UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

OVINTIV USA, INC.,

Plaintiff, Case No. 1:21-cv-2552-RCL v.

DEBRA A. HAALAND, in her official capacity as Secretary of the United States Department of the Interior, et. al.,

Defendants.

MEMORANDUM OPINION

Plaintiff Ovintiv USA (“Ovintiv”) challenges what is, in essence, the government’s failure

to issue a refund. Ovintiv leased land from the federal government and extracted natural gas

products from that land. In exchange, Ovintiv paid a royalty to the government set at a proportion

of the value of what it produced. The firm was, however, permitted to deduct certain costs of

production from the royalties owed. One of those deductions, and the subject of the challenge

here, was for the reasonable actual costs incurred to transport the gas produced.

Under a contract with its gas processor, Ovintiv committed to selling certain minimum

barrels of gas product each day and transporting them via pipeline. If Ovintiv failed to deliver, it

agreed to pay the processor a fee equal to a set price multiplied by the number of missing barrels.

It then failed to meet its volume commitment and the processor assessed the fee. Ovintiv requested

that it be allowed to deduct from its government royalty obligations the part of the incurred cost

associated with “transportation shortfall.” Ovintiv contended that the amount was a reasonable,

actual, transportation cost. The government denied the request. Ovintiv administratively appealed

and, after the denial was affirmed, sued in this Court challenging the denial.

1 Upon consideration of the filings, applicable law, and the record, the Court agrees with

Ovintiv and concludes that the denial was arbitrary and capricious.

I. BACKGROUND

A. Statutory and Regulatory Overview 1

From time to time, the federal government leases government-owned land to companies

interested in extracting natural gas and natural gas liquids (“NGLs”) from that land. See Cont’l

Res., Inc. v. Gould (“Cont’l Res. I”),

, 32 (D.D.C. 2019). The leasing firm

(known as a lessee) must then pay royalties back to the government.

. The

Secretary of the Interior is responsible for leasing land that contains gas deposits,

and is

otherwise charged with administering the leasing and royalty system. Cont’l Res. I, 410 F. Supp.

3d at 32;

(“The Secretary of the Interior is authorized to prescribe necessary and

proper rules and regulations and to do any and all things necessary to carry out and accomplish the

purposes [of the federal leasing program].”);

§ 1711(a) (same); id. § 1751(a) (same). Inside

the Department of the Interior, the Office of Natural Resources Revenue (“ONRR”) 2 is responsible

for managing reporting and payment of royalties by lessees, as well as resolving objections or

conflicts between a lessee and the government. Cont’l Res. I, 410 F. Supp. 3d at 31.

The royalty to be paid by a lessee is based “on the ‘value of the production removed or sold

from the lease.’” Indep. Petroleum Ass’n of Am. v. DeWitt,

(D.C. Cir. 2002)

(quoting

(b)(1)(A)). The Secretary has “establish[ed] the value of production for

royalty purposes” through regulation.

et seq. The government also sets a

1 The Court and the parties relied on the regulations which were in effect when the government issued its decision in 2015 because those regulations determine the outcome in this case. See Pl.’s Mem. in Supp. Summ. J. (“Pl.’s Mem.”) 3 n.3, ECF No. 18-1; Defs.’ Opp’n 3 n.2, ECF No. 20. The Court notes, however, that the regulatory environment has changed significantly since that time. 2 ONRR was formerly called the Minerals Management Service. Cont’l Res., 410 F. Supp. 3d at 31.

2 proportion, such as one-sixth or one-eighth, which is applied to that value to determine the royalty

amount. DeWitt,

. Lessees self-report royalties to ONRR. See

(b)(1)(i).

Many of the finer details for how to calculate value of the production and royalties are

unimportant for the present lawsuit. What is key is the concept of a “[t]ransportation allowance[].”

§ 1206.156. A transportation allowance “allow[s] a deduction for the reasonable actual costs

incurred by the lessee to transport [gas or gas products] from a lease to a point off the lease.” Id.

§ 1206.156(a). In plainer English: a lessee may reduce the royalties that it owes the government

by deducting certain transportation costs.

When the transportation allowance does “not exceed 50 percent of the value” produced,

the lessee need not ask ONRR for permission to deduct the transportation allowance. Id.

§ 1206.156(c). If the proposed allowance does exceed that amount, the lessee must request that

ONRR approve the deduction by providing “all relevant and supporting documentation necessary

for ONRR to make a determination” that the “transportation costs incurred in excess of the

limitations . . . were reasonable, actual, and necessary.” Id. § 1206.156(c)(3). Ovintiv made just

such a request here.

Within the scheme of royalty calculations for federal gas and gas products, the

transportation allowance is significant. Indeed, Section 1206.157, governing “[d]etermination of

transportation allowances,” takes up approximately six full pages in the Code of Federal

Regulations. See id. For this case, two subparts are particularly relevant.

One subpart, titled “[a]llowable costs in determining transportation allowances,” states:

“You may include, but are not limited to (subject to the requirements of paragraph (g) of this

section), the following costs in determining [the transportation allowance].” Id. § 1206.157(f)

3 (emphasis added). The subpart goes on to list ten different allowable costs. Id. Examples of

allowable costs include “commodity charge[s] allow[ing] the pipeline to recover the costs of

providing service,” id. § 1206.157(f)(3), and “the costs of securing a letter of credit, or other surety,

that the pipeline requires you as a shipper to maintain under an arm’s-length transportation

contract,” id. § 1206.157(f)(10).

The other important subpart, which subpart (f) references, is subpart (g). It serves the

opposite function of subpart (f) by listing “[n]onallowable costs in determining transportation

allowances.” id. § 1206.157(g). Those are costs that “[l]essees may not include in determining

the . . . transportation allowance.” Id. (emphasis added). Examples include the fees and costs for

“storing production in a storage facility, whether on or off the lease, for more than 30 days,” id.

§ 1206.157(g)(1), and “fees [] pa[id] to hub operators for administrative services (e.g., title transfer

tracking) necessary to account for the sale of gas within a hub,” id. § 1206.157(g)(4).

One allowable cost and one nonallowable cost are critical to the agency’s decision here as

well as to Ovintiv’s challenge.

That allowable cost is “[f]irm demand charges paid to pipelines.” Id. § 1206.157(f)(1). In

relevant part, that allowable cost reads:

You may deduct firm demand charges or capacity reservation fees paid to a pipeline, including charges or fees for unused firm capacity that you have not sold before you report your allowance.

Id. In the underlying agency action, Ovintiv invoked (f)(1) to explain why the fee it paid was

deductible as a transportation allowance.

The relevant nonallowable cost is “[p]enalties you incur as shipper.” Id. § 1206.157(g)(3).

The relevant portions read:

(ii) Scheduling penalties. This includes penalties you incur for differences between daily volumes delivered into the pipeline and volumes scheduled or nominated at a receipt or delivery point;

4 (iii) Imbalance penalties. This includes penalties you incur (generally on a monthly basis) for differences between volumes delivered into the pipeline and volumes scheduled or nominated at a receipt or delivery point.

Id. Those penalties are relevant because ONRR invoked both to deny Ovintiv’s request for a

transportation allowance exceeding 50%.

B. Factual Background

i. The Relevant Agreements

During the relevant time period, Ovintiv was a federal lessee extracting raw gas on land in

Colorado. Denial of Appeal (“Director’s Decision”) 3, JA 31–43. 3 In 2012, Ovintiv entered into

a contract with gas processor Enterprise Gas Processing, LLC (“Enterprise”) called the NGL

Purchase Agreement (“2012 Agreement”). 2012 Agreement, JA 392–486. Under that contract,

Ovintiv agreed to deliver certain volumes of gas and gas products to Enterprise. Id. On

November 1, 2014, Ovintiv and Enterprise entered an amended agreement, the First Amended and

Restated NGL Purchase Agreement (“2014 Agreement”), JA 337–391. That 2014 Agreement is

the contract relevant for this case.

