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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Chevron U.S.A., Inc. v. State, Dept. of Revenue (12/16/2016) sp-7142

Chevron U.S.A., Inc. v. State, Dept. of Revenue (12/16/2016) sp-7142

          Notice:   This opinion is subject to correction before publication in the P                    ACIFIC  REPORTER.  

          Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,  

                                                                                                                     

           303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email  

                                                                                                                       

           corrections@akcourts.us.  



                       THE  SUPREME  COURT  OF  THE  STATE  OF  ALASKA  



CHEVRON  U.S.A.,  INC.,                                        )  

CONOCOPHILLIPS  ALASKA,  INC.,  )                                        Supreme  Court  No.  S-15891  

EXXONMOBIL  ALASKA                                             )  

PRODUCTION  INC.,  and  FOREST                                 )         Superior  Court  No.  3AN-13-04430  CI   

OIL  CORPORATION,                                              )  

                                                               )         O P I N I O N  

                                                                                             

                     Appellants,                               )  

          v.                                                   )         No. 7142 - December  16, 2016  

                                                                                                                    

                                                               )  

STATE OF ALASKA,                                               )  

                    

DEPARTMENT OF REVENUE,                                         )  

                                  

                                                               )
  

                     Appellee.                                 )
  

                                                               )
  



                     Appeal from the Superior Court of the State of Alaska, Third  

                                                                                                            

                     Judicial District, Anchorage, Michael D. Corey, Judge.  

                                                                                                              



                     Appearances:             Leon  T.  Vance,  Faulkner  Banfield,  P.C.,  

                                                                                                           

                     Juneau, for Appellants. Dario Borghesan, Kenneth J. Diemer,  

                                                                                                        

                     Joanne M.  Grace, Assistant Attorneys  General, Anchorage,  

                                                                                                  

                     and   Craig  W.   Richards,   Attorney   General,  Juneau,   for  

                                                                                                              

                     Appellee.  

                                       



                     Before:  Stowers, Chief Justice, Fabe, Winfree, Maassen, and  

                                                                                                               

                     Bolger, Justices.  

                                  



                     STOWERS, Chief Justice.  

                                                    


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

I.             INTRODUCTION
  

                              In this appeal oil producers (the Producers)1 challenge an administrative  



decision (the Decision) in which the Alaska Department of Revenue (DOR) decided to                                                                                                       



treat separate oil and gas fields operated by common working interest owners as a single                                                                                       



entity when calculating the Producers' oil production tax obligations.                                                                                         Relying on a               



statute that gave DOR the discretion to "aggregate two or more leases or properties (or                                                                                                



portions   of   them),   for   purposes   of   determining   [their   effective   tax   rate],   when  



economically interdependent oil or gas                                              production operations are not confined to a single                                          

                                         2  DOR concluded that operations on a number of smaller oil fields  

lease or property,"                                                                                                                                                              



were economically interdependent with larger operations on the adjacent Prudhoe Bay  

                                                                                                                                                                                    



oil  field.                 The  Producers  argue  that  in  interpreting  the  phrase  "economically  

                                                                                                                                                           



interdependent" in the Decision, DOR effectively promulgated a regulation without  

                                                                                                                                                                            

following theprocedures established intheAlaskaAdministrativeProcedureAct (APA)3  

                                                                                                                                                                              



and, as a result, DOR's Decision was invalid.  We conclude that DOR's Decision was  

                                                                                                                                                                



not  a  regulation  because  it  was  a  commonsense  interpretation  of  the  statute  and,  

                                                                                                                                                                                   



therefore, DOR was not required to comply with APA rulemaking requirements.  We  

                                                                                                                                                                                     



affirm the superior court's decision upholding DOR's decision.  

                                                                                                                        



               1             The    Producers    involved    in    this    appeal    are    Chevron    U.S.A.,    Inc.,  



ConocoPhillips   Alaska,   Inc.,   ExxonMobil   Alaska   Production   Inc.,   and   Forest   Oil  

Corporation.  



               2             Former AS 43.55.013(j) (2005).  

                                                                                    



               3             AS 44.62.180-290.  

                                      



                                                                                           -2-                                                                                    7142
  


----------------------- Page 3-----------------------

II.        FACTS AND PROCEEDINGS     



          A.         Facts  



                                                                                              

                     1.        An overview of Alaska's taxes on oil production  



                                                                                                                                   

                     The  Prudhoe  Bay  oil  field  is  one  of the  largest  oil  and  gas  fields  yet  



                                                                                                                                 

discovered in the United States. Explorers discovered the Prudhoe Bay oil field in 1967  



                                                                                                                                      

and the field began producing oil about ten years later.  Just as oil production began in  



                                                                                                                               

Prudhoe Bay, Alaska passed the initial version of the Oil and Gas Production Tax, which  



                                                                                             4  

                                                                                                                                 

laid out a new system for taxing oil production in Alaska.                                       During the relevant time  



                                                                                                                            

frame this legislation set the production tax rate for oil fields by multiplying a constant  



                                                                                                                                  

nominal tax rate of 15% by the economic limit factor (ELF), a coefficient between zero  



                                                                          5  

                                                                                                                            

and one calculated for each individual oil field.                            In other words, a higher ELF resulted  



                                                                                                                                

in a higher tax rate, and a lower ELF resulted in a lower tax rate for any given oil field.  



                                                                                                                              

                     Thelegislaturepassed HouseBill 118 in 1989,addingthe"fieldsizefactor"  



                                                                                                                                     

as  a  component  of  the  ELF  formula.                        The  field  size  factor  is  the  total  volume  of  



                                                                                       6  

                                                                                                                                  

production from a field during a given reporting month.                                   All else being equal, the field  



           4         See   former   AS   43.55.011(a)   (2005).     In   August   2006   the   legislature  



amended   this   statute   and  eliminated   the   key   provisions   at   issue   in   this   case.     The  

legislature  made  these  changes  effective  retroactively  to  April  1,  2006.   Ch.  2,    34,  39  

TSSLA  2006.   This  appeal  only  concerns  events  that  took  place  before  April  1,  2006,  so  

we cite to AS 43.55.011 and the associated regulations as they existed  during the time  

frame  relevant  to  this  appeal.  



           5         Former AS 43.55.011(a) (2005) ("The tax is equal to . . . the percentage-of- 

                                                                                                                  

value amount calculated under (b) of this section . . . multiplied by the economic limit  

                                                                                 

factor determined for the oil production of the lease or property under AS 43.55.013.").  

                                                                                                                    



           6         See former AS 43.55.011 (2005); former AS 43.55.013 (2005).  The oil  

                                                                                                                                    

ELF formula was:  

                      



                                                                                                                   (continued...)  



                                                                  -3-                                                           7142
  


----------------------- Page 4-----------------------

size factor produced a higher ELF (and therefore a higher tax rate) for larger fields and                                                                      



a lower ELF (and therefore a lower tax rate) for smaller fields.                                                       The legislature reasoned      



that smaller fields needed similar production infrastructure to larger fields but, because                                                             



they   produced   less   oil,   smaller   fields   had   poor   economies   of   scale   and  were   less  

                    7   The legislature hoped that including the field size factor in the ELF formula  

profitable.                                                                                                                                            



             6            (...continued)  



                                                                                                                                                                

"PEL" represents the monthly production rate at the economic limit; "TP" represents the  

                                                                                                                                                              

field's total volume of production during a reporting month; "WD" represents the total  

                                                                                                                                                                

number of well days, or days the well operates, during the month; and "Days" is the  

                                                                             

number of days in the month.  The first exponent in this equation is commonly known  

                                  

as the "field size factor."  



             7           As the legislature contemplated adding the field size factor to the ELF  

                                                                                                                                                             

formula through House Bill 118, the DOR Commissioner at the time, Hugh Malone,  

                                                                                                                                                      

described the reason behind the proposed change to the Speaker of the House in a letter  

                                                                                                                                                            

dated March 21, 1989.  This letter stated that  

                                                                                        



                          [t]here are many economies of scale realized as a result of  

                                                                                                                                        

                          larger field size.  For instance, each field, regardless of size,  

                                                                                                                                    

                          still would require the following:   operations center, base  

                                                                                                                                   

                          camp,  airstrip,  roads,  warehouse,  power  plant,  drill  pads,  

                                                                                                                                  

                          sewage  treatment,  water  storage,  transportation  support  

                                                                                                                            

                         vehicles,             gas       conditioning                 and        compression                 facility,  

                                                                                                                           

                          oil/gas/water   separation   plant,   flow  station,   waterflood  

                                                                                                                      

                          facility, water injection facility, dehydration plant, and so  

                                                                                                                                        

                          forth.  



ConocoPhillips Alaska, Inc. used a similar rationale to advocate for the proposed change  

                                                                                                                                                         

in a letter to members of the House Resources Committee dated February 7, 1989.  The  

                                                                                                                                                              

letter stated that  

                                



                          [a]ll fields, regardless of size, must possess living quarters,  

                                                                                                                            

                         roads, pipelines, and personnel transportation infrastructure  

                          in addition to the normal production handling facilities.  In  

                                                                                                                                        

                         Alaska's  high  cost  environment,  these  factors  result  in  

                                                                                                                                       

                          significant  diseconomies  of  scale  for  smaller  fields.                                                For  

                                                                                                                                     

                                                                                                                                            (continued...)  



                                                                                -4-                                                                         7142
  


----------------------- Page 5-----------------------

would create an economic incentive for oil producers to develop marginal fields that they                                                        

would otherwise shut down or neglect for economic reasons.                                                 8  



                       However, including the field size factor in the ELF formula also created an  

                                                                                                                                                    



incentive for oil producers to capitalize on tax breaks for smaller fields by classifying  

                                                                                                                                     



certain areas as independent fields even if the areas were economically interdependent  

                                                                                                                              



with  other,  larger  oil fields.                     Therefore,  AS 43.55.013(j)  (the Aggregation  Statute)  

                                                                                                                                          



permitted DOR to aggregate two or more fields for the purpose of calculating the ELF  

                                                                                                                 



"when economically interdependent oil or gas production operations are not confined to  

                                                                                                                                                     

a single lease or property."9  Aggregating several fields into a single field for the purpose  

                                                                                                                                           



of calculating the ELF increased the field size factor and, by extension, increased both  

                                                                                                                                                



the ELF and the tax rate for these aggregated fields above what the ELF and the tax rate  

                                                                                                                                                  



would have been for the individual areas.  Whether DOR could aggregate the fields in  

                                                                                                                                                     



            7	          (...continued)  



                                                                                                                        

                        smaller fields to beeconomically developed, webelievesome  

                                                                                                           

                        adjustments must be made in the tax or royalty structure.  



