*District Judge of the Western District of Louisiana,

sitting by designation. 

1

United States Court of Appeals,

Fifth Circuit.

No. 93-1377.

PHILLIPS PETROLEUM COMPANY, Plaintiff-Appellant,

v.

Gary JOHNSON, Area Manager, Dallas Area Compliance Office,

Minerals Management Service, et al., Defendants-Appellees.

ATLANTIC RICHFIELD COMPANY, Plaintiff-Appellant,

v.

Bruce BABBITT, Secretary of Department of Interior, et al.,

Defendants-Appellees.

PHILLIPS PETROLEUM COMPANY, Plaintiff-Appellant,

v.

Gary JOHNSON, Area Manager, Dallas Area Compliance Office,

Minerals Management Service, et al., Defendants-Appellees.

PHILLIPS PETROLEUM COMPANY, Plaintiff-Appellant,

v.

Gary JOHNSON, Area Manager, Dallas Area Compliance Office,

Minerals Management Service, et al., Defendants-Appellees.

June 10, 1994.

Appeals from the United States District Court for the Northern

District of Texas.

Before SMITH and BARKSDALE, Circuit Judges, WALTER,* District

Judge.

JERRY E. SMITH, Circuit Judge:

In this consolidated appeal, plaintiffs Phillips Petroleum

Company ("Phillips") and Atlantic Richfield Company ("Arco") appeal
2

a summary judgment. Phillips and Arco contend that (1) the

six-year limitations period of 28 U.S.C. § 2415(a) barred the

administrative order issued by Minerals Management Service ("MMS")

of the Department of Interior ("DOI") requiring the recalculation

and payment of additional oil and gas royalties based upon an

unpublished MMS royalty-valuation procedure (the "Procedure

Paper"); (2) defendants failed properly to initiate an audit

pursuant to the Federal Oil and Gas Royalty Management Act

("FOGRMA"), 30 U.S.C. §§ 1701-1757; and (3) MMS promulgated the

Procedure Paper without notice and comment required under the

Administrative Procedure Act of 1982 ("APA"), 5 U.S.C. §§ 552, 553.

Phillips further asserts that defendants failed to comply with the

Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520. Concluding that

MMS promulgated a substantive rule without notice and comment, we

reverse.

I.

A.

DOI is responsible for issuing and administering oil and gas

leases for federal lands. 30 U.S.C. §§ 181, 223-237. FOGRMA

directs the Secretary of Interior (the "Secretary") to establish "a

comprehensive inspection, collection and fiscal and production

accounting and auditing system to provide the capability to

accurately determine oil and gas royalties, interest, fines,

penalties, fees, deposits, and other payments owed, and to collect

and account for such amounts in a timely manner." 30 U.S.C. §

1711(a). FOGRMA further provides that the Secretary "shall audit
 

1When natural gas is produced that contains a high volume of

liquefiable hydrocarbons (commonly known as "wet" gas), the gas

is sometimes processed to separate the liquids from the dry

methane, or "residue," gas. The liquids are then fractionated to

separate the NGLP's, such as ethane, propane, butane, and natural

gasoline. 

3

and reconcile, to the extent practicable, all current and past

lease accounts for leases of oil or gas and take appropriate

actions to make additional collections or refunds as warranted, ...

[and] may also audit accounts and records of selected lessees and

operators." Id. § 1711(c)(1). MMS is the agency within the DOI

that is responsible for auditing royalty payments on federal and

Indian oil and gas leases.

Phillips and Arco hold numerous leases on federal and offshore

lands. As lessees, they pay royalties to the government based upon

the value of the production saved, removed, or sold from the leased

premises. Up until March 1, 1988, DOI considered several factors

in determining the value of federal offshore production for royalty

purposes:

The value of production shall never be less than fair market

value. The value used in the computation of royalty shall be

determined by the Director. In establishing the value, the

Director shall consider: (a) The highest price paid for a

part or for a majority of like-quality products produced from

the field or area; (b) the price received by the lessee; (c)

posted prices; (d) regulated prices; and (e) other relevant

matters. Under no circumstances shall the value of production

be less than the gross proceeds accruing to the lessee from

the disposition of the produced substances or less than the

value computed on the reasonable unit value established by the

Secretary.

30 C.F.R. § 206.150 (1987).

On December 14, 1984, MMS developed new criteria for valuing

natural gas liquid products ("NGLP's"),1 as set forth in an
4

unpublished internal agency paper referred to as the "Procedure

Paper." Instead of considering the range of the various types of

prices prescribed in the governing regulation, the Procedure Paper

focused entirely upon one type of price, the spot market price:

MMS will take the highest and lowest published price for the

month from the appropriate [spot market price] bulletin. If

the reported price [by the lessee] falls within this range,

the [lessee's] value will normally be accepted by MMS for

royalty determination purposes....

....

