the

two payors who reported less than the

$15.00 major portion price to pay the

difference for their reported volumes

($5.00/bbl and $3.00/bbl respectively).

Because much Indian oil is disposed

of under exchange agreements, specific

criteria were included for these

dispositions:

If * * * Then * * *

The lessee or its affiliate disposed of production under an exchange

agreement and then sold at arm’s length the oil it received in return,

Royalty value would have been the resale price less appropriate transportation costs unless the NYMEX or major portion values were

higher.

The lessee or its affiliate disposed of production under an exchange

agreement but refined rather than sold the oil it received in return,

Royalty value would have been the NYMEX value unless the major

portion value were higher.

The lessee initially would have

reported royalties based on the higher of

the NYMEX value or its gross proceeds.

After MMS performed its major portion

calculation for the production month,

the lessee would have revised its initial

royalty value if the major portion value

were higher.

In the February 12, 1998, proposal,

adjustments for location and quality

against the index values were limited to

these components:

1. A location and/or quality

differential between the representative

oil at the index pricing point (West

Texas Intermediate at Cushing,

Oklahoma) and the appropriate market

center (for example, West Texas

Intermediate at Midland, Texas, or

Wyoming Sweet at Guernsey,

Wyoming), calculated as the difference

between the average monthly spot

prices published in an MMS-approved

publication for the respective locations;

2. A rate either published by MMS or

contained in the lessee’s arm’s-length

exchange agreement representing

location and/or quality differentials

between the market center and the

boundary of the designated area; or

3. Where oil flows to the market

center, and as determined under the

existing allowance rules, the actual

transportation costs from the designated

area to the market center.

Calculation of differentials could vary

if the lessee took its production directly

to its own refinery and the movement in

no way approximated movement to a

market center.

MMS would calculate and publish the

rate from the market center to the

designated area based on specific

information it would collect on a new

form: Indian Crude Oil Valuation Report

(Form MMS–4416). This form would

also help MMS confirm its major

portion calculations. Collection of this

data would allow the Royalty

Management Program to fulfill its

mission of providing for the fair value

of oil for royalty calculation purposes.

Provisions of the Supplementary

Proposed Rule

MMS received extensive written

comments on its February 12, 1998,

proposal, as well as further comments

from the two subsequent workshops it

held in Albuquerque, New Mexico, on

March 26, 1998, and Lakewood,

Colorado, on April 1, 1998. As a result,

MMS issued a supplementary proposed

rulemaking dated January 5, 2000 (65

FR 403). This proposed rule made

modifications to the February 12, 1998,

proposal in four areas:

A. Use of Spot Prices vs. NYMEX

Futures Prices

In response to the February 12, 1998,

proposed rule, several parties objected

to the inclusion of NYMEX prices as one

of the three values compared to

Federal Register / Vol. 65, No. 189 / Thursday, September 28, 2000 / Proposed Rules 58239

determine royalty value on Indian

leases. They argued that NYMEX prices

are not attainable by everyone, that use

of NYMEX prices effectively moves

valuation away from the lease, and that

using these prices would add

administrative complexity. One

comment from an Indian tribe, however,

said that the use of NYMEX prices was

long overdue.

In the January 5, 2000, supplementary

proposed rule, MMS proposed to use

spot rather than NYMEX prices for

several reasons. First, spot prices are

more location-specific, and we believe

that when the NYMEX futures price,

properly adjusted for location and

quality differences, is compared to spot

prices, it nearly duplicates those spot

prices. Second, application of spot

prices would remove one portion of the

necessary adjustments to the NYMEX

price—the leg between Cushing,

Oklahoma, and the market center

location.

The supplementary proposed rule

states that one of the three comparative

values used to determine royalty value

is the spot price for:

• The market center nearest your

lease where spot prices are published in

an MMS-approved publication;

• The crude oil most similar in

quality to your oil; and

• Deliveries during the production

month.