            8          During a House Resources Committee meeting discussing House Bill 118,  

                                                                                                                                                 

House  Speaker  Sam  Cotten  explained  that  House  Bill  118  "would  encourage  

                                                                                                                                    

development in some of the smaller fields. It would reduce taxes in some of those areas  

                                                                                                                                               

that are so marginal that that might actually make a difference whether they go into  

                                                                                                                                                 

production." Transcription of House Resource Committee Meeting, House Bill No. 118 - 

                                                                                                                                                       

                                                                                                                             

                                                                                                                                                     

ELF, Hearing on H.B. 118 Before the H. Res. Comm., 16th Leg., 1st Sess. 3 (Feb. 9,  

                                                                                                                       

                                                                                                                                                     

 1989) (statement of Sam Cotten, H. Speaker, H.R.).  And DOR's Sectional Analysis of  

                                                                                                                                           

House Bill 118 stated that "[t]he current ELF is not giving Alaska an attractive enough  

                                                                                                                                             

tax climate to encourage development of marginal oil fields. . . .  House Bill 118 would  

                                                                              

target tax breaks toward marginal fields . . . ."  



            9          Former AS 43.55.013(j) (2005) ("The department may aggregate two or  

                                                                                                                                                    

more leases or properties (or portions of them), for purposes of determining economic  

                                                                                                                 

limit factors under this section and applying them to AS 43.55.011 or AS 43.55.016,  

                                                                                                                                     

when economically interdependent oil or gas production operations are not confined to  

                                                                                                                                                     

a single lease or property.").  

                              



                                                                         -5-	                                                                  7142
  


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

question depended onwhether                                                      thefieldswere"economically                                                    interdependent." However,    



the legislature never defined this term in the production tax statutes, and DOR never                                                                                                                                    



defined the term in related regulations.                                 



                                    To eliminate uncertainty whether DOR would aggregate particular fields,                                                                                                             



DOR   adopted   15   Alaska   Administrative   Code   55.027(b),   a   regulation   permitting  



producers to petition for assurance that DOR would not aggregate specific oil fields for                                                                                                                                         

                                                                                               10      To obtain this guarantee, producers had to show  

the purpose of calculating the ELF.                                                                                                                                        



that (1) using common production facilities would lower the costs of production; (2)  

                                                                                                                                                                                                                                



DOR's guarantee would increase the likelihood that producers would develop a new  

                                                                                                                                                                                                                          



field; (3)  oil would be accurately  allocated; and (4)  "operations .  . .  would  not  be  

                                                                                                                                                                                                                     



economically interdependent in the absence of the proposed use of common production  

                                                                                                                                                                                                           

                            11  However, proving thesefactorsdid not guaranteeanadvanceruling because  

facilities."                                                                                                                                                                                                       

DOR had the discretion to aggregate or to decline to do so.12                                                                                                                 As with other related  

                                                                                                                                                                                                                     

regulations, 15 AAC 55.027(b) also did not define "economically interdependent."13  

                                                                                                                                                                                  



                                    In August 2006 the legislature repealed the ELF-based tax system and  

                                                                                                                                                                                                                              

replaced it with a new production tax system, effective retroactively to April 1, 2006.14  

                                                                                                                                                                                                                     



                  10                 15 AAC 55.027(b) (eff. 1/1/95) (repealed 2007).                                                                                             This regulation was                         



repealed in 2007, but it was in effect during the relevant time period in this case. We cite                                                                                                                                   

to the regulation as it appeared during the relevant time period.                                                                                      



                  11                Id .  



                  12                Id .  ("Upon  application  of  a  producer  .  .  .  the  department  will,  in  its  

                                                                                                                                                                                                                                 

discretion, issue an advanceruling that thedepartment will not aggregate specified leases  

                                                                                                                                                                                                                         

or properties for purposes of determining economic limit factors . . . .").  

                                                                                                                                                                                     



                  13                Id. ; 15 AAC 55.900 (am. 1/1/04).  

                                                                                                         



                  14                Ch. 2,  34, 39 TSSLA 2006.  

                                                                                                                        



                                                                                                                -6-                                                                                                        7142
  


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

                                                2.                       Oil production at Prudhoe Bay                                                                           



                                                Before beginning production at Prudhoe Bay, the working interest owners                                                                                                                                                                       



of the field's oil and gas leases combined those leases into a unit called the Prudhoe Bay                                                                                                                                                                                                                



Unit so that the working interest owners could conduct operations as if the entire unit                                                                                                                                                                                                                   



area were a single lease.                                                                  The Alaska Department of Natural Resources approved the                                                                                                                                                           



creation of two separate Participating Areas within the Prudhoe Bay Unit; we refer to                                                                                                                                                                                                                            



                                                                                                                                                                                                             15  

themjointly as the                                               Initial Participating Areas (InitialPAs).                                                                                                                                                                                           

                                                                                                                                                                                                                     Participating areas are made  



                                                                                                                                                                                                                                                                                                  

up of multiple lease tracts that participate in the production of hydrocarbons. The owner  



                                                                                                                                                                                                                                                                                                               

of each individual lease tract receives a certain percentage of the total production of all  



                                                                                                                                                                                                                                                                                                                    

the wells drilled in that participating area.  For tax purposes producers typically treat a  



                                                                                                                                                                                                                                                                                   

participating area as a single lease or property when calculating production taxes, and  



                                                                                                                       

DOR has typically accepted this characterization.  



                                                                                                                                                                                                                                                                                                      

                                                At the start, the two Participating Areas making up the Initial PAs were  

                                                                                                                                                                                                                                                                 16          In 1986 the  

                                                                                                                                                                                                                                                                                                            

divided such that one area produced oil and the other produced gas. 



                        15                      See   11 AAC 83.351(a) (2005) ("At least 90 days before sustained unit                                                                                                                                                                                   



production from a reservoir, the unit operator shall submit to the commissioner for                                                                                                                                                                                                                         

approval a description of the proposed participating area, based on subdivisions of the                                                                                                                                                                                                                      

public   land   or   its   aliquot   parts.     The   participating   area   may   include   only   the   land  

reasonably known to be underlain by hydrocarbons and known or reasonably estimated                                                                                                                                                                                                    

through use of geological, geophysical, or engineering data to be capable of producing                                                                                                                                                                                             

or contributing to production of hydrocarbons in paying quantities. .                                                                                                                                                                                                 . .    Under 11   

AAC 83.371(a), the unit operator also shall submit to the commissioner for approval of                                                                                                                                                                                                                           

a proposed division of interest or formula setting out the percentage of production and                                                                                                                                                                                                                    

costs to be allocated to each lease or portion of lease within the participating area. Upon                                                                                                                                                                                                         

approvalby                                 thecommissioner, the area of                                                                            productivity constitutesaparticipating area.").                                                                                            



                        16                      Later, ownership interests in the Prudhoe Bay Unit realigned such that each  

                                                                                                                                                                                                                                                                                                        

working interest owner had rights to a single percentage interest in both oil and gas in  

                                                                                      

the combined  reservoirs of the Prudhoe Bay  Unit.                                                                                                                                                   This realignment of ownership  

                                                                                                                                                                                                                                                                                 

essentially made the Initial PAs "the equivalent of a single participating area." Thus, we  

                                                                                                                                                                                                                                                                                                              

                                                                                                                                                                                                                                                                         (continued...)  



                                                                                                                                                        -7-                                                                                                                                            7142
  


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

Department of Natural Resources approved an additional participating area on a separate                                                      



reservoir,knownastheLisburneParticipating                                         Area(LisburnePA). Theworking                                interest  



owners   built   a   separate   set   of   production   facilities   to   handle   production  from   the  



Lisburne PA.   



                        Later, the working interest owners identified nine additional reservoirs                                          



within   the   Prudhoe   Bay   Unit,   and   the   Department   of   Natural   Resources   approved  

                                                                                                                    17     Six  of  these  nine  

separate   participating   areas   for   each   of   these   nine   reservoirs.                                                                    



participating areas are involved in this appeal, and we refer to these areas as the "Satellite  

                                                                                                                                            

PAs."18         The Satellite PAs covered separate reservoirs, were developed long after the  

                                                                                                                                                      



development of the Initial PAs, and produced significantly smaller oil outputs than the  

                                                                                                                                                      



Initial PAs. The Satellite PAs integrated operations with the Initial PAs, because, unlike  

                                                                                                                                                 

                                                                                                                                         19  Instead,  

the Lisburne PA, the Satellite PAs did not have their own production facilities.                                                              

                                                                                                                          



production facilities originally built to serve both the Initial PAs also processed the fluids  

                                                                                                                                                  



            16          (...continued)  



                                                                                      

refer to them jointly as "the Initial PAs" in this opinion.  



            17          These nine areas were the Aurora, Borealis, Midnight Sun, Niakuk, North  

                                                                                                                                                  

Prudhoe Bay, Orion, Pt. McIntyre, Polaris, and West Beach Participating Areas.  Some  

                                                                                                                                                  

documents refer to the Pt. McIntyre Participating Area as N. McIntyre, but we use Pt.  

                                                                                                                                                       

McIntyre to refer to the area in question to remain consistent with DOR's Decision.  

                                                                                                                                      



            18          The  participating  areas  involved  in  this  appeal  are  those  that  DOR  

                                                                                                                                                 

aggregated with the Initial PAs. These areas include the Aurora, Borealis, Midnight Sun,  

                                                                                                                                                    

Orion, Polaris, and Pt. McIntyre Participating Areas.  The Producers involved in this  

                                                                                                                                                     

appeal owned working interests in the Prudhoe Bay Unit during the relevant period,  

                                                                                                                                               

February 1, 2005 through March 31, 2006.  These working interests included working  

                                                                                                                                             

interests in the two Initial PAs, the Lisburne PA, and the Satellite PAs.  

                                                                                                                       



            19          Lisburne  PA  production  facilities  initially  processed  production  from  

                                                                                                                                                   

Pt. McIntyre, one of the Satellite PAs, but in 2004, Initial PA facilities began processing  

                                                                                                                                         

a portion of production from Pt. McIntyre as well.  

                                                                                  



                                                                           -8-                                                                     7142
  


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

produced at the Satellite PAs.                                               20  



                                                                                                                                                                                                               

                                   Until oil andgas are separated fromoneanother and fromanywastepresent  



                                                                           

in the well fluids, producers cannot accurately measure oil and gas output.  Therefore,  



                                                                                                                                                                                                    

the measurement of production typically takes place downstream of the production  



                                                                                                                                                                                                                          

facilities.  In this case measurement of output from the production facilities serving the  



                                                                                                                                                                                                                

Initial PAs and the Satellite PAs took place at pump station number one of the Trans- 



                                                                                                                                                                                                              

Alaska Pipeline System.  The working interest owners attributed total metered volume  



                                                                                                                                                                                                                          

to various properties based on estimates of each well's production as determined by  



                                                     

periodic tests of the wells.  



