Shell Offshore Inc. v. Babbitt

Rule of Law:

An agency cannot significantly revise a long-established, consistent interpretation of its regulation without providing notice and comment under the Administrative Procedure Act, as such a change constitutes a new substantive rule.

Facts:

• Shell Offshore, Inc. (Shell) is a lessee in numerous federal leases for crude oil and gas production in the Auger Unit on the Outer Continental Shelf (OCS), and is required to pay royalties to the Department of the Interior (Interior).
• Interior regulations allowed lessees to deduct non-arms-length transportation costs from royalty payments, such as for pipelines owned by an affiliate like Shell’s Auger pipeline, and permitted the use of a Federal Energy Regulatory Commission (FERC) tariff rate if it was 'approved by the FERC' under 30 C.F.R. § 206.105(b)(5).
• From 1988 until 1993 or 1994, Interior's sub-agency, the Minerals Management Service (MMS), consistently accepted tariffs simply filed with FERC as 'approved by FERC' for the purpose of royalty calculations, without requiring a separate determination of jurisdiction from FERC.
• Shell filed a tariff with FERC on March 2, 1994, which FERC accepted and published on April 1, 1994, without protest.
• On July 7, 1994, Shell requested that MMS confirm its entitlement to deduct the accepted FERC tariff rate as transportation costs for its Auger Unit crude oil.
• MMS denied Shell's request on November 10, 1994, and after several administrative appeals, Interior issued a final decision on August 13, 1998, denying Shell's request, stating Shell failed to petition FERC for an affirmative determination of jurisdiction over the Auger pipeline.
• Thereafter, on December 18, 1998, MMS sent a 'Dear Payor' letter to Shell and other OCS lessees, formally announcing that lessees must now 'petition FERC' and receive 'a determination affirmatively stating that it has jurisdiction' before MMS would allow the use of FERC tariffs for royalty calculations.
• The Auger pipeline transports crude oil from the Auger Unit, and a substantial majority of this oil travels in a continuous stream to Illinois for refining, after passing through Louisiana.

Procedural Posture:

• Shell Offshore, Inc. (Shell) sued the Department of the Interior (Interior) in the United States District Court for the Western District of Louisiana, asserting claims under the Outer Continental Shelf Lands Act, the Administrative Procedure Act, and the Declaratory Judgment Act.
• Shell challenged Interior’s denial of its request to use its FERC tariff rate as the cost of transporting crude oil for purposes of calculating royalty payments.
• Both Shell and Interior moved for summary judgment in the district court.
• The district court denied Interior’s motion and partially granted Shell’s motion, holding that Interior’s decision was arbitrary and capricious, and that it was a new substantive rule requiring notice and comment under the APA.
• However, the district court limited Shell's ability to use the FERC tariff rate only for the portion of oil that traveled interstate (to Illinois) and not for oil that remained unrefined in Louisiana.
• Both Shell (as plaintiff-appellant-cross-appellee) and Interior (as defendants-appellees-cross-appellants) timely appealed the district court's decision to the United States Court of Appeals for the Fifth Circuit.