In the continuing a series of Trump deregulation failures, a federal judge in the Northern District of California rejected in harsh terms an effort by the Department of the Interior (DOI) to replace the Valuation Rule for royalties on oil, gas and coal from federal and Indian lands adopted by the Obama DOI. That 2016 rule had been developed after five years of review, comment and consideration by the agency. In State of California, et al. v. U.S. Department of the Interior, Senior Judge Saundra Brown Armstrong, a Bush appointee, held that DOI was arbitrary and capricious in replacing the existing regulation with the prior Valuation Rule, without providing a clear and reasoned explanation. The judge noted that DOI, without stating a basis, now accepted industry concerns the agency had only recently rejected, and faulted DOI for limiting the opportunity for public comment on the repeal.

Notably, there was no reference to “Chevron deference” in the court’s opinion. One hopes that the Department of Justice at least had the grace not to attempt to justify this repeal under that banner.

The system of accounting for oil, gas and coal royalties has been a concern of Congress for nearly forty years. In particular, critics claimed the system for setting royalties in “captive” or non-arms-length transactions between affiliated entities often resulted in the government receiving less than full value. In 2011, the Office of Natural Resource Revenue (ONRR), the DOI sub-agency dealing with royalties, published two advanced notices of proposed rulemaking (ANPR) to obtain suggestions for new methodologies. In 2015, ONRR then offered a Proposed Valuation Rule for comment for 120 days, and received over 1000 pages of comments from 300 commenters, and 190,000 petition signatories. After consideration of the comments, the agency finalized the proposed rule in July 2016 with a January 1, 2017 effective date.

Industry groups sued to enjoin the rule on December 29, 2016. ONRR under the new Administration then decided in February 2017, to postpone implementation of the Rule. When California and New Mexico filed suit to bar the postponement, the magistrate judge held the postponement violated the Administrative Procedure Act (APA), but decline to vacate the postponement notice because ONRR stated it was planning to repeal the Rule. ONRR then published two limited thirty day requests for comment on repeal and an ANPR for a new rule. It denied numerous requests for an extension of the comment periods.

What it Means

The history of this effort is a roadmap for the Trump Administration’s repeal and replace strategy, and the problems with that strategy identified by practitioners from the outset. The Administration cannot simply delay or defer implementation of regulations it does not like without complying with the APA. Numerous adverse court decisions have made that apparent.

Nor can it simply do a 180 on the agency conclusions previously reached in issuing those regulations. As Judge Armstrong makes clear, in the extensive comment periods leading to the original regulation, the industry opponents already made every conceivable argument for rejection or modification of the proposed regulation. If those comments were not found sufficient before, the agency has to offer some reasoned basis for reaching a different conclusion now. Yet, in the case of the Valuation Rule, the administration offered only conclusory statements. Indeed, the court also found that ONRR unduly constrained the scope and the comment period when it requested comments on the repeal of the Rule.

If the Administration persists with this approach to regulatory rewrites, it is likely to simply continue on its long trail of adverse court decisions. Even with a change of strategy, it is late in the game to expect any success in this term. Trump’s best hope for regulatory change may be that with a change of approach that follows the normal legal process, he may find some in a second term.