Opinion ID: 2454108
Heading Depth: 3
Heading Rank: 1

Heading: DNR's Interpretation Of AS 38.05.180(aa) Is Reasonable.

Text: In 1959, shortly after statehood, the legislature passed the Alaska Land Act and gave DNR the responsibility for managing state-owned land. [15] The Alaska Land Act provided that state lands were open to oil and gas development and gave DNR the power to lease state lands for that purpose. [16] The Alaska Land Act required that DNR, when it leased state land, collect a royalty of at least 12.5% of the value of all oil and gas produced. [17] To determine a lessee's royalty obligation, DNR must calculate the value of the oil and gas produced by the lessee. To determine the value of the oil and gas produced by a lessee, DNR historically has not used the price at which the lessee actually sold its oil or gas. Rather, DNR has used an approximation of market price. In its lease agreements, DNR has obligated lessees to pay 12.5% of the higher of four different values. [18] These four values are designed to estimate the market price of oil and gas. The goal of higher of pricing is to ensure the state's royalty is not based on a below-market sales price. The 1986 amendments to the Alaska Land Act allowed lessees to calculate their royalty obligations using a different, potentially more favorable method. The amendments permitted lessees to use the price at which they contracted to sell gas to Alaska utilities as the basis for calculating the state's royalty. [19] To use this contract price, the lessee must apply and receive permission from DNR. [20] The question presented is whether a lessee must apply for contract pricing before production actually occurs. For at least ten years, DNR has interpreted the 1986 amendments as permitting DNR to approve contract pricing only for future production. Thus, a lessee can apply to have contract pricing used to calculate its royalties for future production, but not for gas production that has already occurred. Marathon disputes this interpretation, arguing that the statute permits DNR to use contract pricing for past production. Marathon offers alternative statutory interpretations, proposing several cutoff points after which a lessee would no longer be permitted to apply for contract pricing. Marathon even suggests that a lessee could apply for contract pricing after the completion of the audit to determine its higher of royalty liability so long as the lessee applied before the statute of limitations ran. To establish the meaning of a statute, we examine both its text and its purpose. [21] We will give the appropriate deference to DNR, deferring to its interpretation so long as it has a reasonable basis in the law. [22]

Alaska Statute 38.05.180(aa)(2)(B) provides that DNR should not approve a request for contract pricing if the prospective reduction in royalty receipts would not be balanced by increased benefits to in-state gas and electric consumers. (Emphasis added.) DNR notes that Black's Law Dictionary defines prospective as meaning [i]n the future. [23] According to DNR, prospective refers to the future period after the application is approved and therefore AS 38.05.180(aa) only allows contract pricing for future production. DNR maintains that AS 38.05.180(aa) does not permit application of contract pricing to past production. Marathon argues that the word prospective has a different meaning within the context of the statute. In Marathon's view, the legislature's reference to prospective reduction in royalty receipts is not the same as requiring that a request be made in advance of or commensurate in time with first gas production. Marathon instead argues that the word refers to the future effects of DNR's decision to approve or deny a request for contract pricing. According to Marathon, DNR can decide to approve contract pricing for any period, past or future, but DNR must consider the prospective effects of that decision. Marathon contends that DNR may still consider the `prospective reduction in royalty receipts' resulting from use of the contract price even if the royalty would [correlate] with gas deliveries and production occurring in the past. The term prospective could plausibly have either meaning. The use of the word could signify that the legislature only intended contract pricing to be available for future gas production; or the use of the word could be incidental and the timing of the [application]. . . immaterial. We agree with the superior court that the phrase `prospective reduction in royalty receipts' is ambiguous.
Marathon argues that AS 38.05.180(aa)(2) provides an exhaustive list of the reasons that DNR may reject a request for contract pricing. Alaska Statute 38.05.180(aa)(2) provides that DNR should reject a lessee's request for contract pricing if the commissioner makes a finding that (A) the contract price or transfer price is unreasonably low; (B) the prospective reduction in royalty receipts would not be balanced by increased benefits to in-state gas and electric consumers; (C) the lessee and the utility are related in management, ownership, or other aspect and, in the case of a transfer price, that relationship is not regulated under AS 42.05; and (D) the contract price or transfer price is not in the best interest of the state. Marathon contends that because retroactivity is not among the listed reasons for rejection, DNR had no right to refuse Marathon's request for retroactive application. Marathon claims that AS 38.05.180(aa) creates a presumption in favor of approval and that DNR did not respect this presumption. But AS 38.05.180(aa)(2)'s core scope is more limited than Marathon contends. Alaska Statute 38.05.180(aa)(2) provides an exhaustive list of the price-related reasons DNR can reject requests for contract pricing, but the statute does not address other grounds for rejection. The legislative history of the 1986 amendments indicates that AS 38.05.180(aa)(2) is exclusively concerned with objections to the price a lessee submits as its contract price. [24] Other non-price related reasons for rejecting a request may still exist. If DNR is correct that the statute does not authorize retroactive contract pricing, then DNR is justified in rejecting such a request even though the statute does not specifically list that reason for rejection. Therefore, AS 38.05.180(aa) would not preclude DNR from rejecting Marathon's request. As we will discuss below, agencies are generally given discretion to manage such procedural matters.