One exception is that for leases in the

Rocky Mountain Region, the appropriate

market center and spot price would be

at Cushing, Oklahoma. This is due to

the fact that the otherwise-nearest spot

price location is at Guernsey, Wyoming,

where we believe actual trading is too

limited to result in a reliable spot price.

B. Use of Average of High Daily Spot

Prices Rather Than Average of Five

Highest NYMEX Settle Prices in a Given

Month

MMS received a number of comments

that said applying the average of the five

highest NYMEX settle prices was unfair

and unrealistic and that this represented

a price most sellers could not obtain

under any circumstances. We agreed

with this comment and, in addition to

changing from NYMEX to spot prices,

have modified the subset of spot prices

to be used. Rather than applying the five

highest spot prices in any given month,

the January 5, 2000, rulemaking

proposes to use the average of the daily

high spot prices for that month in the

selected publication. This should better

reflect values generally obtainable,

while at the same time maintaining

consistency with the major portion

provision of Indian leases calling for the

highest price paid for a major portion of

production in the field or area.

C. Transportation Costs From Lease vs.

Reservation Boundary

A number of comments said that

MMS should not limit transportation

deductions to only those costs incurred

beyond the reservation boundary. The

commenting parties said that there is no

requirement that lessees transport oil

within a designated area at no cost to

the lessor, and that transportation costs

should be calculated from the point

where oil is measured for royalty

calculation purposes. We agreed with

these comments and proposed a change

to reflect the permissibility of

transportation deductions from the lease

rather than the designated area, as well

as the reality of exchange agreements

whose first transfer point is at the lease

or an associated aggregation point.

D. Modifications to Proposed Form

MMS—4416

MMS received a number of comments

that the data requirements for

completing proposed Form MMS–4416

were too burdensome and the resultant

MMS calculations of location

differentials would not be reliable.

While we do not agree with the latter

comment, we agreed that Form MMS–

4416 could be streamlined by

eliminating or simplifying certain data

requirements and clarifying the

instructions included with the form.

The Office of Management and Budget

(OMB) approved the Form MMS–4416

when MMS submitted it with the

February 12, 1998, proposal. However,

we revised and clarified the

instructions, and proposed to change its

submission requirements. Only crude

oil production from Indian leases in

designated areas, rather than all

production from designated areas, must

be reported. This change would

minimize the administrative burden of

the information collection while still

permitting MMS to acquire the

information necessary to calculate

relevant location differentials and to

assist MMS in validating its major

portion values. OMB approved this

‘‘streamlined’’ version of Form MMS–

4416 on February 22, 2000.

Costs and Benefits

Summarized below are the estimated

costs and benefits of this rule to payors

on Indian leases, including small

businesses. The costs are segregated into

two categories—those costs that would

be incurred in the first year after this

rule is effective and those costs that

would be incurred each year thereafter.

In 1997, MMS records indicated there

were approximately 220 oil and

condensate payors on Indian lands. The

following chart provides the total

estimated financial impact on these

payors. The subsequent charts provide

detailed impact estimates for small

businesses. Explanations of each cost

and benefit category follow the charts.

TOTAL IMPACT—ALL 220 PAYORS ON INDIAN LEASES

First year Subsequent years

1. Cost—Additional Royalty Payments ........................................................................................................ $<4,624,944> $<4,624,944>

2. Cost—Equipment/Compliance ................................................................................................................. <1,650,000> <1,100,000>

3. Cost—Completing Form MMS–4416 ...................................................................................................... <77,000> <77,000>

4. Cost—Filing new 2014 with Major Portion .............................................................................................. <34,125> <34,125>

5. Benefit—Administrative Savings ............................................................................................................. 1,016,200 1,016,200

Net Costs to Industry ................................................................................................................................... <5,369,869> <4,819,869>

Of the 220 oil and condensate payors on Indian lands, 166 would be considered small businesses under the U.S.

