Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER. 

Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts, 

303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email 

corrections@akcourts.us. 

THE SUPREME COURT OF THE STATE OF ALASKA 

CHEVRON U.S.A., INC., 

CONOCOPHILLIPS ALASKA, INC

EXXONMOBIL ALASKA 

PRODUCTION INC., and FOREST 

OIL CORPORATION, 

Appellants, 

v. 

STATE OF ALASKA, 

DEPARTMENT OF REVENUE, 

Appellee. 

) 

., ) Supreme Court No. S-15891 

Superior Court No. 3AN-13-04430 CI 

O P I N I O N 

No. 7142 – December 16, 2016 

) 

) 

) 

) 

) 

) 

) 

) 

) 

)
 

)
 

)
 

Appeal from the Superior Court of the State of Alaska, Third 

Judicial District, Anchorage, Michael D. Corey, Judge. 

Appearances: Leon T. Vance, Faulkner Banfield, P.C., 

Juneau, for Appellants. Dario Borghesan, Kenneth J. Diemer, 

Joanne M. Grace, Assistant Attorneys General, Anchorage, 

and Craig W. Richards, Attorney General, Juneau, for 

Appellee. 

Before: Stowers, Chief Justice, Fabe, Winfree, Maassen, and 

Bolger, Justices. 

STOWERS, Chief Justice. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I. INTRODUCTION
 

In this appeal oil producers (the Producers)1

 challenge an administrative 

decision (the Decision) in which the Alaska Department of Revenue (DOR) decided to 

treat separate oil and gas fields operated by common working interest owners as a single 

entity when calculating the Producers’ oil production tax obligations. Relying on a 

statute that gave DOR the discretion to “aggregate two or more leases or properties (or 

portions of them), for purposes of determining [their effective tax rate], when 

economically interdependent oil or gas production operations are not confined to a single 

lease or property,”2 DOR concluded that operations on a number of smaller oil fields 

were economically interdependent with larger operations on the adjacent Prudhoe Bay 

oil field. The Producers argue that in interpreting the phrase “economically 

interdependent” in the Decision, DOR effectively promulgated a regulation without 

following theprocedures established intheAlaskaAdministrativeProcedureAct (APA)3 

and, as a result, DOR’s Decision was invalid. We conclude that DOR’s Decision was 

not a regulation because it was a commonsense interpretation of the statute and, 

therefore, DOR was not required to comply with APA rulemaking requirements. We 

affirm the superior court’s decision upholding DOR’s decision. 

1 The Producers involved in this appeal are Chevron U.S.A., Inc., 

ConocoPhillips Alaska, Inc., ExxonMobil Alaska Production Inc., and Forest Oil 

Corporation. 

2 Former AS 43.55.013(j) (2005). 

3 AS 44.62.180-290. 

-2- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

II. FACTS AND PROCEEDINGS 

A. Facts 

1. An overview of Alaska’s taxes on oil production 

The Prudhoe Bay oil field is one of the largest oil and gas fields yet 

discovered in the United States. Explorers discovered the Prudhoe Bay oil field in 1967 

and the field began producing oil about ten years later. Just as oil production began in 

Prudhoe Bay, Alaska passed the initial version of the Oil and Gas Production Tax, which 

laid out a new system for taxing oil production in Alaska.4 During the relevant time 

frame this legislation set the production tax rate for oil fields by multiplying a constant 

nominal tax rate of 15% by the economic limit factor (ELF), a coefficient between zero 

and one calculated for each individual oil field.5 In other words, a higher ELF resulted 

in a higher tax rate, and a lower ELF resulted in a lower tax rate for any given oil field. 

Thelegislaturepassed HouseBill 118 in 1989,addingthe“fieldsizefactor” 

as a component of the ELF formula. The field size factor is the total volume of 

production from a field during a given reporting month.6 All else being equal, the field 

4 See former AS 43.55.011(a) (2005). In August 2006 the legislature 

amended this statute and eliminated the key provisions at issue in this case. The 

legislature made these changes effective retroactively to April 1, 2006. Ch. 2, §§ 34, 39 

TSSLA 2006. This appeal only concerns events that took place before April 1, 2006, so 

we cite to AS 43.55.011 and the associated regulations as they existed during the time 

frame relevant to this appeal. 

5 Former AS 43.55.011(a) (2005) (“The tax is equal to . . . the percentage-ofvalue amount calculated under (b) of this section . . . multiplied by the economic limit 

factor determined for the oil production of the lease or property under AS 43.55.013.”). 

6 See former AS 43.55.011 (2005); former AS 43.55.013 (2005). The oil 

ELF formula was: 

(continued...) 

-3- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

size factor produced a higher ELF (and therefore a higher tax rate) for larger fields and 

a lower ELF (and therefore a lower tax rate) for smaller fields. The legislature reasoned 

that smaller fields needed similar production infrastructure to larger fields but, because 

they produced less oil, smaller fields had poor economies of scale and were less 

profitable.7 The legislature hoped that including the field size factor in the ELF formula 

6 (...continued) 

“PEL” represents the monthly production rate at the economic limit; “TP” represents the 

field’s total volume of production during a reporting month; “WD” represents the total 

number of well days, or days the well operates, during the month; and “Days” is the 

number of days in the month. The first exponent in this equation is commonly known 

as the “field size factor.” 

7 As the legislature contemplated adding the field size factor to the ELF 

formula through House Bill 118, the DOR Commissioner at the time, Hugh Malone, 

described the reason behind the proposed change to the Speaker of the House in a letter 

dated March 21, 1989. This letter stated that 

[t]here are many economies of scale realized as a result of 

larger field size. For instance, each field, regardless of size, 

still would require the following: operations center, base 

camp, airstrip, roads, warehouse, power plant, drill pads, 

sewage treatment, water storage, transportation support 

vehicles, gas conditioning and compression facility, 

oil/gas/water separation plant, flow station, waterflood 

facility, water injection facility, dehydration plant, and so 

forth. 

ConocoPhillips Alaska, Inc. used a similar rationale to advocate for the proposed change 

in a letter to members of the House Resources Committee dated February 7, 1989. The 

letter stated that 

[a]ll fields, regardless of size, must possess living quarters, 

roads, pipelines, and personnel transportation infrastructure 

in addition to the normal production handling facilities. In 

Alaska’s high cost environment, these factors result in 

significant diseconomies of scale for smaller fields. For 

(continued...) 

-4- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

would create an economic incentive for oil producers to develop marginal fields that they 

would otherwise shut down or neglect for economic reasons.8 

However, including the field size factor in the ELF formula also created an 

incentive for oil producers to capitalize on tax breaks for smaller fields by classifying 

certain areas as independent fields even if the areas were economically interdependent 

with other, larger oil fields. Therefore, AS 43.55.013(j) (the Aggregation Statute) 

permitted DOR to aggregate two or more fields for the purpose of calculating the ELF 

“when economically interdependent oil or gas production operations are not confined to 

a single lease or property.”9 Aggregating several fields into a single field for the purpose 

of calculating the ELF increased the field size factor and, by extension, increased both 

the ELF and the tax rate for these aggregated fields above what the ELF and the tax rate 

would have been for the individual areas. Whether DOR could aggregate the fields in 

7	 (...continued) 

smaller fields to beeconomically developed, webelievesome 

adjustments must be made in the tax or royalty structure. 