Enterprise did not own or operate pipelines connecting its processing plants with facilities

that separate NGLs into useful components. Director’s Decision 4. Accordingly, Enterprise

contracted with a pipeline company, Mid-America Pipeline Company (“Mid-America”), to

transport NGLs from its processing plans to those facilities. Id. As part of an agreement between

Enterprise and Mid-America, Enterprise was obligated “to deliver a certain volume of NGLs into

the Pipeline” and Mid-America had to accept that volume. Id. This commitment to volume

delivery was linked to Mid-America’s choice to expand a certain pipeline, the Rocky Mountain

3 The joint appendixes are available at ECF No. 22 (Volume I) and ECF No. 23 (Volume 2).

5 Pipeline, which transported NGLs for Enterprise. Mid-America Rocky Mountain Pipeline

Expansion Transportation Services Agreement (“Mid-America Expansion Agreement”) 1, JA

487–524. If Enterprise failed to meet its volume commitment, it would pay a specified price per

barrel that it failed to ship. Mid-America Expansion Agreement ¶ 4.1.2. That volume commitment

between Enterprise and Mid-America gave Mid-America the assurance necessary to expand the

pipeline and ultimately provides background on the commitments made by Ovintiv to Enterprise

in their 2014 Agreement. Specifically, as the Court will explain, the fee that Ovintiv paid

Enterprise for failure to deliver the committed volume of barrels per day was linked to the volume

commitments that Enterprise made to Mid-America.

Under the 2014 Agreement, Ovintiv and Enterprise agreed to certain “Sale and Purchase

Obligations.” 2014 Agreement ¶ 3.1. The agreement is complicated. For ease of understanding,

the Court will begin with a broad overview of the parties’ obligations before getting into specifics.

In sum, before 2012, Ovintiv was obligated to supply Enterprise with a volume of gas and

gas products produced by wells that began production before June 1, 2012. After the 2014

Agreement was signed, Ovintiv also agreed to supply Enterprise with production from wells that

began producing after June 1, 2012. Specifically, Enterprise committed to buying thousands of

barrels per day produced by those newer wells operated by Ovintiv. At the very least, Enterprise

was committed to purchasing 6,000 barrels of this newer production each day. And for those 6,000

barrels a day, Ovintiv agreed to pay a fee to Enterprise for each one that it failed to supply for

delivery via pipeline. That fee was what Ovintiv sought to have ONRR allow as a deduction from

its government royalty obligations.

ii. Ovintiv’s Volume Commitments

Moving now to the details. In the 2014 Agreement, volume produced by wells that began

operating after June 1, 2012 was treated differently than production from wells that began

6 operating before. Volume produced by wells that began operating after June 1, 2012 was termed

“New Production” by Enterprise and Ovintiv. Id. ¶¶ 1.9, 1.76, 1.84. Ovintiv agreed “to sell and

ratably deliver, or cause the ratable delivery of, the New Production to or for the account of

Enterprise each Day [subject to certain limitations].” Id. ¶ 3.1. “Old Production,” covered wells

that began operating before June 1, 2012. Id. In sum: Old Production was volume attributable to

wells that began operating before June 1, 2012, and New Production was volume attributable to

wells that began operating after.

The 2014 Agreement governed the parties’ commitment to sell and purchase New

Production. This commitment by Enterprise to purchase New Production was governed by a

formula:

(1) Primary Capacity + (2) Secondary Capacity + (3) Future Elected Capacity – Old Production

(but not in excess of Primary Capacity).

Id. ¶ 3.1B. Primary Capacity for the relevant time period was set at 24,000 Barrels Per Day

(“BPD”). Id. ¶ 3.2A.

Secondary Capacity was 6,000 BPD. Id. ¶ 3.3. The 2014 Agreement further specified that

the 6,000 BPD was “with take or pay obligations” 4 and that Secondary Capacity “shall only be (i)

utilized for New Production [and] (ii) utilized after Primary Capacity is fully utilized.” Id.

Future Elected Capacity was presented as an option for Ovintiv in the contract. Id. ¶ 3.4A.

Ovintiv could elect to “secure specified volumes of Future Elected Capacity” up to an aggregate

of 30,000 BPD and, in that event, Future Elected Capacity would be utilized for New Production

4 The meaning of which the parties dispute.

7 after Primary Capacity and Secondary Capacity were fully utilized. Id. ¶ 3.4B. The capacity

would be “under take or pay obligation.” Id. At no relevant time did Ovintiv elect for Future

Elected Capacity. But ONRR considered this option as part of its decision, so ultimately the

provision is relevant to the extent ONRR relied on this provision.

Taking all of that together, the 2014 Agreement set up a series of steps for determining

how Old Production and then New Production would be allocated. First, Old Production would

be allocated up to the limit of Primary Capacity. Id. ¶ 3.5. Assuming that Old Production was less

than Primary Capacity, New Production would be allocated to fill Primary Capacity. Id. After

Primary Capacity was filled, Secondary Capacity would be filled by any leftover New Production.

And, if Secondary Capacity were exhausted, any Future Elected Capacity would have been

utilized, if Ovintiv had decided to elect that option. Id.

We can now fill in the earlier formula with the values established above.

24,000 BPD (Primary Capacity) + 6,000 BPD (Secondary Capacity) + 0 (Future Elected

Capacity) – Old Production (up to 24,000 BPD) = the amount of New Production that Enterprise

was committed to purchasing each day.

In sum then, Enterprise committed to purchasing 30,000 BPD of New Production less Old

Production up to 24,000 BPD. By way of example, if Ovintiv had 22,000 BPD of Old Production,

Enterprise would be obligated to purchase up to 8,000 BPD of New Production. Notice as well

that, no matter the amount of Old Production, Enterprise was always committed to purchasing

6,000 BPD of New Production. That is because Secondary Capacity could only be filled with New

Production. Id. ¶ 3.3.

8 iii. The Relevant Fee Structure

In the 2014 Agreement there were two kinds of fees: those associated with actual delivery

of New Production and those associated with failure to deliver the minimum amounts of New

Production required for Secondary Capacity and Future Elected Capacity.

For actual delivery, Ovintiv was required to pay two kinds of fees: a “Transportation Fee”

and a “Fractionation Fee.”

Enterprise charged a Transportation Fee for each delivered gallon of New Production. Id.

¶ 4.3. The Transportation Fee was different for Primary Capacity, Secondary Capacity, and Future

Elected Capacity. Id. For Primary Capacity and Future Elected Capacity it was set at a specific

price per gallon ($.1292 for Primary Capacity; $.2241 for Future Elected Capacity) to begin

increasing on July 1, 2015. Id. The fee for Secondary Capacity was set to match the “Volume Fee

provided for in the” Mid-America Expansion Agreement. Id. ¶¶ 1.72, 4.3. As the Court discussed

earlier, the Mid-America Expansion Agreement governed the fee and volume commitments

between Enterprise and Mid-America for transportation on the expanded Rocky Mountain

Pipeline.

The formula for the Fractionation Fee is largely unimportant, except to note that it involved

paying a “Fixed Fee for Fractionation” for each gallon of New Production delivered. 5 Id. ¶ 4.4.

That Fixed Fee was set at a certain price per gallon for each of the three capacities, subject to an

irrelevant exception. Id.

