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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Marathon Oil Co. v. State, Depart. of Natural Resources (6/10/2011) sp-6568

Marathon Oil Co. v. State, Depart. of Natural Resources (6/10/2011) sp-6568, 254 P3d 1078

        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@appellate.courts.state.ak.us. 

                THE SUPREME COURT OF THE STATE OF ALASKA 

MARATHON OIL COMPANY,                         ) 
                                              )       Supreme Court No. S-13771 
                       Appellant,             ) 
                                              )       Superior Court No. 3AN-08-08544 CI 
        v.                                    ) 
                                              )       O P I N I O N 
STATE OF ALASKA,                              ) 
DEPARTMENT OF NATURAL                         )       No. 6568 - June 10, 2011 
RESOURCES,                                    ) 
                                              ) 
                       Appellee.              ) 
                                              ) 

               Appeal from the Superior Court of the State of Alaska, Third 
               Judicial District, Anchorage, John Suddock, Judge. 

               Appearances:       Rebecca S. Copeland, Kyle W. Parker, and 
               David J. Mayberry, Crowell & Moring LLP, Anchorage, for 
               Appellant.     Martin T. Schultz, Assistant Attorney General, 
               Anchorage, and Daniel S. Sullivan, Attorney General, Juneau, 
               for Appellee. 

               Before:      Carpeneti,     Chief   Justice,  Fabe,   Winfree,    and 
                Stowers, Justices. [Christen, Justice, not participating.] 

               FABE, Justice. 

I.      INTRODUCTION 

               Gas producers that lease land from the State of Alaska must pay royalties 

calculated on the value of the gas produced from the leased area.  This royalty payment 

----------------------- Page 2-----------------------

can be calculated under one of two methods:               (1) "higher of" pricing or (2) contract 

pricing.   "Higher of" pricing is the default.  Computing the royalty owed under "higher 

of" pricing involves sophisticated calculations using market data and the prices of other 

producers.   The Department of Natural Resources (DNR) usually does not calculate the 

royalty payment under "higher of" pricing until years after the time of production, once 

an audit can be completed.         In order to pay royalties under contract pricing, the lessee 

must first request that form of payment calculation from DNR.  Under contract pricing, 

the lessee's price at which it sells gas is used to determine the lessee's royalty payment. 

                Marathon Oil Corporation (Marathon) began production in the Ninilchik 

gas field in 2003.  In 2008, before completion of the audit to determine the "higher of" 

royalty    payment     for  2003-2008,     Marathon      requested   contract   pricing   from   DNR. 

Marathon      requested     contract   pricing   for  the   period   of  2008    onward    and   sought 

retroactive application of contract pricing to the 2003-2008 period.                  DNR approved 

Marathon's request for contract pricing from 2008 onward but denied the request to 

apply contract pricing to production prior to 2008.            Marathon appealed to the superior 

court, which affirmed DNR's ruling.  Marathon appeals. 

                Marathon has three arguments.  First, Marathon argues that the statute that 

governs   contract   pricing   -   AS   38.05.180(aa)   -   permits   retroactive   application   of 

contract pricing and that DNR was wrong to deny Marathon's request. We conclude that 

the statute is ambiguous, and because DNR's interpretation is longstanding and has a 

reasonable basis in the statute, we defer to its interpretation.  Second, Marathon argues 

in the alternative that even if DNR's interpretation of the statute is valid, DNR was 

obliged to promulgate its interpretation as a regulation before applying it to any party. 

We   conclude   that   DNR's   interpretation   is   a   rule   of   internal   agency   procedure   and 

therefore did not have to be issued as a regulation.  Third, Marathon argues that DNR's 

treatment of Marathon violated due process.  We conclude that Marathon's due process 

                                                  -2-                                             6568
 

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rights were not violated.     We therefore affirm the superior court's decision upholding 

DNR's order. 

II.    FACTS AND PROCEEDINGS 

               Marathon leases land from the State of Alaska for the purpose of producing 

natural gas. Marathon has many natural gas leases on the Kenai Peninsula, including one 

at Ninilchik. 