8 During a House Resources Committee meeting discussing House Bill 118, 

House Speaker Sam Cotten explained that House Bill 118 “would encourage 

development in some of the smaller fields. It would reduce taxes in some of those areas 

that are so marginal that that might actually make a difference whether they go into 

production.” Transcription of House Resource Committee Meeting, House Bill No. 118 ­

ELF, Hearing on H.B. 118 Before the H. Res. Comm., 16th Leg., 1st Sess. 3 (Feb. 9, 

1989) (statement of Sam Cotten, H. Speaker, H.R.). And DOR’s Sectional Analysis of 

House Bill 118 stated that “[t]he current ELF is not giving Alaska an attractive enough 

tax climate to encourage development of marginal oil fields. . . . House Bill 118 would 

target tax breaks toward marginal fields . . . .” 

9 Former AS 43.55.013(j) (2005) (“The department may aggregate two or 

more leases or properties (or portions of them), for purposes of determining economic 

limit factors under this section and applying them to AS 43.55.011 or AS 43.55.016, 

when economically interdependent oil or gas production operations are not confined to 

a single lease or property.”). 

-5-	 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

question depended onwhether thefieldswere“economically interdependent.” However, 

the legislature never defined this term in the production tax statutes, and DOR never 

defined the term in related regulations. 

To eliminate uncertainty whether DOR would aggregate particular fields, 

DOR adopted 15 Alaska Administrative Code 55.027(b), a regulation permitting 

producers to petition for assurance that DOR would not aggregate specific oil fields for 

the purpose of calculating the ELF.10 To obtain this guarantee, producers had to show 

that (1) using common production facilities would lower the costs of production; (2) 

DOR’s guarantee would increase the likelihood that producers would develop a new 

field; (3) oil would be accurately allocated; and (4) “operations . . . would not be 

economically interdependent in the absence of the proposed use of common production 

facilities.”11 However, proving thesefactorsdid not guaranteeanadvanceruling because 

DOR had the discretion to aggregate or to decline to do so.12 As with other related 

regulations, 15 AAC 55.027(b) also did not define “economically interdependent.”13 

In August 2006 the legislature repealed the ELF-based tax system and 

replaced it with a new production tax system, effective retroactively to April 1, 2006.14 

10 15 AAC 55.027(b) (eff. 1/1/95) (repealed 2007). This regulation was 

repealed in 2007, but it was in effect during the relevant time period in this case. We cite 

to the regulation as it appeared during the relevant time period. 

11 Id. 

12 Id. (“Upon application of a producer . . . the department will, in its 

discretion, issue an advanceruling that thedepartment will not aggregate specified leases 

or properties for purposes of determining economic limit factors . . . .”). 

13 Id.; 15 AAC 55.900 (am. 1/1/04). 

14 Ch. 2, §§ 34, 39 TSSLA 2006. 

-6- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. Oil production at Prudhoe Bay 

Before beginning production at Prudhoe Bay, the working interest owners 

of the field’s oil and gas leases combined those leases into a unit called the Prudhoe Bay 

Unit so that the working interest owners could conduct operations as if the entire unit 

area were a single lease. The Alaska Department of Natural Resources approved the 

creation of two separate Participating Areas within the Prudhoe Bay Unit; we refer to 

themjointly as the Initial Participating Areas (InitialPAs).15 Participating areas are made 

up of multiple lease tracts that participate in the production of hydrocarbons. The owner 

of each individual lease tract receives a certain percentage of the total production of all 

the wells drilled in that participating area. For tax purposes producers typically treat a 

participating area as a single lease or property when calculating production taxes, and 

DOR has typically accepted this characterization. 

At the start, the two Participating Areas making up the Initial PAs were 

divided such that one area produced oil and the other produced gas.16 In 1986 the 

15 See 11 AAC 83.351(a) (2005) (“At least 90 days before sustained unit 

production from a reservoir, the unit operator shall submit to the commissioner for 

approval a description of the proposed participating area, based on subdivisions of the 

public land or its aliquot parts. The participating area may include only the land 

reasonably known to be underlain by hydrocarbons and known or reasonably estimated 

through use of geological, geophysical, or engineering data to be capable of producing 

or contributing to production of hydrocarbons in paying quantities. . . . Under 11 

AAC 83.371(a), the unit operator also shall submit to the commissioner for approval of 

a proposed division of interest or formula setting out the percentage of production and 

costs to be allocated to each lease or portion of lease within the participating area. Upon 

approvalby thecommissioner, the area of productivity constitutesaparticipating area.”). 

16 Later, ownership interests in the Prudhoe Bay Unit realigned such that each 

working interest owner had rights to a single percentage interest in both oil and gas in 

the combined reservoirs of the Prudhoe Bay Unit. This realignment of ownership 

essentially made the Initial PAs “the equivalent of a single participating area.” Thus, we 

(continued...) 

-7- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Department of Natural Resources approved an additional participating area on a separate 

reservoir,knownastheLisburneParticipating Area(LisburnePA). Theworking interest 

owners built a separate set of production facilities to handle production from the 

Lisburne PA. 

Later, the working interest owners identified nine additional reservoirs 

within the Prudhoe Bay Unit, and the Department of Natural Resources approved 

separate participating areas for each of these nine reservoirs.17 Six of these nine 

participating areas are involved in this appeal, and we refer to these areas as the “Satellite 

PAs.”18 The Satellite PAs covered separate reservoirs, were developed long after the 

development of the Initial PAs, and produced significantly smaller oil outputs than the 

Initial PAs. The Satellite PAs integrated operations with the Initial PAs, because, unlike 

the Lisburne PA, the Satellite PAs did not have their own production facilities.19 Instead, 

production facilities originally built to serve both the Initial PAs also processed the fluids 

16 (...continued) 

refer to them jointly as “the Initial PAs” in this opinion. 

17 These nine areas were the Aurora, Borealis, Midnight Sun, Niakuk, North 

Prudhoe Bay, Orion, Pt. McIntyre, Polaris, and West Beach Participating Areas. Some 

documents refer to the Pt. McIntyre Participating Area as N. McIntyre, but we use Pt. 

McIntyre to refer to the area in question to remain consistent with DOR’s Decision. 

18 The participating areas involved in this appeal are those that DOR 

aggregated with the Initial PAs. These areas include the Aurora, Borealis, Midnight Sun, 

Orion, Polaris, and Pt. McIntyre Participating Areas. The Producers involved in this 

appeal owned working interests in the Prudhoe Bay Unit during the relevant period, 

February 1, 2005 through March 31, 2006. These working interests included working 

interests in the two Initial PAs, the Lisburne PA, and the Satellite PAs. 

19 Lisburne PA production facilities initially processed production from 

Pt. McIntyre, one of the Satellite PAs, but in 2004, Initial PA facilities began processing 

a portion of production from Pt. McIntyre as well. 

-8- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

produced at the Satellite PAs.20 

Until oil andgas are separated fromoneanother and fromanywastepresent 

in the well fluids, producers cannot accurately measure oil and gas output. Therefore, 

the measurement of production typically takes place downstream of the production 

facilities. In this case measurement of output from the production facilities serving the 

Initial PAs and the Satellite PAs took place at pump station number one of the TransAlaska Pipeline System. The working interest owners attributed total metered volume 

to various properties based on estimates of each well’s production as determined by 

periodic tests of the wells. 

