Court Opinion

ID: 4108036
Source: CourtListenerOpinion
Date Created: 2016-12-16 18:03:02.550367+00
Date Added: 2024-06-11T07:46:08.665172
License: Public Domain

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 .,                 )        Supreme Court No. S-15891
EXXONMOBIL ALASKA                             )
PRODUCTION INC., and FOREST                   )        Superior Court No. 3AN-13-04430 CI
OIL CORPORATION,                              )
                                              )        OPINION
             Appellants,                      )
     v.                                       )        No. 7142 – December 16, 2016
                                              )
STATE OF ALASKA,                              )
DEPARTMENT OF REVENUE,                        )
                                              )

             Appellee.                        )

                                              )

             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 the procedures established in the Alaska Administrative Procedure Act (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.
              The legislature passed House Bill 118 in 1989, adding the “field size factor”
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-of­
value 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 be economically developed, we believe some
              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 on whether the fields were “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 these factors did not guarantee an advance ruling 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 advance ruling that the department 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
them jointly as the Initial Participating Areas (Initial PAs).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
approval by the commissioner, the area of productivity constitutes a participating 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, known as the Lisburne Participating Area (Lisburne PA). The working 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 and gas are separated from one another and from any waste present
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 Trans-
Alaska 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 from aggregating 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 from February
2003 to November 2004, DOR continued to explore options for addressing its concerns
about the interpretation of the phrase “economic interdependence.” In the February 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, the Satellite PAs and the Initial PAs could not be economically 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, the August 2004 draft, seeming to assume that DOR would 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
“economically interdependent.” The Decision then reviewed judicial decisions analyzing
the term in other legal contexts in jurisdictions outside of Alaska and a 1998 DOR
decision in which DOR aggregated 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, DOR concluded that the areas in question easily satisfied
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 “the backout phenomenon, taken together with highly disparate economic
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

      24
             See 15 AAC 05.001-05.050 (governing appeal procedures related to tax
matters under AS 43).
                                          -16-                                     7142
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, through correspondence, or by telephone, audio, or video teleconference, 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 a regulation adopted without 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]” of existing requirements are not 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 courts have applied the commonsense exception
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 twenty-
foot 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
achieved the desired interpretation through considerable, complicated effort, not through
a routine, [commonsense] interpretation of clear statutory language.” The Producers 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 demonstrate that DOR’s Decision was
not a departure from its previous interpretation of the Aggregation Statute.
              First, these documents were never meant to 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
              The Producers concede that they “do not claim that the [internal] documents
established DOR’s official position or policy.” They do, however, claim that 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
past precedent, 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.” 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 “so integrated as to be reasonably treated as an 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
articulate its understanding of the phrase “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 “economic interdependence” throughout these proceedings. 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 articulate what 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 alternative definitions 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