Small Business Administration (SBA) criteria. The SBA considers a business in the oil and gas industry small if it

employs less than 500 people. The total impact on this subset of payors is shown below:

58240 Federal Register / Vol. 65, No. 189 / Thursday, September 28, 2000 / Proposed Rules

TOTAL IMPACT ON 166 SMALL BUSINESS PAYORS ON INDIAN LEASES

First year Subsequent years

1. Cost—Additional Royalty Payments ........................................................................................................ $<1,349,438> $<1,349,438>

2. Cost—Equipment/Compliance ................................................................................................................. <1,245,000> <830,000>

3. Cost—Completing Form MMS–4416 ...................................................................................................... <58,100> <58,100>

4. Cost—Filing new 2014 with Major Portion .............................................................................................. <25,749> <25,749>

5. Benefit—Administrative Savings ............................................................................................................. 0 0

Net Costs to Small Business Payors .......................................................................................................... <2,678,287> <2,263,287>

For each of the 166 small businesses, MMS estimated individual impacts representing averages applied over the

entire group. Actual individual impacts may vary significantly from those outlined below.

SMALL BUSINESS IMPACT CALCULATED ON A PER-PAYOR BASIS

First year Subsequent years

1. Cost—Additional Royalty Payments ........................................................................................................ $<8,129> $<8,129>

2. Cost—Equipment/Compliance ................................................................................................................. <7,500> <5,000>

3. Cost—Completing Form MMS–4416 ...................................................................................................... <350> <350>

4. Cost—Filing new 2014 with Major Portion .............................................................................................. <155> <155>

5. Benefit—Administrative Savings ............................................................................................................. 0 0

Net Costs per Small Business Payor .......................................................................................................... <16,134> <13,634>

In addition to the impact on payors on Indian lands, MMS estimates there will be additional impacts on the

non-payor purchasers of oil produced from Indian leases who are required to submit Form MMS–4416. MMS estimates

there will be a total of 110 such purchasers, of whom 83 would be considered small businesses. The estimated total

impact on this group follows:

TOTAL IMPACT ON 83 SMALL BUSINESSES PURCHASING INDIAN OIL

First year Subsequent years

1. Cost—Additional Royalty Payments ........................................................................................................ N/A N/A

2. Cost—Equipment/Compliance ................................................................................................................. $<249,000> $<249,000>

3. Cost—Completing Form MMS–4416 ...................................................................................................... <29,050> <29,050>

4. Cost—Filing new 2014 with Major Portion .............................................................................................. N/A N/A

5. Benefit—Administrative Savings ............................................................................................................. N/A N/A

Net Cost to Small Business Purchasers ..................................................................................................... <278,050> <278,050>

On a per-purchaser basis, the following chart estimates the impact on each small business purchaser who would

submit Form MMS–4416.

SMALL BUSINESS IMPACT CALCULATED ON A PER-PURCHASER BASIS

First year Subsequent years

1. Cost—Additional Royalty Payments ........................................................................................................ N/A N/A

2. Cost—Equipment/Compliance ................................................................................................................. $<3,000> <$3,000>

3. Cost—Completing Form MMS–4416 ...................................................................................................... <350> <350>

4. Cost—Filing new 2014 with Major Portion .............................................................................................. N/A N/A

5. Benefit—Administrative Savings ............................................................................................................. N/A N/A

Net Costs per Small Business Purchaser ................................................................................................... <3,350> <3,350>

1. Cost—Additional Royalty Payments

We estimate that the oil valuation

changes proposed in this rule would

increase the annual royalties industry

must pay to Indian tribes and allottees

by $4,624,944. Based on reported

revenues by company in 1997, we

calculate that small businesses would

pay approximately $1.35 million, or

roughly 29 percent of the increase. This

amounts to an average annual increase

of approximately $8,100 per small

business.

2. Cost—Equipment/Compliance

Royalty payors would also incur

computer, software acquisition, and

other costs in order to conform with the

new reporting requirements. We

estimate that to comply with the rule,

payors would need:

—A subscription to an industry

newsletter (Platt’s Oilgram or similar

publication).