Furthermore, the amount of oil developed from each participating area 

depended on the amount and quality of oil produced at the others. Because the 

centralized production facilities serving the Initial PAs and the Satellite PAs could not 

process all production from all wells in those participating areas, fluids from some wells 

were “backed out,” or blocked, in favor of fluids from other wells based on the “best well 

produces” principle. This principle favored well fluids with the highest ratio of oil to 

gas, which were ultimately the most profitable fluids to produce, regardless of their 

participating area of origin and regardless of which working interest owner owned that 

participating area. 

20 Well fluids include gas, oil, and water. The Satellite PAs sent their well 

fluid to centralized production facilities originally built to serve the Initial PAs. There, 

fluids from the Satellite PAs commingled with fluids from the Initial PAs. Six 

coordinated processing centers processed the commingled fluids, separating crude oil 

from the other well fluids and using small pipelines to deliver the oil to pump station 

number one of the Trans-Alaska Pipeline System. The processing centers sent the 

separated natural gas to a central gas facility to further separate natural gas liquids from 

the natural gas. Some of the natural gas liquids were blended back into the crude oil or 

taken in kind as natural gas liquids, while the rest were sent to the central compression 

plant for re-injection into the reservoirs. 

-9- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the Prudhoe Bay Unit, each Satellite PA had a smaller field size factor 

and therefore a lower ELF than the Initial PAs. Consequently, while DOR taxed 

production from the Initial PAs at a rate of about 12.5%, DOR taxed production from the 

Satellite PAs at a rate of less than 0.5%. Furthermore, the older Initial PA wells tended 

to produce more gas and water per barrel of oil than wells in the Satellite PAs. 

Therefore, lower-tax oil from the Satellite PAs backed out higher-tax oil from the Initial 

PA wells at increasing rates. The number of barrels of Initial PA production backed out 

in favor of Satellite PA production increased substantially from 217,896 barrels in 2000 

to 1,224,090 barrels in 2004. As the low-tax oil from the Satellite PAs increasingly 

backed out the high-tax oil from the Initial PAs, the total amount of tax DOR collected 

from the Prudhoe Bay Unit decreased accordingly. 

The Producers sought advance rulings from DOR that it would not 

aggregate several Satellite PAs that used Initial PA production facilities. Between 

August 1998 and November 2001 the Producers filed multiple requests for advance 

rulings involving the Aurora, Borealis, Midnight Sun, and Polaris Participating Areas. 

As early as 2000 DOR informed the Producers that it was examining the issue, but it 

never acted on these applications. During that time period DOR considered the requests 

and conducted internal analyses on the best way to clarify the phrase “economic 

interdependence” as it was used in the Aggregation Statute.21 

3. DOR’s internal analyses of the Aggregation Statute 

DOR produced a variety of internal memoranda and internal departmental 

position papers acknowledging confusion over the interpretation of “economic 

interdependence” and analyzing whether it would be better to clarify the term via statute, 

regulation, or administrative decision. In August 2001, Dan E. Dickinson, the Director 

21 Former AS 43.55.013(j) (2005). See supra note 9 and accompanying text. 

-10- 7142 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of DOR’s Tax Division (the Director) prepared an internal memorandum expressing 

concern that the Aggregation Statute did not clearly define the grounds for aggregation 

and that the then-existing regulations did not remedy the confusion. The Director 

complained that “[t]he ELF is difficult to administer because the base criteria for 

aggregation and segregation are not clearly articulated in the statute. . . . [O]ur attempts 

to further clarify the criteria in the regulations are self-contradictory and have not 

dispelled the murkiness.” In particular, the Director was concerned that a 

straightforward reading of the term “economically interdependent” would permit 

aggregation only if the fields were “mutually contingent,” (emphasis added) preventing 

DOR fromaggregating older fields and satellite fields relying on the production facilities 

originally built to serve only those older fields, the situation DOR faced with regard to 

the Initial PAs and the Satellite PAs. The Director wrote that DOR 

may aggregate [fields] when they are economically 

interdependent. Going to Webster suggests that [DOR] must 

show that the [fields] are “mutually contingent” before 

[DOR] aggregate[s]. The argument can always be made that 

as long as new production comes on and uses empty space in 

old production facilities, there is no mutual dependency. 

The Director suggested that DOR could repeal 15 AAC 55.027(b) and 

adopt new regulations evaluating economic interdependence using analytical factors. 

The Director believed that the use of his suggested analytical factors would represent “a 

180-degree switch in the roles played by production facilities in the ELF decision.” In 

May 2002 the Director issued a separate internal memorandum proposing adding new 

provisions to 15 AAC 55.027 that would take production constraints in common 

production facilities into account when interpreting the phrase “economic 

interdependence” as it was used in the Aggregation Statute. 

While DOR never adopted those proposed regulations, it continued to 

-11- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

internally discuss the need for clarification. The Director began drafting a departmental 

position paper (the White Paper) on the application of the Aggregation Statute, 

particularly the meaning of “economic interdependence.” August and September 2002 

versions of the White Paper draft suggested that the term “economically interdependent” 

as it was used in the Aggregation Statute was ambiguous, theorized that DOR could 

change its “established reading” of the statute to a “better, alternative reading of the law” 

that could “turn the current ELF practice on its head,” and suggested that such changes 

would be so extensive that they should probably occur through legislation rather than 

regulation. 

Shortly after the completion of the September 2002 White Paper draft, the 

Director acknowledged that upcoming advance ruling decisions, which were likely to 

result in the “granting of separate ELFs,” would provide an opportunity to clarify the 

Aggregation Statute’s reference to economic interdependence. However, he expressed 

doubt that DOR should use the decisions to change the existing interpretation of the 

statute and stated that DOR “do[es] not inten[d] to amend that policy without either 

(a) legislative direction or (b) encountering a factual situation that is so egregious that 

to preserve any measure of original legislative intent it becomes necessary for us to act.” 

In subsequent drafts of the White Paper circulated internally fromFebruary 

2003 to November 2004, DOR continued to explore options for addressing its concerns 

about theinterpretation ofthephrase“economicinterdependence.” In theFebruary 2003 

draft DOR suggested that these changes to ELF policy “should [be] . . . enshrined in a 

regulation.” The White Paper also pointed out that DOR “ha[s] the power through 

regulation . . . to raise an additional 100 million dollars a year in taxes by changing 

course and raising taxes on the [Satellite PAs].” 

A March 2003 draft of the White Paper again stressed the need to clarify 

the statutory standard through the adoption of regulations, emphasizing that “the 

-12- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

definition of economic interdependence . . . [is] sufficiently vague in statute that [DOR] 

ought to adopt regulations to clarify the definition.” The draft recognized the policy 

implications of such a decision, explaining that DOR likely “has the discretion through 

regulation to either validate its current practices, or take a much more aggressive revenue 

stance.” In its analysis of the then-current policy, DOR acknowledged that one of the 

primary dictionary definitions of the term “interdependence” involved mutual 

dependence, which could require each field to be contingent upon the existence of the 

other before DOR could aggregate the fields. The draft reasoned that under this 

definition, theSatellitePAs andtheInitialPAs could not beeconomically interdependent 

because the Initial PAs were developed long before and independently of the Satellite 

PAs, and, therefore, the Initial PAs could not be contingent upon the Satellite PAs. This 

March 2003 draft also explored alternative interpretations of “economic 

interdependence” that would produce different results when applied to the Prudhoe Bay 

Unit. The draft concluded this analysis by recognizing that the “words and concepts” of 

the Aggregation Statute “are not well defined.” 