The overview of these figures and fees is important because the figures and fees ultimately

frame the meaning and effect of the crucial provision of the 2014 Agreement: the requirement that

Ovintiv pay Enterprise whenever Ovintiv failed to supply the entirety of its Secondary Capacity

5 The full formula was: ($.0080/(Gallon * (Fuel Index/3.50))) + Fixed Fee = Fractionalization Fee.

9 or Future Elected Capacity. Id. ¶ 4.5. That “Deficiency Fee” was to be paid monthly to Enterprise

based on the amount of volume that Ovintiv failed to supply in Secondary Capacity (and Future

Elected Capacity if Ovintiv had acted on its option). Id. There was no fee for failure to supply all

of Primary Capacity.

Under the contract, the fee formulas for both Secondary Capacity and Future Elected

Capacity differed slightly from each other. The Court emphasizes below the differences in

language.

The Deficiency Fee for Secondary Capacity (“SC Deficiency Fee”) was calculated by the

following formula:

(Fixed Fee for Fractionation for Secondary Capacity + Transportation Shortfall Fee for

Secondary Capacity) * the month’s shortfall of Secondary Capacity volume

=

SC Deficiency Fee

Id. The Transportation Shortfall Fee for Secondary Capacity was, like the Secondary Capacity

Transportation Fee, set by reference to the transportation services agreement between Enterprise

and Mid-America for transportation on the expanded Rocky Mountain Pipeline. Id. ¶¶ 1.72, 4.3.

Specifically, the 2014 Agreement set the Transportation Shortfall Fee for Secondary Capacity as

equal to the “Shortfall Volume Fee” in the agreement between Enterprise and Mid-America. Id.

The Deficiency Fee for Future Elected Capacity (“FEC Deficiency Fee”) was calculated

by an almost identical formula:

10 (Fixed Fee for Fractionation for Future Elected Capacity + Transportation Shortfall Fee for

Future Elected Capacity)*the month’s shortfall of Future Elected Capacity volume

=

FEC Deficiency Fee

Id. ¶ 4.5. The Transportation Shortfall Fee for Future Elected Capacity was, per the 2014

Agreement, set to be same as the “Transportation Fee then in effect for Future Elected Capacity.”

Id. ¶ 4.3.

C. Underlying Agency Action

Ovintiv ultimately failed to satisfy its volume commitments for Secondary Capacity and

was assessed a SC Deficiency Fee by Enterprise. Director’s Decision 6. Ovintiv then submitted

a request to ONRR to exceed the 50% limit for deductions from the amount of royalties owed to

the government. Id. In its request, Ovintiv asked to deduct the entire SC Deficiency Fee that it

paid Enterprise. Id. Ovintiv made the request under the theory that the SC Deficiency Fee was

deductible as an allowable firm demand charge or capacity reservation fee under

(f)(1).

ONRR denied the allowance.

Ovintiv then modified its request for an allowance and appealed to the Director of ONRR.

Recall that the SC Deficiency Fee consisted of two fees—the Fixed Fee for Fractionation and

the Transportation Shortfall Fee—together multiplied by the number of barrels that went

unshipped. Under its modified request, Ovintiv abandoned seeking the portion of the SC

Deficiency Fee associated with the Fixed Fee, and instead asked only for the Transportation

Shortfall Fee portion. Id. at 7. To reiterate—Ovintiv was charged by Enterprise for failing to

provide sufficient barrels of New Production each day and Ovintiv asked ONRR to allow for a

11 deduction equal to the part of that charge associated with “Transportation Shortfall.” See id.

Moving forward, the Court will refer to that portion of the SC Deficiency Fee (Transportation

Shortfall Fee for Secondary Capacity * the month’s shortfall of Secondary Capacity volume) as

simply the “Challenged Fee.”

The Director described Ovintiv’s appeal as presenting two issues:

A. Was the [Challenged] Fee paid to reserve Pipeline capacity, or was it assessed as a penalty because Ovintiv failed to meet its Secondary Capacity volume commitment?

B. Does the Denial contradict either DeWitt or the Director’s Decision in Maxus?

Id. The Director ultimately determined that the Challenged Fee was not a transportation allowance

and affirmed the earlier denial. Id. at 13.

On the first issue, the Director concluded that Ovintiv had failed to show that “the

[Challenged] Fee was an ordinarily allowable firm demand or capacity reservation fee, under

(f)(1).” Id. at 7.

The Director began by noting that ONRR considers agreements and the fees contained

within those agreements based on substance rather than the labels assigned by the parties. Id. at 8

(citing 62 Fed. Reg. at 65,753). She then defined a firm demand charge and capacity reservation

fee as being “paid to reserve ‘a guaranteed amount of continuously available pipeline capacity.’”

Id. (quoting DeWitt,

). Citing to DeWitt again, the Director concluded that, for a

fee to be eligible as a firm demand charge or capacity reservation fee, the “fee in question must be

paid to a pipeline company to reserve pipeline capacity, regardless of whether the capacity was

used or not.”

(citing DeWitt,

). The Director also quoted DeWitt for the

proposition that such a fee must be “upfront.”

at 2 (quoting DeWitt,

). The

Director contrasted firm demand charges and capacity reservation fees with a fee “charged only if

12 a shipper failed to meet its delivery commitment”—a kind of cost she concluded was not permitted

as a transportation allowance. Id. at 8. The Director cited to two regulatorily defined versions of

that nonallowable cost: “scheduling penalties” and “imbalance penalties.” Id. at 8 & n.40 (citing

(g)(3)(ii) and (iii)). She described those penalties as “not actual and

reasonable transportation costs, but rather ‘economic disincentives for shipper actions’” and

therefore not permissible transportation allowances.

at 8–9 (citation omitted).

Applying that understanding to the situation before her, the Director concluded that the

“[Challenged] Fee was not paid to reserve pipeline capacity” and was rather paid “because

[Ovintiv] failed to meet its Secondary Capacity volume commitment.” Id. at 9. Consequently, the

Director concluded that “the [Challenged] Fee is a penalty, not an ordinarily allowable firm

demand or capacity reservation fee.” Id.

The Director then rejected several counterarguments.

First, the Director addressed several non-royalty cases where a shipper paid to reserve

pipeline capacity. Id. (citing Rockies Exp. Pipeline, LLC v. Dep’t of the Int., 11-2 B.C.A. (CCH)

¶ 34847,

(Bd. Cont. App. 2011), aff’d in part, rev’d in part, Rockies Exp.

Pipeline LLC v. Salazar,

(Fed. Cir. 2013); Suncor Energy Mktg. Inc. & Suncor

Energy (U.S.A.) Inc.,

(Sept. 17, 2010); Enlink Crude Pipeline, LLC,

(Nov. 16, 2016)). The Director concluded that these cases, especially Rockies

Express, supported the Director’s conclusion because the shipper “was required to pay the fee

whether it shipped the reserved volumes or not. So, unlike the Deficiency Fee here, the reservation

charge the [shipper] owed . . . was a firm demand or capacity reservation fee.” Id. at 10.

Second, the Director rejected Ovintiv’s contention that the Challenged Fee “was not a

penalty because it was compensatory rather than punitive (i.e. it was paid to compensate Enterprise

13 for pipeline capacity enlargement).” Id. Under Ovintiv’s theory, “because [Mid-America]

recently expanded [its] pipeline, the Deficiency Fee represented a portion of the more expensive

commodity charges . . . when the Deficiency Fee, Transportation Fee, and Fractionation Fee were

considered together, they have the effect of reserving pipeline capacity.” Id. The Director found

the argument unpersuasive because “[f]irm demand or pipeline capacity reservation fees, however,

are limited to fees that specifically reserve capacity,” and then, relying on a regulation promulgated

by the Federal Energy Regulatory Commission (“FERC”), explained that “any other fee ‘that has

the effect of guaranteeing revenue’ is excluded.” Id. (quoting

(e)). The Director

further reasoned that accepting Ovintiv’s argument would transform “penalty fees assessed to a

shipper for failure to meet a contractual volume commitment” into firm demand or capacity

reservation fees therefore “render[ing] the distinction between

(f)(1) and

§ 1206.157(g)(3)(ii) and (iii) effectively moot.” Id. Accordingly, the Director rejected Ovintiv’s

second counterargument. Id.

