[Federal Register Volume 62, Number 155 (Tuesday, August 12, 1997)]
[Rules and Regulations]
[Pages 43076-43091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21162]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 227, 228, and 229

RIN 1010-AC25


Delegation of Royalty Management Functions to States

AGENCY: Minerals Management Service, Interior.

ACTION: Final rulemaking.

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SUMMARY: The Minerals Management Service (MMS) is adding new rules 
authorizing the delegation of several Federal royalty management 
functions to States. These rules implement recently-enacted 
legislation.

EFFECTIVE DATE: September 11, 1997.

FOR FURTHER INFORMATION CONTACT: David Guzy, Chief, Rules and 
Publications Staff, Royalty Management Program, Minerals Management 
Service, telephone (303) 231-3432, Fax (303) 231-3385, e-Mail 
David__G[email protected].

SUPPLEMENTARY INFORMATION: The principal authors of this final 
rulemaking are Larry Cobb, Harry Corley, Jim Detlefs, Clare Onstad, 
Robert Prael, Todd McCutcheon, Dave Steiber, Cecelia Williams, and Sam 
Wilson, MMS; and Peter Schaumberg and Sarah Inderbitzin of the Office 
of the Solicitor.

I. General

    On August 13, 1996, Congress enacted the Federal Oil and Gas 
Royalty Simplification and Fairness Act of 1996, Pub. L. 104-185, as 
corrected by Pub. L. 104-200 (RSFA). The RSFA amends portions of the 
Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA), 30 U.S.C. 
1701 et seq. Prior to the RSFA enactment, section 205 of FOGRMA, 30 
U.S.C. 1735, provided for the delegation of only audits, inspections, 
and investigations to the States. The RSFA amendments to section 205 
now provide that the Minerals Management Service (MMS) may delegate 
other Federal royalty management functions to requesting States for 
Federal oil and gas leases onshore.
    The royalty management functions MMS may delegate under the RSFA 
amendments are:
    (1) Conducting audits and investigations;
    (2) Receiving and processing production and royalty reports;
    (3) Correcting erroneous report data;
    (4) Performing automated verification; and
    (5) Issuing demands, subpoenas, orders to perform restructured 
accounting, and related tolling agreements and notices to lessees or 
their designees.
    The RSFA amendments to section 205(d) also provide that within 12 
months after the date of enactment, after consultation with the States, 
the Secretary must issue standards and regulations pertaining to 
delegable functions and other relevant responsibilities, including:
    (1) Audits to be performed;
    (2) Records and accounts to be maintained;
    (3) Reporting procedures to be required by the States under this 
section;
    (4) Receipt and processing of production and royalty reports;
    (5) Correction of erroneous report data;
    (6) Performance of automated verification;
    (7) Issuance of standards and guidelines in order to avoid 
duplication of effort;
    (8) Transmission of report data to the Secretary; and
    (9) Issuance of demands, subpoenas, and orders to perform 
restructured accounting, for royalty accounting purposes.
    In response to the section 205 RSFA amendments, MMS formed the 205 
Consultation Team, comprised of MMS, interested States, representatives 
from State associations, and a representative of the Bureau of Land 
Management to discuss how to implement the delegation provisions of the 
RSFA.
    MMS proposed rules implementing the section 205 RSFA amendments (62 
FR 19967 April 24, 1997. As part of that proposed rulemaking, MMS 
explained that it would develop MMS Standards for Delegation 
(Standards) which would contain further information States would need 
to perform delegated functions. MMS held several outreach meetings in 
June of 1997 at various locations to discuss the MMS Standards for 
Delegation (Standards) document with States and industry attendees.

II. Indian Lands

    In the proposed rule, MMS proposed to amend 30 CFR parts 228 and 
229 to remove references to cooperative agreements and delegations for 
Federal lands under those parts since delegation for Federal lands are 
now covered under new part 227. MMS also proposed to amend those parts 
to conform to the principles of ``Plain English.'' Because MMS is not 
under a statutory deadline to publish parts 228 and 229 like it is for 
part 227, MMS is not removing the references to Federal lands in, or 
making the ``Plain English'' changes to

[[Page 43077]]

those parts at this time. However, MMS is making an interim change to 
parts 228 and 229 by adding a sentence to those parts that will state 
that, ``As of the effective date of this rule, this part does not apply 
to Federal lands.'' This sentence will make clear that from this time 
forward, those parts only apply to Indian cooperative agreements and 
delegation agreements for audits, inspections, and investigations with 
States for Indian lands within the State. We will amend the language in 
parts 228 and 229 to ``Plain English,'' and make any other changes to 
those parts at a future date.

III. Comments on Proposed Rule

    The proposed rulemaking provided a 30-day public comment period, 
which ended May 27, 1997. MMS received comments from thirteen 
commenters during the comment period. One additional commenter 
submitted late comments that MMS received on June 2, 1997. Thus, we 
accepted a total of fourteen comments for review. Four of the comments 
were from States, two were from mining associations, two were from oil 
and gas trade associations, and six were from industry.
    We reviewed and analyzed all of the comments, and in some instances 
revised the language of the final rule based on these comments. The 
following is a discussion of the comments received and our response. 
First, we address five general concerns the comments raised. Second, we 
respond to the specific comments referred to by regulation paragraph 
number. Third, we address the questions and issues where we asked the 
public for specific comment.