               Gas lessees must pay a royalty to the State in the amount of 12.5% of the 

value of the gas produced in the leased area.  Determining the value of the gas produced 

for the purpose of calculating this royalty is usually done through "higher of" pricing. 
The value of the gas produced is deemed to be the highest of four possible prices.1 

               Lessees must deliver royalty payments on or before "the last day of the 

calendar month following the month in which the oil, gas, or associated substances are 

produced."   But the four values needed to calculate the royalty under "higher of" pricing 

        1      The four prices are:   (1) "the field price received by the lessee for the oil, 

gas, or associated substances"; (2) "the volume-weighted average of the three highest 
field prices by other producers in the same field or area for oil of like grade and gravity, 
gas of like kind and quality, or associated substances of like kind and quality at the time 
the oil, gas, or associated substances are sold or removed from the leased or unit area or 
the gas is delivered to an extraction plant if that plant is located on the leased or unit area; 
if there are less than three prices reported by other producers, the volume-weighted 
average will be calculated using the lesser number of prices received by other producers 
in the field or area"; (3) "the lessee's posted price in the field or area for the oil, gas, or 
associated substances"; or (4) "the volume-weighted average of the three highest posted 
prices in the same field or area of the other producers in the same field or area for oil of 
like grade and gravity, gas of like kind and quality, or associated substances of like kind 
and quality at the time the oil, gas, or associated substances are sold or removed from the 
leased or unit area or the gas is delivered to an extraction plant if that plant is located on 
the leased land or unit area; if there are less than three prices posted by other producers, 
the volume-weighted average will be calculated using the lesser number of prices posted 
by other producers in the field or area." STATE OF ALASKA, DEP'T OF NATURAL RES., 
COMPETITIVE OIL AND GAS LEASE (ADL No. 384372),  38 (1995). 

                                               -3-                                         6568
 

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are usually not determined until several years after the time of production, after DNR 

performs   an   audit.    After   the   audit,   a   lessee's   royalty   liability   is   often   "re-adjusted 

upward." 
                In 1986 the legislature amended the royalty statute.2               The amendments, 

codified in AS 38.05.180(aa) and AS 38.05.180(bb), allowed lessees to request contract 

pricing rather than the default "higher of" pricing. Contract pricing permits lessees to use 

the price at which they sell gas to Alaska utilities as the price on which royalties will be 

calculated.       The   stated   purpose    of  the   1986    amendments       was   to  benefit   utility 

              3 
consumers.       The contracts between gas producers like Marathon and gas-purchasing 

utilities had historically allocated the risk of higher royalty payments to the utilities. That 

is, producers sold gas to utilities under a long-term contract with a fixed price for gas. 

If the market price of gas rose above the contract price, producers had to pay higher 

royalties.   Under the terms of their contracts with utilities, they could pass on this added 

expense to utilities. Utilities would then pass the expense along to their consumers.  The 

1986 amendments allowed lessee-producers to use their contract price as the royalty 

price, thus avoiding this possible increase in consumers' utility bills. 

                In 1995 DNR leased lands in the Ninilchik Unit on the Kenai Peninsula to 

Marathon for the purposes of gas production.  Marathon began production on this land 

in   2003.    In   2008   Marathon   requested   contract   pricing   from   DNR,   both   for   future 

production and for past production between 2003 and 2008. DNR approved Marathon's 

request for contract pricing from 2008 forward but rejected the request for the 2003-2008 

period.   The commissioner stated that he "decline[d] to grant retroactive approval under 

the    terms    of   the  statute."     Marathon       requested     reconsideration,      arguing    that 

        2       Ch. 55, SLA 1986. 

        3       Letter from Esther C. Wunnicke, Comm'r, Dep't of Natural Res., to Rep. 

Richard Schultz (Apr. 22, 1986). 