Third, the Director addressed Ovintiv’s contention that, in ONRR’s original denial, it

recognized that capacity reservation language was included in the Future Elected Capacity portion

of the 2014 Agreement, but not in the Secondary Capacity portion, even though both had identical

structures. Id. at 11. In response, the Director distinguished the SC Deficiency Fee from the FEC

Deficiency Fee. Id. Specifically, the Director explained that the Transportation Shortfall Fee

portion of the FEC Deficiency Fee was equal to “the Transportation Fee then in effect for Future

Elected Capacity.” Id. (quoting the 2014 Agreement). However, the Director noted that the

Transportation Shortfall Fee for Secondary Capacity was not equal to the Transportation Fee for

Secondary Capacity, and determined instead that it was “a separate penalty fee.” Id. Therefore,

“while the ‘Future Elected Capacity’ section of the Sales Contract may contain capacity

14 reservation language, the functional equivalent of the Deficiency Fee for ‘Future Elected Capacity’

is distinct from the Secondary Capacity’s Deficiency Fee.” Id.

Fourth, the Director rejected the contention that the 2014 Agreement’s language regarding

“take or pay obligations” “showed that the Deficiency Fee reserved capacity.” Id. In its entirety,

the Director’s reasoning was as follows: “It is unclear, however, from the Sales Contract what

constitutes a Secondary Capacity ‘take or pay obligation,’ and the mere mention of ‘take or pay

obligations’ does not substantiate Ovintiv’s claim.” Id.

On the second question, the Director concluded that DeWitt and a prior decision by the

Director in Maxus Energy Corp., ONRR-11-0035-OCS (June 27, 2013), did not support Ovintiv’s

position.

The Director explained that, in DeWitt, the D.C. Circuit held that even the unused portion

of a firm demand or capacity reservation fee—that is, the portion of the fee paid to reserve capacity

never used—must be deductible as an actual transportation cost. Id. at 12. This had overturned a

prior ONRR determination to the contrary. Id. The Director distinguished DeWitt because the

Challenged Fee “did not reserve capacity, but rather was assessed because Ovintiv failed to satisfy

its Secondary Capacity volume commitment” and therefore concluded that DeWitt was

inapplicable. Id.

The Director went on to describe how Maxus involved a contract which required the

shipper to pay a set fee for the actual volume of gas shipped as well as the same fee for any volume

below the minimum volume required under the contract. Id. The Director in Maxus concluded

that the fee charged for failing to meet minimum volume was deductible because it “was paid to

reserve pipeline capacity: it was charged whether the volumes were shipped or not.” Id. at 13.

Distinguishing the situation before her, the Director determined that “the [Challenged] Deficiency

15 Fee was not paid to reserve Pipeline capacity, but rather as a penalty for failing to meet Secondary

Capacity volume commitments” and therefore Maxus’s reasoning did not apply. Id.

Based on those reasons, the Director affirmed the denial of Ovintiv’s request. Id. Ovintiv

then appealed to the Interior Board of Land Appeals which almost immediately lost jurisdiction of

the appeal when the deadline to review the decision expired—making the Director’s Decision final

agency action reviewable by this Court. Id.; JA 1–2.

D. Procedural History of this Lawsuit

Ovintiv subsequently filed suit in this Court seeking relief under the Administrative

Procedure Act (“APA”), the Mineral Leasing Act (“MLA”), and the Fifth Amendment’s Due

Process Clause. Compl., ECF No. 1. Ovintiv moved for summary judgment on all counts. Pl.’s

Mot., ECF No. 18. The federal defendants (Deb Haaland, Secretary of the Interior; Kimbra Davis,

Director of ONRR; and the United States Department of the Interior) opposed. Defs.’ Opp’n.

Ovintiv Replied. Pl.’s Reply, ECF No. 21. Upon consideration of the applicable law, the parties’

briefing, and the record, the Court will SET ASIDE the Director’s action and REMAND for

further proceedings consistent with this opinion.

II. LEGAL STANDARDS

When plaintiffs “seek[] review of an agency’s actions, the [typical summary judgment]

standard under Fed. R. Civ. P. 56(a) does not apply.” Beyond Nuclear v. Dep’t of Energy,

(D.D.C. 2017). Instead, a court must decide “as a matter of law whether the

agency action is supported by the administrative record and otherwise consistent with the APA

standard of review.” Coe v. McHugh,

(D.D.C. 2013). Summary

judgment in such cases is favored. See Zemeka v. Holder,

(D.D.C. 2013).

And this Court “sits as an ‘appellate tribunal’” with the purpose of “answer[ing] the[] legal

questions based on the evidence in the administrative record.” Truitt v. Kendall,

167, 174 (D.D.C. 2021) (quoting Am. Bioscience, Inc. v. Thompson,

(D.C.

Cir. 2001)).

“The APA provides the bedrock principles and standards by which a court will review the

lawfulness of agency actions.” Torres v. Del Toro, No. 1:21-cv-306 (RCL),

,

at *4 (D.D.C. Oct. 5, 2022) (citing

). Under the APA, a court shall “hold unlawful

and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law.”

(2)(A).

When considering whether an action is “arbitrary, capricious, [or] an abuse of discretion,”

a court reviews the agency’s reasoning in a way that is “narrow and a court is not to substitute its

judgment for that of the agency.” Motor Vehicle Mfrs. Ass’n v. State Farm,

(1983);

Jackson v. Mabus,

(D.C. Cir. 2015). Instead of de novo review, the Court

“assess[es] only whether the decision was based on a consideration of the relevant factors and

whether there has been a clear error of judgment.’” Cigar Ass’n of Am. v. FDA,

(D.C. Cir. 2021) (quoting Dep’t of Homeland Sec. v. Regents of the Univ. of California,

(2020)). “[T]he agency must examine the relevant data and articulate a satisfactory

explanation for its action including a ‘rational connection between the facts found and the choice

made.’” State Farm,

(quoting Burlington Truck Lines v. United States,

(1962)). In sum, “the agency must explain why it decided to act as it did,” Butte Cnty.

v. Hogen,

(D.C. Cir. 2010), and the reason for the agency’s decision must be

“both rational and consistent with the authority delegated to it by Congress,” Xcel Energy Servs.

Inc. v. FERC,

(D.C. Cir. 2016). “[T]he party challenging the action bears the

burden of proof.” Nat’l Lifeline Ass’n v. FCC,

(D.C. Cir. 2020).

17 Linked to that deferential review is a “foundational principle of administrative law” which

requires “that judicial review of agency action is limited to the grounds that the agency invoked

when it took the action.” Regents of the Univ. of California,

(internal quotation

marks and citation omitted). “[P]ost hoc rationalizations” by litigation counsel are not to be

accepted. State Farm,

. Therefore, “an agency’s action must be upheld, if at all, on

the basis articulated by the agency itself.”

Nevertheless, a Court may “uphold a decision of

less than ideal clarity if the agency’s path may reasonably be discerned.”

(citation

omitted).