I. General Concerns

Delegation of Functions for Solid Mineral, Geothermal, and OCSLA 8(g) 
Leases

    One State, two mining associations, and two mining companies 
commented on delegating royalty management functions to States for 
solid mineral leases. The State supported the concept, but believed we 
should not issue regulations until the Department provides a legal 
opinion on this issue. The mining industry objected to the delegation 
of functions for solid mineral leases because they believed we lack the 
statutory authority. One company agreed that we should obtain a legal 
opinion before issuing the final regulation. One trade association 
stated that it did not oppose delegation for Outer Continental Shelf 
Lands Act (OCSLA), section 8(g) leases, but that MMS should not split 
the reporting for leases or units that contain both section 8(g) and 
non-section 8(g) properties.
    MMS Response--MMS has obtained a legal opinion from the Office of 
the Solicitor, which concludes that Pub. L. 102-154 does not provide 
authority to apply the section 205 RSFA amendments to solid mineral, 
geothermal, and offshore leases subject to section 8(g) of OCSLA. Based 
on that opinion and the comments, we omitted from the final rule 
delegations of additional functions for solid mineral leases, 
geothermal leases, and oil and gas leases subject to section 8(g) of 
OCSLA, 43 U.S.C. 1337(g). However, States may continue to perform audit 
functions for solid mineral, geothermal, and OCSLA section 8(g) leases 
under the existing and successive delegation agreements. Because MMS is 
not delegating the additional royalty management functions for OCSLA 
section 8(g) leases, there is no issue regarding split reporting for 
such leases.
    Furthermore, we combined proposed Sec. 227.100 with proposed 
Sec. 227.101 to conform with comments received from the mining industry 
and the Departmental legal opinion. Thus, although MMS will not 
delegate RSFA's additional royalty management functions for solid, 
geothermal, or section 8(g) leases, when requesting the function of 
audits and investigations, a State must still follow the procedures 
under this part.
    In addition, we added language to clarify that a State performing 
delegated functions must perform those functions for all applicable 
Federal leases within the State's boundaries.
    For example, assume that there are 100 Federal oil and gas leases 
within a State's boundaries. If that State requests delegation of the 
royalty management functions of audit and receiving and processing 
production and royalty reports, it cannot choose to perform audits and 
receive and process production and royalty reports for only 25 of those 
Federal oil and gas leases. Rather, it must accept delegation of audit 
and receiving and processing production and royalty reports 
responsibility for all 100 of those Federal leases.
    Regulatory Flexibility--We received three comments from States 
expressing concern that the regulations did not provide enough 
flexibility. One of these commenters stated, ``An organization should 
be allowed to adjust to a changing environment and apply a better 
approach or technique without having the fear of the audit contract 
being withdrawn or the audit findings negotiated.'' In particular, they 
were opposed to the extensive use of the word ``must,'' because they 
believe it would require their programs to operate in only one way. One 
commenter indicated that the delegation proposal contained too many 
detailed requirements. Conversely, one State commented that the 
regulations ``* * * appear to be a reasonable interpretation * * *'' of 
RSFA.
    Industry commented that they would like to see the specific 
standards that provided the details of how the States would perform the 
delegated functions. One industry oil and gas trade association 
maintained that ``* * * the standards should have been published along 
with the proposed rule and included in the regulations.'' This industry 
oil and gas trade association, another oil and gas association, plus 
two industry representatives protested that they were forced to comment 
on the proposed rule without the benefit of reviewing the standards. 
Two of these commenters requested that MMS extend the comment period 
until after it issues the standards.
    MMS Response--On the issue of flexibility, RSFA section 3(a), 
FOGRMA section 205(d) mandated that the Government and delegated States 
maintain a consistent royalty management program. Moreover, RSFA 
specifically stated that States must agree to adopt ``standardized 
reporting procedures'' unless all affected parties agree otherwise, 
RSFA section 3(a), FOGRMA section 205(b)(4), and that the delegations 
``will not create an unreasonable burden on any lessee,'' RSFA section 
3(a), FOGRMA section 205(b)(3). We believe that the rule allows for as 
much flexibility as possible within the constraints that RSFA mandates, 
while maintaining a consistent royalty management program and 
minimizing any burden on lessees. Like RSFA section 3(a), FOGRMA 
section 205(b)(4), the rule provides that States may use alternative 
reporting procedures if all affected parties agree. See 30 CFR 
227.106(d). In addition, we anticipate that States may achieve further 
flexibility in performing delegated functions when they work with us to 
develop their delegation agreements, as provided in 30 CFR 227.108.
    Our intent in developing the rule and Standards was to provide the 
basic framework necessary to maintain uniform royalty management 
standards, not to inhibit any flexibility in complying with those 
Standards. Thus, in describing the royalty management functions, we 
used the word ``must'' for both MMS and the States for required 
performance. Although we did not eliminate the word ``must,'' we

[[Page 43078]]

modified Sec. 227.300 to provide for flexibility in this function. 
Section 227.300(a) shows the activities that must be performed under an 
audit, while Sec. 227.300(b) lists additional activities that would be 
appropriate to perform only in certain situations.
    In our attempt to try to achieve further flexibility, we also 
reviewed our use of the word ``all.'' Upon review, we believe that it 
was correctly used in describing the activities performed in the 
various functions. We, therefore, did not make any changes to the word 
``all.'' However, we acknowledge that additional flexibility can be 
attained in certain areas, such as the delegation proposal in 
Sec. 227.103(e). Therefore, we modified the final rule by deleting the 
requirements of Secs. 227.103(e)(2)(ii) and (iv) from the proposed 
rule.
    With respect to the comment that we extend the comment period until 
MMS issues the Standards, RSFA's requirement that MMS issue a final 
rule within 12 months of enactment makes it extremely difficult for us 
to extend the comment period. Accordingly, we will not extend the 
comment period. We believe that we are complying with the statutory 
mandates of RSFA. We also believe we made a sufficient effort to share 
the Standards with industry as soon as they were developed. While we 
did not consult with industry during the initial phase of development, 
we did conduct outreach meetings with industry in June 1997 to share a 
first draft of the Standards and receive their input.
    Further, while we published the proposed regulation for notice and 
comment, we do not intend to formally publish the Standards document in 
the Federal Register for notice and comment because it merely offers 
additional clarification on the basic standards contained in the rule 
detailing, for example, day-to-day operational information States need 
to perform delegated functions. We will publish a notice in the Federal 
Register advising when the Standards are available and will post the 
Standards on the MMS Website. Moreover, while we understand industry's 
concerns, we believe the proposed rule provides sufficient standards 
information for commenters to be knowledgeable of the process and 
requirements. Finally, we consider the Standards to be a living 
document that will change, as we reengineer and as States, in 
coordination with MMS, develop their procedures with industry 
involvement.
    Industry Participation--One oil and gas trade association and two 
industry representatives requested more industry participation in the 
entire delegation process, including the proposed regulation, the 
Standards, and the delegation proposal. One industry commenter believed 
that because industry is vitally affected by the process, they must be 
allowed an opportunity to provide input. This commenter also stated 
that the Federal Advisory Committee Act (FACA) requires that industry 
be included in the development of the standards and procedures for 
delegation. Another industry commenter pointed out that industry 
participation would ``* * * minimize the lessee's burden, ensure 
uniformity, eliminate duplication and protect confidential data.'' Two 
commenters suggested making the delegation agreement a public document.
    MMS Response--We believe we have included industry in the process 
to the maximum extent possible given the limited time available. RSFA 
only requires that MMS consult with States in developing these rules 
and Standards. Nonetheless, MMS included industry through outreach 
meetings and consideration of their comments to the proposed rule. In 
addition, MMS has incorporated industry's feedback in both the rule and 
Standards.
    With respect to the comments on the applicability of FACA, in the 
preamble to the proposed rule, 62 FR 19967, April 24, 1997, MMS 
suggested formation of an advisory committee consisting of States 
receiving delegations and MMS to help develop the standards and 
procedures for performing delegable functions. Such meetings are 
specifically exempted from FACA, 5 U.S.C. App., under section 204(b) of 
the Unfunded Mandates Reform Act of 1995, Pub. L. 104-4 (UMRA). Section 
204(b) of the UMRA provides that:

    (b) Meetings Between State * * * and Federal Officers: [FACA] 
shall not apply to actions in support of intergovernmental 
communications where--
    (1) Meetings are held exclusively between Federal officials and 
elected officers of State * * * governments (or their designated 
employees with authority to act on their behalf) acting in their 
official capacities; and
    (2) Such meetings are solely for the purposes of exchanging 
views, information, or advice relating to the management or 
implementation of Federal programs established pursuant to public 
law that explicitly or inherently share intergovernmental activities 
or administration.

    Clearly, meetings MMS officials, or their delegates, have with 
delegated State officials, or their delegates, to develop the standards 
and procedures necessary for States to assume delegated functions ``are 
solely for the purposes of exchanging views, information, or advice 
relating to the management or implementation of Federal programs 
established pursuant to public law that explicitly or inherently share 
intergovernmental activities or administration.'' Thus, any State-MMS 
advisory committee meetings regarding delegations would be exempt from 
FACA under section 204(b) of UMRA.
    Finally, the delegation agreements are public documents evidencing 
an agreement between MMS and the State. Because industry is not a party 
to the agreement, we believe that only the States and MMS should be 
involved in the negotiating process. However, MMS and States will 
consult with industry when it is specifically impacted by the 
agreement. For example, if a State wants to initiate an innovative 
reporting procedure, we would seek industry concurrence with the 
procedure before its implementation.
    Plain English--One industry commenter expressed concern that 
rewriting regulations for parts 228 and 229 in ``Plain English'' would 
change their meaning and interpretation.
    MMS Response--The Federal Government endorses the use of ``Plain 
English'' writing for all Government documents. E.O. 12866, 58 FR 
51735, October 4, 1993. As stated above, we will amend parts 228 and 
229 at a future date to remove references to cooperative agreements and 
delegations for Federal lands under those parts and to conform to 
``Plain English'' principles.
    Simplify and Streamline Royalty Management Practices and the 
Relationship to Costs--Two industry commenters stated that the 
regulations at part 227 should simplify and streamline royalty 
management requirements and practices. These commenters were concerned 
about the additional costs that industry would incur under the new 
regulations such as the increase in information collection 
requirements.
    MMS Response--RSFA mandates promulgation of these regulations. 
However, the decentralization of functions authorized under RSFA and 
these implementing regulations does not necessarily guarantee 
streamlining, nor a reduction in costs. Although we have minimized the 
burden to lessees in this rulemaking, the impact of RSFA's mandates may 
result in some additional cost to industry. We identified the potential 
additional costs as stemming primarily from an increase in coordination 
between industry and multiple royalty management entities. But, the 
cost figure was an estimate and may not actually be realized by 
industry.

[[Page 43079]]