                                                   -4-                                                6568 

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AS 38.05.180(aa) permitted retroactive approval.           DNR affirmed its earlier decision, 

reasoning   that   "AS   [3]8.05.180(aa)   does   not   authorize   the   Department   of   Natural 

Resources to grant retroactive approval."          Marathon appealed, and the superior court 

affirmed DNR's order.  Marathon appeals. 

III.    STANDARD OF REVIEW 

               We interpret statutes "according to reason, practicality, and common sense, 

taking into account the plain meaning and purpose of the law as well as the intent of the 
drafters."4 We decide questions of statutory interpretation on a sliding scale:             "[T]he 

plainer the language of the statute, the more convincing contrary legislative history must 
be."5  We use one of two standards to review agency interpretations of statutes.6              We 

apply the reasonable basis standard, under which we give deference to the agency's 

interpretation so long as it is reasonable, when the interpretation at issue implicates 

agency expertise or the determination of fundamental policies within the scope of the 
agency's   statutory   functions.7   We   apply   the   independent   judgment   standard,   under 

which "the court makes its own interpretation  of the statute at issue, . . . where the 

agency's specialized knowledge and experience would not be particularly probative on 

        4      Native Village of Elim v. State, 990 P.2d 1, 5 (Alaska 1999). 

        5      Alaskans For Efficient Gov't, Inc. v. Knowles, 91 P.3d 273, 275 (Alaska 

2004) (quoting Ganz v. Alaska Airlines, Inc., 963 P.2d 1015, 1019 (Alaska 1998)). 

        6      Matanuska-Susitna   Borough   v.   Hammond,   726   P.2d   166,   175   (Alaska 

1986). 

        7      Id. 

                                                -5-                                           6568
 

----------------------- Page 6-----------------------

the meaning of the statute."8     We give more deference to agency interpretations that are 

"longstanding and continuous."9 

               It is DNR's job to manage the state's resources and to collect royalties from 
gas lessees.10  We have explained that the reasonable basis standard is appropriate when 

an agency's adjudication of a regulated party's   claim  "requires   resolution   of   policy 

questions which lie within the agency's area of expertise and are inseparable from the 
facts underlying the agency's decision."11  The question whether to allow retroactivity 

lies within DNR's expertise.  Allowing retroactivity could have important consequences 

for   how   royalties   are  assessed   and  paid.   The    state  royalty  and   audit  system   is 

complicated, and DNR has expertise in deciding when retroactive application makes 
sense within that system.12      In Alaska International Construction v. Earth Movers of 

Fairbanks, we explained that " 'the comparative qualification of court and agency to 

decide the particular issue'  [is] the most important factor for whether a court should 
substitute its judgment for that of an agency's."13  Here, where the question implicates 

        8      Id. 

        9      Premera Blue Cross v. State, Dep't of Commerce, Cmty. & Econ. Dev., Div. 

of Ins., 171 P.3d 1110, 1119 (Alaska 2007). 

        10     AS 38.05.020, .180. 

        11     Earth Res. Co. v. State, Dep't of Revenue, 665 P.2d 960, 964 (Alaska 1983). 

        12     See Kelly v. Zamarello, 486 P.2d 906, 917 (Alaska 1971) (holding that 

reasonable basis deference is appropriate in areas with "complex subject matter"). 

        13     697   P.2d   626,   633   (Alaska   1985)   (quoting   4  KENNETH    CULP   DAVIS, 

ADMINISTRATIVE LAW TREATISE  30.14, at 269 (1958)). 

                                                -6-                                           6568
 

----------------------- Page 7-----------------------

"special agency expertise" and is not "merely . . . a question of statutory interpretation," 
we use the reasonable basis standard.14 