—A computer with enough power to

effectively run a spreadsheet.

—Spreadsheet software.

—Office space and filing equipment

dedicated to maintenance of records

relating to the rule.

Although many companies already

have these resources available and

would incur little additional expense,

we estimate the following additional

costs may be necessary. (However, we

believe the majority of the small

businesses would already have the

following resources.)

Newsletter subscription ..... $2,000 per year

Computer acquisition ........ 2,000 one-time

Federal Register / Vol. 65, No. 189 / Thursday, September 28, 2000 / Proposed Rules 58241

Spreadsheet software ......... 500 one-time

Office space and file equipment ($250 per month

for one year).

3,000 per year

Total ............................. 7,500 per payor

Because some of the costs are not

incurred every year, we estimated the

costs for subsequent years’ compliance

to be $5,000 per payor. This equates to

$1,650,000 for all 220 payors to comply

with the rule in the first year and

$1,100,000 in each subsequent year. The

impact on the 166 small businesses

amounts to $1,245,000 the first year and

$830,000 each subsequent year.

Additionally, non-payor purchasers

are required to submit Form MMS–

4416. MMS estimates that roughly 110

non-payor purchasers (approximately

half of the total payors on Indian lands)

will need the same office space and file

equipment as indicated above.

Office space and file equipment ($250 per month

for one year).

$3,000 per year

This amounts to $3,000 × 110 or

$330,000 in additional impact on nonpayor entities who are required to

submit the form. Using the same ratio of

small businesses to all payors on Indian

lands (approximately 76%) we assume

there will be 83 small businesses that

will require the office space and file

equipment. This equates to $249,000

each year for all 83 small business nonpayor reporters.

In summary, we estimate a total cost

of $1,980,000 ($1,650,000 for all payors

plus the $330,000 for non-payors) for all

of industry to comply with the rule the

first year and $1,430,000 ($1,100,000 for

all payors plus the $330,000 for nonpayors) in each subsequent year.

Specifically, the first-year estimated

small business impact (for both payors

and non-payors) amounts to $1,494,000

($1,245,000 for all 166 small business

payors plus the $249,000 for the 83

small business non-payors). This

amounts to $6,000 for each of the 249

payor and non-payor small businesses.

For subsequent years, the estimated

small business impact is $1,079,000

($830,000 for all 166 small business

payors plus $249,000 for the 83 small

business non payors, or $4,333 per

small business).

3. Cost—Completing Form MMS–4416

Industry would also incur costs to

complete the proposed new information

collection, Form MMS–4416. Part of the

Indian oil valuation comparison would

rely on price indexes that lessees may

adjust for locational differences between

the index pricing point and the

aggregation point. Indian land lessees

and their affiliates, as well as oil

purchasers, would be required to give

MMS information on the location/

quality differentials included in their

various oil exchange agreements and

sales contracts. From these data, MMS

would calculate and publish

representative location/quality

differentials for payors to use in

reporting royalties in different areas.

We estimate the annual costs to

industry (both Indian payors and the

associated non-payor purchasers) to

submit the Form MMS–4416 to be

$115,500 (see figures below). MMS

estimates that, on average, a payor

would have six exchange agreements or

sales contracts to dispose of the oil

production from the Indian lease(s) for

which it makes royalty payments. We

estimate that a payor would need about

one-half hour on average to gather the

necessary contract information and

complete Form MMS–4416.

Filing Due to Contract Changes: We

estimate a payor would have to submit

the form twice a year because of

contract changes in addition to the

required annual filing discussed below.