II. Specific Comments

    Section 227.102--One State commented that impacted States must be 
allowed to participate in settlement negotiations, even though they do 
not have a delegation agreement. In particular, the commenter stated 
``(MMS)  * * * must depart from its current settlement procedures in 
order to comply with RSFA. RSFA expands the authority of all States 
concerned, not just those with delegations of authority, granting them 
the ability to veto compromises of royalty obligations. Under RSFA, 
each State will need to represent itself.''
    MMS Response--MMS agrees that under RSFA section 4(a), FOGRMA 
section 115(i), the ``State concerned'' (defined as a State which 
statutorily receives royalties and other payments under mineral leasing 
laws, RSFA section 2(2), FOGRMA section 3(31)) may participate in the 
negotiation process. RSFA section 4(a), FOGRMA section 115(i), provides 
that for royalties due on production after September 1, 1996, ``the 
parties shall hold not less than one settlement consultation and the 
Secretary and the State concerned may take such action as is 
appropriate to compromise and settle a disputed obligation. * * *''
    However, this language does not expressly grant States authority to 
settle a dispute or prevent the Secretary from settling a dispute over 
a State objection or ``veto.'' Rather, the Secretary must determine 
what is the appropriate action and has done so in this rulemaking 
through the retention of ultimate settlement authority. This is 
consistent with the entire structure of RSFA because: (1) Under RSFA 
section 4(a), FOGRMA section 115(h), the Secretary retains authority to 
decide appeals, even appeals of orders that a delegated State issues; 
(2) RSFA section 12 provides that ``(n)othing in this Act shall be 
construed to give a state a property right or interest in any Federal 
lease or land,'' and the power to settle a dispute is at least an 
inchoate property right which Congress has specifically stated it did 
not grant to any State; and (3) as a practical matter, many settlements 
involve more than one State, and we do not believe it was Congress' 
intent to allow one State to frustrate the settlement process in such 
instances when it enacted RSFA section 4(a), FOGRMA section 115(i). 
Thus, we believe, as we always have, that the appropriate action 
involves consultation with the States. Accordingly, while all concerned 
States may participate in negotiations or other alternative dispute 
resolution, MMS must retain settlement authority over Federal 
royalties.
    Section 227.102(d)--Two industry commenters expressed concern about 
possible duplication that might result from the splitting of 
enforcement procedures between the States and MMS.
    One oil and gas trade association supported MMS retaining 
enforcement actions. This commenter recommended that MMS continue to 
apply its current tolerances for error rates, compliance, and other 
applications at the payor code level for all Federal leases instead of 
by State.
    MMS Response--We do not believe that there will be any duplication 
regarding enforcement procedures. RSFA does not allow for the splitting 
of enforcement procedures. Rather, the only enforcement procedures that 
RSFA allows the States are issuing demands, subpoenas, and orders to 
perform restructured accounting. MMS will retain all other enforcement 
activities. See 30 CFR 227.102(c).
    Importantly, as stated in the proposed rule, MMS will continue to 
process and decide all appeals, including appeals from demands or 
orders a delegated State issues, 30 CFR 227.102(d), and will continue 
to decide all valuation policies. 30 CFR 227.102(f). Accordingly, 
although a State may issue a demand, MMS will retain ultimate authority 
for its enforcement. This process will prevent ``duplicative'' or 
``split'' enforcement procedures.
    We agree that we must retain enforcement actions not specifically 
delegated by RSFA. We will address how we will apply tolerances to 
payors in various States in the regulations relevant to the particular 
type of application, such as error rates.
    Section 227.103(i)--One State commenter and one oil and gas trade 
association pointed out that Sec. 227.103(i) was incomplete. Another 
commenter ``urge(d) that MMS strictly enforce confidentiality 
obligations * * * where the same state auditors are conducting federal 
and state royalty audits simultaneously, along with state tax audits.''
    MMS Response--We agree that there is a typographical error in the 
last sentence of Sec. 227.103(i). Thus, we have deleted the semicolon 
and the word ``and.'' In addition, to clarify what we mean by the 
phrase in Sec. 227.103(i) that ``persons who have access to information 
received under delegated functions are subject to the same provisions 
of law regarding confidentiality and disclosure as that of Federal 
employees'' we are adding the following language to that paragraph:

    Therefore, persons who have access to information received under 
delegation agreements may not use such information or provide such 
information to any other person, including State personnel, for 
purposes other than performing delegated functions. However, this 
limitation does not apply if the person submitting the information 
consents in writing to its use for other State purposes.

    We are adding the additional language because under existing laws, 
Federal employees are prohibited from disseminating confidential 
commercial information to a State, except for delegation situations 
where certain restrictions exist. For example, MMS cannot provide 
information it obtains in a royalty audit to a State for the State to 
use in a tax audit. Likewise, a State employee acting as the Federal 
Government's delegatee is prohibited from disseminating information to 
other State personnel for purposes other than delegated functions, 
unless the person providing the information agrees to the further 
dissemination. Moreover, some State employees will perform delegated 
functions and also other State functions such as State severance tax 
audits. If that person receives information from a company under an MMS 
delegation, the person cannot use the information gathered under the 
delegation for State enforcement purposes without obtaining written 
consent from the company.
    Section 227.103(c)(1)--Two State commenters recommended making the 
word ``entity'' plural because more than one State agency may perform 
delegated functions.
    MMS Response--We agree and have made this change in this rule. We 
also added language to clarify that if more than one entity is 
delegated responsibility for performing delegated functions, the State 
must include in its proposal the position of the highest ranking State 
official having ultimate authority over the collection of royalties 
from leases on Federal lands within the State.
    Section 227.105--Two State commenters questioned whether MMS would 
require a hearing in all cases, even if a State requested only to make 
minor changes to an existing delegation. These commenters suggested 
holding a hearing only if necessary or appropriate and using language 
to that effect.
    MMS Response--We agree that we will hold a hearing only if 
necessary and have changed the final rule to state that we will require 
a hearing when MMS determines it is appropriate.
    Section 227.106(d)--One oil and gas trade association supported 
maintaining uniformity in the delegation program.
    MMS Response--We agree.

[[Page 43080]]

    Section 227.107--One oil and gas industry commenter expressed 
concern about industry having enough time to modify their systems to 
comply with any new reporting requirements. This commenter suggested 
allowing a 6-month grace period before the effective date of the 
delegation.
    MMS Response--This section does not address the effective date of 
delegation agreements or ``grace periods.'' Rather, it informs States 
that submit a delegation proposal that the MMS Director will decide 
whether to approve the proposal within 90 days after the proposal is 
complete. The 90-day period is mandated under RSFA section 3(a), FOGRMA 
section 205(c) and cannot be changed. However, we agree that a 
transition time is necessary between the date a delegation agreement 
becomes effective and the date industry must comply with any new 
requirements under such agreements. Although not raised by this 
comment, during its review of this comment MMS realized that it had not 
included an effective date for delegation agreements in its proposed 
rule. Therefore, we will modify Sec. 227.110(a) as follows:

    (a) Delegation agreements are effective for 3 years from the first 
day of the month following the date the MMS Director signs the 
delegation agreement. However, during the development of the State's 
delegation proposal under Sec. 227.108 of this part, MMS, the delegated 
State and any other affected person will determine an appropriate 
transition period for industry to modify their systems to comply with 
any new requirements under a delegation agreement. Thus, the MMS 
Director will not sign any delegation agreement until after the agreed 
to transition period. MMS will publish notice of the effective date of 
a State's delegation agreement in the Federal Register and that notice 
will inform industry of any transition period.