IV.     DISCUSSION 

        A.      DNR's Interpretation Of AS 38.05.180(aa) Is Reasonable. 

                In 1959, shortly after statehood, the legislature passed the Alaska Land Act 
and gave DNR the responsibility for managing state-owned land.15  The Alaska Land Act 

provided that state lands were open to oil and gas development and gave DNR the power 
to lease state lands for that purpose.16  The Alaska Land Act required that DNR, when it 

leased   state   land,   collect   a royalty   of  at   least   12.5%   of  the   value   of  all   oil   and   gas 
produced.17    To determine a lessee's royalty obligation, DNR must calculate the value 

of the oil and gas produced by the lessee.           To determine the value of the oil and gas 

produced by a lessee, DNR historically has not used the price at which the lessee actually 

sold its oil or gas.   Rather, DNR has used an approximation of market price.  In its lease 

agreements, DNR has obligated lessees to pay 12.5% of the "higher of" four different 
values.18  These four values are designed to estimate the market price of oil and gas. The 

goal of "higher of" pricing is to ensure the state's royalty is not based on a below-market 

sales price. 

                The 1986 amendments to the Alaska Land Act allowed lessees to calculate 

their   royalty   obligations   using   a   different,  potentially   more   favorable   method.   The 

amendments permitted lessees to use the price at which they contracted to sell gas to 

        14      Union Oil Co. of California v. State, 804 P.2d 62, 64 (Alaska 1990). 

        15      Ch. 169, SLA 1959. 

        16      Ch. 169, Art. VIII,  3, SLA 1959; Ch. 169, Art. II,  4, SLA 1959. 

        17      Ch. 169, Art. VIII,  3, SLA 1959. 

        18      See supra note 1. 

                                                  -7-                                             6568
 

----------------------- Page 8-----------------------

Alaska utilities as the basis for calculating the state's royalty.19  To use this "contract" 

price, the lessee must apply and receive permission from DNR.20 

                The question presented is whether a lessee must apply for contract pricing 

before production actually occurs.  For at least ten years, DNR has interpreted the 1986 

amendments as permitting DNR to approve contract pricing only for future production. 

Thus, a lessee can apply to have contract pricing used to calculate its royalties for future 

production, but not for gas production that has already occurred.  Marathon disputes this 

interpretation, arguing that the statute permits DNR to use contract pricing for past 

production.     Marathon   offers   alternative  statutory   interpretations,   proposing   several 

cutoff points after which a lessee would no longer be permitted to apply for contract 

pricing.   Marathon even suggests that a lessee could apply for contract pricing after the 

completion of the audit to determine its "higher of" royalty liability so long as the lessee 

applied "before the statute of limitations ran." 

                To establish the meaning of a statute, we examine both its text and its 

          21 
purpose.     We will give the appropriate deference to DNR, deferring to its interpretation 
"so long as it has a reasonable basis in the law."22 

        19      AS 38.05.180(aa), (bb). 

        20      AS 38.05.180(aa). 

        21      Borg-Warner Corp. v. Avco Corp., 850 P.2d 628, 633 n.12 (Alaska 1993) 

("Statutory construction begins with an analysis of the language of the statute construed 
in view of its purpose."). 

        22       Wilber v. State, Commercial Fisheries Entry Comm'n, 187 P.3d 460, 465 

(Alaska 2008). 

                                                   -8-                                             6568
 

----------------------- Page 9-----------------------

                1.     The text of the statute 

                       a.      The meaning of "prospective" 

               Alaska Statute 38.05.180(aa)(2)(B) provides that DNR should not approve 

a request for contract pricing if "theprospective reduction in royalty receipts would not 

be balanced by increased benefits to in-state gas and electric consumers."              (Emphasis 

added.)   DNR notes that Black's Law Dictionary defines "prospective" as meaning "[i]n 
the future."23   According to DNR, "prospective" refers to the "future period after the 

application is approved" and therefore AS 38.05.180(aa) only allows contract pricing for 

future production.  DNR maintains that AS 38.05.180(aa) does not permit application of 

contract pricing to past production. 

               Marathon argues that the word "prospective" has a different meaning within 

the context of the statute. In Marathon's view, the legislature's reference to "prospective 

reduction in royalty receipts" is "not the same as requiring that a request be made in 

advance of or commensurate in time with first gas production." Marathon instead argues 

that the word refers to the future effects of DNR's decision to approve or deny a request 

for   contract   pricing. According   to   Marathon,   DNR   can   decide   to   approve   contract 

pricing for any period, past or future, but DNR must consider the "prospective" effects 

of that decision.    Marathon contends that "DNR may still consider the 'prospective 

reduction in royalty receipts' resulting from use of the contract price even if the royalty 

would [correlate] with gas deliveries and production occurring in the past." 