Finally, theAugust 2004 draft, seeming toassumethatDORwould proceed 

via regulation — the White Paper draft discussed what would happen “[o]nce the 

regulations are written,” for instance — presented various alternative interpretations of 

the Aggregation Statute, one of which required mutual contingence for interdependence 

to be found. A November 2004 draft of the White Paper repeated this line of reasoning, 

but it also mentioned that DOR was planning to aggregate some of the Satellite PAs with 

the Initial PAs. 

B. Proceedings 

In January 2005 the Director issued DOR’s Decision notifying the 

Producers that DOR had decided to aggregate the Initial PAs and the Satellite PAs in the 

-13- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prudhoe Bay Unit22 for the purpose of calculating production tax obligations effective 

February 1, 2005, the start of a new monthly period for determining production tax 

obligations.23 DOR found that operations at the Initial PAs and the Satellite PAs were 

economically interdependent, and, therefore, DOR aggregated them, referencing a 

variety of policy reasons for its decision. The Decision effectively treated the aggregated 

areas as a single lease or property for calculating the ELF, resulting in a higher ELF and 

a higher tax rate on the oil produced from these properties. 

The Decision explained that DOR’s prior administrative decisions related 

to aggregation provided “only limited guidance” on the meaning of the term 

“economicallyinterdependent.” TheDecision then reviewedjudicialdecisionsanalyzing 

the term in other legal contexts in jurisdictions outside of Alaska and a 1998 DOR 

decision in which DORaggregated multiple leases covering a single reservoir developed 

under a sole management plan. DOR concluded that “while the guidance provided by 

past administrative precedent is sparse, the applicable generality . . . seems to be that 

economic interdependence is shown by or associated with unified or integrated 

operations or enterprise encompassing the several leases or properties in question.” 

Based on that review, DOR’s Decision stated that “if [fields] are so 

integrated as to be reasonably treated as an economically unitary activity,” the fields are 

economically interdependent. DOR further explained that a “weak” form of economic 

interdependence “exists between two or more things when the economic activity or 

22 The Decision aggregated the Aurora, Borealis, Midnight Sun, Orion, 

Polaris, and Pt. McIntyre Participating Areas with the Initial PAs. The superior court’s 

statement that the Lisburne and Niakuk Participating Areas were also aggregated is not 

correct. Aggregation changed the production tax obligations for all four of the Producers 

and for BP Exploration (Alaska) Inc. 

23 See former AS 43.55.020(a) (2005) (providing that oil production taxes 

should be paid on a monthly basis). 

-14- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

condition of each has a material effect on the economic activity or condition of the other” 

and a “strong” form of economic interdependence “exists when formally distinct entities 

or activities are sufficiently economically integrated that for some practical purpose they 

may reasonably be considered as equivalent to a single or unitary economic entity or 

activity.” DOR observed that these two concepts often, if not always, “differ . . . only 

in the degree of interdependence that exists.” 

DOR did not decide which standard controlled for the purposes of the 

Aggregation Statute. However,DORconcludedthattheareas in questioneasilysatisfied 

the more demanding standard because (1) the Initial PAs and the Satellite PAs shared 

common production facilities for oil and gas, and the use of common facilities made the 

volume of oil produced from any participating area dependent on the volume of oil 

produced from the others; (2) the working interest owners made decisions about which 

wells to produce and which wells to back out “across participating areas, not within each 

participating area on an isolated basis”; and (3) “the commingling of produced fluids in 

common production facilities and the consequent need to estimate and allocate volumes 

from different [participating areas] renders the production volumes of all the 

[participating areas] interdependent.” 

DOR then explained the policy rationale behind its Decision. First, DOR 

concluded that “thebackout phenomenon, takentogetherwithhighlydisparateeconomic 

limit factors as between the Initial PAs and the [S]atellite PAs, results in a tax structure 

that is grossly at odds with the economics of oil production.” DOR explained that the 

legislature intended the ELF system to serve as a tax break for costlier production, but 

in Prudhoe Bay, non-aggregation gave a tax break to oil from the Satellite PAs even 

though that oil was less costly to produce due to its higher ratio of oil to gas than the oil 

from the Initial PAs. Second, due to the rising cost of oil in recent years, oil production 

on all Prudhoe Bay fields was moving further away from its economic limit; therefore, 

-15- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

increasing the tax rate on oil from the Satellite PAs would not discourage the Producers 

from continuing to produce oil from the Satellite PAs. Third, DOR believed “[i]t [was] 

inherently problematical to tax oil at widely differing effective rates when the 

determination of how much oil is subject to which rate is based not on accurate metering 

but on estimation.” DOR acknowledged that it had approved the use of allocation in 

previous instances of facility sharing but that “its subsequent experience ha[d] not been 

without significant problems.” Finally, based on the history of North Slope 

development, DOR found “little reason to believe” that declining to aggregate the 

Satellite PAs with the Initial PAs in the Prudhoe Bay Unit would “promot[e] additional 

development.” 

DOR concluded its Decision by determining that the Satellite PAs in 

question were eligible for aggregation with the Initial PAs, relying on factors including 

the use of common production facilities, the coordination of well production to deal with 

constrained capacity in shared production facilities, the use of backout volume and 

compensation arrangements, and the allocation of production to wells without exact 

metering. 

In March 2005 the Producers appealed the Decision24 and requested an 

See 15 AAC 05.001-05.050 (governing appeal procedures related to tax 

matters under AS 43). 

-16- 7142 

24 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

informal conference with DOR under AS 43.05.240(a)25 and 15 AAC 05.020(a).26 In 

November 2008 after the informal conference, DOR affirmed its earlier decision. 

Pursuant to AS 43.05.24127 and AS 43.05.40528 the Producers then 

appealed to the Office of Administrative Hearings, where Administrative Law Judge 

Christopher Kennedy presided over the appeal. At the administrative hearing the 

Producers argued that DOR’s Decision violated the Administrative Procedure Act and 

25 AS 43.05.240(a) (“A taxpayer aggrieved by the action of the department 

in fixing the amount of a tax or penalty may apply to the department within 60 days after 

the date of mailing of the notice required to be given to the taxpayer by the department, 

giving notice of the grievance, and requesting an informal conference to be scheduled 

with an appeals officer.”). BP Exploration (Alaska) Inc. participated in the informal 

conference, but it did not participate in subsequent appeals. 

26 15 AAC 05.020(a) (“Upon receipt of a written request for appeal under 

15 AAC 05.010 requesting an informal conference, an appeals officer will promptly 

schedule the informal conference. . . . The informal conference will be conducted in 

person, throughcorrespondence,orbytelephone,audio, or videoteleconference, or other 

electronic means. The appeals officer shall make available to the person who filed the 

request for appeal the relevant portion of that person’s file, and shall explain at the 

informal conference the action taken by the department. A person who wants to present 

facts and information in support of its position must bring all pertinent books, records, 

schedules, and other documents to the conference. . . . The person who filed the request 

shall supply additional information that the appeals officer considers necessary.”). 

27 AS 43.05.241 (“For a matter within the jurisdiction of the office of 

administrative hearings (AS 44.64) under AS 43.05.405, the taxpayer aggrieved by an 

informal conference decision entered under AS 43.05.240 may file with the office of 

administrative hearings a notice of appeal for formal hearing, as provided in 

AS 43.05.430, no later than 30 days after service of the decision resulting from an 

informal conference.”). 

