CHAPTER 2 AGENCY RULEMAKING AND ADJUDICATION 101

• Jurisdiction: United States

Natural Resources Development and the Administrative State: Navigating Federal Agency Regulation and Litigation
(Feb 2019)
CHAPTER 2
AGENCY RULEMAKING AND ADJUDICATION 101
L. Poe Leggette
Shanisha Y. Smith ¹
Baker & Hostetler LLP ²
Houston, TX

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POE LEGGETTE recently received special recognition from the Board of Directors of the Independent Petroleum Association of America. Poe has represented IPAA for over 25 years and, according to the Association's citation, has saved the oil and gas industry over $25 billion dollars in needless regulatory costs and in unlawful royalty demands. Poe is the national head of the Baker & Hostetler Energy Practice Team and is based in the firm's Houston office. That practice was named a 2015 Practice Group of the Year by Law360. Before entering private practice, Poe served as Assistant Solicitor for the U.S. Department of the Interior. He has worked on federal administrative law issues since 1977, when he graduated from the University of Virginia School of Law. Additional information about his practice may be found in a predictably stuffy web biography found at https://www.bakerlaw.com/LPoeLeggette?fullassoc=1.

SHANISHA Y. SMITH is an associate at Baker & Hostetler LLP in Houston and Denver. Shanisha focuses her litigation practice in the energy and natural resources industry. She represents clients in oil and gas litigation, administrative, and environmental disputes governed by the Mineral Leasing Act, the National Environmental Policy Act, the Outer Continental Shelf Lands Act, the False Claims Act, the Federal Oil and Gas Royalty Management Act, and numerous other environmental statutes and related regulations. Shanisha holds an LL.M. in Energy, Environment, and Natural Resources Law from the University of Houston Law Center. During her LL.M. she worked at the Texas Railroad Commission and the Comisión Nacional de Hidrocarburos during the Mexico Energy Reform. Shanisha also has a wealth of experience working in courts. She has had the opportunity to work with a Texas state civil court judge, a federal magistrate judge, two federal district court judges, and a federal appellate circuit judge. Prior to joining Baker's Energy Team, Shanisha clerked for the Honorable Judge George C. Hanks, Jr. of the United States District Court for the Southern District of Texas.

ABSTRACT³

This paper and accompanying presentation will focus on the basics of agency rulemaking and adjudication. Paper 2a will cover legal basics of formal and informal agency rulemaking, with a focus on the powers and limits of agencies to adopt new regulations and repeal existing regulations. This topic includes when rulemaking is required and when it is not, exceptions to informal rulemaking requirements, interpretive rules, and related topics. Paper 2b provides background on what is considered an adjudication and the process and outcomes associated with agency adjudications.⁴

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TABLE OF CONTENTS

I. Introduction: The Administrative Procedure Act, Rules and Adjudications

II. Paper 2a: Back to the Basics - Agency Rulemaking 101

A. What Is Rulemaking?

B. Powers and Limits of Agencies

i. Adopting New Regulations

ii Repealing Existing Regulations

C. Rulemaking Overview

D. Requirements for Rulemaking

E. Exceptions to Informal Rulemaking Requirements

F. Choice of Rulemaking Over Adjudication

III. Paper 2b: Back to the Basics - Agency Adjudications 101

A. What is Considered an Adjudication?

B. Formal adjudication

C. Informal adjudication

D. Process and Outcomes Associated with Agency Adjudications

E. Analyzing Agency Adjudication

F. Choice of Adjudication Over Rulemaking

i. Supreme Court's Trilogy--Chenery, Wyman-Gordon, and Bell Aerospace \

ii. Bell Aerospace's Exception and Subsequent Appellate Court Case Law

IV. Subsequent Appellate Court Case Law

A. The Development of the Law in the Ninth Circuit

B. Case Law from Outside the Ninth Circuit

V. Conclusions

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I. Introduction: The Administrative Procedure Act, Rules and Adjudications

Congress delegates its legislative authority to regulatory agencies to govern people, both the living and the legal. After the Civil War, the power of the American administrative state grew substantially. Both Congress and the courts began to develop agency-specific requirements to check the growth of administrative power, but it took nearly seventy-five years to consolidate those checks in a single framework: the Administrative Procedure Act (APA).⁵ Though it does so incompletely and imperfectly, the APA brings predictability and transparency to federal agency conduct. The APA's legislative history pronounced its goal:

[T]he powers that are committed to these regulating agencies, and which they must have to do their work, carry with them great and dangerous opportunities of oppression and wrong. If we are to continue a government of limited powers these agencies of regulation must themselves be regulated. The limits of their power over the citizen must be fixed and determined. The rights of the citizen against them must be made plain. A system of administrative law must be developed, and that with us is still in its infancy, crude, and imperfect. ⁶

Stated most simply, the APA can be said to serve three purposes. First, it tells agencies what information it must provide the people they govern.⁷ Second, it sets many of the procedures agencies must use to govern.⁸ Third, it creates a uniform, though not universal, framework for judicial review of agencies' actions.⁹

The APA sets out two categories of administrative decision-making: rulemaking or adjudication.¹⁰ The APA provides for both formal and informal rulemaking. The APA defines "rule" and an adjudicative "order,"¹¹ and prescribes procedures for both.¹² Administrative agencies develop law through rulemaking and adjudication.

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Energy companies and other stakeholders often find themselves maneuvering through the maze of new federal regulations. This paper will explain the basics of how agencies implement, review, and finalize their regulations. Topics include how agencies propose and repeal regulations, the requirements of rulemaking, the public notice and comment process, exceptions to informal rulemaking requirements, formal and informal adjudication, the choice between rulemaking and adjudication, and analyzing agency adjudication.

We begin, however, with understanding the basic distinction between rulemaking and adjudication. In concept, it is easy to understand by analogy. Congress legislates, agencies make rules. Courts resolve individual disputes and issue orders, agencies adjudicate and issue orders.

While analogies are easy, definitions are complex. The APA defines "rule" as "the whole or party of an agency statement of general of particular applicability and future effect designed to implement, interpret, or prescribe law or policy."¹³ But a "rule" can cover more mundane and even particularized actions. For in addition to prescribing or implementing law or policy, a "rule" includes an agency statement:

[To describe] the organization, procedure or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, service or allowances therefor or of valuations, cost, or accounting, or practices.... ¹⁴

The striking feature of rulemaking is that it must be of "future effect."¹⁵ The process by which federal agencies develop, amend, or repeal rules is called "rulemaking."

In contrast, the ultimate output of "adjudication" is an "order." An "order" is "the whole or any part of the final disposition (whether affirmative, negative, injunctive, or declaratory in form) of any agency in any matter other than rule making but including licensing."¹⁶ In turn, "license" means "the whole or part of any agency permit, certificate, approval, registration, charter, membership, statutory exemption or other form of permission."¹⁷ "Licensing" is also defined and includes "agency process respecting the grant, renewal, denial, revocation, suspension, annulment, withdrawal, limitation, amendment, modification or conditioning of a license."¹⁸

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II. Paper 2a: Back to the Basics - Agency Rulemaking 101

A. What Is Rulemaking?

Congress gives agencies authority to issue regulations.¹⁹ Agencies must follow an open public process when they issue regulations, according to the APA. Federal regulation is a government tool used to implement public policy. Scholars say that rulemaking has several efficiency and fairness advantages.²⁰

B. Powers and Limits of Agencies

i. Adopting New Regulations

Section 553 of the APA requires a federal agency to provide public notice and an opportunity for comment on any proposed rule. The APA's broad definition of "rule" includes any agency statement about what regulated parties should do in the future.²¹ Because promulgating regulations under section 553's public notice-and-comment provisions is costly and timely, agencies often choose an alternative to the APA's rulemaking procedures. The average federal rulemaking takes approximately four years.²² The overwhelming about of time is spent on reviewing millions of public comments on proposed rules. A perfect example of this voluminous process was the Bureau of Land Management's ("BLM") 2015 hydraulic fracturing rule. The BLM took three years respond to 1.3 million comments before it finalized and ultimately rescinded the rule.²³ As discussed in detail below, agencies use other methods to create policy namely interpretive rules, general policy statements or "clarifications" of existing regulations.²⁴

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ii Repealing Existing Regulations or Informal Rulemaking

An administrative agency may repeal its rules, provided such action is not arbitrary or unreasonable.²⁵ Repeal means to revoke or rescind. A repeal has statutory procedural...