               The term "prospective" could plausibly have either meaning.              The use of 

the word could signify that the legislature only intended contract pricing to be available 

for future gas production; or the use of the word could be incidental "and the timing of 

        23     BLACK'S LAW DICTIONARY 1222 (6th ed. 1990). 

                                                -9-                                             6568 

----------------------- Page 10-----------------------

the [application] . . . immaterial."       We agree with the superior court that "the phrase 

'prospective reduction in royalty receipts' is ambiguous." 

                        b.      The scope of AS 38.05.180(aa)(2) 

                Marathon argues that AS 38.05.180(aa)(2)provides an exhaustive list of the 

reasons      that    DNR      may     reject    a   request     for   contract     pricing.    Alaska 

Statute 38.05.180(aa)(2) provides that DNR should reject a lessee's request for contract 

pricing if the commissioner makes a finding that 

                (A)     the contract price or transfer price is unreasonably low; 

                (B)     the prospective reduction in royalty receipts would not 
                be balanced by increased benefits to in-state gas and electric 
                consumers; 

                (C)     the lessee and the utility are related in management, 
                ownership, or other aspect and, in the case of a transfer price, 
                that relationship is not regulated under AS 42.05; and 

                (D)     the contract price or transfer price is not in the best 
                interest of the state. 

Marathon   contends   that   because   retroactivity   is   not   among   the   listed   reasons   for 

rejection, DNR had no right to refuse Marathon's request for retroactive application. 

Marathon claims that AS 38.05.180(aa) creates a presumption in favor of approval and 

that DNR did not respect this presumption.            But AS 38.05.180(aa)(2)'s core scope is 

more limited than Marathon contends.             Alaska Statute 38.05.180(aa)(2) provides an 

exhaustive list of theprice-related reasons DNR can reject requests for contract pricing, 

but the statute does not address other grounds for rejection. The legislative history of the 

1986 amendments indicates that AS 38.05.180(aa)(2) is exclusively concerned with 
objections to the price a lessee submits as its contract price.24   Other non-price related 

        24      Letter   from   Esther   C.   Wunnicke,   Comm'r,   Dep't   of   Natural   Res.,   to 

Rep. Drue Pearce (Apr. 28, 1986). 

                                                 -10-                                              6568 

----------------------- Page 11-----------------------

reasons for rejecting a request may still exist.  If DNR is correct that the statute does not 

authorize retroactive contract pricing, then DNR is justified in rejecting such a request 

even though the statute does not specifically list that reason for rejection.               Therefore, 

AS 38.05.180(aa) would not preclude DNR from rejecting Marathon's request.  As we 

will discuss below, agencies are generally given discretion to manage such procedural 

matters. 

                2.      The purpose of the statute 

                        a.      The pro-consumer purpose of the 1986 amendments 

                Both parties agree that the purpose of the 1986 amendments was to benefit 

consumers:     The statute lowers the amount of royalties paid by gas producers, and the 

savings are passed on to consumers.          Marathon points to this pro-consumer purpose of 

the 1986 amendments and argues that allowing retroactivity would further this legislative 

purpose.   Marathon argues that (1) the purpose of the statute is to benefit consumers by 

using contract pricing; (2) retroactivity results in more contract pricing; and (3) therefore, 

retroactivity is consistent with the purpose  of the statute.            Marathon cites extensive 

legislative history to support its argument, but while this legislative history generally 

recognizes the benefits of contract pricing, it does not answer the question whether the 

statute permits retroactivity. 

