Opinion ID: 695504
Heading Depth: 4
Heading Rank: 2

Heading: OSM's Review of the PSC's Determination

Text: 32 Treating the enforcement regulations at Secs. 842.11 and 842.12 as valid, we proceed to examine OSM's review of the PSC determination that Coteau was not owned or controlled by Basin. It has long been settled that an agency must abide by its own regulations. Voyageurs Region Nat'l Park Ass'n v. Lujan, 966 F.2d 424, 428 (8th Cir.1992) (citing Service v. Dulles, 354 U.S. 363, 372, 77 S.Ct. 1152, 1157, 1 L.Ed.2d 1403 (1957)). We examine the agency FAD, setting it aside if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Voyageurs, 966 F.2d at 427 (quoting 5 U.S.C. Sec. 706(2)(A)). We find that, by applying a de novo standard of review to the PSC determination, OSM did not act in accordance with law, and that their reversal of the PSC's determination was arbitrary. 33 OSM argues that we should examine the OSM's FAD for a patent violation of the law only, citing Leedom v. Kyne, 358 U.S. 184, 79 S.Ct. 180, 3 L.Ed.2d 210 (1958). As appellants note in their brief, Leedom carves out a special exception to the general rule that agency decisions are not appealable until final. [A] Board order in certification proceedings under Sec. 9 is not 'a final order' and therefore is not subject to judicial review.... Id. at 187, 79 S.Ct. at 183. The OSM specifically designated its determination of ownership and control as a final agency decision, and Leedom therefore is inapplicable. We review the OSM decision under the standard applicable when Congress has not specifically indicated a limited scope of review. See Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415-16, 91 S.Ct. 814, 823-24, 28 L.Ed.2d 136 (1971) (subsequent history omitted) (stating that the standard of review at 5 U.S.C. Sec. 706(2)(A) is generally applicable). 34
35 Under Sec. 842.11, OSM can order a federal inspection only if the state does not take appropriate action to correct a reported violation or show good cause for failure to correct it. OSM's authority to issue a notice of violation under Sec. 843.12 is triggered by an inspection. Thus, if the state takes appropriate action or shows good cause in response to a ten-day notice, neither federal inspection nor a federal notice of violation is authorized by the regulations. 36 Section 842.11 provides a standard for appropriate action and good cause: 37 [A]n action or response by a State regulatory authority that is not arbitrary, capricious, or an abuse of discretion under the state program shall be considered appropriate action to cause a violation to be corrected or good cause for failure to do so. 38 30 C.F.R. Sec. 842.11(b)(1)(ii)(B)(2). 39 Under the federal regulations, if the PSC determination that Basin does not own or control Coteau was not arbitrary, capricious, or an abuse of discretion, the determination constituted appropriate action regarding the alleged violation, and should have ended the proceedings. 40
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
63 OSM's initial response to the PSC's determination was appropriately deferential; on January 14, 1993, Snyder stated in a letter to North American, Coteau's parent corporation, that he found the PSC determination to be correct, after reviewing the union's complaint and the PSC report. This decision was confirmed in a letter to the local OSM field office on January 19, which stated that [b]oth parties [Coteau and Basin] are only bound by the terms of the [Agreement]. Any determination beyond this shows a lack of understanding of normal business contracts between buyers and sellers. This statement implicitly refers to the AVS Memo, issued prior to Snyder's decision, which characterized the mining plan approval and cost-plus provisions as creating control by Basin of Coteau's operations. The AVS Memo shows no deference to the PSC's interpretation of these provisions, and flatly refuses to consider the commonplace nature of these types of provisions in large-scale utilities contracts, insisting that these provisions would be examined on a case-by-case basis. 9 64 After the change in federal administrations, the new acting director of the OSM withdrew the previous decision and issued a FAD which determined that Coteau was controlled by Basin. The FAD makes no pretense of applying, to the PSC determination, the deferential standard of review mandated by OSM's own regulations. 65 The FAD states that, in coming to a decision, OSM has reviewed all documents which have been submitted to the agency with regard to this lengthy proceeding. In substance, we have conducted a de novo proceeding, taking a fresh look at the issues. After conducting such a review, OSM finds that Basin owns or controls Coteau within the provisions of 30 C.F.R. Secs. 773.5(a)(3) and 773.5(b)(6). OSM FAD at 8. The regulations simply do not permit OSM to conduct a de novo review of the PSC's determination, and in the FAD, OSM states that they are conducting just such a review. Astonishingly, the FAD cites 30 C.F.R. Sec. 842.11(b)(1)(ii)(B) for its authority to determine whether the PSC's response to the ten-day notice was appropriate, but fails to take any notice whatsoever of the paragraph in the very provision cited that defines any action by the state authority that is not arbitrary, capricious, or an abuse of discretion as appropriate. OSM's de novo review thus was not in accordance with law. 66 Further, both the withdrawal of Snyder's decision supporting the PSC and the ensuing reversal of the PSC's determination are arbitrary. The FAD states three reasons for its withdrawal of the previous director's determination: 67 (1) it appeared that the former Director did not consider the entire record available to OSM at the time of the Decision; (2) a preliminary analysis of the information then available to the former Director indicated that his decision was not supported by the weight of the evidence; (3) one day after announcing that he agreed with the PSC's decision, the former Director recused himself from further participation in matters involving specific persons associated with or issues involving North American, among others. 