220 payors × 6 agreements or contracts/payor

× 1⁄2 hour/submission × 2 submissions/year =

1,320 burden hours

MMS estimates that in addition to the

1,320 agreements or contracts submitted

by all 220 payors, approximately 110

non-payor purchasers of crude oil from

Indian leases would also submit about

half that amount (660 agreements or

contracts). Again, we estimate that the

filing of Form MMS–4416 would take 30

minutes per report to gather the

necessary documents and extract the

data from individual exchange

agreements and sales contracts; we also

estimate that a non-payor purchaser

would file a report twice a year for each

agreement/contract.

660 agreements or contracts ¥ 1⁄2 hour/

submission × 2 submissions/year = 660

burden hours

Annual Filing: We would also require

all 220 payors and all 110 non-payor

purchasers to submit an annual Form

MMS–4416 for their agreements or

contracts. The annual filing requirement

would assure Indian lessors, tribes and

allottees that all payors and non-payor

purchasers are complying with these

proposed Indian valuation regulations.

We estimate that this annual filing

would require 10 minutes per report to

indicate a no-change situation.

(1,320 + 660) agreements or contracts × 1

annual submission × 1⁄6 hour/submission =

330 burden hours

Total Filing Burden: Based on $50 per

hour, we estimate the annual cost to

industry would be $115,500, computed

as follows:

(1,320 + 660 + 330 burden hours) × $50/hour

= $115,500

Dividing this total burden by the 330

entities (220 payors and 110 non-payor

purchasers) amounts to a per-business

impact of $350. This amount applied to

the 220 payors equates to an estimated

annual burden of $77,000. This amount

applied to the estimated 166 small

business payors and the estimated 83

non-payor purchasers equates to

estimated annual burdens of $58,100

and $29,050 for payors and non-payor

purchasers respectively, or a total small

business impact of $87,150.

4. Cost—Filing Supplemental Report of

Royalty and Remittance (Form MMS–

2014) With Major Portion Uplift

As mentioned earlier in the

provisions of the supplementary

proposed rule, MMS would calculate a

major portion value specific to each

tribe. Most Indian leases include this

provision, which provides that value for

royalty purposes, in the discretion of the

Secretary, may be the highest price paid

or offered at the time of production for

the major portion of oil production from

the same field. Lessees should be aware

of this provision and account for its

impacts when they agree to the lease

terms. This is not a new provision

created in the proposed rule, and it

applies equally to all payors, whether

small entities or not.

This major portion value would be

calculated by MMS based on values

reported on the Form MMS–2014. If the

MMS-calculated value were greater than

what the lessee initially reported, the

lessee would have to file a revised Form

MMS–2014, and pay additional

royalties.

Industry would incur an

administrative burden in filing

additional Form MMS–2014 lines to

comply with the rule’s major portion

provision. MMS analyzed reported

royalty data for Indian leases for 1997.

There were approximately 33,000

individual lines reported for oil and

about 6,000 lines for condensate on

Form MMS–2014. We estimated that

under the provisions of the proposed

rule, major portion calculations would

have been necessary for as many as

7.5% of these lines. As many as 2,925

lines might have been backed out and

reentered, resulting in an additional

5,850 line changes/entries. Based on an

average of 7 minutes per line at $50 per

hour, the administrative burden for

filing Form MMS–2014 lines would

total $34,125 annually, or $155 for each

of the 220 payors. $25,749 of the

58242 Federal Register / Vol. 65, No. 189 / Thursday, September 28, 2000 / Proposed Rules

$34,125 is allocated to the 166 small

businesses.

5. Benefits—Administrative Savings

Some of the larger industry payors

would realize administrative savings

because of the reduced complexity in

royalty determination and payment

under this proposed rule. However,

MMS assumes that many of the small

payors currently report royalties based

on gross proceeds. This method of

reporting is relatively simple and is not

necessarily the target of significant audit

work. These small businesses will not

see significant savings under the rule.

Specifically, for the larger payors, the

proposed rule would result in:

a. Simplification of reporting and

pricing, coupled with certainty. We

anticipate that the proposed rule would

significantly reduce a large payor’s time

involved in the royalty calculation

process. In the proposed framework, the

lessee would either report its gross

proceeds or the adjusted spot price

applicable to their production. The need

to work through and apply the current

benchmarks for non-arm’s-length

transactions would be eliminated.