    Thus, MMS, the delegated State, and affected industry will 
determine the amount of transition time necessary on a case-by-case 
basis depending on the type and number of functions that we agree to 
delegate to a given State. We will ensure that sufficient time is 
provided to all affected parties to allow for a successful transition.
    Section 227.108--One State commenter suggested cross-referencing 
the standards in this section to the standards in Secs. 227.200 and 
227.201.
    MMS Response--We disagree. We do not see any benefit in cross-
referencing to only those sections in the rule. Although this rule and 
the Standards provide the basic framework for uniform performance of 
the delegated functions, we believe further flexibility can be achieved 
through development of the delegation agreement under this section.
    Section 227.109--One State commenter pointed out that this section 
does not address a State's ability to appeal if it is denied a 
delegation. This commenter indicated that a review of the decision at 
the administrative level is a logical first step.
    MMS Response--We disagree. RSFA section 3(a), FOGRMA section 205(g) 
expressly provides that disapproval of a delegation proposal is 
reviewable in Federal district court. Thus, consistent with RSFA 
section 3(a), FOGRMA section 205(g), the MMS Director's decision to 
deny a delegation with the concurrence of the Secretary is final agency 
action that a State may appeal in Federal district court.
    Section 227.110--Two oil and gas trade associations recommended, at 
a minimum, that we publish notice of a State's request for delegation 
in addition to its request to renew a delegation. Further, they 
recommended that upon such notice, any affected or interested party, 
including industry, could request a hearing. One of these commenters 
requested that a hearing be held in all renewal cases.
    MMS Response--We agree that we should publish notice of a State's 
proposal for delegation, renewal of an existing delegation, and any 
successive delegation agreement. Therefore, we will publish such 
notices and notice of the effective date of a State's delegation 
agreement in the Federal Register. We will post the proposals on the 
MMS Website and also will send a copy of delegation proposals to trade 
associations or anyone else upon request. The trade associations may 
make further distribution to their members, as necessary. MMS has added 
a new paragraph at Sec. 227.105(d) in response to this comment. See 
also Sec. 227.110(g).
    In addition, MMS agrees that affected parties should be able to 
request a hearing when States request a renewal or a successive 
delegation agreement under this section. Accordingly, we are modifying 
the final rulemaking by adding a new paragraph (e) to this section as 
follows:

    (e) If a State does not request a hearing under paragraphs 
(b)(1) or (d) of this section, any other affected person may submit 
a written request for a hearing under those paragraphs to the MMS 
Associate Director for Royalty Management.

    Section 227.112--We received several comments on costs from three 
States. One State commenter was concerned about the adequacy of our 
cost accounting system and how States would be compensated under it. 
The other two State commenters protested the requirement to submit 
vouchers with a level of detail above current delegation agreements. 
They did support, however, making cost and voucher information 
available for review. One State commenter was concerned that we would 
determine costs on a micro-level of activity. This commenter believed 
that costs related to the audit function should be consistent with 
current funding for delegated audit work. Another State commenter 
believed that we must make any cost comparisons by looking at the whole 
picture rather than a single part.
    MMS Response--Through the net receipt sharing process, MMS has 
refined the costs regarding the program's royalty management functions. 
Although the process is not based on a detailed cost accounting system, 
the Office of the Inspector General concurred in our methodology for 
allocating costs to States. However, we appreciate the State's concerns 
and will contract with an independent accounting firm to review MMS 
costs related to all delegable functions and recommend a methodology 
for determining what funds should be made available to States 
requesting a delegation agreement for one or more functions. This issue 
is important because of RSFA's requirement that compensation to a State 
may not exceed the Secretary's reasonably anticipated expenditure for 
performance of such delegated activities by the Secretary.
    The vouchers referred to in the proposed rule need only show the 
level of cost categories that are presently required under existing 
delegated audit agreements, not each individual expenditure. The States 
will not need to provide the detailed supporting documentation with the 
vouchers, for example, an employee's travel voucher. States will need 
only to make the detailed supporting documentation available, if we 
request it. We confirm that we will focus on the overall costs under 
the agreement.
    Section 227.200--Two State commenters objected to the requirement 
that States obtain MMS guidance on any applicable Federal requirement, 
such as valuation interpretation or policy. One State commenter was 
concerned about repercussions for not following our interpretation or 
guidance. This State commenter stated that, ``A delegation may decide 
not to follow the guidance due to discovery of new pertinent facts and 
may elect, for purposes of effective use of resources, to not have MMS 
issue new guidance.'' This State also

[[Page 43081]]