                                                                                                                                                                                                                      

                                   Furthermore, the amount of oil developed from each participating area  



                                                                                                                                                                                                                        

depended  on  the  amount  and  quality  of  oil  produced  at  the  others.                                                                                                                     Because  the  



                                                                                                                                                                                            

centralized production facilities serving the Initial PAs and the Satellite PAs could not  



                                                                                                                                                                                                                    

process all production from all wells in those participating areas, fluids from some wells  



                                                                                                                                                                                                                       

were "backed out," or blocked, in favor of fluids from other wells based on the "best well  



                                                                                                                                                                                                                            

produces" principle.  This principle favored well fluids with the highest ratio of oil to  



                                                                                                                                                                                                                     

gas, which were ultimately the most profitable fluids to produce, regardless of their  



                                                                                                                                                                                                                        

participating area of origin and regardless of which working interest owner owned that  



                                   

participating area.  



                 20                Well fluids include gas, oil, and water.                                                               The Satellite PAs sent their well                                           



fluid to centralized production facilities originally built to serve the Initial PAs.                                                                                                                          There,  

fluids   from   the   Satellite   PAs   commingled   with  fluids  from   the   Initial   PAs.     Six  

coordinated processing centers processed the commingled fluids, separating crude oil                                                                                                                                      

from the other well fluids and using small pipelines to deliver the oil to pump station                                                                                                                         

number one of the Trans-Alaska Pipeline System.                                                                                           The processing centers sent the                                                

separated natural gas to a central gas facility to further separate natural gas liquids from                                                                                                                         

the natural gas.                         Some of the natural gas liquids were blended back into the crude oil or                                                                                                            

taken in kind as natural gas liquids, while the rest were sent to the central compression                                                                                                       

plant for re-injection into the reservoirs.                                  



                                                                                                             -9-                                                                                                    7142
  


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

                                                         In the Prudhoe Bay Unit, each Satellite PA had a smaller field size factor                                                                                                                                                                                                                  



and   therefore   a   lower   ELF   than   the   Initial   PAs.     Consequently,   while   DOR   taxed  



production from the Initial PAs at a rate of about 12.5%, DOR taxed production from the                                                                                                                                                                                                                                                                           



 Satellite PAs at a rate of less than 0.5%.                                                                                                                              Furthermore, the older Initial PA wells tended                                                                                                                          



to   produce   more   gas   and   water   per   barrel   of   oil   than   wells   in   the   Satellite   PAs.   



Therefore, lower-tax oil from the Satellite PAs backed out higher-tax oil from the Initial                                                                                                                                                                                                                                                           



PA wells at increasing rates.                                                                                           The number of barrels of Initial PA production backed out                                                                                                                                                                                



in favor of Satellite PA production increased substantially from 217,896 barrels in 2000                                                                                                                                                                                                                                                                 



to 1,224,090 barrels in 2004.                                                                                                   As the low-tax oil from the Satellite PAs increasingly                                                                                                                                   



backed out the high-tax oil from the Initial PAs, the total amount of tax DOR collected                                                                                                                                                                                                                                                 



from the Prudhoe Bay Unit decreased accordingly.                                                                                                                  



                                                         The   Producers   sought   advance   rulings  from   DOR   that   it   would   not  



aggregate   several Satellite PAs that used Initial PA production facilities.                                                                                                                                                                                                                                                        Between  



August 1998 and November 2001 the Producers filed multiple requests for advance                                                                                                                                                                                                                                                           



rulings involving the Aurora, Borealis, Midnight Sun, and Polaris Participating Areas.                                                                                                                                                                                                   



As early as 2000 DOR informed the Producers that it was examining the issue, but it                                                                                                                                                                                                                                                                                    



never acted on these applications. During that time period DOR considered the requests                                                                                                                                                                                                                                                     



and   conducted   internal   analyses   on   the   best   way   to   clarify   the   phrase   "economic  

interdependence" as it was used in the Aggregation Statute.                                                                                                                                                                                                  21  



                                                         3.                          DOR's internal analyses of the Aggregation Statute  

                                                                                                                                                                                                                                                                                            



                                                         DOR produced a variety of internal memoranda and internal departmental  

                                                                                                                                                                                                                                                                                                                       



position  papers  acknowledging  confusion  over  the  interpretation  of  "economic  

                                                                                                                                                                                                                                                                                                                            



interdependence" and analyzing whether it would be better to clarify the term via statute,  

                                                                                                                                                                                                                                                                                                                                                



regulation, or administrative decision.  In August 2001, Dan E. Dickinson, the Director  

                                                                                                                                                                                                                                                                                                                                           



                            21                           Former  AS  43.55.013(j)  (2005).   See  supra  note  9  and  accompanying  text.  



                                                                                                                                                                               -10-                                                                                                                                                                                         7142  


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

                                                                                                                    

of DOR's Tax Division (the Director) prepared an internal memorandum expressing  



                                                                                                                   

concern that the Aggregation Statute did not clearly define the grounds for aggregation  



                                                                                                                       

and that the then-existing regulations did  not remedy  the confusion.                                          The Director  



                                                                                                                               

complained  that  "[t]he  ELF  is  difficult  to  administer  because  the  base  criteria  for  



                                                                                                                        

aggregation and segregation are not clearly articulated in the statute. . . .  [O]ur attempts  



                                                                                                                               

to  further  clarify  the  criteria  in  the  regulations  are  self-contradictory  and  have  not  



                                                                                                                                 

dispelled   the   murkiness."                   In   particular,   the   Director   was   concerned   that   a  



                                                                                                                          

straightforward  reading  of  the  term  "economically  interdependent"  would  permit  



                                                                                                                    

aggregation only if the fields were "mutually contingent," (emphasis added) preventing  



                                                                                                                        

DOR fromaggregating older fields and satellite fields relying on the production facilities  



                                                                                                                                  

originally built to serve only those older fields, the situation DOR faced with regard to  



                                                                                                         

the Initial PAs and the Satellite PAs.  The Director wrote that DOR  



                                                                                          

                    may       aggregate         [fields]      when        they     are     economically  

                                                                                                         

                    interdependent. Going to Webster suggests that [DOR] must  

                                                                                                      

                    show  that  the  [fields]  are  "mutually  contingent"  before  

                                                                                                           

                     [DOR] aggregate[s].  The argument can always be made that  

                                                                                                              

                    as long as new production comes on and uses empty space in  

                                                                                        

                    old production facilities, there is no mutual dependency.  



                                                                                                                               

                    The Director suggested that DOR could repeal 15 AAC 55.027(b) and  



                                                                                                                                      

adopt new regulations evaluating economic interdependence using analytical factors.  



                                                                                                                                  

The Director believed that the use of his suggested analytical factors would represent "a  



                                                                                                                                  

180-degree switch in the roles played by production facilities in the ELF decision."  In  



                                                                            

May 2002 the Director issued a separate internal memorandum proposing adding new  



                                                                                                                       

provisions  to  15  AAC  55.027  that  would  take  production  constraints  in  common  



                                                                                                                  

production          facilities      into      account        when       interpreting          the     phrase       "economic  



                                                                                

interdependence" as it was used in the Aggregation Statute.  



                                                                                                                                 

                    While DOR never adopted those proposed regulations, it continued to  



                                                               -11-                                                         7142
  


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

                                                                                                               

internally discuss the need for clarification. The Director began drafting a departmental  



                                                                                                                      

position  paper  (the  White  Paper)  on  the  application  of  the  Aggregation  Statute,  



                                                                                                                           

particularly the meaning of "economic interdependence."  August and September 2002  



                                                                                                           

versions of the White Paper draft suggested that the term "economically interdependent"  



                                                                                                                          

as it was used in the Aggregation Statute was ambiguous, theorized that DOR could  



                                                                                                                            

change its "established reading" of the statute to a "better, alternative reading of the law"  



                                                                                                                       

that could "turn the current ELF practice on its head," and suggested that such changes  



                                                                                                                            

would be so extensive that they should probably occur through legislation rather than  



regulation.  



                                                                                                                              

                    Shortly after the completion of the September 2002 White Paper draft, the  



                                                                                                                                

Director acknowledged that upcoming advance ruling decisions, which were likely to  



                                                                                                                              

result in the "granting of separate ELFs," would provide an opportunity to clarify the  



                                                                                                                    

Aggregation Statute's reference to economic interdependence.  However, he expressed  



                                                                                                                              

doubt that DOR should use the decisions to change the existing interpretation of the  



                                                                                                             

statute and stated that DOR "do[es] not inten[d] to amend that policy without either  



(a) legislative direction or (b) encountering a factual situation that is so egregious that  



                                                                                                                            

to preserve any measure of original legislative intent it becomes necessary for us to act."  



                                                                                                                     

                    In subsequent drafts of the White Paper circulated internally fromFebruary  



                                                                                                                     

2003 to November 2004, DOR continued to explore options for addressing its concerns  



                                                                                                                            

about theinterpretation ofthephrase"economicinterdependence." In theFebruary 2003  



                                                                                                        

draft DOR suggested that these changes to ELF policy "should [be] . . . enshrined in a  



                                                                                                                       

regulation."   The White Paper also pointed out that DOR "ha[s] the power through  



                                                                                                                     

regulation . . . to raise an additional 100 million dollars a year in taxes by changing  



                                                               

course and raising taxes on the [Satellite PAs]."  



                                                                                                             

                    A March 2003 draft of the White Paper again stressed the need to clarify  



                                                                                                                            

the  statutory  standard  through  the  adoption  of  regulations,  emphasizing  that  "the  



                                                              -12-                                                        7142
  


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

definition of economic interdependence . . . [is] sufficiently vague in statute that [DOR]  

                                                                                                                          



ought to adopt regulations to clarify the definition."  The draft recognized the policy  

                                                                                                                           



implications of such a decision, explaining that DOR likely "has the discretion through  

                                                                                                                         



regulation to either validate its current practices, or take a much more aggressive revenue  

                                                                                                                         



stance."  In its analysis of the then-current policy, DOR acknowledged that one of the  

                                                                                                                                



primary   dictionary   definitions   of   the   term  "interdependence"   involved   mutual  

                                                                                                                        



dependence, which could require each field to be contingent upon the existence of the  

                                                                                                                                



other  before  DOR  could  aggregate  the  fields.                          The  draft  reasoned  that  under  this  

                                                                                                                              



definition, theSatellitePAs andtheInitialPAs could not beeconomically interdependent  

                                                                                                              



because the Initial PAs were developed long before and independently of the Satellite  

                                                                                                                        



PAs, and, therefore, the Initial PAs could not be contingent upon the Satellite PAs. This  

                                                                                                                              



March         2003       draft      also      explored         alternative         interpretations          of     "economic  

                                                                                                                  



interdependence" that would produce different results when applied to the Prudhoe Bay  

                                                                                                                               



Unit. The draft concluded this analysis by recognizing that the "words and concepts" of  

                                                                                                                                  



the Aggregation Statute "are not well defined."  