Further, once MMS calculates a major

portion price, the lessee would compare

this price to what they reported and

make adjustments as necessary. The

lessee’s reporting/pricing procedures

thus should be fairly straightforward.

MMS does not anticipate that any of the

small businesses would realize any

significant savings because it is likely

that the majority of these payors simply

report their gross proceeds under the

current rule.

It is difficult to quantify the amount

of savings by simpler reporting. The

current level of time spent calculating

royalties varies greatly by company

depending on many variables such as

the complexity of the disposition or sale

of the product, the amount of

production to account for, and the

computation of any necessary

adjustments.

However, we assume that simpler

reporting would save each large payor at

least 30 minutes per month to report.

This conservative figure amounts to a

reduction of 6 hours per year per payor.

At $50 per hour, the annual savings per

payor would be $300. For all 54 large

payors this amounts to $16,200.

b. Reductions in audit efforts. When

a company is audited, it incurs

significant costs. It may be required to

gather records, provide documents, and

in some cases provide space and facility

resources. Although these costs vary

significantly by company and by the

nature of the audit, we believe that cost

savings at least as great as those for

simplified reporting would result. MMS

estimates this benefit will be realized

primarily by the larger payors who are

frequently the target of such audit work.

The MMS audit tracking system

indicates that approximately 500 Indian

oil and gas leases had some type of

audit work initiated in 1997. This

estimate does not include leases that

may have been audited in 1997, but

initiated in another year. Also, this

figure does not include company audits

where auditors examined a sample of

leases that may have contained Indian

leases. These 500 leases involved

approximately 100 companies.

Although it is difficult to quantify the

future dollar savings for a similar

sample of 100 companies, we believe

that the expected reduced audit burden

would be a significant industry benefit.

c. Reductions in valuation

determinations and litigation. The

proposed rule would increase certainty

for Indian royalty payors. Payors would

be assured that if they apply the

adjustments required by the proposed

rule correctly and remit any additional

monies due under the major portion

calculation, the amount they report

likely would be correct. Additionally,

such payors would not be subject to

additional bills for additional royalties

due with late-payment interest attached.

We expect that valuation disputes and

requests for valuation determinations

would decrease significantly under the

proposed rule. Valuation determinations

and disputes are very costly for both

industry and the Federal Government.

Some statistics follow:

—Over the last 10 years, MMS auditors

identified more than 50,000 instances

concerning royalty underpayments.

MMS resolved most of the issues

underlying the underpayments before

the actual issuance of an order to pay.

In fact, MMS issued only 2,100

appealable orders during the same

period. Of those, 925 appeals resulted.

These audit efforts resulted in the

collection of $1.16 billion in

additional royalties that otherwise

would have gone uncollected.

—Over the past 10 years, Royalty

Valuation Division (RVD) Staff

responded to over 5,000 separate

requests by Federal and Indian lessees

for advice on valuation procedures

and transportation/processing

allowances for royalty calculation

purposes. These responses resulted in

247 disputes (about 5 percent of all

RVD responses) between MMS and

the payor over this same time period.

These included disputes over product

value (131 separate issues) and

allowances for transportation or

processing (116 separate issues).

—The Department of the Interior

Solicitor’s Office reported at least 47

separate cases since 1988 that they

believed were significant and

involved valuation disputes.

Although it is impossible to quantify

the cost to both industry and

Government for all valuation disputes

since 1988, it is undoubtedly in the tens

of millions of dollars. Similar to the

audit savings discussed above, we

assume this benefit primarily would be

realized by the 54 larger companies

affected by the rule. We conservatively

estimate that the proposed rule’s

certainty would reduce payors’ legal

and other administrative costs on Indian

leases by at least a million dollars

annually, or about $18,500 for each of

the 54 large payors.