If the prices used to calculate royalties fall below this

range, a minimum value that is acceptable to MMS can be

determined by developing an average value from the lowest and

highest prices in the range.

In a September 6, 1989, order, MMS advised Arco that it had

audited royalty payments under five of Arco's federal offshore

leases for the month of September 1983. MMS directed Arco to

recalculate its royalties under the five leases, using the

Procedure Paper, for the period 1983-1989. In a September 7, 1989,

order, MMS required Arco to recalculate and pay additional

royalties for all federal offshore leases from 1983 to 1989. MMS

sent Arco another order on September 29, 1989, requiring Arco to

recalculate its royalties using the Procedure Paper for all federal

offshore leases for a period from October 1980 to February 1988.

MMS sent similar orders to Phillips in September 1989, requiring

Phillips to recalculate and pay additional royalties, using the

Procedure Paper, on all offshore leases between January 1977 and

February 1988.

B.

Phillips filed three separate suits for declaratory and
 

2Title 5 U.S.C. § 551(4) defines a "rule" as "an agency

statement of general or particular applicability and future

effect designed to implement, interpret, or prescribe law or

policy or describing the organization, procedure, or practice

requirements of an agency and includes [various substantive

agency functions] or practices bearing on any of the foregoing." 

Section 551(5) defines "rulemaking" as "agency process for

formulating, amending, or repealing a rule." Indeed, MMS does

not argue that its action was not rulemaking but only that the

Procedure Paper was exempt from the APA's notice and comment

provisions. 

5

injunctive relief, disputing the validity of the MMS orders; at

about the same time, Arco filed a similar action in the same court.

The four cases were consolidated, and the parties filed

cross-motions for summary judgment. The district court allowed the

government to file a counterclaim seeking judicial enforcement of

the orders, concluding that the statute of limitations provision of

28 U.S.C. § 2415(a) did not apply to the contested orders, and

granted summary judgment on the government's counterclaim.

II.

The Procedure Paper is a "rule," and its promulgation

constituted "rulemaking" within the meaning of the APA.2 Section

553 of the APA provides that an agency must provide notice of a

proposed rule in the Federal Register and afford an opportunity for

interested persons to present their views. 5 U.S.C. § 553(b), (c).

The required publication must be made not less than thirty days

before the effective date of the proposed rule. Id. § 553(d). In

promulgating the Procedure Paper, MMS did not attempt to comport

with these requirements, as it argues that the requirements of §

553 do not apply to the APA.

The APA exempts "interpretative rules, general statements of
6

policy, [and] rules of agency organization, procedure, or practice"

from the notice and comment requirements. Id. § 553(b)(A). In the

Procedure Paper itself, MMS attempted to avoid the notice and

comment requirements of the APA by characterizing the rule as a

"yardstick." The Interior Board of Land Appeals called the rule

"essentially a policy guideline." Conoco & ARCO Oil & Gas Co., 110

IBLA 232, 242-43 (1989). This court, however, must determine the

category into which the rule falls: "[T]he label that the

particular agency puts upon its given exercise of administrative

power is not, for our purposes, conclusive; rather it is what the

agency does in fact." Brown Express, Inc. v. United States, 607

F.2d 695, 700 (5th Cir.1979) (quoting Lewis-Mota v. Secretary of

Labor, 469 F.2d 478, 481 (2d Cir.1972)). We review this legal

issue de novo. See Munn v. Algee, 924 F.2d 568, 575 (5th Cir.),

cert. denied, --- U.S. ----, 112 S.Ct. 277, 116 L.Ed.2d 229 (1991).

A.

MMS argues that the Procedure Paper merely interprets the

existing royalty valuation regulation in the context of NGLP's used

internally and not sold. It is therefore a clarification or

explanation of existing laws and regulations rather than a

substantive modification of existing regulations or adoption of new

ones. See Continental Oil Co. v. Burns, 317 F.Supp. 194, 197

(D.Del.1970). Consequently, MMS concludes, the Procedure Paper is

exempt from the notice and comment requirements as an

"interpretative rule."

"Interpretative rules" have been defined by this court in
 

3MMS claims that the Procedure Paper effects no change

because MMS could have used spot market prices to value NGLP's

not sold. Under 30 C.F.R. § 206.150, "posted prices" are but one

factor to be used in valuing NGLP royalties. And rules are

viewed as substantive when they "constrict the discretion of

agency officials by largely determining the issue addressed." 

Batterton v. Marshall, 648 F.2d 694, 702 (D.C.Cir.1980) (footnote

omitted). 

7

Brown Express: "Generally speaking, it seems to be established

that "regulations,' "substantive rules,' or "legislative rules' are

those which create law, usually implementary to an existing law;

whereas interpretative rules are statements as to what the

administrative officer thinks the statute or regulation means."