                                                           



                    Finally, theAugust 2004 draft, seeming toassumethatDORwould proceed  

                                                                                                                         



via  regulation  - the  White  Paper  draft  discussed  what  would  happen  "[o]nce  the  

                                                                                                                                



regulations are written," for instance - presented various alternative interpretations of  

                                                                                                                                  



the Aggregation Statute, one of which required mutual contingence for interdependence  

                                                                                                            



to be found.  A November 2004 draft of the White Paper repeated this line of reasoning,  

                                                                                                                     



but it also mentioned that DOR was planning to aggregate some of the Satellite PAs with  

                                                                                                                              



the Initial PAs.  

                 



          B.        Proceedings  



                    In  January  2005  the  Director  issued  DOR's  Decision  notifying  the  

                                                                                                                               



Producers that DOR had decided to aggregate the Initial PAs and the Satellite PAs in the  

                                                                                                                                



                                                               -13-                                                         7142
  


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

                                      22  

Prudhoe Bay Unit                          for the purpose of calculating production tax obligations effective  



February 1, 2005, the start of a new monthly period for determining production tax                                                                                           



                        23 

                                                                                                                                     

obligations.                 DOR found that operations at the Initial PAs and the Satellite PAs were  



                                                                                                                                                                                

economically  interdependent,  and,  therefore,  DOR  aggregated  them,  referencing  a  



                                                                                                                                                             

variety of policy reasons for its decision. The Decision effectively treated the aggregated  



                                                                                                                                                                            

areas as a single lease or property for calculating the ELF, resulting in a higher ELF and  



                                                                                                    

a higher tax rate on the oil produced from these properties.  



                                                                                                                                                                      

                            The Decision explained that DOR's prior administrative decisions related  



                                                                                                                                                                        

to  aggregation  provided  "only  limited  guidance"  on  the  meaning  of  the  term  



                                                                                                                                                                

"economicallyinterdependent." TheDecision then reviewedjudicialdecisionsanalyzing  



                                                                                                                                                                        

the term in other legal contexts in jurisdictions outside of Alaska and a 1998 DOR  



                                                                                                                                                               

decision in which DORaggregated multiple leases covering a single reservoir developed  



                                                                                                       

under a sole management plan.  DOR concluded that "while the guidance provided by  



                                                                                                                                                                            

past administrative precedent is sparse, the applicable generality . . . seems to be that  



                                                                                                                                                             

economic  interdependence  is  shown  by  or  associated  with  unified  or  integrated  



                                                                                                                                                        

operations or enterprise encompassing the several leases or properties in question."  



                                                                                                                                                                              

                            Based  on  that  review,  DOR's  Decision  stated  that  "if  [fields]  are  so  



                                                                                                                                                                             

integrated as to be reasonably treated as an economically unitary activity," the fields are  



                                                                                                                                                                

economically interdependent.  DOR further explained that a "weak" form of economic  



                                                                                                                                                                               

interdependence "exists between two or more things when the economic activity or  



              22            The   Decision   aggregated   the   Aurora,   Borealis,   Midnight   Sun,   Orion,  



Polaris, and Pt. McIntyre Participating Areas with the Initial PAs.                                                                      The superior court's        

statement that the Lisburne and Niakuk Participating Areas were also aggregated is not                                                                                       

correct. Aggregation changed the production tax obligations for all four of the Producers                                                                      

and for BP Exploration (Alaska) Inc.                                 



              23            See former AS 43.55.020(a) (2005) (providing that oil production taxes  

                                                                                                                                                                         

should be paid on a monthly basis).  

                                                             



                                                                                     -14-                                                                                7142
  


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

                                                                                                                           

condition of each has a material effect on the economic activity or condition of the other"  



                                                                                                                          

and a "strong" form of economic interdependence "exists when formally distinct entities  



                                                                                                                              

or activities are sufficiently economically integrated that for some practical purpose they  



                                                                                                                                 

may reasonably be considered as equivalent to a single or unitary economic entity or  



                                                                                           

activity."  DOR observed that these two concepts often, if not always, "differ . . . only  



                                                          

in the degree of interdependence that exists."  



                                                                                                                                

                    DOR did not decide which standard controlled for the purposes of the  



                                                                                                                        

Aggregation Statute. However,DORconcludedthattheareas in questioneasilysatisfied  



                                                                                                                           

the more demanding standard because (1) the Initial PAs and the Satellite PAs shared  



                                                                                                                                

common production facilities for oil and gas, and the use of common facilities made the  



                                                                                                                                

volume of oil produced from any participating area dependent on the volume of oil  



                                                                                                                            

produced from the others; (2) the working interest owners made decisions about which  



                                                                                                                              

wells to produce and which wells to back out "across participating areas, not within each  



                                                                                                                                  

participating area on an isolated basis"; and (3) "the commingling of produced fluids in  



                                                                                                                        

common production facilities and the consequent need to estimate and allocate volumes  



                                                                                                                               

from  different  [participating  areas]  renders  the  production  volumes  of  all  the  



                                 

[participating areas] interdependent."  



                                                                                                                             

                    DOR then explained the policy rationale behind its Decision.  First, DOR  



                                                                                                                      

concluded that "thebackout phenomenon, takentogetherwithhighlydisparateeconomic  



                                                                                                                       

limit factors as between the Initial PAs and the [S]atellite PAs, results in a tax structure  



                                                                                                                                

that is grossly at odds with the economics of oil production."  DOR explained that the  



                                                                                                                                

legislature intended the ELF system to serve as a tax break for costlier production, but  



                                                                                                                             

in Prudhoe Bay, non-aggregation gave a tax break to oil from the Satellite PAs even  



                                                                                                                                 

though that oil was less costly to produce due to its higher ratio of oil to gas than the oil  



                                                                                                                    

from the Initial PAs.  Second, due to the rising cost of oil in recent years, oil production  



                                                                                                                      

on all Prudhoe Bay fields was moving further away from its economic limit; therefore,  



                                                               -15-                                                         7142
  


----------------------- Page 16-----------------------

increasing the tax rate on oil from the Satellite PAs would not discourage the Producers                                                                                                                                                                                                                               



from continuing to produce oil from the Satellite PAs.                                                                                                                                                                      Third, DOR believed "[i]t [was]                                                                              



inherently   problematical   to  tax  oil   at   widely   differing   effective   rates   when   the  



determination of how much oil is subject to which rate is based not on accurate metering                                                                                                                                                                                                                                    



but on estimation."                                                              DOR acknowledged that it had approved the use of allocation in                                                                                                                                                                                                        



previous instances of facility sharing but that "its subsequent experience ha[d] not been                                                                                                                                                                                                                                                   



without   significant   problems."     Finally,   based   on   the   history   of   North   Slope  



development,   DOR found                                                                                       "little   reason   to   believe"   that   declining   to   aggregate   the  



 Satellite PAs with the Initial PAs in the Prudhoe Bay Unit would "promot[e] additional                                                                                                                                                                                                                               



development."  



                                                      DOR   concluded   its   Decision   by   determining   that   the   Satellite   PAs   in  



question were eligible for aggregation with the Initial PAs, relying on factors including                                                                                                                                                                                                                                



the use of common production facilities, the coordination of well production to deal with                                                                                                                                                                                                                                                     



constrained capacity in shared production facilities, the use of backout volume and                                                                                                                                                                                                                                                            



compensation arrangements, and the allocation of production to wells without exact                                                                                                                                                                                                                                                       



metering.  

                                                                                                                                                                                                                                                                                24  and requested an  

                                                      In March 2005 the Producers appealed the Decision                                                                                                                                                                                                                                              



                           24                         See  15 AAC 05.001-05.050 (governing appeal procedures related to tax  

                                                                                                                                                                                                                                                                                                                                                   

matters under AS 43).  

                                                                                            



                                                                                                                                                                        -16-                                                                                                                                                                                  7142  


----------------------- Page 17-----------------------

                                                                                                                         25                                                        26  

informal conference with DOR under AS 43.05.240(a)                                                                            and 15 AAC 05.020(a).                                     In  



November   2008   after   the   informal   conference,   DOR   affirmed   its   earlier   decision.  

                                                                                          27                                               28    the  Producers  then  

                                                                                                 and  AS  43.05.405                                       

                             Pursuant   to   AS   43.05.241                                                         



appealed to the Office of Administrative Hearings, where Administrative Law Judge  

                                                                                                                                                                                 



Christopher  Kennedy  presided  over  the  appeal.                                                                At  the  administrative  hearing  the  

                                                                                                                                                                                       



Producers argued that DOR's Decision violated the Administrative Procedure Act and  

                                                                                                                                                                                      



               25            AS 43.05.240(a) ("A taxpayer aggrieved by the action of the department                             



in fixing the amount of a tax or penalty may apply to the department within 60 days after                                                                                            

the date of mailing of the notice required to be given to the taxpayer by the department,                                                                           

giving notice of the grievance, and requesting an informal conference to be scheduled                                                                                   

with an appeals officer.").                                 BP Exploration (Alaska) Inc. participated in the informal                                                      

conference, but it did not participate in subsequent appeals.                                                    



               26             15 AAC 05.020(a) ("Upon receipt of a written request for appeal under  

                                                                                                                                                                                 

 15 AAC 05.010 requesting an informal conference, an appeals officer will promptly  

                                                                                                                                                                          

schedule the informal conference. . . .  The informal conference will be conducted in  

                                                                                                                                                                                          

person, throughcorrespondence,orbytelephone,audio, or videoteleconference, or other  

                                                                                                                                                                                   

electronic means.  The appeals officer shall make available to the person who filed the  

                                                                                                                                                                                        

request for appeal the relevant portion of that person's file, and shall explain at the  

                                                                                                                                                                                       

informal conference the action taken by the department. A person who wants to present  

                                                                                                                                                                               

facts and information in support of its position must bring all pertinent books, records,  

                                                                                                                                                                             

schedules, and other documents to the conference. . . .  The person who filed the request  

                                                                                                                                                                               

shall supply additional information that the appeals officer considers necessary.").  

                                                                                                                                                         



               27            AS  43.05.241  ("For  a  matter  within  the  jurisdiction  of  the  office  of  

                                                                                                                                                                                         

administrative hearings (AS 44.64) under AS 43.05.405, the taxpayer aggrieved by an  

                                                                                                                                                                                         

informal conference decision entered under AS 43.05.240 may file with the office of  

                                                                                                                                                                                         

administrative  hearings  a  notice  of  appeal  for  formal  hearing,  as  provided  in  

                                                                                                                                                                                        

AS 43.05.430, no later than 30 days after service of the decision resulting from an  

                                                                                                                                                                                        

informal conference.").  