28 AS 43.05.405 (“The office has original jurisdiction to hear formal appeals 

from informal conference decisions of the Department of Revenue under AS 43.05.240. 

Appeal to the office may be taken only from an informal conference decision under 

AS 43.05.240.”). 

-17- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the Producers’ due process rights. The Producers maintained that DOR should have 

implemented any changes to its interpretation of the relevant statutes by proper 

rulemaking under the APA, not through its decision process. In support of their 

arguments, the Producers relied heavily on DOR’s internal documents, which the 

Producers had acquired from DOR during the informal conference process. 

Judge Kennedy’s decision acknowledged that the internal memoranda and 

White Paper drafts “suggest that the question of how to interpret ‘economically 

interdependent’ and other phrases in the ELF statute could have been approached by 

asking the legislature for clarifying amendments or by adopting an interpretive 

regulation[], and that the department considered those options,” but that “[a]s 

preliminary, informal, internal, confidential, and generally unattributed papers, 

the[y] . . . show nothing more.” In October 2012 Judge Kennedy upheld DOR’s decision 

and concluded that DOR was not required to engage in formal rulemaking in interpreting 

the Aggregation Statute the way it did in its Decision. 

The Producers then appealed Judge Kennedy’s decision to the superior 

court, again raising APA and due process arguments. In March 2015 Superior Court 

Judge Michael D. Corey held that DOR had adopted a commonsense interpretation of 

the Aggregation Statute that did not require formal rulemaking under the APA. The 

court also held that DOR did not abuse its discretion or violate the Producers’ due 

process rights. 

The Producers appeal to this court. The Producers claim that DOR’s 

Decision constitutes a regulation and, since aregulationadoptedwithout complying with 

the APA is invalid,29 the Decision itself is invalid. The Producers argue that DOR should 

29 Friends of Willow Lake, Inc. v. State, Dep’t of Transp. & Pub. Facilities,
 

Div. of Aviation & Airports, 280 P.3d 542, 548-49 (Alaska 2012) (citing Smart v. State,
 

(continued...)
 

-18- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

recalculate the production tax for the period from February 2005 through March 2006 

and refund any amounts the Producers paid in excess of the recalculated production tax 

for that period with interest. 

III.	 STANDARD OF REVIEW 

“Whether an agency action is a regulation is a question of law that does not 

involve agency expertise, which we review applying our independent judgment.”30 

Therefore, “more deferential standards of review sometimes reserved for agency 

interpretations are inappropriate here” where “[t]he threshold question . . . is whether the 

APA applies” to DOR’s action.31 

IV.	 DISCUSSION 

A.	 DOR’s Decision Applying The Term “Economically Interdependent” 

To The Initial PAs and Satellite PAs Was A Commonsense 

Interpretation Of The Statute And Did Not Trigger APA Rulemaking 

Requirements. 

1.	 Defining a regulation under Alaska law 

The APA defines a regulation as “every rule, regulation, order, or standard 

of general application or the amendment, supplement, or revision of a rule, regulation, 

order, or standard adopted by a state agency to implement, interpret, or make specific the 

29 (...continued) 

Dep’t of Health & Soc. Servs., 237 P.3d 1010, 1017 (Alaska 2010)). 

30 State, Dep’t of Nat. Res. v. Nondalton Tribal Council, 268 P.3d 293, 299 

(Alaska 2012) (citing Alyeska Pipeline Serv. Co. v. State, Dep’t of Envtl. Conservation, 

145 P.3d 561, 564 (Alaska 2006)). 

31 Id. (first alteration in original) (quoting Jerrel v. State, Dep’t of Nat. Res., 

999 P.2d 138, 141 (Alaska 2000)). 

-19-	 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

law enforced or administered by it.”32 Regulations that are not promulgated under APA 

procedures are invalid.33 

“[T]he label placed on a particular statement by an administrative agency 

does not determine the applicability of the APA. Under the Alaska statute, ‘regulation’ 

encompasses many statements made by administrative agencies, including policies and 

guides to enforcement.”34 But while the APA’s definition of regulation is construed 

broadly,35 not every agency action or decision constitutes a regulation.36 An agency 

action must meet both of the following criteria to be a regulation: (1) “the [agency 

action] implements, interprets, or makes specific the law enforced or administered by the 

agency”; and (2) “the [agency action] affects the public or is used by the agency in 

dealing with the public.”37 An agency action must satisfy both prongs in order for APA 

rulemaking requirements to apply to that action. 

In analyzing whether an agency action was adopted “to implement, 

interpret, or make specific the law enforced or administered by it”38 we have recognized 

32 AS 44.62.640(a)(3). 

33 Friends of Willow Lake, Inc., 280 P.3d at 548-49 (citing Smart, 237 P.3d 

at 1017). 

34 Kenai Peninsula Fisherman’s Coop. Ass’n v. State, 628 P.2d 897, 905 

(Alaska 1981). 

35 Friends of Willow Lake, Inc., 280 P.3d at 549 (quoting Smart, 237 P.3d at 

1017). 

36 Nondalton Tribal Council, 268 P.3d at 300 (quoting Kachemak Bay Watch, 

Inc. v. Noah, 935 P.2d 816, 825 (Alaska 1997)). 

37 Id. at 300-01. 

38 AS 44.62.640(a)(3); see also Nondalton Tribal Council, 268 P.3d at 300­

-20- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

that agencies must have some freedom to apply relevant statutes without the burden of 

adopting a regulation each time they do so. We have explained that “[n]early every 

agency action is based, implicitly or explicitly, on an interpretation of a statute or 

regulation authorizing it to act. A requirement that each such interpretation be preceded 

by rulemaking would result in complete ossification of the regulatory state.”39 

Therefore, we have clarified that agency actions that are merely 

“[commonsense]interpretation[s]”ofexistingrequirements arenot regulations requiring 

compliance with APA rulemaking standards.40 In other words, “obvious, commonsense 

interpretations of statutes do not require [rulemaking].”41 We have further explained that 

38 (...continued) 

01. 

39 Alyeska Pipeline Serv. Co. v. State, Dep’t of Envtl. Conservation, 145 P.3d 

561, 573 (Alaska 2006). 

40 Alaska Ctr. for the Env’t v. State, 80 P.3d 231, 243-44 (Alaska 2003) 

(holding that an agency interpretation “[did] not satisfy the Administrative Procedure 

Act’s definition of ‘regulation,’ as it was not an ‘amendment, supplement, or revision of 

a rule, regulation, order, or standard’ so much as it was a [commonsense] interpretation 

of the regulation’s applicability” because “[i]t neither provided new requirements nor 

made the existing ones any more specific,” and concluding that the agency interpretation 

“thus was not a ‘regulation’ and did not need to be promulgated in accordance with the 

Alaska Administrative Procedure Act.” (internal citations omitted)). 

41 Alyeska Pipeline Serv. Co., 145 P.3d at 573. The Producers characterize 

this holding — that “obvious, commonsense interpretations of statutes do not require 

rulemaking” — as an exception to the definition of a regulation set forth in the APA. 

The Producers use this characterization to argue that the exception does not apply to 

DOR’s Decision because (1) Alaska courts only — or at least predominantly — apply 

the exception in cases where an agency is interpreting its own regulations, as opposed 

to legislation and (2) even where Alaska courtshaveapplied thecommonsenseexception 

to situations where an agency interpreted a statute directly, as opposed to interpreting its 

own regulation, Alaska courts have only done so when the agency’s “interpretation 

(continued...) 