                Although it is true that the stated purpose of the 1986 amendments was to 

benefit consumers, the 1986 amendments exist within the larger goals of the Alaska Land 

Act.   Alaska Statute 38.05.180(a) recites the goals of the Alaska Land Act: 

                (a)     The legislature finds that 

                        (1)     the   people   of   Alaska   have   an   interest   in   the 
                        development of the state's oil and gas resources to 

                                (A)     maximize       the  economic     and   physical 
                                recovery of the resources; 

                                                  -11-                                            6568
 

----------------------- Page 12-----------------------

                             (B)    maximize     competition   among    parties 
                             seeking to explore and develop the resources; 
                             [and] 

                             (C)    maximize      use   of  Alaska's    human 
                             resources in the development of the resources. 

As we have recognized, the overall purpose of the Alaska Land Act is to maximize 

revenue for the state:   In Chevron v. LeResche we pointed out that the purpose of the 

Alaska Land Act was "to provide for orderly oil and gas leasing that maximizes state 

return on its oil and gas resources," and that this fact should influence the statute's 
construction.25  And as Marathon acknowledges, AS 38.05.180(aa) is "an exception to 

the goal of maximum royalty recovery." 

              Though the 1986 amendments' purpose of benefiting a smaller subset of 

Alaska's utility consumers would arguably support Marathon's interpretation, the Alaska 

Land Act's overall purpose of maximizing revenue for all Alaskan citizens would support 

DNR's interpretation. The 1986 amendments and their legislative history do not provide 

guidance as to which purpose should predominate in this case. 

                     b.      The legislative tolerance for retroactivity 

              Marathon points to the retroactivity that exists elsewhere in the statute and 

the fact that audits and royalty calculations occur well after the time of production. 

Royalty calculations involve amounts, such as "tax reimbursement amounts," that cannot 
be known until some time after production.26  Marathon argues that the 1986 amendments 

reflect a tolerance for retroactivity and that, therefore, the statute allows retroactive 

requests for contract pricing.   But Marathon ignores a crucial distinction between the 

type of retroactivity it seeks and the retroactivity built into the statute's structure. The 

       25     663 P.2d 923, 931 (Alaska 1983). 

       26     AS 38.05.180(bb). 

                                            -12                                         6568 

----------------------- Page 13-----------------------

statute recognizes that royalties will be calculated retroactively, but that is different than 

allowing the method used to calculate royalties to be applied retroactively. Royalties are 

necessarily calculated after the fact because the amount of gas production and other 

inputs will not be known until after production has occurred.                 Selecting which royalty 

calculation   method   to   apply,   however,   can   be   accomplished   before   production   has 
occurred.27 

                 3.      We defer to DNR's longstanding interpretation. 

                 The key to our decision is the standard of review.              We conclude that the 

statute is ambiguous and provides no direct answer whether retroactive contract pricing 

is permitted. We have recognized that "an agency's interpretation of a law within its area 
of jurisdiction can help resolve lingering ambiguity."28               We therefore defer to DNR's 

interpretation that both the 1986 amendments' use of the word "prospective" and the 

Alaska Land Act's purpose of maximizing revenue prohibit it from approving retroactive 

contract pricing and we therefore conclude that it has a reasonable basis in the statute. 

                 We     are   especially     inclined    to   defer   when     an   agency's     statutory 

interpretation is longstanding.         DNR has been applying its interpretation for at least a 

decade.      In   multiple   cases,   we   have   recognized   the   special   deference   that   is   due   to 

longstanding   agency   statutory   interpretations.           In  Bullock   v.   State,   we   afforded   a 

        27       Moreover, the 1986 amendments provide that contract pricing can only be 

applied to gas sales made after the legislation's passage.  The 1986 session law adopting 
AS     38.05.180(aa)      includes    a  note   stating   that  the   statute  is  only   to  be   applied 
prospectively:   "The legislature finds that this authorization should apply prospectively 
and does not intend the authorization to apply to the valuation for royalty purposes of gas 
sold by a lessee under a gas sales contract entered into before the effective date of this 
Act."   Ch. 55,  1, SLA 1986. 