                     



               28            AS 43.05.405 ("The office has original jurisdiction to hear formal appeals  

                                                                                                                                                                              

from informal conference decisions of the Department of Revenue under AS 43.05.240.  

                                                                                                                                                                       

Appeal to the office may be taken only from an informal conference decision under  

                                                                                                                                                                                 

AS 43.05.240.").  

         



                                                                                           -17-                                                                                    7142
  


----------------------- Page 18-----------------------

the Producers' due process rights.                                                                                                                                  The Producers maintained that DOR should have                                                                                                                                                                           



 implemented   any   changes   to   its   interpretation   of   the   relevant   statutes  by  proper  



rulemaking   under   the   APA,   not  through   its   decision   process.     In   support   of   their  



 arguments,   the   Producers   relied   heavily   on   DOR's   internal   documents,   which   the  



 Producers had acquired from DOR during the informal conference process.                                                                                                                                                                                                                                                  



                                                               Judge Kennedy's decision acknowledged that the internal memoranda and                                                                                                                                                                                                                                                               



 White   Paper   drafts   "suggest   that   the   question   of   how   to  interpret   'economically  



 interdependent' and other phrases in the ELF statute could have been approached by                                                                                                                                                                                                                                                          



 asking   the   legislature   for   clarifying   amendments   or   by   adopting   an   interpretive  



regulation[],   and   that  the   department   considered   those   options,"   but   that   "[a]s  



preliminary,    informal,    internal,    confidential,    and    generally    unattributed    papers,  



the[y] . . . show nothing more." In October 2012 Judge Kennedy upheld DOR's decision                                                                                                                                                                                                                                                                                         



 and concluded that DOR was not required to engage in formal rulemaking in interpreting                                                                                                                                                                                                                                                                       



the Aggregation Statute the way it did in its Decision.                                                                                                                                                       



                                                               The Producers then appealed Judge Kennedy's decision to the superior                                                                                                                                                                                                                                        



 court, again raising APA and due process arguments.                                                                                                                                                                                                           In March 2015 Superior Court                                                                                             



 Judge Michael D. Corey held that DOR had adopted a commonsense interpretation of                                                                                                                                                                                                                                                                                                                        



the Aggregation Statute that did not require formal rulemaking under the APA.                                                                                                                                                                                                                                                                                                                The  



 court also held that DOR did not abuse its discretion or violate the Producers' due                                                                                                                                                                                                                                                                                                             



process rights.   



                                                               The Producers                                                              appeal to this court.                                                                                The Producers claim that DOR's                                                                                                   



 Decision constitutes a regulation and, since aregulationadoptedwithout                                                                                                                                                                                                                                                                    complying with   

                                                                                       29 the Decision itself is invalid. The Producers argue that DOR should  

the APA is invalid,                                                                                                                                                                                                                                                                                                                                                                  



                                29                            Friends of Willow Lake, Inc. v. State, Dep't of Transp. & Pub. Facilities,
                                                                                                                                                                                                                           



Div. of Aviation & Airports                                                                                                    , 280 P.3d 542, 548-49 (Alaska 2012) (citing                                                                                                                                                                    Smart v. State,
                          

                                                                                                                                                                                                                                                                                                                                                      (continued...)
  



                                                                                                                                                                                                 -18-                                                                                                                                                                                        7142
  


----------------------- Page 19-----------------------

recalculate the production tax for the period from February 2005 through March 2006   



and refund any amounts the Producers paid in excess of the recalculated production tax                                                                                        



for that period with interest.            



III.	         STANDARD OF REVIEW                      



                            "Whether an agency action is a regulation is a question of law that does not                                                                      



                                                                                                                                                                                 30  

involve agency                     expertise,   which   we review applying our                                               independent  judgment."                                  



                                                                                                                                                                    

Therefore,  "more  deferential  standards  of  review  sometimes  reserved  for  agency  



                                                                                                                                                                               

interpretations are inappropriate here" where "[t]he threshold question . . . is whether the  



                                                                  31  

                                                    

APA applies" to DOR's action. 



IV.	          DISCUSSION  



                                                                                                                                                

              A.	           DOR's Decision Applying The Term "Economically Interdependent"  

                                                                                                                                                  

                            To   The   Initial   PAs   and   Satellite   PAs   Was   A   Commonsense  

                                                                                                                                                          

                            Interpretation Of The Statute And Did Not Trigger APA Rulemaking  

                            Requirements.  



                                                                                                                          

                            1.	           Defining a regulation under Alaska law  



                                                                                                                                                                   

                            The APA defines a regulation as "every rule, regulation, order, or standard  



                                                                                                                                                              

of general application or the amendment, supplement, or revision of a rule, regulation,  



                                                                                                                                                                               

order, or standard adopted by a state agency to implement, interpret, or make specific the  



              29            (...continued)  



                                                                                                                                

Dep't of Health & Soc. Servs., 237 P.3d 1010, 1017 (Alaska 2010)).  



              30            State, Dep't of Nat. Res. v. Nondalton Tribal Council                                                          , 268 P.3d 293, 299  



(Alaska 2012) (citing                        Alyeska Pipeline Serv. Co. v. State, Dep't of Envtl. Conservation                                                                     ,  

 145 P.3d 561, 564 (Alaska 2006)).  

                                                          



              31            Id . (first alteration in original) (quoting Jerrel v. State, Dep't of Nat. Res.,  

                                                                                                                                                                           

999 P.2d 138, 141 (Alaska 2000)).  

                                                          



                                                                                      -19-	                                                                               7142
  


----------------------- Page 20-----------------------

                                                           32  

law enforced or administered by it."                            Regulations that are not promulgated under APA                          



                                      33  

procedures are invalid.                    



                      "[T]he label placed on a particular statement by an administrative agency  

                                                                                                                                     



does not determine the applicability of the APA.  Under the Alaska statute, 'regulation'  

                                                                                                                             



encompasses many statements made by administrative agencies, including policies and  

                                                                                                                                           

guides to enforcement."34                     But while the APA's definition of regulation is construed  

                                                                                                                                

broadly,35  not every agency action or decision constitutes a regulation.36                                                  An agency  

                                                                                                                                    



action must meet both of the following criteria to be a regulation: (1) "the [agency  

                                                                                                                                   



action] implements, interprets, or makes specific the law enforced or administered by the  

                                                                                                                                            



agency"; and (2) "the [agency action] affects the public or is used by the agency in  

                                                                                                                               

dealing with the public."37   An agency action must satisfy both prongs in order for APA  

                                                                                                                                        



rulemaking requirements to apply to that action.  

                                                                      



                      In  analyzing  whether  an  agency  action  was  adopted  "to  implement,  

                                                                                                                      

                                                                                                            38  we have recognized  

interpret, or make specific the law enforced or administered by it"                                                           

                                                                                                         



           32         AS 44.62.640(a)(3).                  



           33         Friends of Willow Lake, Inc., 280 P.3d at 548-49 (citing Smart, 237 P.3d  

                                                                                                                                 

at 1017).  

     



           34         Kenai Peninsula Fisherman's Coop. Ass'n v. State, 628 P.2d 897, 905  

                                                                                                                                          

(Alaska 1981).  

               



           35         Friends of Willow Lake, Inc., 280 P.3d at 549 (quoting Smart, 237 P.3d at  

                                                                                                                                             

 1017).  



           36         Nondalton Tribal Council, 268 P.3d at 300 (quoting Kachemak Bay Watch,  

                                                                                                                                     

Inc. v. Noah, 935 P.2d 816, 825 (Alaska 1997)).  

                                                                     



           37         Id . at 300-01.  

                                 



           38         AS 44.62.640(a)(3); see also Nondalton Tribal Council, 268 P.3d at 300- 

                                                                                                                                         



                                                                     -20-                                                              7142
  


----------------------- Page 21-----------------------

that agencies must have some freedom to apply relevant statutes without the burden of                                                                                                 



adopting a regulation each time they do so.                                                        We have explained that "[n]early every                                     



agency action                    is based, implicitly                        or   explicitly, on                   an   interpretation of                       a   statute or   



regulation authorizing it to act. A requirement that each such interpretation be preceded                                                                              

by rulemaking would result in complete ossification of the regulatory state."                                                                                       39  



                             Therefore,   we   have   clarified   that   agency   actions   that   are   merely  

                                                                                                                                                                         



"[commonsense]interpretation[s]"ofexistingrequirements arenot regulations requiring  

                                                                                                                                                                       

compliance with APA rulemaking standards.40  In other words, "obvious, commonsense  

                                                                                                                                                            

interpretations of statutes do not require [rulemaking]."41  We have further explained that  

                                                                                                                                                                                            



              38             (...continued)  



01.  



              39            Alyeska Pipeline Serv. Co. v. State, Dep't of Envtl. Conservation                                                                        , 145 P.3d     



561, 573 (Alaska 2006).                



              40            Alaska Ctr. for the Env't v. State , 80 P.3d 231, 243-44 (Alaska 2003)  

                                                                                                                                                                             

(holding that an agency interpretation "[did] not satisfy the Administrative Procedure  

                                                                                                                                                                    

Act's definition of 'regulation,' as it was not an 'amendment, supplement, or revision of  

                                                                                                                                                                                      

a rule, regulation, order, or standard' so much as it was a [commonsense] interpretation  

                                                                                                                                                             

of the regulation's applicability" because "[i]t neither provided new requirements nor  

                                                                                                                                                                                   

made the existing ones any more specific," and concluding that the agency interpretation  

                                                                                                                                                              

"thus was not a 'regulation' and did not need to be promulgated in accordance with the  

                                                                                                                                                                                    

Alaska Administrative Procedure Act." (internal citations omitted)).  

                                                                                                                              



              41            Alyeska Pipeline Serv. Co. , 145 P.3d at 573.  The Producers characterize  

                                                                                                   

this holding - that "obvious, commonsense interpretations of statutes do not require  

                                                                                                                                                                  

rulemaking" - as an exception to the definition of a regulation set forth in the APA.  

                                                                                                                                                                                            

The Producers use this characterization to argue that the exception does not apply to  

                                                                                                                                                                                      

DOR's Decision because (1) Alaska courts only - or at least predominantly - apply  

                                                                                                                                                                              

the exception in cases where an agency is interpreting its own regulations, as opposed  

                                                                                                                      

to legislation and (2) even where Alaska courtshaveapplied thecommonsenseexception  

                                                                                                                                                                      

to situations where an agency interpreted a statute directly, as opposed to interpreting its  

                                                                                                                                                                                      

own regulation, Alaska courts have only done so when the agency's "interpretation  

                                                                                                                                                           

                                                                                                                                                             (continued...)  