suggested that MMS can convey guidance orally, without a formal written 
procedure. Therefore, this commenter recommended that we delete the 
requirement for a written request. Conversely, one oil and gas trade 
association strongly supported the requirement for a State to submit a 
written request for interpretation of applicable Federal requirements 
and for MMS to respond in writing. This commenter believed that, 
``Besides ensuring uniform and consistent application of Federal 
requirements, it will also provide lessees with greater certainty that 
they are properly reporting and paying their royalties.'' One State 
commenter requested that the States be held to no higher standard than 
MMS in performing delegated functions.
    MMS Response--The Department of the Interior (DOI) has the final 
responsibility for deciding appeals and must maintain a uniform 
valuation policy. In particular, for unique questions and complex 
situations, such as valuation issues, we believe it is more efficient 
for us to provide written guidance to all impacted parties early in a 
developing situation than to provide it late in the process. Further, 
this encourages consistency in the application of laws and regulations 
because it eliminates confusion during the administrative process. We 
concur that for routine or procedural matters States could obtain 
guidance orally. We have clarified our position in the final 
regulation.
    We will not hold States to standards higher than those we perform. 
However, we encourage States to improve the efficiency and 
effectiveness of the Federal royalty management program they are 
delegated.
    Section 227.300--Two States commented that the list of delegable 
audit functions was too detailed and restrictive. These commenters 
pointed out that not all functions would apply in every audit 
situation, such as site visits, close-out conferences, and records 
releases. One of these commenters further contended that MMS should 
compensate the States for the costs of conducting any special audit 
initiatives. Another State commenter recommended deleting the reference 
in this section to MMS deciding all appeals because it may adopt the 
recommendation of the Royalty Policy Committee.
    MMS Response--We agree with the idea of increased flexibility. We 
have modified the rule to only require performance of the specific 
audit functions as appropriate.
    Compensation for special audit initiatives is subject to 
Congressional funding. Thus, when audit initiatives arise and 
additional funds are not available, the audit work plans of affected 
States and MMS would have to be modified in response to the higher 
priority work. This could result in lower priority work not being 
accomplished with existing resources, unless Congress provides 
additional funding.
    We are retaining the language in the final rules that the 
Department will decide all appeals as provided in RSFA. We are 
reviewing the recommendations by the Royalty Policy Committee on 
appeals and will issue an amended rule on this matter if necessary.
    Section 227.301--Three State commenters stated that the 
responsibilities for performing audits were too restrictive, and that 
MMS should allow them to develop their own audit strategies. They 
pointed out that, for example, the annual work plan is subject to 
frequent change and that the regulations need to allow for that kind of 
flexibility.
    MMS Response--Although, we understand the need for flexibility in 
developing audit strategies, we stress the need for a coordinated audit 
program. Thus, we agree that the annual audit work plans can be changed 
to reprioritize work with our approval and have modified 
Sec. 227.301(e) accordingly.
    Section 227.400--One State commenter advocated State collection of 
royalty payments, similar to Indian lockboxes, to minimize the 
complications resulting from erroneous reports. A second State 
commenter raised the issue that RSFA's term ``State concerned'' (in the 
context of granting exceptions from reporting and payment requirements 
under 30 U.S.C. 1726(c)) applies to a broader universe than the term 
``delegated State'' used in this rule, and requested that its meaning 
not be changed. An oil and gas industry representative questioned 
whether a lessee could appeal a State's denial of an exception request.
    MMS Response--As we stated in the preamble to the proposed rule, 
RSFA does not authorize MMS to delegate collection functions. Thus, MMS 
has reserved this function because it is necessary for uniform 
administration of the royalty management system among the States. 
Further, we believe that no complication results from a centralized 
collection function.
    The commenter has misinterpreted the application of 
Secs. 227.400(b)(1) and (2) in this rulemaking. With respect to 
Sec. 227.400(b)(1), RSFA provides, in the section applicable to 
allocation of production to leases within a unit or communitization 
agreement, that ``[t]he Secretary or the delegated State shall grant an 
exception from the reporting and payment requirements for marginal 
properties.'' 30 U.S.C. 1721(k)(4) (emphasis added). That is the 
applicable section of RSFA that was addressed in Sec. 227.400(b)(1) of 
this rulemaking and does not require consent of the ``state 
concerned.'' However, RSFA also provides in the section applicable to 
marginal properties in general that the State concerned must consent to 
alternative accounting and auditing procedures for marginal properties. 
30 U.S.C. 1726(c). We are in the process of separately promulgating 
rules implementing section 1726(c) of RSFA that do require consent of 
the State concerned before it will grant alternative accounting and 
auditing procedures for marginal properties.
    With respect to Sec. 227.400(b)(2), RSFA also provides, in the 
section applicable to allocation of production to leases within a unit 
or communitization agreement, that ``(f)or any unit or communitization 
agreement if all lessees contractually agree to an alternative method 
of royalty reporting and payment, the lessees may submit such 
alternative method to the Secretary or the delegated State for 
approval. * * *'' 30 U.S.C. 1721(k)(3) (emphasis added). That is the 
applicable section of RSFA that was addressed in Sec. 227.400(b)(2) of 
this rulemaking and does not require consent of the ``state 
concerned.''
    Section 227.401--One oil and gas industry commenter suggested that 
States accept all forms of electronic media as currently done by MMS.
    MMS Response--We agree. We intend to continue this policy in our 
delegation program.
    Section 227.500--One oil and gas trade association and one oil and 
gas industry commenter recommended that we assess interest and 
erroneous reporting at the payor code level for all Federal leases and 
not at the individual State level.
    MMS Response--We will address how we will assess for interest and 
erroneous reporting in other appropriate rulemakings.
    Section 227.600--A State commenter opposed the requirement to 
verify ``unit prices for reasonable product valuation,'' because MMS 
does not perform that function. Two other State commenters suggested 
that cost effectiveness be taken into account to optimize the return on 
the resources spent when performing automated verification. An oil and 
gas industry trade association stated that it `` * * * does not object 
to a State calculating

[[Page 43082]]