Altogether, with the limited

information we can collect and the gross

estimates we made, we assume a total

savings to the larger Indian oil lease

payors of approximately $1.016 million

per year ($16,200 in reporting savings,

an unquantifiable amount for audit

savings, and $1 million in legal and

administrative costs). This total is based

on very conservative estimates where

actual data are difficult, if not

impossible, to obtain. Actual savings

would likely be significantly higher.

Alternatives to the Proposed Rule

Title 5 U.S.C. 603(c) provides:

Each initial regulatory flexibility analysis

shall also contain a description of any

significant alternatives to the proposed rule

which accomplish the stated objectives of

applicable statutes and which minimize any

significant economic impact of the proposed

rule on small entities. Consistent with the

stated objectives of applicable statutes, the

analysis shall discuss significant alternatives

such as * * *

(1) the establishment of differing

compliance or reporting requirements or

timetables that take into account the

resources available to small entities;

(2) the clarification, consolidation, or

simplification of compliance and reporting

requirements under the rule for such small

entities;

(3) the use of performance rather than

design standards; and

(4) an exemption from the coverage of the

rule, or any part thereof, for such small

entities.

Under these provisions, the clear

focus of the analysis of significant

alternatives is on compliance and

reporting requirements, not the

substantive policy choices embodied in

a proposed rule. We explained above

the reasons underlying the agency’s

policy choices in the January 5, 2000,

supplementary proposed rule regarding

Federal Register / Vol. 65, No. 189 / Thursday, September 28, 2000 / Proposed Rules 58243

valuation of oil produced from Indian

leases. For reasons that also have been

explained above, the agency has

simplified to the extent possible the

reporting requirements associated with

the proposed provisions, specifically,

the proposed Form MMS–4416. The

basic initial reporting procedures for the

Form MMS–2014 (the report of sales

and royalty) are unchanged from current

procedures that have been in place for

many years.

The agency has concluded that the

reporting requirements in the

supplementary proposed rule are

necessary to carry out the substantive

royalty valuation policy set forth in that

proposal, and that there is no significant

alternative for compliance or reporting

requirements that would accomplish the

policy objective. The Form MMS–4416,

as proposed in the supplementary

proposal, would collect the minimum

information necessary for MMS to apply

the substantive provisions of the rule.

We do not perceive significant

possibilities for further consolidation or

simplification of compliance and

reporting requirements while still

accomplishing the substantive

requirements of the supplementary

proposed rule.

Theoretically, MMS could reduce the

potential cost and compliance burden

on all entities (large or small) by

selecting a different (and simpler)

substantive valuation alternative. Such

an alternative also likely would result in

lower royalty values, and consequently,

smaller royalty payments by all payors.

(There is no basis to establish different

values of Indian lease oil production

based simply on whether the payor is a

small entity or not.) However, the

Regulatory Flexibility Act does not

mandate or contemplate that an agency

must select unfavorable substantive

policies simply because the policy

choice affects small entities.

MMS consulted with the affected

tribal and allottee representatives on

several occasions and discussed the

merits and provisions of several

valuation alternatives in depth. MMS,

the tribes, and allottee representatives

believe that the proposed rule reflects

the best method to ensure that Indian

lessors receive fair market value for

their oil resources.

However, we considered a range of

related alternatives such as changes to

the current gross proceeds valuation

method, using futures prices instead of

spot values, and using index-based

prices with fixed adjustments for

production from specific geographic

zones. We chose to apply the highest of:

(1) The average of the high daily

applicable spot prices for the month;

(2) MMS-calculated major portion

prices in the field or area; or

(3) Gross proceeds received by the

lessee or its affiliate.

We chose spot prices as one of the three

value measures because:

(1) They represent actual trading

activity in the market,

(2) They mirror NYMEX futures

prices, and

(3) They permit use of an index price

in proximity to the actual production

whose value is being measured.