                                                                                         -21-                                                                                  7142
  


----------------------- Page 22-----------------------

agency actions may not be "commonsense interpretations" of existing laws (1) when the                                                              



agency adds "requirements of substance" and does more than just "interpret[] . . . the                                                            



 [statute] according to its own terms"; (2) when the agency interprets a statute in a way               



that   is   "expansive   or   unforeseeable";   or   (3)   when   the   agency   "alters   its   previous  



            41          (...continued)  



                                                                                                                                                      

was . . . routine."  But the commonsense "exception" is not an exception at all; rather it  

                                                                                                                                                   

is the rule, clarifying when an agency action is not a regulation.  And apart from the  

                                                                                                                                                   

Producers' incorrect characterization of the commonsense language as an exception, the  

                                                                                                                                                

Producers' arguments that the commonsense language does not apply to the case at hand  

              

are not persuasive.  



                                                                                                                                                     

                        The Producers cite Friends of Willow Lake, Inc. v. State, Department of  

                                                                                                                                                 

 Transportation & Public Facilities, Division of Aviation & Airports, 280 P.3d 542  

                                                                                                                                               

(Alaska 2012), Smart v. State, Department of Health & Social Services, 237 P.3d 1010  

                                                                                                                                          

(Alaska 2010), and Alaska Center for the Environment v. State , 80 P.3d 231 (Alaska  

                                                                                                                                               

2003)  in  support  of  their  proposition  that  Alaska  courts  only  -  or  at  least  

                                                                                                                                                  

predominantly  - apply  the  commonsense  language  to  cases  where  an  agency  has  

                                                                                                                                                 

already interpreted a statute through regulation.  But we have specifically stated that  

                                                                                                                                           

"obvious, commonsense interpretations of statutes do not require rulemaking." Alyeska  

                                                                                                                                                 

Pipeline Serv. Co., 145 P.3d at 573 (emphasis added).  Notably, we did not state that  

                                                                                                                                            

"obvious, commonsense interpretations of regulations based on statutes do not require  

                                                                                                                                           

rulemaking," and we did not qualify this statement in any other way that would suggest  

                                                                                                                                               

that we exclusively or even predominantly apply the commonsense language to cases  

                                                                                                                            

where an agency has already interpreted a statute through regulation.  



                                                                                                         

                        Second, the Producers argue that even where Alaska courts have applied  

                                                                                                                                            

the  commonsense  "exception"  to  situations  where  an  agency  interpreted  a  statute  

                                                                                                                                                 

directly, as opposed to interpreting the agency's own regulation, Alaska courts have only  

                                                                                                                                      

done so when the agency's "interpretation was . . . routine." But whether the challenged  

                                                                                                                                  

interpretation  was  "routine"  is  not  a  factor  courts  must  analyze  when  determining  

                                                                                                                                  

whether an agency action is a regulation under the APA's definition of a regulation or  

                                                                                                                                     

relevant case law. The Producers merely use the word "routine" to attempt to distinguish  

                                                                                                                                            

this case from those they cite in support of their argument, such as Squires v. Alaska  

                                                                                                                                                  

Board of Architects, Engineers & Land Surveyors, 205 P.3d 326 (Alaska 2009) and  

                                                                                                                                  

Alaska Center for the Environment v. State , 80 P.3d 231 (Alaska 2003).  



                                                                        -22-                                                                   7142
  


----------------------- Page 23-----------------------

interpretation of a statute."                42  



                                                                                                                                         

                      2.	        DOR interpreted the Aggregation Statute according to its own  

                                 terms.  



                                                                                                                                           

                      An agency action may not be a commonsense interpretation of existing law  



                                                                                                                                            

when it adds "requirements of substance" rather than serving as an "interpretation of the  



                                                                 43  

                                                                                                                                   

[statute]  according  to  its  own  terms."                             In  its  Decision,  DOR  determined  that  oil  



                                                                                                                                             

production operations are economically interdependent when they are "so integrated as  



                                                                                                                                  

to be reasonably treated as an economically unitary activity."  Comparing our previous  



                                                                                                       44  

                                                                                                                              

decisions in Jerrel v. State, Department of Natural Resources                                             and  Burke v. Houston  



                   45                                                                                    46  

                                                                                                                                  

NANA LLC               with Alaska Center for the Environment v. State                                      and Alyeska Pipeline  



                                                                                                                       47  

                                                                                                                                 

Service Company v. State, Department of Environmental Conservation,                                                        we conclude  



                                                                                                                                            

that DOR's Decision was a commonsense interpretation of the statute according to its  



                                                                                                                        

own terms, and DOR's interpretation does not add any requirements of substance.  



                                                                                                                                           

                      In Jerrel, the Jerrels held grazing leases on state land subject to a statute and  



                                                                                                                                      

its implementing regulation requiring them to mark their horses that grazed on the leased  



        48  

                                                                                                                                          

land.       The Department of Natural Resources sent a letter informing the Jerrels that they  



                                                                                                                                      

were not in compliance with the statute, which required that the livestock owners "tag[],  



           42         Alyeska Pipeline Serv. Co.                   , 145 P.3d at 573 (quoting                   Alaska Ctr. for the        



Env't, 80 P.3d at 244).                  



           43         Id .  (quoting  Alaska  Ctr.  for  the  Env't,  80  P.3d  at  244).  



           44         999  P.2d   138  (Alaska  2000).  



           45         222  P.3d  851  (Alaska  2010).  



           46         80  P.3d  231.   



           47          145  P.3d  561.  



           48         Jerrel,  999  P.2d  at   142.  



                                                                     -23-	                                                             7142
  


----------------------- Page 24-----------------------

                                                                                              49  

dye[], or otherwise mark[]" their animals.                                                          The Department of Natural Resources                            



directed them to mark their animals with "[sufficiently] permanent" markings visible                                                                                       



from   at   least   twenty   feet,   even   though   neither  the   statute   nor   relevant   regulations  

                                                                            50   We rejected the agency's argument that a twenty- 

contained that specific requirement.                                                                                                                                     



foot requirement was an informal "policy rule," concluding that the requirement was a  

                                                                                                                                                                                        



regulation developed "precisely in order to interpret, make specific, and implement the  

                                                                                                                                                                                    

statutory requirement that a mark or brand 'show[] distinctly.' "51  

                                                                                                                                                



                             Similarly, in Burke, we held that an agency's action was a regulation when  

                                                                                                                                                                               



that agency decided that its filing deadline's exemption for extenuating circumstances  

included an unwritten "discovery rule" that capped the grace period at ninety days.52   In  

                                                                                                                                                                                      



both Jerrel and Burke, the agency action in question added specific criteria or values that  

                                                                                                                                                                                   



clarified the existing statutory or regulatory standard and required the public to comport  

                                                                                                                                                                         



with precise criteria not specified in existing rules. In other words, the agencies' actions  

                                                                                                                                                                           



in Jerrel  and Burke  added requirements of substance and, therefore, we held that the  

                                                                                                                                                                                    



agencies' actions were regulations.  

                                                   



                             In contrast, in Alaska Center for the Environment , an agency clarified that  

                                                                                                                                                                                   



the term "major  energy facility" as used  in  a regulation  did  not include an  airport  

                                                                                                                                                                           



expansion project because the regulation was not meant to include businesses that used  

                                                                                                                                                                                 

fuel incidentally in daily operations.53                                             We held that the agency's interpretation was a  

                                                                                                                                                                                        



              49            Id.  



              50            Id . at 142-43.     



              51            Id . at 143 (alteration in original) (quoting AS 03.40.020).                                        



              52  

                                                                                                                                                                  

                            Burke v. Houston NANA LLC, 222 P.3d 851, 868-69 (Alaska 2010).  



              53            Alaska Ctr. for the Env't v. State                                     , 80 P.3d 231, 242-44 (Alaska 2003).                               



                                                                                         -24-                                                                                  7142
  


----------------------- Page 25-----------------------

commonsense interpretation of the statute that did not require rulemaking under the                                                      

APA.54                                                                                                                                    

              In Alaska Center for the Environment , the agency did not add anything to the  



                                                                                                                                           

existing rule; it merely interpreted a broad phrase and decided whether a certain type of  



                                                                                                                                  

project was included in the definition of "major energy facility."  Similarly, in Alyeska  



                                                    

Pipeline Service Company, an agency concluded that a statute authorizing it to recoup  



                                                                                                                                      

costs of reviewing air quality permit applications from the applicant included the costs  

                                                                                              55  We held that the agency's  

                                                                                                                                

the agency incurred in defending related permit appeals. 



decision  was  a  commonsense  interpretation  under  the  terms  of  the  statute,  not  a  

                                                                                                                                            

regulation.56          In other words, the agency did not add anything to the statute; it merely  

                                                                                                                                   



clarified whether costs related to the defense of permit appeals fell under the broad  

                                                                                                                                     



umbrella of "costs," as that term was used in the statute.  

                                                                                 



                      In this case, DOR's Decision is more similar to the agencies' actions in  

                                                                                                                                           



Alaska Center for the Environment and Alyeska Pipeline Service Company than to the  

                                                                                                                                          



agencies'  actions  in  Jerrel  and  Burke.                           DOR  clarified  the  scope  of  the  statute  by  

                                                                                                                                          



indicating the degree of economic interdependence that could warrant aggregation, but  

                                                                                                                                         



it did not add any specific criteria to the term "economically interdependent" that went  

                                                                                                                                       



beyond  the scope of  the  Aggregation  Statute's existing  language.                                              Instead,  DOR's  

                                                                                                                                  



Decision was based only on existing statutory language, and the Decision served only  

                                                



to clarify whether the broad term "economically interdependent" covered the specific  

                                                                                                                                  



situation involving the Satellite PAs and the Initial PAs.  Notably, the interpretation of  

                                                                                                                                           



"economically interdependent" set forth in DOR's Decision does not do much to clarify  

                                                                                                                                    



           54         Id . at 244.     



           55  

                                                                                                                                       

                      Alyeska Pipeline Serv. Co. v. State, Dep't of Envtl. Conservation , 145 P.3d  

                                       

561, 563, 572 (Alaska 2006).  