interest, but we have concerns on how the excessive overpayment 
provision of FOGRSFA will be interpreted. (It) believes that this 
provision must be viewed on a Payor Code level for all federal leases. 
We do not believe that this provision should be made on a state-by-
state basis. What if a reporter had only one lease within a delegated 
state, but hundreds of federal leases in other states?''
    MMS Response--We do perform a limited product value verification 
within certain broad parameters and have left the provision unchanged 
in the final rule. We would not require the States to perform under a 
more stringent standard than we do. Further, we support flexibility and 
will work with States to develop customized approaches to automated 
verification that are cost effective and meet their needs. We will 
address the issue of calculating interest on excessive overpayments in 
another separate rulemaking.
    Section 227.601--One oil and gas industry representative was 
concerned about States' abilities to verify the proper volume of gas 
plant products as currently done by MMS. This commenter suggested that 
States have the same capability to avoid extraneous reporting by 
industry. Two State commenters objected to their having to perform 
verification under a higher standard than MMS. One oil and gas trade 
association commented that the word ``update'' in Sec. 227.601(d) 
should be ``updated.''
    MMS Response--If States request this function, we will assure that 
they have the capability to verify plant production volumes. We will 
not require a State to perform verification at a higher standard than 
we do; however, we will work with States to develop verification 
tolerances that best suit each State's needs. We agree that the word in 
Sec. 227.601(d) should be ``updated'' and corrected this section.
    Section 227.800--Two oil and gas industry trade associations 
supported establishment of a MMS monitoring team. They further 
suggested that the team consult industry on a regular basis.
    MMS Response--We agree that the monitoring team should serve as a 
point of contact with industry to address their concerns. Upon review 
of this section, we modified it to clarify the annual and periodic 
reviews performed by the monitoring team.
    Section 227.801--Two State commenters believed that States should 
have the ability to appeal a finding by MMS that it is not performing a 
delegated function adequately. Two oil and gas trade associations 
asserted that we must take corrective actions if a State has not 
performed its delegated function satisfactorily, so the word ``may'' 
must be changed to ``will.'' One of these commenters also recommended 
that we put any notices of a State's noncompliance in writing.
    MMS Response--The process we proposed provides appropriate 
administrative due process for the delegated State. If a State's 
performance problem is not corrected through informal discussion, we 
may then begin to terminate the delegation. Any termination of a 
delegated function will be decided by the MMS Director, with 
concurrence by the Secretary. This decision would be appealable to 
Federal district court.
    In situations involving corrective actions, we wish to retain the 
latitude to work with States in improving their performance of the 
delegated functions. Some situations may not require us to take a 
formal corrective action, for example, where problems can be resolved 
verbally. Further, MMS wishes to assure that before it terminates an 
agreement, a State will have ample opportunity to correct any harmful 
or significant deficiencies. Therefore, MMS is retaining the word 
``may'' in the sections involving corrective actions.
    Although the rule provides that MMS will notify a State in writing 
of the State's failure to adequately perform delegated functions, MMS 
will not inform industry of a State's noncompliance. Industry may 
request information on a State's performance under its delegation 
agreement under the Freedom of Information Act. If industry has 
concerns regarding a State's performance of delegated functions, 
industry may contact the monitoring team described under Sec. 227.800 
of this part.
    Section 227.804--Two oil and gas trade associations requested that 
we provide industry with 180 days for systems changes, if a State 
elects to terminate its delegation. One of these commenters also asked 
that industry be notified of such terminations.
    MMS Response--This section does not explicitly address the 
effective date of terminations of delegation agreements or time periods 
for industry to make systems changes once a termination becomes 
effective. Rather, it informs States that they must provide MMS with a 
90-day written notice of their intent to terminate a delegation 
agreement. However, MMS agrees that a transition time is warranted and 
is modifying Sec. 227.804 to address this concern. Although not raised 
by this comment, during its review of this comment, MMS realized that 
it had not included an effective date for termination of delegation 
agreements in its proposed rule. Accordingly, we have modified 
Sec. 227.804 to provide that MMS will determine a termination date 
based on the number and type of delegation function(s) and the number 
of affected parties. Therefore, in attempting to provide flexibility, 
we will work with each State and industry, as appropriate, to determine 
the appropriate amount of time for termination of their particular 
delegated function(s).

III. Comments That MMS Specifically Requested

    We specifically asked for comment on the following issues:
    Removal of Part 229 ``As an alternative proposal, MMS would like 
comment on whether it should remove part 229 completely and incorporate 
delegations to States for audits, inspections, and investigations on 
Indian lands into new Part 227.''
    Comment--One industry commenter recommended that MMS retain 
separate delegation regulations for audits, inspections and 
investigations for Indian leases in part 229. Another industry 
commenter pointed out that FOGRSFA did not affect leases on Indian 
lands.
    MMS Response--We agree and we are retaining this authority in part 
229.

Delegation Proposal

    ``MMS specifically requested comments on additional information 
that you believe would be important to include in a State's delegation 
proposal.''
    Comment--We did not receive any specific comments on this issue. 
However, one oil and gas trade association requested timely access to 
delegation proposals.
    MMS Response--We addressed this issue under Sec. 227.110.

Formation of an Advisory Committee

    ``MMS would suggest formation of an advisory committee comprised of 
States receiving delegations and MMS representatives. The committee 
would be responsible for providing advice and recommendations about the 
standards and procedures required for the performance of delegable 
functions. MMS would like comments on this suggestion.''
    Comment--One oil and gas industry trade association advocated that 
industry also be included in the advisory committee.
    MMS Response--RSFA requires that MMS and the States consult in the 
development of procedures and standards for States to perform royalty

[[Page 43083]]

management functions. We believe that it may be helpful for States with 
delegations and MMS to work informally together through a State-
initiated advisory group on the continuing development and coordination 
of the delegation program. The discussions would involve mostly the 
day-to-day coordination of activities between MMS and States and would 
have little, if any, effect on industry's activities. Once standards, 
procedures, and coordination techniques are developed, industry will 
have the opportunity for review.
    Monitoring Team--``Please provide comment to MMS if you have 
suggestions on how MMS should form the monitoring team.''
    Comment--One oil and gas trade association stated that the 
monitoring team should consist of MMS subject matter experts. Further, 
this commenter suggested that the team consult with affected payors on 
a regular basis.
    MMS Response--We agree that the monitoring team members should be 
subject matter experts and that the team will consult with affected 
payors on a regular basis.
    Reporting Burden--``As part of our continuing effort to reduce 
paperwork and respondent burden, MMS invites the public and other 
Federal agencies to comment on any aspect of the reporting burden.''
    Comment--One oil and gas trade association emphasized that 
reporting burdens could exist when payors report in more than one 
State. Further, this commenter stated that industry participation is 
essential to eliminate duplication and provide a uniform reporting 
format.
    MMS Response--While we agree that under RSFA there may be an 
additional reporting burden for those payors reporting to multiple 
States, we are committed to coordinating with States and industry to 
minimize this burden.
    Paperwork Reduction Act Requirements--``In compliance with the 
requirement of section 3506(c)(2)(A) of the Paperwork Reduction Act of 
1995, MMS is providing notice and otherwise consulting with members of 
the public and affected agencies concerning collection of information 
in order to solicit comment to: (a) Evaluate whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information shall 
have practical utility; (b) evaluate the accuracy of the agency's 
estimate of the burden of the proposed collection of information; (c) 
enhance the quality, utility, and clarity of the information to be 
collected; and (d) minimize the burden of the collection of information 
on those who are to respond, including through the use of automated 
collection techniques or other forms of information technology.''
    Comment--We did not receive any comments on this issue.

Section-by-Section Analysis

Section 227.100  What States may request delegation?

