Opinion ID: 695504
Heading Depth: 5
Heading Rank: 2

Heading: The PSC Determination

Text: 41 The PSC Report of Investigation concluding that Basin does not own or control Coteau indicates that the PSC conducted a thorough investigation of the relationship between Basin and Coteau, and provides both legal and factual support for the conclusion that, despite the relationship, Basin does not control Coteau's operations. Under both federal and state regulations: 42 The following relationships are presumed to constitute ownership or control unless a person can demonstrate that the person subject to the presumption does not in fact have the authority directly or indirectly to determine the manner in which the relevant surface coal mining operation is conducted: 43 ... 44 (6) Owning or controlling coal to be mined by another person under a lease, sublease or other contract and having the right to receive such coal after mining or having authority to determine the manner in which that person or another person conducts a surface coal mining operation. 45 30 C.F.R. Sec. 773.5(b); see N.D.Admin.Code Sec. 69-05.2-01-02(64). 46 Basin owned coal to be mined, under lease, by Coteau. A subsidiary of Basin, DCC, had a contract with Coteau stating that Coteau would supply all of DCC's coal requirements. The PSC found that this relationship gave rise to a presumption, under Sec. 773.5(b)(6), that Basin controlled Coteau, but found that Coteau had successfully rebutted this presumption, as provided for in the regulation. 47 The PSC found, first, that the contractual agreements between Coteau and Basin were traditional arm's length business contracts. The contracts include several provisions designed to allocate risk between the parties; provisions, such as default remedies for Basin, that would not be necessary if Basin in fact controlled Coteau's mining operation. The Agreement, the contract forming the key Sec. 773.5(b)(6) relationship between Coteau and Basin, provides for: arbitration in the event of a dispute between DCC and Coteau; a cost plus arrangement, which allocates the risk of increased production costs, particularly costs of reclamation, to DCC; compliance by Coteau with all surface mining regulatory requirements; payment by Basin of Coteau's out-of-pocket expenses if Basin takes no coal deliveries; an option for Basin to buy Coteau out at the end of the Agreement's term; and a requirement that Basin buy Coteau out if Basin terminates the Agreement, with prices to be determined by an independent auditor. The PSC found that these provisions indicate that Basin does not control Coteau's mining operations, because such provisions protecting Basin's interests, providing for dispute resolution and independent audits, and allocating various risks between Basin and Coteau would be unnecessary if Basin controlled Coteau. 48 The Agreement also does not restrict Coteau to sell coal only to DCC or to Basin. It provides, as is only reasonable in a requirement contract, that Coteau must fulfill its supply obligation to DCC before selling to other customers, and that for the first ten years of the contract, Coteau must obtain Basin's approval before selling more than two million tons of coal per year to other customers. As the PSC states, Coteau is thus not restricted to selling coal only to DCC or to Basin, nor is Coteau required to sell the particular coal leased from Basin to DCC. 49 The Agreement includes a provision for the approval of Coteau's mining plan by DCC at DCC's request. The plan is specifically described as a plan to furnish Dakota's [DCC's] Requirements, and a submitted plan is deemed approved by DCC unless DCC objects to it within seventy-five days of receipt. As part of a requirement contract, such an approval provision, especially when review is not periodic, but only upon request, and when coupled with a default position of approval, indicates not control but protection of supply. The PSC also noted that the only substantive restriction on Coteau's mining plans stated in the Agreement is that the plan shall be in accordance with sound engineering and design practices and applicable laws, rules and regulations, which simply states that Coteau must use common sense and obey the law; not unreasonable expectations in an arm's length business transaction. 50 Further, the PSC examined the quantity of coal leased by Coteau from Basin, and the governing lease agreement. All coal leased by Coteau from Basin and Basin subsidiaries constituted about 5.8% of the total tonnage of Coteau's coal reserves. The lease agreement stated that [t]he timing, nature and extent of Lessee's operations, if any, under this Agreement shall be at the sole discretion of Lessee. The PSC reasoned that the amount of coal leased from Basin by Coteau should be compared to Coteau's total reserves, rather than only to the reserves covered by the specific permit at issue. This is logical, because under the Agreement, Coteau provides coal to DCC from any of its tracts, not only from the tract covered by this permit. In addition, the PSC notes that because Coteau holds permits for tracts in which none of the coal is leased from Basin, if ownership and control is analyzed permit-by-permit, under some permits Coteau would have no connection to Basin, and under others, a relationship giving rise to the presumption of ownership and control would exist. Since the question is not whether Basin controls Coteau in terms of a specific contract, but whether Basin overall controls Coteau's mining operations, it makes no sense to tie the analysis of ownership and control to some permits and not to others. Further, we gather that the AVS links entities, not permit-by-permit, but overall. 51 Finally, the PSC summarizes several signifiers of Coteau's independent operation: 52 With respect to permits and operations at the Freedom Mine: 53 a. The premining engineering work (including development of mining plans) and the work needed to obtain the many permits needed for a mining operation is done by Coteau. 54 b. Coteau is solely responsible for all reclamation work and compliance with other environmental laws and regulations applicable to the Freedom Mine. 55 c. The people working at the Freedom mine are employees of Coteau, and Coteau is responsible for all hiring and firing. Coteau employs its own professional support staff including engineers, environmental specialists and administrative staff. 56 d. Coteau, or contractors hired by Coteau, put in place all permanent mine facilities and equipment such as draglines that had to be erected onsite. 57 e. All permits needed for operating the Freedom Mine are in Coteau's name. 58 f. All personnel, environmental and safety policies and procedures for the Freedom Mine are developed and implemented by Coteau. 59 g. Coteau negotiates, acquires and maintains all surface lands, easements, leases and mining rights. 60 PSC Report of Investigation, Case No. RC-1093-92-1137, at 8-9. 61 The PSC, in making its determination that Coteau had rebutted the presumption of ownership and control arising from Sec. 733.5(b)(6) by showing that Basin did not have authority to determine the manner in which Coteau's operations were conducted, addressed the relevant connections between Basin and Coteau. It came to the conclusion that, although Basin and Coteau were connected through contractual agreements, such agreements were at arm's length, and the provisions in them were designed to protect each party's interests, not to establish Basin's control over Coteau's operations. In fact, if Basin did control Coteau, the provisions designed to protect Basin would not be necessary, as Basin's and Coteau's interests would not diverge if Basin controlled Coteau. The PSC also produced an impressive list of key operating activities over which Coteau maintained control. 62