        28       Wilson v. State, Dep't of Corr., 127 P.3d 826, 829 (Alaska 2006) (quoting 

Bartley v. State, Dep't of Admin., Teacher's Ret. Bd., 110 P.3d 1254, 1261 (Alaska 
2005)). 

                                                   -13-                                              6568
 

----------------------- Page 14-----------------------

Department of Revenue interpretation "great weight" because it was "long-standing" and 
"continuous."29     In Bartley v. State, we also emphasized how deference was due "when 

the agency's interpretation is longstanding."30         In Premera v. State, we explained that we 

"apply a more deferential standard of review where an agency action is longstanding and 
continuous."31  Since DNR's interpretation has been "longstanding and continuous," we 

apply   this   deferential   standard   of   review   and   conclude   that   DNR's   interpretation   is 

reasonable. 

        B.	     DNR      Was     Not   Required     To    Promulgate      Its  Interpretation      In   A 
                Regulation. 

                Marathon argues that DNR's interpretation of the statute, even if valid, must 

be promulgated through a regulation before being applied to Marathon or any other 
party.32   We use our independent judgment in deciding whether an agency action is a 

        29      19 P.3d 1209, 1210, 1215 (Alaska 2001). 

        30      110 P.3d at 1261. 

        31      171 P.3d 1110, 1119 (Alaska 2007). 

        32      The      Administrative        Procedure       Act     defines      a    "regulation." 

AS 44.62.640(a)(3) (" 'regulation' means 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 
law enforced or administered by it, or to govern its procedure, except one that relates 
only to the internal management of a state agency; 'regulation' does not include a form 
prescribed by a state agency or instructions relating to the use of the form, but this 
provision is not a limitation upon a requirement that a regulation be adopted under this 
chapter   when   one   is   needed   to   implement   the   law   under   which   the   form   is   issued; 
'regulation'   includes   'manuals,'   'policies,'  'instructions,'   'guides   to   enforcement,' 
'interpretative bulletins,' 'interpretations,' and the like, that have the effect of rules, 
orders, regulations, or standards of general application, and this and similar phraseology 
may not be used to avoid or circumvent this chapter; whether a regulation, regardless of 
name, is covered by this chapter depends in part on whether it affects the public or is 
                                                                                         (continued...) 

                                                  -14-	                                              6568 

----------------------- Page 15-----------------------

regulation.33    Alaska Statute 38.05.020 provides that DNR may "establish reasonable 

procedures and adopt reasonable regulations necessary to carry out this chapter." Alaska 

Statute   38.05.020   requires   that   regulations   so   adopted   must   comply   with   Alaska's 
Administrative Procedure Act (APA).34 

                We   have   been   hesitant   to   force   agencies   to   promulgate   all   statutory 
interpretations as regulations.35       Other courts have been similarly reluctant to require 

agencies to convert statutory interpretations into regulations, especially in matters that 

the agency would have had difficulty foreseeing.             The United States Supreme Court in 

SEC v. Chenery explained this limitation:            "[P]roblems may arise in a case which the 

administrative agency could not reasonably foresee, problems which must be solved 
despite the absence of a relevant general rule."36  We stated in Alyeska Pipeline Service 

Co.   v.   State   that   a   "requirement   that   each   [agency]   interpretation   be   preceded   by 
rulemaking would result in complete ossification of the regulatory state."37  It would be 

counterproductive to require DNR to devote its resources to promulgating regulations on 

        32(...continued) 

used by the agency in dealing with the public"). 

        33      Alaska   Ctr.   for   the   Env't   v.   State,   80   P.3d   231,   243   (Alaska   2003) 

("Whether the agency action is a regulation is a question of law that does not involve 
agency expertise, so we apply our independent judgment."). 

        34      AS 38.05.020(b)(1). 

        35      See Burke v. Houston NANA, 222 P.3d 851, 867 (Alaska 2010); see also 

RICHARD J. PIERCE, JR., 1 ADMINISTRATIVE LAW TREATISE  6.9, at 504 (5th ed. 2010) 
("Courts   cannot   require   agencies   to  make   'rules'   only   through   rulemaking   because 
sometimes       an   agency    is  justified  in   eschewing     rulemaking      in  favor   of  gradual 
development of 'rules' through adjudication of cases . . . ."). 