           56         Id . at 573.  

                                



                                                                    -25-                                                              7142
  


----------------------- Page 26-----------------------

the Aggregation Statute until that interpretation is applied to the specific facts of this                                                                                                                                                                                                                                                                                                    



case.     This   suggests   that   DOR   narrowly   tailored   its   interpretation  of   the   phrase  



"economically interdependent" to the facts of this case and applied the existing language                                                                                                                                                                                                                                                                             



of the Aggregation Statute to this case without adding any additional terms.                                                                                                                                                                                                                                                                                     



                                                              DOR acknowledged in its White Paper drafts that there were a variety of  



possible definitions of "economically interdependent" based on dictionary definitions of                                                                                                                                                                                                                                                                                                               



related terms. The Producers argue the decisions by the superior court and the Office of                                                                                                                                                                                                                                                                                                              



Administrative Hearings "ignore completely the confusion and wildly different valid                                                                                                                                                                                                                                                                                                    



interpretations that DOR acknowledged, and the effort it expended over several years                                                                                                                                                                                                                                                                                                  



evaluating alternative interpretations different from the one obtained by looking at the                                                                                                                                                                                                                                                                                                         



primary dictionary definition."                                                                                                                      The Producers claim that this "demonstrates that it                                                                                                                                                                                               



achievedthedesired interpretation                                                                                                                            through considerable,complicated                                                                                                                               effort, not                                    through  



aroutine,                                   [commonsense]interpretation                                                                                                                ofclear                            statutory language." TheProducers                                                                                                                                  also  



 fault DOR for failing to cite any of the dictionary definitions related to the phrase                                                                                                                                                                                                                                                                                         



"economically interdependent" in its Decision.                                                                                                                              



                                                              But it is not uncommon for there to be multiple ways to read a given phrase                                                                                                                                                                                                                                        



in a statute without adding any additional substantive terms or requirements; if this were                                                                                                                                                                                                                                                                                               



not   the   case,   agencies   would   always    be   required   to   proceed   via   rulemaking.   



Furthermore, DOR's interpretation of "economic interdependence" is consistent with                                                                                                                                                                                                                                                                                                        



dictionary definitions of the terms.                                                                                                                                 Webster's Dictionary defines "inter-" as a prefix                                                                                                                                                       

                                                                                                         57               It  defines  "dependent"  as  "determined  or  conditioned  by  

meaning   "reciprocal."                                                                                                                                                                                                                                                                                                                                                                          



another" and "dependence" as "the quality or state of being influenced or determined by  

                                                                                                                                                                                                                                                                                                                                                                                                    



                               57                            Inter-,  WEBSTER 'S  COLLEGIATE  DICTIONARY  (10th  ed.   1998).   



                                                                                                                                                                                               -26-                                                                                                                                                                                                           7142  


----------------------- Page 27-----------------------

                                                 58  

or subject to another."                               DOR's determination that oil production operations may be                                                                     



economically interdependent "if [fields] are so integrated as to be reasonably treated as                                                                                            

                                                                                                                                                59  In Smart v. State,  

an economically unitary activity" is consistent with these definitions.                                                                                                       



Department of Health & Social Services, we held that an agency, in selecting one of  

                                                                                                                                                                                     



several definitions of the term "statistically valid sampling methodologies" to use in  

                                                                                                                                                                                     



selecting a "statewide sample" of a group of service providers for auditing, did not  

                                                                                                                                                                                  



impose new substantive requirements because the agency chose its interpretation from  

                                                                                                                                                                               

an array of approaches laid out in published sources like statistics books.60  Just as the  

                                                                                                                                                                                   



agency in Smart chose from among various established definitions of a broad phrase,  

                                                                                                                                                                          



DOR  internally  reviewed  dictionary  definitions  relating  to  the  phrase  "economic  

                                                                                                                                                                 



interdependence" and interpreted the broad phrase in the Aggregation Statute based on  

                                                                                                                                                                                    



these established definitions. In doing so DOR did not add anything to the Aggregation  

                                                                                                                                                               



 Statute that was not present in the statute's existing language.  

                                                                                                                



                             3.	           DOR's                  interpretation                           of          the           term              "economically  

                                                                                                                  

                                           interdependent" was foreseeable.  

                                                                                                                          



                             The legislature enacted the ELF tax regime and gave DOR the discretion  

                                                                                                                                                            



to aggregate oil fields in order to accomplish its main purpose:  to tax different oil fields  

                                                                                                                                                                              



at different rates to reflect each field's underlying economics and to incentivize oil  

                                                                                                                                                                                   



              58            Dependent, W                    EBSTER 'S  COLLEGIATE  DICTIONARY  (10th ed. 1998).                                                              



              59  

                                                                                                                                                                

                             "Reciprocal" means "shared, felt, or shown by both sides."  Reciprocal,  

WEBSTER 'S                   COLLEGIATE                     DICTIONARY                     (10th    ed.    1998).       DOR's    reference    to  

"economically  unitary  activity" (emphasis added) is consistent with this meaning, in that                                                                                       

DOR views fields engaged in shared economic activity as economically interdependent.                                                                                                       

And   DOR's   reference   to   "integrated"   fields   is   consistent   with   the   fields   being  

"determined or conditioned" by each other or "being influenced or determined by or                                                                                                   

subject to" each other.             



              60             237 P.3d 1010, 1012, 1017-18 (Alaska 2010).  

                                                                                                                  



                                                                                        -27-	                                                                                 7142
  


----------------------- Page 28-----------------------

production in smaller, less profitable fields.  When oil and gas operations in different  

                                                                                                  



fields become integrated such that there is no meaningful separation between production  

                                                                                                                     



in the different fields, there is no justification for maintaining different effective tax rates  

                                                                                                                              



on those fields. The Initial PAs and the Satellite PAs used common production facilities,  

                                                                                                                       



coordinated well production to deal with constrained capacity in shared production  

                                                                                                                    



facilities,      implemented            backout        and      compensation            agreements           based      on     the  

                                                                                                                              



interconnections between the Initial PAs and the Satellite PAs, and allocated production  

                                                                                                                    



to wells without exact metering.  This meant that the Satellite PAs received tax breaks  

                                                                                                                           



that were designed to alleviate costs they did not face, and the Satellite PAs began to  

                                                                                                                                  



back  out  oil  taxed  at  the  higher  rate.                  DOR's  Decision  to  interpret  "economically  

                                                                                                              



interdependent"  such  that  "economic  substance  .  .  .  prevail[ed]  over  form"  should  

                                                                                                                          



therefore have been foreseeable in light of the ELF tax regime and the well-known  

                                                                                                                  



purposes behind it; DOR's Decision was consistent with the legislature's intent.  What  

                                                                                                                             



had changed was the way in which the Producers increasingly integrated their operations  

                                                                                                                     



among the Initial PAs and the Satellite PAs.  It was foreseeable that DOR would use the  

                                                                                                                                



tool the legislature gave it - its discretionary ability to aggregate fields if they were  

                                                                                                                             



economically interdependent - to aggregate the Satellite PAs with the Initial PAs to  

                                                                                                                                  



better reflect the economic realities of the Prudhoe Bay Unit.  

                                                                                      



                    4.	       DOR's decision did not depart from a previous interpretation  

                                                                                                              

                               of the Aggregation Statute.  

                                                               



                    The Producers rely mainly on internal DOR memoranda and White Paper  

                                                                                                                            



drafts to argue that "DOR's extended internal analysis of the [A]ggregation [S]tatute and  

                                                                                                                               



the then-existing interpretation of and policy under that statute" demonstrate that "the  

                                                                                                                       



Decision . . . altered DOR's prior interpretation of the statute."  The Producers highlight  

                                                                                                                       



the fact that in one memo, the Director  acknowledged that an interpretation of the  

                                                                                                                                



Aggregation  Statute  similar  to  DOR's  interpretation  in  its  Decision  represented  a  

                                                                                                                                  



                                                               -28-	                                                        7142
  


----------------------- Page 29-----------------------

                                                                                                                                                                                61  

"180-degree switch in the roles played by production facilities in the ELF decision."                                                                                                



                                                                                                                                                                    

In  another  2002  draft,  the  Director  wrote  that  "two  very  different  -  almost  



                                                                                                                                                                  

opposite - interpretations can be drawn from" the ELF statute and that DOR supports  



                                                                                                                                                                               

an "alternative reading of the law" that would "turn the current ELF practice over on its  

              62   While these comments may offer weak support for the Producers' arguments,  

head."                                                                                                                                                       



              61            DOR convincingly asserts that this statement was a mistake because that                                                                         



memo incorrectly assumed that 15 AAC 55.027(b)                                                             prohibited  DOR from aggregating                

operations if " 'production operations on the respective leases or properties would not   

be   economically   interdependent   in   the   absence   of   the   proposed   use   of   common  

production facilities,' when in fact the regulation merely gave the agency the discretion                                                                      

not    to    aggregate    properties    in    that    situation."    (quoting    15    AAC    55.027(b)).   

Administrative Law Judge Kennedy noted that "[a]nalysis in some of the documents is                                                                                             

very   preliminary   and   rough,   reflecting   confusion"   and,   regarding   the   Director's  

statement, agreed that                



                            Mr. Dickinson seems to have been under the impression that                                                           

                            15        AAC            55.027(b)    prohibited                           the        department                 from  

                            aggregating    [participating    areas]    if    they    would    not  be  

                            economically   interdependent   in   the   absence   of   common  

                            production facilities.                      This is a reading of 15 AAC 55.027(b)                       

                            that    is    sufficiently    unsupportable    that    the    [Producers]  

                            themselves have abandoned it in this appeal.                                  



              62            Looking at the White Paper as a whole, it is not entirely clear that these  

                                                                                                                                                                         

comments  are  referring  to  DOR's  interpretation  of  "economically  interdependent."  

                                                                                                                                                                                     

Instead, a close reading of these comments in context suggests that they may address  

                                                                                                                                                                    

issues related to alternative readings of the term "lease or property" or, more broadly, to  

                                                                                                                                                                                

alternative readings of the statutory purpose guiding DOR's exercise of its discretion  

                                                                                                                                                               

whether to continue taxing small fields lightly to encourage development or to aggregate  

                                                                                                                                                                

the smaller fields in order to better reflect the realities of oil production in certain areas.  

                                                                                                                                                                        

DOR explains that "producers have generally treated each participating area as a lease  

                                                                                                                                                                         

or property for the purposes of calculating oil and gas production taxes, and [DOR] has  

                                                                                                                                                                             

generally accepted this treatment."  But the internal documents suggest that DOR was  

                                                                                                             

considering changing this approach.  The Director's comments, at best, offer only weak  

                                                                                                                                                                         

support for a conclusion that the Decision represented a departure from DOR's previous  

                                                                                                                                                                  

                                                                                                                                                       (continued...)  