-21- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

agency actions may not be “commonsense interpretations” of existing laws (1) when the 

agency adds “requirements of substance” and does more than just “interpret[] . . . the 

[statute] according to its own terms”; (2) when the agency interprets a statute in a way 

that is “expansive or unforeseeable”; or (3) when the agency “alters its previous 

41 (...continued) 

was . . . routine.” But the commonsense “exception” is not an exception at all; rather it 

is the rule, clarifying when an agency action is not a regulation. And apart from the 

Producers’ incorrect characterization of the commonsense language as an exception, the 

Producers’ arguments that the commonsense language does not apply to the case at hand 

are not persuasive. 

The Producers cite Friends of Willow Lake, Inc. v. State, Department of 

Transportation & Public Facilities, Division of Aviation & Airports, 280 P.3d 542 

(Alaska 2012), Smart v. State, Department of Health & Social Services, 237 P.3d 1010 

(Alaska 2010), and Alaska Center for the Environment v. State, 80 P.3d 231 (Alaska 

2003) in support of their proposition that Alaska courts only — or at least 

predominantly — apply the commonsense language to cases where an agency has 

already interpreted a statute through regulation. But we have specifically stated that 

“obvious, commonsense interpretations of statutes do not require rulemaking.” Alyeska 

Pipeline Serv. Co., 145 P.3d at 573 (emphasis added). Notably, we did not state that 

“obvious, commonsense interpretations of regulations based on statutes do not require 

rulemaking,” and we did not qualify this statement in any other way that would suggest 

that we exclusively or even predominantly apply the commonsense language to cases 

where an agency has already interpreted a statute through regulation. 

Second, the Producers argue that even where Alaska courts have applied 

the commonsense “exception” to situations where an agency interpreted a statute 

directly, as opposed to interpreting the agency’s own regulation, Alaska courts have only 

done so when the agency’s “interpretation was . . . routine.” But whether the challenged 

interpretation was “routine” is not a factor courts must analyze when determining 

whether an agency action is a regulation under the APA’s definition of a regulation or 

relevant case law. The Producers merely use the word “routine” to attempt to distinguish 

this case from those they cite in support of their argument, such as Squires v. Alaska 

Board of Architects, Engineers & Land Surveyors, 205 P.3d 326 (Alaska 2009) and 

Alaska Center for the Environment v. State, 80 P.3d 231 (Alaska 2003). 

-22- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interpretation of a statute.”42 

2.	 DOR interpreted the Aggregation Statute according to its own 

terms. 

An agency action may not be a commonsense interpretation of existing law 

when it adds “requirements of substance” rather than serving as an “interpretation of the 

[statute] according to its own terms.”43 In its Decision, DOR determined that oil 

production operations are economically interdependent when they are “so integrated as 

to be reasonably treated as an economically unitary activity.” Comparing our previous 

decisions in Jerrel v. State, Department of Natural Resources44 and Burke v. Houston 

NANA LLC45 with Alaska Center for the Environment v. State46 and Alyeska Pipeline 

Service Company v. State, Department of Environmental Conservation, 

47 we conclude 

that DOR’s Decision was a commonsense interpretation of the statute according to its 

own terms, and DOR’s interpretation does not add any requirements of substance. 

In Jerrel, the Jerrels held grazing leases on state land subject to a statute and 

its implementing regulation requiring them to mark their horses that grazed on the leased 

land.48 The Department of Natural Resources sent a letter informing the Jerrels that they 

were not in compliance with the statute, which required that the livestock owners “tag[], 

42 Alyeska Pipeline Serv. Co., 145 P.3d at 573 (quoting Alaska Ctr. for the 

Env’t, 80 P.3d at 244). 

43 Id. (quoting Alaska Ctr. for the Env’t, 80 P.3d at 244). 

44 999 P.2d 138 (Alaska 2000). 

45 222 P.3d 851 (Alaska 2010). 

46 80 P.3d 231. 

47 145 P.3d 561. 

48 Jerrel, 999 P.2d at 142. 

-23-	 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

dye[], or otherwise mark[]” their animals.49 The Department of Natural Resources 

directed them to mark their animals with “[sufficiently] permanent” markings visible 

from at least twenty feet, even though neither the statute nor relevant regulations 

contained that specific requirement.50 We rejected the agency’s argument that a twentyfoot requirement was an informal “policy rule,” concluding that the requirement was a 

regulation developed “precisely in order to interpret, make specific, and implement the 

statutory requirement that a mark or brand ‘show[] distinctly.’ ”51 

Similarly, in Burke, we held that an agency’s action was a regulation when 

that agency decided that its filing deadline’s exemption for extenuating circumstances 

included an unwritten “discovery rule” that capped the grace period at ninety days.52 In 

both Jerrel and Burke, the agency action in question added specific criteria or values that 

clarified the existing statutory or regulatory standard and required the public to comport 

with precise criteria not specified in existing rules. In other words, the agencies’ actions 

in Jerrel and Burke added requirements of substance and, therefore, we held that the 

agencies’ actions were regulations. 

In contrast, in Alaska Center for the Environment, an agency clarified that 

the term “major energy facility” as used in a regulation did not include an airport 

expansion project because the regulation was not meant to include businesses that used 

fuel incidentally in daily operations.53 We held that the agency’s interpretation was a 

49 Id. 

50 Id. at 142-43. 

51 Id. at 143 (alteration in original) (quoting AS 03.40.020). 

52 Burke v. Houston NANA LLC, 222 P.3d 851, 868-69 (Alaska 2010). 

53 Alaska Ctr. for the Env’t v. State, 80 P.3d 231, 242-44 (Alaska 2003). 

-24- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

commonsense interpretation of the statute that did not require rulemaking under the 

APA.54 In Alaska Center for the Environment, the agency did not add anything to the 

existing rule; it merely interpreted a broad phrase and decided whether a certain type of 

project was included in the definition of “major energy facility.” Similarly, in Alyeska 

Pipeline Service Company, an agency concluded that a statute authorizing it to recoup 

costs of reviewing air quality permit applications from the applicant included the costs 

the agency incurred in defending related permit appeals.55 We held that the agency’s 

decision was a commonsense interpretation under the terms of the statute, not a 

regulation.56 In other words, the agency did not add anything to the statute; it merely 

clarified whether costs related to the defense of permit appeals fell under the broad 

umbrella of “costs,” as that term was used in the statute. 

In this case, DOR’s Decision is more similar to the agencies’ actions in 

Alaska Center for the Environment and Alyeska Pipeline Service Company than to the 

agencies’ actions in Jerrel and Burke. DOR clarified the scope of the statute by 

indicating the degree of economic interdependence that could warrant aggregation, but 

it did not add any specific criteria to the term “economically interdependent” that went 

beyond the scope of the Aggregation Statute’s existing language. Instead, DOR’s 

Decision was based only on existing statutory language, and the Decision served only 

to clarify whether the broad term “economically interdependent” covered the specific 

situation involving the Satellite PAs and the Initial PAs. Notably, the interpretation of 

“economically interdependent” set forth in DOR’s Decision does not do much to clarify 

54 Id. at 244. 

55 Alyeska Pipeline Serv. Co. v. State, Dep’t of Envtl. Conservation, 145 P.3d 

561, 563, 572 (Alaska 2006). 