Finally, an agency action is “‘not in accordance with law’ if it violates some extant federal

statute or regulation.” E. Band of Cherokee Indians v. Dep’t of the Interior,

,

97 (D.D.C. 2021) (quoting

(2)(A)), appeal dismissed, No. 21-5114,

(D.C. Cir. Jan. 5, 2022). In some instances, an agency’s interpretation of its own regulation

will be accorded deference by a reviewing court. Kisor v. Wilkie,

(2019);

U.S. Dep’t of Air Force v. Fed. Lab. Rels. Auth.,

(D.C. Cir. 1991) (explaining

that deference is not due to one agency’s “interpretation of regulations promulgated by other

agencies”). Specifically, “[c]ourts defer to an agency’s interpretation of its own regulation if the

regulation in question is ‘genuinely ambiguous’ and if the agency’s reading is reasonable.” Doe

v. SEC,

(D.C. Cir. 2022) (per curiam) (quoting Kisor, 139 S. Ct. at 2415–16

(2019)). 6

“The interpretation must be the agency’s ‘authoritative’ or ‘official position,’ ‘implicate its

substantive expertise’ and reflect ‘fair and considered judgment’ to receive deference.”

(quoting Kisor,

at 2416–18). In sum then, a court must consider whether (1) the

6 This deference is called “Auer deference” in reference to Auer v. Robbins,

(1997).

18 relevant regulation is the agency’s own regulation; (2) it is genuinely ambiguous; (3) the

interpretation meets the factors that make it the agency’s official and legitimate position; and (4)

the agency’s reading is reasonable. See

III. DISCUSSION

Ovintiv challenges the Director’s Decision on several grounds. It argues that the Director

acted arbitrarily and capriciously by (1) reasoning that the Challenged Fee was a penalty, Pl.’s

Mem. 21–23; (2) irrationally failing to treat the Challenged Fee as a cost of transportation,

at 23–27; (3) irrationally applying the regulation on transportation deductions,

at 27–32; (4)

irrationally likening the Challenged Fee to those penalties listed in

(g)(3)(ii)

& (iii),

at 32–35; (5) and departing from precedent set in DeWitt and Maxus,

at 35–37.

Ovintiv also argues that the Director’s Decision is not entitled to deference because the Director

relied, in part, on a regulation promulgated by FERC.

at 37–40.

Most of those arguments are ultimately different ways of getting at the same points.

Reformulating slightly, the Court will address the following in turn. First, in order to evaluate the

Director’s Decision, the Court will determine what kind of deference it is entitled to receive.

Second, the Court will consider whether it was arbitrary and capricious for the Director to conclude

that the Challenged Fee was not a firm demand charge or capacity reservation fee. Finally, the

Court will consider whether the Director’s conclusion that the Challenged Fee should be

understood as a penalty—and therefore not an allowable cost of transportation—was arbitrary and

capricious.

Ultimately, the Director’s Decision is deserving of the standard deferential inquiry into

whether it “was the product of reasoned decisionmaking.” State Farm,

. The

Director’s Decision fails that basic test. Her stated reasons for finding that the Challenged Fee

was not deductible under Section 1206.157(f)(1) were at times contradictory, in conflict with a

19 prior decision by the Director, or lacking any explanation at all. The Director’s further

determination that the Challenged Fee was a penalty similarly lacks reasoned explanation.

Accordingly, the Court will set aside her action and remand for further proceedings.

A. The Director’s Decision is Entitled to Deference for Reasoned Decisionmaking, but not Auer Deference

Ovintiv argues that the Director’s Decision is not entitled to any deference because the

Director unreasonably interpreted her own unambiguous regulation,

(f), and

to do so, relied in part on a FERC regulation,

(e). Pl.’s Mem. 27–32, 37–40.

The government opposes primarily under the theory that Ovintiv is confusing “deference afforded

to an agency’s decision under the APA . . . with the deference afforded an agency’s interpretation

of its own ambiguous regulations under Auer.” Defs.’ Opp’n 27–30. The government also argues

that the Director did not interpret the FERC regulation but rather “invoked” it “to provide context

for and insight into what constitutes a firm demand charge or capacity reservation fee under

ONRR’s own regulation [Section 1206.157(f)(1)].”

Finally, the government contends that the

Director’s “interpretation of [Section 1206.157(f)(1)] is entitled to deference.”

(emphasis in

original).

Ultimately, Ovintiv and the government are both right in part. The reasoning of the

Director’s Decision is straightforwardly subject to deference such that the Court will “assess only

whether the decision was based on a consideration of the relevant factors and whether there has

been a clear error of judgment.’” Cigar Ass’n of Am.,

(D.C. Cir. 2021) (quoting

Regents of the Univ. of California,

). But interpretation of regulations is subject

to the strictures of Auer deference. The two may be separated in a rather straightforward way;

interpretation allows the agency “to say what its own [ambiguous] rules mean,” Kisor,

, while agency reasoning involves how the agency applies its rules and explains its

20 reasoning. The two concepts may, at times “overlap at the margins,” cf. Babbitt, 92 F.3d at 1258

(citation omitted), but in general that distinction provides the guideposts necessary to understand

which kind of deference is at issue.

The government invokes Auer deference for the Director’s interpretation of Section

1206.157(f)(1). Defs.’ Opp’n 28. As the Court previously discussed, that subpart governs firm

demand charges and capacity reservation fees. Those terms are not defined in ONRR’s regulation.

However, in the Director’s Decision, she seemed to consider that several requirements must be

met for a payment to fall under Section 1206.157(f)(1). First, the payment must be “paid to reserve

‘a guaranteed amount of continuously available pipeline capacity,’” Director’s Decision 8 (quoting

DeWitt,

), meaning “[f]irm demand or pipeline capacity reservation fees[] are

limited to fees that specifically reserve capacity.” Id. at 10. Second, the payment must be made

“regardless of whether the capacity was used or not.” Id. at 8 (citing DeWitt,

);

id. at 10 (“whether [the shipper] shipped the reserved volume or not.”). Third, “any other fee ‘that

has the effect of guaranteeing revenue’ is excluded.” Id. (quoting

(e)).

The government does little to explain why those statements by the Director ultimately merit

Auer deference—other than the conclusory statement that interpretations of regulations receive

deference. Indeed, it is not even clear whether the government is arguing that such statements

should be given Auer deference in this case, or rather that the Director is generally entitled to

produce authoritative interpretations deserving of deference. Nevertheless, the Court will evaluate

whether the statements made here are subject to Auer deference, and answers that question no.

The Director’s stated requirement that Section 1206.157(f)(1) only covers fees that

specifically reserve capacity, whether the capacity was used or not, is plainly not entitled to Auer

deference. It does not constitute a “fair and considered judgment” nor “the agency’s authoritative

21 or official position” of how to interpret the regulation. Doe,

(internal quotation

marks and citation omitted). The requirement is not a fair and considered judgment because, for

support, the Director merely quoted or cited the D.C. Circuit’s decision in DeWitt. The Director

provided no additional support or reasoning outside the appeal to the D.C. Circuit authority. To

be fair and considered, the Director would have to, at the very least, justify her interpretation using

policy and an appeal to the tools of interpretation. See Nat’l Lifeline, 983 F.3d at 511–12. But the

Director here provided neither, merely parroting her understanding of the Circuit’s opinion.

Because, “an agency has no special competence or role in interpreting a judicial decision,” there

is no fair and considered judgment justifying deference. See Glatt v. Fox Searchlight Pictures,

Inc.,

(2d Cir. 2016) (quoting State of N.Y. v. Shalala,

(2d Cir.

1997)); cf. U.S. Dep’t of Just. v. Fed. Lab. Rels. Auth.,

(D.C. Cir. 2001)

(applying the same principle in the context of deference to an agency’s view of a statute’s

interpretation). For similar reasons, the statements are not “the agency’s authoritative and official

position.” See Kisor,

. Restatement of the purported holding of a prior judicial

decision is not obviously a “vehicle[]” that would be “understood to make authoritative policy in

the relevant context.” See

(citation omitted). 7

The Director also failed to properly understand DeWitt (a case for which undersigned was

the district court judge). The case did not hold that the only valid costs under Section

1206.157(f)(1) consist of “upfront reservation fee[s]” that “secure a guaranteed amount of

continuously available pipeline capacity” and are “nonrefundable.” See DeWitt,

.