                                                                                     -29-                                                                                7142
  


----------------------- Page 30-----------------------

the Producers also cite portions of documents where the Director wrote, "Going to                                                                                                                                                



Webster   suggests   that   we   must   show   that   the   [leases   or   properties]   are   'mutually  



contingent'   before   we   aggregate"   and   that   based   on   dictionary   definitions,   "[t]he  



argument can always be made that as long as new production comes on and uses empty                                                                                                                                     



space in old production facilities, there is no mutual dependency." But even considering                                                                                                                



these quotes, we conclude that the character of this evidence, the internal documents as                                                                                                                                          



a whole, and DOR's reasoning within its Decision demonstratethat DOR's Decision was                                                                                                                                          



not a departure from its previous interpretation of the Aggregation Statute.                                                                                                       



                                    First, these                 documents werenever meantto represent DOR's official policy                                                                                           

                          63      These documents were internal, and DOR clearly labeled them as drafts.  

positions.                                                                                                                                                                                                                                



Thus, an official decision, such as DOR's Decision, that reaches a conclusion different  

                                                                                                                                                                                                                



from those reached in internal White Paper drafts or memoranda does not represent a  

                                                                                                                                                                                                                                    



change in official policy that requires rulemaking because the internal documents never  

                                                                                                                                                                                                                         



purported to set forth DOR's official position on the interpretation of the Aggregation  

                                                                                                                                                                                                     



Statute.                    Relying  on  these  internal  documents  as  evidence  of  DOR's  previous  

                                                                                                                                                                                                              



interpretations  of  the  Aggregation  Statute  under  the  facts  of  this  case  would  be  

                                                                                                                                                                                                                               



problematic because agency officials would fear that any written materials, even internal  

                                                                                                                                                                                                                   



ones,  could  invalidate  later  official  actions  that  differed  from  initial,  non-public  

                                                                                                                                                                                                        



approaches.  This would dissuade agency officials from conducting important internal  

                                                                                                                 



written analyses and examining policy issues from all sides while in the process of  

                                                                                                                                                                                                                                 



                  62                (...continued)  



                                                                                                                                                                                                                                          

interpretations of the phrase "economically interdependent" in the Aggregation Statute.  



                  63  

                                                                                                                                                                                                           

                                    TheProducers concedethatthey"donotclaimthatthe[internal]documents  

                                                                                                                                                                                                                   

established DOR's official position or policy." They do, however, claimthat the internal  

                                                                                                                                                                                                              

documents serve as evidence that DOR "for years wrestled with the problems presented  

                                                                                                                                                                             

by the statutory standard and a [commonsense] interpretation of it."  



                                                                                                              -30-                                                                                                        7142
  


----------------------- Page 31-----------------------

establishing the agency's official position on vital administrative matters.                                                                              



                                Second, the internal documents as a whole do not suggest that DOR's                                                                                        



Decision    represented    a    departure    from    DOR's    previous    interpretations    of    the  



Aggregation Statute's use of the phrase "economically interdependent."                                                                                                       At most, the            



internal documents suggest that the term "economically interdependent" is subject to                                                                                                                   



more than one commonsense reading.                                                         But the mere fact that a term can be interpreted                                       



in more than one way does not automatically mean that rulemaking is required or that                                                                                                               

                                                                                                                                                   64       In  multiple  internal  

DOR   changed   its   interpretation   of   the   Aggregation  Statute.                                                                                                                  



documents,  DOR  concluded  that  the  Satellite  PAs  and  the  Initial  PAs  were  not  

                                                                                                                                                                                                   



economically interdependent under one of the definitions of interdependence it found in  

                                                                                                                                                                                                        



the  dictionary.                        But  DOR  also  noted  that  within  the  same  dictionary,  other  listed  

                                                                                                                                                                                              



definitions   for   the   same   terms   yielded   different   interpretations   of   economic  

                                                                                                                                                                                  



interdependence that supported aggregation of the Satellite PAs and the Initial PAs.  

                                                                                                                                                                                          



                                 Third, the Producers fail to cite or describe earlier decisions addressing  

                                                                                                                                                                                  



aggregation,  much  less  demonstrate  how  DOR's  Decision  was  inconsistent  with  

                                                                                                                                                                                                



precedent.  Most importantly, the Producers themselves admit that the Decision was the  

                                                                                                                                                                                                     



first   time   DOR   formally   addressed   the   meaning   of   the   term   "economically  

                                                                                                                                                                       



interdependent."   DOR's interpretation could not have changed if this was, as both  

                                                                                                                                                                                                 



parties agree, the first time DOR was called upon to articulate its understanding of the  

                                                                                                                                                                                                     



term.  

               



                               Furthermore, in reaching its Decision, DOR carefully reviewed its own  

                                                                                                                                                                                                 



administrative  precedent  surrounding  the  Aggregation  Statute.                                                                                            It  found  that  early  

                                                                                                                                                                                               



decisions were "not particularly informative" but that they did "contain a common  

                                                                                                                                                                                      



                64             See Alyeska Pipeline Serv. Co. v. State, Dep't of Envtl. Conservation                                                                                                      ,  



 145    P.3d    561    (Alaska    2006);   Alaska   Ctr.   for   the   Env't   v.   State ,   80  P.3d  231  

(Alaska 2003).   



                                                                                                 -31-                                                                                           7142
  


----------------------- Page 32-----------------------

factual predicate that logically supports a finding of economic interdependence, namely,  

                                                                                                                        



that a single operator manages the production operations."  DOR also analyzed a 1998  

                                                                                                                             



decision aggregating multiple leases covering a single reservoir developed under a sole  

                                                                                                                              



management plan. DOR acknowledged that the 1998 decision focused on development  

                                                                                                                



history  in  deciding whether  to aggregate,  but it clarified  that it took  that approach  

                                                                                                                     



because the agency was aggregating the leases for a retroactive determination of tax  

                                                                                                                               



burdens. DOR determined that "insofar as the question of economic interdependence of  

                                                                                                                                 



current or future production operations is concerned, the manner in which development  

                                                                                                                



previously occurred may not necessarily be of much relevance." After closely reviewing  

                                                                                                                     



pastprecedent, DORconcluded that "while the guidance provided by past administrative  

                                                                                                              



precedent  is  sparse,  the  applicable  generality  .  .  .  seems  to  be  that  economic  

                                                                                                                    



interdependence is shown by or associated with unified or  integrated operations or  

                                                                                                                                



enterprise encompassing the several leases or properties in question."   Rather than  

                                                                                                                             



disavowing  precedent,  DOR looked  to  its  past  decisions  and  interpretations  of  the  

                                                                                                                               



Aggregation           Statute   and   determined                that     its   interpretation   of   "economically  

                                                                                                            



interdependent" as meaning"sointegrated as to bereasonably treated asan economically  

                                                                                                                



unitary activity" did not conflict and was consistent with its prior decisions.  

                                                                                                     



                    Overall, while DOR may have changed the way it exercised its discretion  

                                                                                                                     



in deciding to aggregate, this was the first time that DOR had been called upon to  

                                                                                                                                



articulateits understanding ofthephrase "economically interdependent,"and its analysis  

                                                                                                                        



in the Decision was not inconsistent with related, but not entirely analogous, precedent.  

                                                                                                                                     



Instead, DOR observed changing realities in the Prudhoe Bay Unit and decided to  

                                                                                                                                



aggregate increasingly interdependent operations.  

                                                                                  



          B.	       The Producers Had An Opportunity To Be Heard Throughout The  

                                                                                                                             

                    Proceedings.  



                    Although the Producers dropped their argument that DOR violated their  

                                                                                                                             



                                                              -32-	                                                        7142
  


----------------------- Page 33-----------------------

right to due process by issuing its Decision, we note that we have explained that in                                                                                                   



                                                                                                                                                                              65  

 agency decision-making contexts, due process requires an opportunity to be heard.                                                                                                 We  



                                                                                                                                                                           

note that the Producers had a fair opportunity to be heard and to challenge DOR's  



                                                                                                                                                                                 

 interpretation of"economicinterdependence"throughouttheseproceedings. After DOR  



                                                                                                                                                                        

 issued its Decision, the Producers appealed the Decision and requested an informal  



                                                                                                                                                                               

 conference with DOR under AS 43.05.240(a) and 15 AAC 05.020(a).   After DOR  



                                                                                                                                                                        

 affirmed the Decision, the Producers appealed to the Office of Administrative Hearings  



                                                                                                                                                                                   

pursuant  to  AS  43.05.241  and  AS  43.05.405.                                                               The  Producers  then  appealed  the  



                                                                                                                

 administrative law judge's decision to the superior court.  



                                                                                                                                                                              

                             During oral argument to  this court, the Producers admitted that "[t]he  



                                                                                                                                                                                 

 [Producers] did have an  opportunity to challenge [DOR's] interpretation," but they  



                                                                                                                                                                                    

 argued that they did not have the opportunity to challenge the interpretation "in the  



                                                                                                                                                                                       

 context   of   a   clean   slate   the   way   there   would   be   with   the   discussion   of   a  



                                                                                                                                                                         

regulation . . . .  Instead of going through the public regulation process where anybody  



                                                                                                                                                                             

 could participate, any interested party could state what their concerns were, now you're  



                                                                                                                                                                                  

just dealing with the arguments about the application."  The Producers argued that they  



                                                                                                                                                                  

 did  not  have  the  opportunity  to  propose  a  better  interpretation  of  "economic  



                                                                                                                                                                          

 interdependence"  and  that,  instead,  they  were  confined  to  arguing  that  DOR's  



                                                                                                                                                                      

 interpretation was "an impermissible, irrational interpretation." However, the Producers  



                                                                                                                                                                     

 fail to articulatewhat they would have argued during the process of adopting a regulation  



                                                                                                                                                                                 

that they did not argue during these various proceedings, and they agree that their  



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



 1170,   1178   (Alaska   1986)   ("While   we   endorse   the   judicial   bridling   of   excessive  

 administrative discretion by requiring guiding regulations, we will only do so to the                                                                                              

 extent necessary to assure a fair administrative process.                                                                 Thus, we will not reverse an                               

 administrative adjudication on procedural due process grounds unless there exists an                                                                                                 

 element of unfairness, vagueness or lack of notice or opportunity to be heard.").                                                                         



                                                                                         -33-                                                                                   7142
  


----------------------- Page 34-----------------------

arguments during these                                                                      proceedings included arguments for alternativedefinitions of the                                                                                                                                                                                



phrase   "economic   interdependence."     We   conclude   that   during   each   stage   of   the  



proceedings, the Producers were able to set forth their preferred alternative definition of                                                                                                                                                                                                                                                   



                                                                                                                                                                                                                                                                           

the phrase "economic interdependence," satisfying their right to be heard.  



V.                         CONCLUSION  



                                                                                                                                                                                                                                                                                                                                            

                                                     We AFFIRM the superior court's conclusion that DOR's Decision was not  



a regulation but instead was a commonsense interpretation of the Aggregation Statute.                                                                                                                                                                                                                                                                     



We also AFFIRM the superior court's decision upholding DOR's Decision.                                                                                                                                                                                                



                                                                                                                                                                   -34-                                                                                                                                                            7142
  

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