56 Id. at 573. 

-25- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the Aggregation Statute until that interpretation is applied to the specific facts of this 

case. This suggests that DOR narrowly tailored its interpretation of the phrase 

“economically interdependent” to the facts of this case and applied the existing language 

of the Aggregation Statute to this case without adding any additional terms. 

DOR acknowledged in its White Paper drafts that there were a variety of 

possible definitions of “economically interdependent” based on dictionary definitions of 

related terms. The Producers argue the decisions by the superior court and the Office of 

Administrative Hearings “ignore completely the confusion and wildly different valid 

interpretations that DOR acknowledged, and the effort it expended over several years 

evaluating alternative interpretations different from the one obtained by looking at the 

primary dictionary definition.” The Producers claim that this “demonstrates that it 

achievedthedesired interpretation through considerable,complicated effort, not through 

aroutine, [commonsense]interpretation ofclear statutory language.” TheProducers also 

fault DOR for failing to cite any of the dictionary definitions related to the phrase 

“economically interdependent” in its Decision. 

But it is not uncommon for there to be multiple ways to read a given phrase 

in a statute without adding any additional substantive terms or requirements; if this were 

not the case, agencies would always be required to proceed via rulemaking. 

Furthermore, DOR’s interpretation of “economic interdependence” is consistent with 

dictionary definitions of the terms. Webster’s Dictionary defines “inter-” as a prefix 

meaning “reciprocal.”57 It defines “dependent” as “determined or conditioned by 

another” and “dependence” as “the quality or state of being influenced or determined by 

57 Inter-, WEBSTER’S COLLEGIATE DICTIONARY (10th ed. 1998). 

-26- 7142 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

or subject to another.”58 DOR’s determination that oil production operations may be 

economically interdependent “if [fields] are so integrated as to be reasonably treated as 

an economically unitary activity” is consistent with these definitions.59 In Smart v. State, 

Department of Health & Social Services, we held that an agency, in selecting one of 

several definitions of the term “statistically valid sampling methodologies” to use in 

selecting a “statewide sample” of a group of service providers for auditing, did not 

impose new substantive requirements because the agency chose its interpretation from 

an array of approaches laid out in published sources like statistics books.60 Just as the 

agency in Smart chose from among various established definitions of a broad phrase, 

DOR internally reviewed dictionary definitions relating to the phrase “economic 

interdependence” and interpreted the broad phrase in the Aggregation Statute based on 

these established definitions. In doing so DOR did not add anything to the Aggregation 

Statute that was not present in the statute’s existing language. 

3.	 DOR’s interpretation of the term “economically 

interdependent” was foreseeable. 

The legislature enacted the ELF tax regime and gave DOR the discretion 

to aggregate oil fields in order to accomplish its main purpose: to tax different oil fields 

at different rates to reflect each field’s underlying economics and to incentivize oil 

58 Dependent, WEBSTER’S COLLEGIATE DICTIONARY (10th ed. 1998). 

59 “Reciprocal” means “shared, felt, or shown by both sides.” Reciprocal, 

WEBSTER’S COLLEGIATE DICTIONARY (10th ed. 1998). DOR’s reference to 

“economically unitary activity” (emphasis added) is consistent with this meaning, in that 

DOR views fields engaged in shared economic activity as economically interdependent. 

And DOR’s reference to “integrated” fields is consistent with the fields being 

“determined or conditioned” by each other or “being influenced or determined by or 

subject to” each other. 

60 237 P.3d 1010, 1012, 1017-18 (Alaska 2010). 

-27-	 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

production in smaller, less profitable fields. When oil and gas operations in different 

fields become integrated such that there is no meaningful separation between production 

in the different fields, there is no justification for maintaining different effective tax rates 

on those fields. The Initial PAs and the Satellite PAs used common production facilities, 

coordinated well production to deal with constrained capacity in shared production 

facilities, implemented backout and compensation agreements based on the 

interconnections between the Initial PAs and the Satellite PAs, and allocated production 

to wells without exact metering. This meant that the Satellite PAs received tax breaks 

that were designed to alleviate costs they did not face, and the Satellite PAs began to 

back out oil taxed at the higher rate. DOR’s Decision to interpret “economically 

interdependent” such that “economic substance . . . prevail[ed] over form” should 

therefore have been foreseeable in light of the ELF tax regime and the well-known 

purposes behind it; DOR’s Decision was consistent with the legislature’s intent. What 

had changed was the way in which the Producers increasingly integrated their operations 

among the Initial PAs and the Satellite PAs. It was foreseeable that DOR would use the 

tool the legislature gave it — its discretionary ability to aggregate fields if they were 

economically interdependent — to aggregate the Satellite PAs with the Initial PAs to 

better reflect the economic realities of the Prudhoe Bay Unit. 

4.	 DOR’s decision did not depart from a previous interpretation 

of the Aggregation Statute. 

The Producers rely mainly on internal DOR memoranda and White Paper 

drafts to argue that “DOR’s extended internal analysis of the [A]ggregation [S]tatute and 

the then-existing interpretation of and policy under that statute” demonstrate that “the 

Decision . . . altered DOR’s prior interpretation of the statute.” The Producers highlight 

the fact that in one memo, the Director acknowledged that an interpretation of the 

Aggregation Statute similar to DOR’s interpretation in its Decision represented a 

-28-	 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“180-degree switch in the roles played by production facilities in the ELF decision.”61 

In another 2002 draft, the Director wrote that “two very different — almost 

opposite — interpretations can be drawn from” the ELF statute and that DOR supports 

an “alternative reading of the law” that would “turn the current ELF practice over on its 

head.”62 While these comments may offer weak support for the Producers’ arguments, 

61 DOR convincingly asserts that this statement was a mistake because that 

memo incorrectly assumed that 15 AAC 55.027(b) prohibited DOR from aggregating 

operations if “ ‘production operations on the respective leases or properties would not 

be economically interdependent in the absence of the proposed use of common 

production facilities,’ when in fact the regulation merely gave the agency the discretion 

not to aggregate properties in that situation.” (quoting 15 AAC 55.027(b)). 

Administrative Law Judge Kennedy noted that “[a]nalysis in some of the documents is 

very preliminary and rough, reflecting confusion” and, regarding the Director’s 

statement, agreed that 

Mr. Dickinson seems to have been under the impression that 

15 AAC 55.027(b) prohibited the department from 

aggregating [participating areas] if they would not be 

economically interdependent in the absence of common 

production facilities. This is a reading of 15 AAC 55.027(b) 

that is sufficiently unsupportable that the [Producers] 

themselves have abandoned it in this appeal. 

62 Looking at the White Paper as a whole, it is not entirely clear that these 

comments are referring to DOR’s interpretation of “economically interdependent.” 

Instead, a close reading of these comments in context suggests that they may address 

issues related to alternative readings of the term “lease or property” or, more broadly, to 

alternative readings of the statutory purpose guiding DOR’s exercise of its discretion 

whether to continue taxing small fields lightly to encourage development or to aggregate 

the smaller fields in order to better reflect the realities of oil production in certain areas. 

DOR explains that “producers have generally treated each participating area as a lease 

or property for the purposes of calculating oil and gas production taxes, and [DOR] has 

generally accepted this treatment.” But the internal documents suggest that DOR was 

considering changing this approach. The Director’s comments, at best, offer only weak 

support for a conclusion that the Decision represented a departure from DOR’s previous 

(continued...) 