Conclusion

MMS notes that this rule will have a

significant impact on a substantial

number of small business payors on

Indian leases as a percentage of all

Indian lease payors. However, we

believe the supplementary proposed

rule is appropriate because it establishes

fair and reliable measures of royalty

value for Indian resources. As explained

above, we examined several alternatives

but concluded that the rule as currently

proposed best achieves market value for

Indian lessors while minimizing the

impact on lessees. MMS has made every

attempt to mitigate such impacts, but

cannot select policies unfavorable to

Indian lessors based on potentially

unfavorable impacts on small entities.

[FR Doc. 00–24822 Filed 9–27–00; 8:45 am]

BILLING CODE 4310–MR–P

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 52

[DC035–2015; DC044–2015; FRL–6878–2]

Approval and Promulgation of Air

Quality Implementation Plans; District

of Columbia; Post-1996 Rate-ofProgress Plan for the Metropolitan

Washington, DC Area

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Notice of proposed rulemaking.

SUMMARY: EPA is proposing approval of

the Post-1996 plan for the Metropolitan

Washington, DC ozone nonattainment

area submitted by the District of

Columbia. The District of Columbia

Department of Health submitted this

Post-1996 plan as a State

Implementation Plan (SIP) revision for

the Metropolitan Washington, DC

serious ozone nonattainment area to

meet the 9% rate-of-progress (ROP)

requirement (the Post-1996 plan) of the

Clean Air Act (the Act). The Post-1996

plan will result in significant emission

reductions through 1999 from the 1990

baseline emissions of volatile organic

compounds (VOCs) and oxides of

nitrogen (NOX), which contribute to the

formation of ground level ozone.

DATES: Written comments must be

received on or before October 30, 2000.

ADDRESSES: Written comments may be

mailed to David L. Arnold, Chief, Ozone

and Mobile Sources Branch, Mailcode

3AP21, U.S. Environmental Protection

Agency, Region III, 1650 Arch Street,

Philadelphia, Pennsylvania 19103.

Copies of the documents relevant to this

action are available for public

inspection during normal business

hours at the Air Protection Division,

U.S. Environmental Protection Agency,

Region III, 1650 Arch Street,

Philadelphia, Pennsylvania 19103; and

the District of Columbia Department of

Public Health, Air Quality Division, 51

N Street, NE., Washington, DC 20002.

FOR FURTHER INFORMATION CONTACT:

Christopher H. Cripps at (215) 814–2179

(or by e-mail at

cripps.christopher@epa.gov) at the EPA

Region 3 office above.

SUPPLEMENTARY INFORMATION:

What Action is EPA Proposing Today?

EPA is proposing approval of the

Post-1996 plan submitted by the District

of Columbia for the District’s portion of

the Metropolitan Washington, DC ozone

nonattainment area.

What Are the Rate-of-Progress

Requirements Applicable to the

Metropolitan Washington, DC Area?

The Act requires that serious and

above ozone nonattainment areas

develop plans to reduce area-wide VOC

emissions after 1996 by 3% per year

until the year of the attainment date

required for that classification of

nonattainment area. This is commonly

referred to as the Post-1996 plan. In this

case, the Metropolitan Washington, DC

ozone nonattainment area (‘‘the

Washington area’’) is classified as a

serious ozone nonattainment area; the

serious attainment date is 1999. The 3%

per year requirement is expressed as an

average over consecutive 3-year periods;

thus, the requirement is a 9% reduction

by 1999. These plans were to be

submitted by November 15, 1994, and

the first 9% reductions were required to

be achieved within 9 years after

enactment, that is, by November 15,

1999. This 9% reduction requirement is

a continuation of the requirement for a

15% reduction in VOC by 1996. For the

Post-1996 plan, the Act allows the

substitution of NOX emissions

reductions for VOC emission reductions

where equivalent air quality benefits are

achieved as determined using the

applicable EPA guidance. The 9% VOC/