        36      332 U.S. 194, 202-03 (1947). 

        37       145 P.3d 561, 573 (Alaska 2006). 

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every   possible   eventuality.       We   have  previously   explained   that   "absent   statutory 

restrictions and due process limitations, administrative agencies have the discretion to 
set   policy   by   adjudication   instead   of   rulemaking."38   Here,   DNR   made   its   statutory 

interpretation in the context of adjudicating applications for contract pricing.              Because 

we permit agencies to make new statutory interpretations in adjudications and because 
DNR's interpretation does not impose "any new substantive requirements,"39 we hold 

that DNR was not required to promulgate its interpretation in a regulation. 

        C.      Due Process 

                Marathon claims that "[d]ue process considerations are triggered by DNR's 

refusal to consider Marathon's request under the legislative criteria."              But, as the State 

notes, it is somewhat difficult to discern what due process violation Marathon is alleging. 

The Alaska Constitution provides that "[n]o person shall be deprived of life, liberty, or 
property, without due process of law."40  The Fourteenth Amendment to the United States 

Constitution provides that no state shall "deprive any person of life, liberty, or property, 

without   due   process   of   law."   We   have   held   that   the   "crux   of   due   process   is   the 
opportunity to be heard and the right to adequately represent one's interests."41 

                Marathon did have sufficient notice and the opportunity to represent its 

interests.    Marathon argues that DNR did not adequately "apprise" Marathon of the 

grounds on which DNR would make its decision.                Marathon argues that because it did 

        38      Amerada Hess Pipeline Corp. v. Alaska Pub. Utils. Comm'n, 711 P.2d 

1170, 1178 (Alaska 1986). 

        39      Smart v. State, Dep't of Health & Soc. Servs., 237 P.3d 1010, 1017 (Alaska 

2010). 

        40      Alaska Const. art. I,  7. 

        41      Groom v. State, Dep't of Transp., 169 P.3d 626, 635 (Alaska 2007). 

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not have adequate notice of DNR's earlier interpretation of the statute, Marathon was 

therefore denied the "opportunity to defend its request and have its merits judged." 

                But DNR has relied on its interpretation of AS 38.05.180(aa) for over a 

decade.     As we explained in Alyeska Pipeline Service Co. v. State, a statute itself can 
provide   constructive   notice   of   an   agency's   interpretation.42      The   statute   in Alyeska 

Pipeline, like AS 38.05.180(aa), was silent on the issue in question.               Nevertheless, we 

explained that, since the agency's interpretation was reasonable, a "careful reading" of 

that   statute   "should   have   alerted   Alyeska  to   the   possibility"   that   the   agency   could 
interpret the statute the way it did.43      The fact that AS 38.05.180(aa) does not expressly 

prohibit retroactive requests does not mean that Marathon can assume that the statute 

allows retroactivity.   Accordingly, we conclude that Marathon did have adequate notice 

that DNR could interpret AS 38.05.180(aa) as not allowing retroactive contract pricing. 

                Moreover,   DNR   did   provide   Marathon   with   notice   of   its   decision on 

Marathon's request, and Marathon had the opportunity to present its arguments to DNR. 

After    Marathon      submitted    its  request,   DNR     rejected   the  request    because    it  was 

retroactive. Marathon requested reconsideration and argued that AS 38.05.180(aa) does 

permit retroactivity.     DNR affirmed its earlier decision and explained its interpretation 

that "AS [3]8.05.180(aa) does not authorize the Department of Natural Resources to 

grant retroactive approval."         Because Marathon had both adequate notice and a fair 

opportunity   to   present   its   claims,   we   conclude   that   its   due   process   rights   were   not 

violated. 

V.      CONCLUSION 

                For the foregoing reasons, we AFFIRM the superior court's decision. 

        42       145 P.3d at 571. 

        43      Id. 

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