-29- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

the Producers also cite portions of documents where the Director wrote, “Going to 

Webster suggests that we must show that the [leases or properties] are ‘mutually 

contingent’ before we aggregate” and that based on dictionary definitions, “[t]he 

argument can always be made that as long as new production comes on and uses empty 

space in old production facilities, there is no mutual dependency.” But even considering 

these quotes, we conclude that the character of this evidence, the internal documents as 

a whole, and DOR’s reasoning within its Decision demonstratethat DOR’s Decision was 

not a departure from its previous interpretation of the Aggregation Statute. 

First, these documents werenever meantto represent DOR’s official policy 

positions.63 These documents were internal, and DOR clearly labeled them as drafts. 

Thus, an official decision, such as DOR’s Decision, that reaches a conclusion different 

from those reached in internal White Paper drafts or memoranda does not represent a 

change in official policy that requires rulemaking because the internal documents never 

purported to set forth DOR’s official position on the interpretation of the Aggregation 

Statute. Relying on these internal documents as evidence of DOR’s previous 

interpretations of the Aggregation Statute under the facts of this case would be 

problematic because agency officials would fear that any written materials, even internal 

ones, could invalidate later official actions that differed from initial, non-public 

approaches. This would dissuade agency officials from conducting important internal 

written analyses and examining policy issues from all sides while in the process of 

62 (...continued) 

interpretations of the phrase “economically interdependent” in the Aggregation Statute. 

63 TheProducers concedethatthey“donotclaimthatthe[internal]documents 

established DOR’s official position or policy.” They do, however, claimthat the internal 

documents serve as evidence that DOR “for years wrestled with the problems presented 

by the statutory standard and a [commonsense] interpretation of it.” 

-30- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

establishing the agency’s official position on vital administrative matters. 

Second, the internal documents as a whole do not suggest that DOR’s 

Decision represented a departure from DOR’s previous interpretations of the 

Aggregation Statute’s use of the phrase “economically interdependent.” At most, the 

internal documents suggest that the term “economically interdependent” is subject to 

more than one commonsense reading. But the mere fact that a term can be interpreted 

in more than one way does not automatically mean that rulemaking is required or that 

DOR changed its interpretation of the Aggregation Statute.64 In multiple internal 

documents, DOR concluded that the Satellite PAs and the Initial PAs were not 

economically interdependent under one of the definitions of interdependence it found in 

the dictionary. But DOR also noted that within the same dictionary, other listed 

definitions for the same terms yielded different interpretations of economic 

interdependence that supported aggregation of the Satellite PAs and the Initial PAs. 

Third, the Producers fail to cite or describe earlier decisions addressing 

aggregation, much less demonstrate how DOR’s Decision was inconsistent with 

precedent. Most importantly, the Producers themselves admit that the Decision was the 

first time DOR formally addressed the meaning of the term “economically 

interdependent.” DOR’s interpretation could not have changed if this was, as both 

parties agree, the first time DOR was called upon to articulate its understanding of the 

term. 

Furthermore, in reaching its Decision, DOR carefully reviewed its own 

administrative precedent surrounding the Aggregation Statute. It found that early 

decisions were “not particularly informative” but that they did “contain a common 

64 See Alyeska Pipeline Serv. Co. v. State, Dep’t of Envtl. Conservation, 

145 P.3d 561 (Alaska 2006); Alaska Ctr. for the Env’t v. State, 80 P.3d 231 

(Alaska 2003). 

-31- 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

factual predicate that logically supports a finding of economic interdependence, namely, 

that a single operator manages the production operations.” DOR also analyzed a 1998 

decision aggregating multiple leases covering a single reservoir developed under a sole 

management plan. DOR acknowledged that the 1998 decision focused on development 

history in deciding whether to aggregate, but it clarified that it took that approach 

because the agency was aggregating the leases for a retroactive determination of tax 

burdens. DOR determined that “insofar as the question of economic interdependence of 

current or future production operations is concerned, the manner in which development 

previously occurred may not necessarily be of much relevance.” After closely reviewing 

pastprecedent, DORconcluded that “while the guidance provided by past administrative 

precedent is sparse, the applicable generality . . . seems to be that economic 

interdependence is shown by or associated with unified or integrated operations or 

enterprise encompassing the several leases or properties in question.” Rather than 

disavowing precedent, DOR looked to its past decisions and interpretations of the 

Aggregation Statute and determined that its interpretation of “economically 

interdependent” as meaning“sointegrated as to bereasonably treated asan economically 

unitary activity” did not conflict and was consistent with its prior decisions. 

Overall, while DOR may have changed the way it exercised its discretion 

in deciding to aggregate, this was the first time that DOR had been called upon to 

articulateits understanding ofthephrase “economically interdependent,”and its analysis 

in the Decision was not inconsistent with related, but not entirely analogous, precedent. 

Instead, DOR observed changing realities in the Prudhoe Bay Unit and decided to 

aggregate increasingly interdependent operations. 

B.	 The Producers Had An Opportunity To Be Heard Throughout The 

Proceedings. 

Although the Producers dropped their argument that DOR violated their 

-32-	 7142
 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

right to due process by issuing its Decision, we note that we have explained that in 

agency decision-making contexts, due process requires an opportunity to be heard.65 We 

note that the Producers had a fair opportunity to be heard and to challenge DOR’s 

interpretation of“economicinterdependence”throughouttheseproceedings. After DOR 

issued its Decision, the Producers appealed the Decision and requested an informal 

conference with DOR under AS 43.05.240(a) and 15 AAC 05.020(a). After DOR 

affirmed the Decision, the Producers appealed to the Office of Administrative Hearings 

pursuant to AS 43.05.241 and AS 43.05.405. The Producers then appealed the 

administrative law judge’s decision to the superior court. 

During oral argument to this court, the Producers admitted that “[t]he 

[Producers] did have an opportunity to challenge [DOR’s] interpretation,” but they 

argued that they did not have the opportunity to challenge the interpretation “in the 

context of a clean slate the way there would be with the discussion of a 

regulation . . . . Instead of going through the public regulation process where anybody 

could participate, any interested party could state what their concerns were, now you’re 

just dealing with the arguments about the application.” The Producers argued that they 

did not have the opportunity to propose a better interpretation of “economic 

interdependence” and that, instead, they were confined to arguing that DOR’s 

interpretation was “an impermissible, irrational interpretation.” However, the Producers 

fail to articulatewhat they would have argued during the process of adopting a regulation 

that they did not argue during these various proceedings, and they agree that their 

65 Amerada Hess Pipeline Corp. v. Alaska Pub. Utils. Comm’n, 711 P.2d 

1170, 1178 (Alaska 1986) (“While we endorse the judicial bridling of excessive 

administrative discretion by requiring guiding regulations, we will only do so to the 

extent necessary to assure a fair administrative process. Thus, we will not reverse an 

administrative adjudication on procedural due process grounds unless there exists an 

element of unfairness, vagueness or lack of notice or opportunity to be heard.”). 

-33- 7142
 
 

 

 

 

 

 

 

arguments during these proceedings included arguments for alternativedefinitions of the 

phrase “economic interdependence.” We conclude that during each stage of the 

proceedings, the Producers were able to set forth their preferred alternative definition of 

the phrase “economic interdependence,” satisfying their right to be heard. 

V. CONCLUSION 

We AFFIRM the superior court’s conclusion that DOR’s Decision was not 

a regulation but instead was a commonsense interpretation of the Aggregation Statute. 

We also AFFIRM the superior court’s decision upholding DOR’s Decision. 

-34- 7142