Both parties agree that the purpose of the 1986 amendments was to benefit consumers: The statute lowers the amount of royalties paid by gas producers, and the savings are passed on to consumers. Marathon points to this pro-consumer purpose of the 1986 amendments and argues that allowing retroactivity would further this legislative purpose. Marathon argues that (1) the purpose of the statute is to benefit consumers by using contract pricing; (2) retroactivity results in more contract pricing; and (3) therefore, retroactivity is consistent with the purpose of the statute. Marathon cites extensive legislative history to support its argument, but while this legislative history generally recognizes the benefits of contract pricing, it does not answer the question whether the statute permits retroactivity. Although it is true that the stated purpose of the 1986 amendments was to benefit consumers, the 1986 amendments exist within the larger goals of the Alaska Land Act. Alaska Statute 38.05.180(a) recites the goals of the Alaska Land Act: (a) The legislature finds that (1) the people of Alaska have an interest in the development of the state's oil and gas resources to (A) maximize the economic and physical recovery of the resources; (B) maximize competition among parties seeking to explore and develop the resources; [and] (C) maximize use of Alaska's human resources in the development of the resources. As we have recognized, the overall purpose of the Alaska Land Act is to maximize revenue for the state: In Chevron v. LeResche we pointed out that the purpose of the Alaska Land Act was to provide for orderly oil and gas leasing that maximizes state return on its oil and gas resources, and that this fact should influence the statute's construction. [25] And as Marathon acknowledges, AS 38.05.180(aa) is an exception to the goal of maximum royalty recovery. Though the 1986 amendments' purpose of benefiting a smaller subset of Alaska's utility consumers would arguably support Marathon's interpretation, the Alaska Land Act's overall purpose of maximizing revenue for all Alaskan citizens would support DNR's interpretation. The 1986 amendments and their legislative history do not provide guidance as to which purpose should predominate in this case.
Marathon points to the retroactivity that exists elsewhere in the statute and the fact that audits and royalty calculations occur well after the time of production. Royalty calculations involve amounts, such as tax reimbursement amounts, that cannot be known until some time after production. [26] Marathon argues that the 1986 amendments reflect a tolerance for retroactivity and that, therefore, the statute allows retroactive requests for contract pricing. But Marathon ignores a crucial distinction between the type of retroactivity it seeks and the retroactivity built into the statute's structure. The statute recognizes that royalties will be calculated retroactively, but that is different than allowing the method used to calculate royalties to be applied retroactively. Royalties are necessarily calculated after the fact because the amount of gas production and other inputs will not be known until after production has occurred. Selecting which royalty calculation method to apply, however, can be accomplished before production has occurred. [27]
The key to our decision is the standard of review. We conclude that the statute is ambiguous and provides no direct answer whether retroactive contract pricing is permitted. We have recognized that an agency's interpretation of a law within its area of jurisdiction can help resolve lingering ambiguity. [28] We therefore defer to DNR's interpretation that both the 1986 amendments' use of the word prospective and the Alaska Land Act's purpose of maximizing revenue prohibit it from approving retroactive contract pricing and we therefore conclude that it has a reasonable basis in the statute. We are especially inclined to defer when an agency's statutory interpretation is longstanding. DNR has been applying its interpretation for at least a decade. In multiple cases, we have recognized the special deference that is due to longstanding agency statutory interpretations. In Bullock v. State, we afforded a Department of Revenue interpretation great weight because it was long-standing and continuous. [29] In Bartley v. State, we also emphasized how deference was due when the agency's interpretation is longstanding. [30] In Premera v. State, we explained that we apply a more deferential standard of review where an agency action is longstanding and continuous. [31] Since DNR's interpretation has been longstanding and continuous, we apply this deferential standard of review and conclude that DNR's interpretation is reasonable.