Brown Express, 607 F.2d at 700 (quoting Gibson Wine Co. v. Snyder,

194 F.2d 329, 331 (D.C.Cir.1952)). The Procedure Paper is not an

interpretative rule, as it does not purport to interpret a statute

or regulation. Notwithstanding MMS's assertion that the Procedure

Paper merely announced the approach MMS would take in interpreting

and applying 30 C.F.R. § 206.150, the Procedure Paper is not a mere

clarification. It defines no ambiguous term. It gives no

officer's opinion about the meaning of the statute or regulations.

Rather, it effects a change in the method used by MMS in valuing

NGLPs.3 As such, it is a new rule and cannot be interpretative.

Brown Express, 607 F.2d at 700.

B.

MMS also contends that the Procedure Paper may be

characterized as a "general statement of MMS policy." A general

statement of policy is a statement by an administrative agency

announcing motivating factors the agency will consider, or
8

tentative goals toward which it will aim, in determining the

resolution of a substantive question of regulation. Id. at 701.

A general statement of policy ... is merely an announcement to

the public of the policy which the agency hopes to implement

in future rulemakings or adjudications. A general statement

of policy, like a press release, presages an upcoming

rulemaking or announces the course which the agency intends to

follow in future adjudications.

Id. (quoting Pacific Gas & Elec. Co. v. FPC, 506 F.2d 33, 38

(D.C.Cir.1974)). The Procedure Paper, however, does none of these

things. It does not set a goal that future proceedings may

achieve, for the change has already been made. Immediately upon

its effective date, the five-factor valuation technique of 30

C.F.R. § 206.150 was no longer to be followed. An announcement

stating a change in the method by which an agency will value NGLP's

is not a "general statement of policy." Thus, the Procedure Paper

is not exempt from APA requirements as a "general statement of

policy."

C.

Section 553(b)(A) also exempts "rules of agency organization,

procedure, or practice." Although the Procedure Paper would appear

to fall squarely within this exemption, for the change effected by

the Procedure Paper plainly relates to the internal practices of

MMS, the mere fact that it may guide MMS procedures does not mean

that the Procedure Paper is a "procedural" rule for purposes of the

APA.

The Supreme Court has stated that the notice and comment

provisions "were designed to assure fairness and mature

consideration of rules of general application." NLRB v. Wyman-
9

Gordon Co., 394 U.S. 759, 764, 89 S.Ct. 1426, 1429, 22 L.Ed.2d 709

(1969). These provisions afford an opportunity for "the agency

promulgating the rule to educate itself before establishing rules

and procedures which have a substantial impact on those regulated."

Texaco, Inc. v. Federal Power Comm'n, 412 F.2d 740, 744 (3d

Cir.1969). Congress realized that an agency's judgment would be

only as good as the information upon which it drew. It prescribed

these procedures to ensure that the broadest base of information

would be provided to the agency by those most interested and

perhaps best informed on the subject of the rulemaking at hand.

See Shell Oil Co. v. Federal Energy Admin., 574 F.2d 512, 516

(Temp.Emer.Ct.App.1978).

The proper test to be applied in considering a rule that may

arguably fall under the exemptions for "procedural rules" is as

stated by Brown Express: "[W]hen a proposed regulation of general

applicability has a substantial impact on the regulated industry,

or an important class of the members or the products of that

industry, notice and opportunity for comment should first be

provided." Brown Express, 607 F.2d at 702 (citation omitted). The

exemption of § 553(b)(A) from the duty to provide notice by

publication does not extend to those procedural rules that depart

from existing practice and have a substantial impact on those

regulated. Our inquiry, therefore, is not whether the rule is

"substantive" or "procedural," but rather whether the rule will

have a "substantial impact" on those regulated.

We conclude that the Procedure Paper does have a substantial
 

4A posted price is a publicly announced price at which a

purchaser is willing to buy a certain type and amount of

petroleum products. Spot prices, on the other hand, reflect

actual transactions on a short-term or one-time basis. 

10

impact on those regulated in the industry. The rule narrowly

restricts the discretion of MMS officials in determining the value

of NGLP's. It forecloses other valuation methods by prescribing

binding valuation criteria. Although the regulation allows the use

of posted prices in determining the value of NGLP's, the Procedure

Paper mandates the use of spot prices.4 Thus, the Procedure Paper

does not even comport with the regulation in using posted prices.

Moreover, the Procedure Paper eliminates the other four factors in

determining the value of NGLP's.

This change in valuation technique dramatically affects the

royalty values of all oil and gas leases. Thus, the Procedure

Paper should have been published in the Federal Register and

offered for notice and comment. A party may not be adversely

affected by a rule promulgated in violation of these requirements.

5 U.S.C. § 552(a)(1).

III.

We conclude that the Procedure Paper is a substantive rule,

and § 553 of the APA controlled its promulgation. We therefore

REVERSE the summary judgment and REMAND for such further

proceedings as may be necessary.