Instead, the Circuit was focused on whether, when fees do have those characteristics, but the

7 The Director also stated that such a fee must be paid “upfront.” Director’s Decision 2. That language was never repeated, and it does not appear that the requirement was ever applied by the Director to the Challenged Fee. However, the Court notes that the “upfront” language originated in DeWitt and is similarly not an authoritative nor reasoned interpretation of the regulation. See Director’s Decision 2.

22 capacity reserved goes unused, ONRR could properly exclude the fees as not “actual transportation

costs.”

The Circuit held that the government had failed to sufficiently support the conclusion

that fees for unused capacity were nondeductible.

at 1043 (citing State Farm,

).

As the panel explained, “it is hard to see how money paid for assurance of secure transportation is

not ‘for transportation.’” Id. at 1042. The rule to be taken from the case is not that only costs

structured as upfront, nonrefundable, and securing a guaranteed amount of pipeline are proper

under Section 1206.157(f)(1). Rather, the takeaway is merely that ONRR must reasonably

evaluate costs submitted and explain whether they are for actual transportation, or not. See id.

at 1043 (“While some reason may lurk behind the government’s position, it has offered none, and

we have no basis for sustaining its conclusion.”).

The Director’s additional statement that “any other fee ‘that has the effect of guaranteeing

revenue’ is excluded,” Director’s Decision 8 (quoting

(e)), is also not entitled to

Auer deference. Courts “generally do not accord deference to an agency’s interpretation of

regulations promulgated by another agency that retains authority to administer the regulations.”

Amerada Hess Pipeline Corp. v. FERC,

(D.C. Cir. 1997). While sometimes

Auer deference may still be justified if an agency actually adopts another agency’s regulation, or

is given authoritative control over that regulation, neither circumstance occurred here. See, e.g.,

Paralyzed Veterans of Am. v. D.C. Arena L.P.,

(D.C. Cir. 1997) (deferring to

the agency’s interpretation after it adopted the regulation of a different agency), abrogated on

other grounds by Perez v. Mortg. Bankers Ass’n,

(2015); Amerada Hess Pipeline, 117

F.3d at 600–01 (deferring when FERC “adopted the rules and regulations of” a different agency

when the other agency’s jurisdiction over pipelines was transferred to FERC); Sec’y of Lab., Mine

Safety & Health Admin. v. Excel Mining, LLC,

, 6–7 (D.C. Cir. 2003) (similarly

23 deferring to an adopted regulatory interpretation). Indeed, the government confirms that “the

Director neither adopted nor purported to interpret FERC’s regulation.” Defs.’ Opp’n 20–21.

Consequently, the “effect of generating revenue” requirement does not merit deference either. 8

The Director has not provided an interpretation that is entitled to Auer deference.

Therefore, the Director’s Decision, in its entirety, will be subject to the standard review for

reasoned decisionmaking.

B. The Director’s Conclusion that the Challenged Fee Could not be Deducted Under Section 1206.157(f)(1) Was Arbitrary and Capricious

Ovintiv’s primary argument in front of ONRR was that the Challenged Fee was deductible

under Section 1206.157(f)(1). The Director disagreed and concluded that it was not an allowable

firm demand charge or capacity reservation fee because it “was not paid to reserve pipeline

capacity.” Director’s Decision 9, 13. That denial was arbitrary and capricious.

The Director’s conclusion that the Challenged Fee did not qualify under Section

1206.157(f)(1) was arbitrary and capricious in three ways. First, the Director unreasonably treated

the SC Deficiency Fee differently than the FEC Deficiency Fee. Second, the Director attempted

to distinguish her prior decision in Maxus without reasoned explanation. Third, the Director

summarily disregarded Ovintiv’s argument that the “take or pay obligations” language in the 2014

Agreement supported its position that the Challenged Fee reserved pipeline capacity. Because that

leaves the Court without a “satisfactory explanation for [the agency’s] action including a ‘rational

connection between the facts found and the choice made,’” those errors require the Court to set

8 The government does not suggest, and indeed appears to deny, that the Director’s Decision merits Auer deference for any other interpretation. See Defs.’ Opp’n 16–18, 27–30. The government specifically disclaims that the Director interpreted

(g)(3) (which discusses scheduling penalties and imbalance penalties).

The Court agrees. See Director’s Decision 8–10. Therefore, there is no authoritative interpretation to defer to under Auer. See Doe,

.

24 aside the Director’s Decision. See State Farm,

(quoting Burlington Truck Lines,

).

i. The Director Unreasonably Distinguished the SC Deficiency Fee from the FEC Deficiency Fee

First, the Director failed to reasonably explain why there was “[a] functional difference

between a charge for ‘Future Elected Capacity’ shortfall volumes, which Ovintiv allege[d] that

ONRR considers to be an allowable firm demand charge, and the [Challenged] Fee, which was

disallowed.” Director’s Decision 11. To distinguish the SC Deficiency Fee and the FEC

Deficiency Fee, the Director characterized the former as involving a “separate penalty fee” but

stated that the latter “may contain capacity reservation language.”

As a reminder, the

Transportation Shortfall Fee for Secondary Capacity equaled the “Shortfall Volume Fee” in the

agreement between Enterprise and Mid-America. 2014 Agreement ¶¶ 1.72, 4.3. On the other

hand, the Transportation Shortfall Fee for Future Elected Capacity equaled the “Transportation

Fee [in the 2014 Agreement] then in effect for Future Elected Capacity.” Id. ¶ 4.3. Based on the

difference in the fees, the Director concluded that “the functional equivalent of the Deficiency Fee

for ‘Future Elected Capacity’ is distinct from the Secondary Capacity’s Deficiency Fee.”

Director’s Decision 11. That conclusion lacks a reasoned explanation.

The key difference between the two fees was simply the amount that Ovintiv was required

to pay for each barrel not supplied. In all other respects, the structure of the fees was identical; for

every barrel that Ovintiv failed to supply, it was charged a fee. Whether it be for Secondary

Capacity or Future Elected Capacity, if Ovintiv failed to deliver 1,000 barrels, it was charged the

fee multiplied by 1,000. If it met its required volume, it paid nothing.

The Director failed to explain why the difference in the amount of per-barrel payment

sufficed to transform one fee into capacity reservation language and the other into a separate

25 penalty fee. 9 The Court will nevertheless attempt to “reasonably [] discern[]” the Director’s

reasoning. See Casino Airlines, Inc. v. Nat’l Transp. Safety Bd.,

(D.C. Cir.

2006) (quoting Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc.,

(1974)).

The only possible explanation this Court can discern is that the Director determined that Section

1206.157(f)(1) only applies when a fee charges the precise amount per unshipped barrel as the

shipper would be charged for transportation of a shipped barrel. After all, that is the only

difference between the Challenged Fee and the transportation shortfall portion of the FEC

Deficiency Fee. It would also partially explain the Director’s discussion of the Maxus decision,

which approved a fee that charged the same amount for shortfall volume as shipped volume. See

infra Part III.B.ii.

Assuming that this was the basis for the denial, the Director’s Decision fails the arbitrary

and capricious test. First, the Director never explained why the fee for unshipped barrels must

match the fee for shipped barrels, and the answer is not so obvious that the Court can affirm without

additional explanation. See State Farm,

. Second, that basis would also indicate

that the Director “entirely failed to consider an important aspect of the problem before [her].” Pub.