68 OSM Final Agency Decision (Aug. 18, 1993). 69 None of these reasons adequately supports the withdrawal of the former director's decision. The director's initial letter indicated that he had considered the complaint and the PSC's report, which discussed each of the relevant connections between Coteau and Basin. Although the FAD cites the previous director's failure to explicitly rely on the entire record in stating his determination, the FAD itself, in its discussion of the agreements between Basin and Coteau, does not cite any evidence that is not discussed in the PSC's report; there is no smoking gun in the record that the previous director could have overlooked. The letter confirming the director's decision refers explicitly to the agreements as normal business contracts, implying both that the agreements had been considered, and that the AVS Memo had been read. Thus, the previous director had considered and had based his determination on the relevant record. 70 Second, as discussed above, the standard the OSM is to apply to the PSC's decision is not whether it is supported by the weight of the evidence, but whether it was arbitrary or capricious. This standard is considerably more deferential than one determining whether a decision was supported by the weight of the evidence: whether the previous director's decision was supported by the weight of the evidence is immaterial. 71 Third, the FAD cites the previous director's recusal after issuing the determination that the PSC was correct as support for withdrawing the determination, but provides no evidence that impropriety occurred regarding the determination at issue. Without more, a later recusal does not provide reason for invalidating a previous determination. 72 In the FAD, OSM relies on Belville Mining Co. v. United States, 999 F.2d 989 (6th Cir.1993), to support its contention that the withdrawal was appropriate. In Belville, the court found that withdrawal of previous OSM decisions after a change in administrations was not arbitrary because the previous decisions were inadequate. The court cited the brevity of the letter announcing the decisions, and its lack of legal analysis or factual determinations, id. at 999, finding that, because the reason for reconsideration was a legitimate concern that the decisions were inadequate, [t]his case is thus distinguishable from a situation in which an agency uses 'the power to correct inadvertent ministerial errors ... as a guise for changing previous decisions because the wisdom of those decisions appears doubtful in the light of changing policies.'  Id. at 998 (quoting American Trucking Ass'ns, Inc. v. Frisco Transp. Co., 358 U.S. 133, 146, 79 S.Ct. 170, 177, 3 L.Ed.2d 172 (1958)). We find that Belville is inapplicable here, and that OSM indeed decided that the withdrawn decision was doubtful in the light of changing policies. The OSM decisions withdrawn in Belville were original OSM determinations of rights, not based on deferential review of primacy state regulatory determinations. Id. at 991. OSM cites the brevity of Snyder's letter announcing his determination that the PSC was correct as creating a situation analogous to Belville, but fails to recognize that Snyder appropriately relied on the PSC report to provide the legal and factual reasoning behind his determination. Upholding a decision under an arbitrary and capricious standard does not require the enunciation of reasoning that an original determination does: the upheld decision itself provides the reasoning. We therefore find that the withdrawal of Snyder's decision was arbitrary. 73 The FAD also offers no evidence that the PSC's determination was arbitrary or capricious. The determination of ownership and control rests almost entirely on the Agreement's mining plan approval and cost-plus provisions, both considered by the PSC and dealt with in the PSC's report in a reasonable manner. Far from identifying a clear error in judgment in the PSC's report, the FAD consists of flat assertions that the mining plan approval and cost-plus provisions demonstrate control. This contrasts with the PSC's careful analysis of these provisions as designed to allocate risk and protect each party's interests, and with the previous OSM administration's view that these are normal business contracts. 74 Further, the FAD cites as the primary basis for its decision the AVS Memo, which also engaged in a de novo review of the allegations of ownership and control, giving no deference to the PSC's determination. The AVS Memo, too, consists largely of conclusory assertions that the mining plan approval and cost-plus provisions constitute control by Basin. In the AVS Memo, the cost-plus arrangement is criticized as eliminating Coteau's risk as to changes in mining costs. The AVS Memo itself, however, goes on to note that the cost-plus arrangement also benefits Basin by providing a prearranged price that offers predictability and insulation against market fluctuations. AVS Memo at 4. The AVS Memo fails to observe that this arrangement then makes perfect sense as an arm's length exchange between Basin and Coteau, as opposed to an indicator of control, which was the assessment made of the cost-plus arrangement in the PSC's determination. We find that the reversal of the PSC's determination was arbitrary. 75 We find that Coteau has shown a strong likelihood of success on the merits in its action against the enforcement of OSM's Final Agency Decision.