Citizen v. Fed. Motor Carrier Safety Admin.,

(D.C. Cir. 2004) (internal

quotation marks and citation omitted). Specifically, the Director failed to explain why Ovintiv

could not simply deduct the Transportation Shortfall Fee for Secondary Capacity up to the amount

of the Transportation Fee for Secondary Capacity—while any leftover amount would be

9 It is also undefined and ultimately unclear what exactly “capacity reservation language” means. The Director’s Decision only uses that term twice—both times when distinguishing the SC Deficiency Fee from the FEC Deficiency Fee. Director’s Decision 11. Furthermore, the sudden importance of particular language contradicts the Director’s earlier statement that “for over 20 years, ONRR has applied the applicable federal gas transportation allowance regulations, regardless of how lessees choose to label their contracts or the fees contained therein.” Id. at 8. This sudden, contradictory, and unexplained requirement reinforces the Court’s conclusion that the Director’s Decision was arbitrary and capricious.

26 considered nondeductible. That would make the structure of the Challenged Fee and the relevant

portion of the FEC Deficiency Fee identical in every way. It would also fit the applicable

regulation, which ensures that companies like Ovintiv may make “a deduction for the reasonable

actual costs incurred by the lessee to transport [gas or gas products] from a lease to a point off the

lease.”

(a). Under the Court’s understanding of the Director’s reasoning,

Ovintiv should be able to deduct up to what the Director appears to believe is the actual reasonable

transportation cost associated with the Challenged Fee (the cost of transporting shipped barrels of

Secondary Capacity) and then be prohibited from deducting anything more. By failing to consider

whether the Challenged Fee may contain a portion that is deductible, and a portion that is not, the

Director ignored an aspect of the problem so important as to constitute error even under the

deferential standard of arbitrary and capricious review.

Because the Court can discern only one explanation for the Director’s reasoning, and that

explanation ultimately is not sufficiently explained and fails consider an important aspect of the

problem, the Director’s Decision was arbitrary and capricious. 10

ii. The Director Unreasonably Distinguished Maxus

Second, and relatedly, the Director failed to explain why the prior decision in Maxus failed

to support Ovintiv. The transportation agreement in Maxus required the shipper to pay a set

transportation fee ($1.66) on each barrel of product shipped by pipeline. Maxus,

at *3. Furthermore, the shipper was required to pay the same $1.66 amount for each

barrel it failed to ship, up to a specified “minimum daily quantity.”

For example, if the

10 The Court also notes that the Director failed to address Ovintiv’s contention that ONRR would consider the FEC Deficiency Fee allowable as a firm demand charge, despite the Director acknowledging that Ovintiv raised the argument. See Director’s Decision 11. The government, in its briefing, agrees that “the Director neither conceded nor concluded that the Deficiency Fee for Future Elected Capacity would constitute a firm demand or capacity reservation fee.” Defs.’ Opp’n 23. The Director was required to “respond meaningfully to the arguments raised before it,” and, by failing to do so, independently erred. Pub. Serv. Comm’n v. FERC,

(D.C. Cir. 2005).

27 minimum daily quantity was 10,000, and the shipper shipped 8,000, the shipper would pay

$1.66 * 8,000 for the actual amount shipped and $1.66 * 2,000 for the amount under the minimum.

See

ONRR originally disallowed a deduction for the latter amount (the fee paid for unshipped

amounts) until a month when the shipper shipped more than the minimum daily quantity.

The

Director reversed. Id. at *4. The Director explained that the cost for shipped and unshipped

portions are both deductible under Section 1206.156(a) accepting that both are a “a charge

associated with firm pipeline capacity.” See id. at *3.

The structure of the Maxus payment and the structure of the Challenged Fee are strikingly

similar. For both, the fee for unshipped quantities are only assessed if there actually is an

unshipped quantity (up to some minimum). See id. at *1. For the agreement in Maxus, if the actual

delivered amount “equal[ed] or exceed[ed] the minimum daily volume” for that month, then there

was no fee for a shortfall in volume. See id. The shipper would then only pay $1.66 times the

actual quantity delivered. See id. Similarly, if the amount shipped by Ovintiv met the Secondary

Capacity Shortfall Volume, Ovintiv needed only to pay the cost associated with the actual quantity

delivered, with no SC Deficiency Fee at all. 2014 Agreement ¶¶ 1.72, 4.3.

The Director distinguished Maxus by explaining that the charge there “was paid to reserve

pipeline capacity: it was charged whether the volumes were shipped or not.” Director’s Decision

13. On the other hand, the Challenged Fee “was only paid for unmet Secondary Capacity

commitments, and not if the requisite Sales Volumes were delivered.” Id. Like the Director’s

reasoning for the difference between the SC Deficiency Fee and the FEC Deficiency Fee, it is not

easy to understand the basis on which the Director is making a distinction. See Kreis v. Sec’y of

the Air Force,

(D.C. Cir. 2005) (holding that an “agency must treat similar cases

in a similar manner unless it can provide a legitimate reason for failing to do so” (quoting Babbitt,

28 92 F.3d at 1258)). After all, in both instances, the shipper only pays a charge on unshipped volume

if it fails to meet the minimum threshold. If it meets the volume requirement, it owes no shortfall

fee.

The Court can reasonably discern that the Director was concerned because the cost of

shipping versus not shipping in Maxus was identical, while the Challenged Fee here was not the

same as the fee for transportation of actual volume. However, as the Court explained before, the

Director has failed to explain why the fee associated with a shortfall in volume must be identical

to the fee to actually transport volume. If that was indeed the Director’s concern, and the reason

for distinguishing Maxus, then the Director has also failed to consider the important question of

whether the amount of the Challenged Fee up to the cost associated with transportation of delivered

production should be deductible as reserving pipeline capacity. See Pub. Citizen,

.

And if the Director had some other reason in mind, she has provided no trail of breadcrumbs that

this Court can follow home. Ultimately, these unexplained aspects of the Director’s reasoning

render the Director’s Decision arbitrary and capricious.

iii. The Director Failed to Address the “Take or Pay” Language

Third, the Director completely failed to address Ovintiv’s argument that the contract’s use

of the term “take or pay obligations” “showed that the Deficiency Fee did specifically reserve

capacity.” See Director’s Decision 11. When faced with that question, the Director responded

with the following, and only the following: “It is unclear, however, from the Sales Contract what

constitutes a Secondary Capacity ‘take or pay obligation,’ and the mere mention of ‘take or pay

obligations’ does not substantiate Ovintiv’s claim.”

That response entirely fails to address

whether the “take or pay obligations” language should be understood as “capacity reservation

language,” a concept that the Director found important only one paragraph earlier.

For

example, the Director should have considered and addressed evidence submitted by Ovintiv

29 suggesting that “take or pay” speaks to the issue of guaranteed shipment and pipeline reservation

associated with new construction. See JA 287. Instead, by providing “an unusually raw ipse dixit,”

the Director acted arbitrarily and capriciously. See DeWitt,

. 11

* * *

In sum, the Director failed to provide a reasoned explanation for why the Challenged Fee

requested by Ovintiv was not deductible in any part under Section 1206.157(f)(1). By pointing to

distinctions without an explained difference, failing to consider an important aspect of the problem,

and disregarding contractual language without explaining why, the Director acted arbitrarily and

capriciously and her action shall be set aside.

C. The Director’s Reasoning that the Challenged Fee was a Penalty was Arbitrary and Capricious

Related to her determination about the inapplicability of Section 1206.157(f)(1) to the

Challenged Fee, the Director also concluded that the payment was not deductible because it was a

penalty. Director’s Decision 9 (“[T]he [Challenged] Deficiency Fee is a penalty, not an ordinarily

allowable firm demand or capacity reservation fee.”) In so doing, she cited two particular

penalties labeled as nondeductible in the regulation:

(ii) Scheduling penalties. This includes penalties you incur for differences between daily volumes delivered into the pipeline and volumes scheduled or nominated at a receipt or delivery point;

11 It also strikes this Court as peculiar that the Director treated interpretation of the 2014 Agreement as a matter removed from any State’s substantive law of contract. After all, there is a “general principle that outside narrow areas of federal interest, ‘[t]here is no federal common law of contracts.’” Barnett v. DynCorp Int'l, L.L.C.,

(5th Cir. 2016) (quoting Ford v. Hamilton Invs., Inc.,

(6th Cir. 1994)). The Court would have expected that determining the meaning and effect of contractual language would rely, in whole or in part, on what the relevant State law has to say about such a provision. By way of example, under Texas law, “one-half of one-eighth sometimes equals one-half—in the context of reservations of mineral interests” rather than what would otherwise plainly be one-sixteenth. Van Dyke v. Navigator Grp., --- S.W.3d ---,

, at *1 (Tex. 2023). In that way, state substantive law supplies content to the text of an agreement. And since ONRR provides deductions based on the obligations of a requesting party, like Ovintiv, to a third party, like Enterprise, the lack of analysis as to what the governing State law says about the obligation is troubling.

30 (iii) Imbalance penalties. This includes penalties you incur (generally on a monthly basis) for differences between volumes delivered into the pipeline and volumes scheduled or nominated at a receipt or delivery point[.]

(g)(3).

The Director explained that scheduling penalties and imbalance penalties are “not actual

and reasonable transportation costs, but rather ‘economic disincentives for shipper actions.’”

Director’s Decision 8–9. However, while the Director cited to scheduling penalties and imbalance

penalties when discussing the Challenged Fee, she never determined that the Challenged Fee was

either of those. See id.; Defs.’ Opp’n 15–16 (agreeing that the Director did not so find). 12

Instead, the Director concluded that “the [Challenged] Fee is a penalty” because it would

only be paid if Ovintiv “failed to meet its Secondary Capacity volume commitment” and would

not be paid if Ovintiv “met its Secondary Capacity commitment.” Director’s Decision 9. But that

bare distinction explains nothing. As the Court explored earlier, the Maxus case involved a fee

associated with the failure of a shipper to meet its volume commitment. See supra Part III.B.ii.

The Director concluded that the fee was deductible when paid, with no indication that it could be

a nondeductible penalty. See id. So, the Director’s stated reason cannot alone explain her choice

here. See Kreis,

.

Further insight into the Director’s conclusion may come from her response to one of

Ovintiv’s counterarguments. Ovintiv contended that the Challenged Fee was compensatory—and

therefore not a penalty—because it was part of a broader scheme to compensate Mid-America for

building additional pipeline that Ovintiv was then reserving. Director’s Decision 10. The Director

12 The government is flatly incorrect when it further claims, in direct contradiction to the Director’s own statement, that “the Director did not—and did not need to—make an explicit finding that the Deficiency Fee amounted to a penalty.” Defs.’ Opp’n 16. As the Director stated: “[T]he [Challenged] Fee is a penalty, not an ordinarily allowable firm demand or capacity reservation fee.” Director’s Decision 9. That is plainly an explicit finding.

31 explained that allowing “penalty fees assessed to a shipper for failure to meet a contractual volume

commitment . . . because they guarantee revenue if the shipper fails to meet its volume

commitment, and thus compensate the pipeline company . . . [would] render[] the distinction

between

(f)(1) and § 1206.157(g)(3)(ii) and (iii) effectively moot.” Id.

Ultimately, the distinction may have been reasonable, if the Director had applied the rule

in her decision. But instead of deciding that the Challenged Fee was indeed an enumerated

nondeductible penalty under Section 1206.157(g)(3), she merely left the matter there. By doing

so, the Director raised and ultimately failed to answer an important question: At what point should

Section 1206.157(f)(1) end and the nondeductible penalties in Section 1206.157(g)(3) begin? That

question is particularly crucial because shippers may certainly deduct costs like Section

1206.157(f)(1) as transportation allowances “but are not limited to (subject to the requirements of

paragraph (g) of this section), th[ose] costs].”

(f) (emphasis added). By

never answering the question of where the Challenged Fee fits in the spectrum between Section

1206.157(f) and the disallowed costs in Section 1206.157(g), the Director failed to supply a

reasoned basis for her decision.

To put a finer point on it, Ovintiv’s deduction request required the Director to determine

where the Challenged Fee fit within the broader regulatory framework governing actual

transportation costs. The structure of the fee was similar, but not identical, to prior decisions, see

supra Part III.B.ii, contained distinctive language, see supra Part III.B.iii., and included other fees

more similar to firm demand charges approved in the past, see supra Part III.B.i. Ovintiv also

leveled novel arguments regarding fees used to incentivize construction of new pipeline. The

compensation scheme might ultimately best fit within the framework of Section 1206.157(g), or

otherwise not constitute “reasonable, actual, and necessary” “transportation costs,” see 30 C.F.R.

32 § 1206.156(c)(3). But the Director either failed to engage with those questions, or failed to explain

her reasoning, ultimately leaving Ovintiv with no deduction and no satisfactory answer as to why.

For those reasons, this Court must set aside the Director’s Decision.

D. Remand Is the Proper Outcome After Setting the Director’s Decision Aside

At the end of its motion, Ovintiv briefly asks that this Court not to remand back to the

agency. Pl.’s Mem. 40. It argues do so would be “futile” because “the [Interior Board of Land

Appeals] has since lost jurisdiction to review the Decision.” Id. The government ignores this issue

in its brief. See generally Defs.’ Opp’n.

Ultimately, Ovintiv misreads the relevant statute. After 33 months have passed following

the commencement of administrative proceedings, “the Secretary [of the Interior] shall have been

deemed to have issued a final decision” and “the appellant shall have a right to judicial review of

such deemed final decision.”

(h). In this case, when 33 months passed, the

Interior Board of Land Appeals lost jurisdiction over Ovintiv’s administrative appeal and the

Director’s Decision became final. JA 1–2. As another judge in this District explained, “Section

1724(h) merely requires that the Secretary render a final administrative decision within 33 months.

It says nothing about the Court’s authority to order a remand, and it says nothing about ONRR’s

authority on remand.” Cont’l Res. I, 410 F. Supp. 3d at 38 (citation omitted).

Absent extraordinary circumstances, a district court reviewing agency action should set

aside the action it has found unlawful and then remand to the agency for next steps. See Palisades

Gen. Hosp. Inc. v. Leavitt,

(D.C. Cir. 2005); N. Air Cargo v. USPS,

(D.C. Cir. 2012); see also Fed. Power Comm’n v. Idaho Power Co.,

(1952). That principle stems from the special role “a district court reviewing a final agency action”

plays “as an appellate tribunal.” Palisades General Hosp. Inc.,

(internal quotation

marks omitted) (quoting Cnty. of Los Angeles v. Shalala,

, 1011 (D.C. Cir. 1999)).

33 Seeing no such special circumstances, this Court will remand to the Interior Board of Land Appeals

which may “enter special orders governing the handling of matters remanded to it for further

proceedings by any court” and otherwise administer an appropriate and prompt remand

proceeding. Cont’l Res., Inc. v. Gould (“Cont’l Res. II”), No. 14-cv-00065 (RDM),

, at *1–2 (D.D.C. Oct. 3, 2019) (citation omitted) (concluding that the Interior Board of

Land Appeals is the appropriate administrative body to conduct remand proceedings).

34 IV. CONCLUSION

Based on the reasoning above, this Court will GRANT Ovintiv's motion, VACATE and

SET ASIDE the Director's Decision, and REMAND to the agency for further proceedings

consistent with this Memorandum Opinion. A separate Order shall issue.

Date: March� 2023 ��. � Royce C. Lamberth United States District Judge

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