    We removed this section and combined the information with 
Sec. 227.101 to conform with comments received from the mining industry 
and the Departmental legal opinion.

Section 227.101  What royalty management functions may MMS delegate to 
a State?

    We combined the proposed Sec. 227.100 with this section for clarity 
purposes.
    At Sec. 227.101(a), we added language to clarify that a State 
performing delegated royalty management functions must perform those 
functions for all Federal oil and gas leases within the State 
boundaries.
    At Sec. 227.101(b), we added language to clarify that a State 
performing delegated audits and investigations must perform those 
functions for all federal leases subject to OCSLA section 8(g) and 
solid mineral leases and geothermal leases on Federal lands within the 
State boundaries.

Section 227.103  What must a State's delegation proposal contain?

    We modified Sec. 227.103(c)(1) to include the word ``entities'' in 
response to comments and added language to clarify that if more than 
one entity is delegated responsibility for performing delegated 
functions, the State must provide in its proposal the position of the 
highest ranking State official having ultimate authority over the 
collection of royalties from leases on Federal lands within the State.
    At Sec. 227.103(e)(2), we deleted paragraphs (ii) and (iv) in 
response to comments.
    At Sec. 227.103(i), we added language to clarify the 
responsibilities of handling confidential information.

Section 227.105  What are the hearing procedures?

    At Sec. 227.105, we added the words ``if appropriate'' in response 
to comments. We inserted a new paragraph at Sec. 227.105(d) also in 
response to comments.

Section 227.110  When and for how long are delegation agreements 
effective?

    We changed the section title to add clarity. We added information 
at Sec. 227.110(a) to clarify our language regarding the effective date 
for delegation agreements. We added new language at Sec. 227.110(d) to 
clarify our original proposal.
    In response to comments, we added Sec. 227.110(e) to further 
explain the hearing process.

Section 227.111  Do existing delegation agreements remain in effect?

    We added language at Sec. 227.111(a) to further explain our 
requirements in this section.

Section 227.112  What compensation will a State receive to perform 
delegated functions?

    We added language at Sec. 227.112(d) to provide an option to the 
States for voucher submittal.

Section 227.200  What are a State's general responsibilities if it 
accepts a delegation?

    We modified Sec. 227.200(a) to provide flexibility to States in 
response to their comments.
    We deleted the phrase ``and the MMS Standards for Delegation 
(Standards)'' from Sec. 227.200(e) for clarity purposes.
    We added the phrase ``and the delegation agreement;'' to 227.200(f) 
for clarity purposes.

Section 227.300  What audit functions may a State perform?

    We modified Sec. 227.300 to provide greater flexibility to the 
States in response to their comments.

Section 227.301  What are a State's responsibilities if it performs 
audits?

    We modified the language at Sec. 227.301(e) of the proposed rule to 
provide flexibility to States regarding their audit plans, as expressed 
in their comments.
    We also modified the language at Sec. 227.301(f) of the proposed 
rule to clarify our requirements regarding the appeals process.

Section 227.400  What functions may a State perform in processing 
production reports or royalty reports?

    We modified Sec. 227.400(a)(7) to clarify our requirements 
regarding the appeals process.

Section 227.401  What are a State's responsibilities if it processes 
production reports or royalty reports?

    We modified Sec. 227.401(b) to clarify our requirements for 
processing fatal

[[Page 43084]]

errors. At Sec. 227.401(h), we modified the language to clarify our 
requirements regarding the appeals process.

Section 227.500  What functions may a State perform to ensure that 
reporters correct erroneous report data?

    We modified Sec. 227.500(b) for further clarity.

Section 227.501  What are a State's responsibilities to ensure that 
reporters correct erroneous data?

    We changed Sec. 227.501(b) for simplicity. We modified 
Sec. 227.501(d) to clarify our requirements regarding the appeals 
process.

Section 227.600  What automated verification functions may a State 
perform?

    We modified Sec. 227.600(b)(4) as a result of mining industry 
comments regarding the delegation of additional royalty management 
functions for solid, geothermal, and Sec. 8(g) leases.
    We deleted Sec. 227.600(b)(7) to correct this final rulemaking 
because this item is not a separate, identifiable automated 
verification function. We modified Sec. 227.600(d) to clarify our 
requirements regarding the appeals process.

Section 227.601  What are a State's responsibilities if it performs 
automated verification?

    We changed Sec. 227.601(d) to correct a typographical error. We 
modified Sec. 227.601(e) to provide further clarity regarding the 
appeals requirements.

Section 227.700  What enforcement documents may a State issue in 
support of its delegated function?

    We deleted language from Sec. 227.700(a) as a result of mining 
industry comments regarding the delegation of additional royalty 
management functions for solid, geothermal, and Sec. 8(g) leases.

Section 227.800  How will MMS monitor a State's performance of 
delegated functions?

    We modified Sec. 227.800 in response to comments and to further 
specify our review process.

Section 227.802  How will MMS terminate a State's delegation agreement?

    We added further information about the termination of delegation 
agreement process at Sec. 227.802 for clarity purposes.

Section 227.804  How else may a State's delegation agreement terminate?

    We modified Sec. 227.804 as a result of industry comments.

V. Procedural Matters

The Regulatory Flexibility Act

    The Department certifies that this rule will not have a significant 
economic effect on a substantial number of small entities under the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This rule provides 
guidance to States about the delegation of royalty management 
functions.
    Approximately 4,500 reporters provide royalty and production 
reports on mineral production from Federal and Indian lands to MMS. 
However, many of these companies report both royalty and production 
information to MMS. The total number of companies reporting to MMS is 
about 2,500. The majority of these are considered small businesses 
under the criteria of the Small Business Administration.
    Some small entities might have activities in more than one State. 
While these companies could be required to report to several States 
instead of only the Federal Government under this rulemaking, they 
would file the same reports that they do now, but to a greater number 
of regulatory agencies. For the small entity, this will require further 
communication and coordination between the States and MMS. If the 
entity has several leases in more than one State, we estimate an 
additional burden of 50 hours for coordination between the several 
States and MMS. Under this scenario, the annual cost burden estimate to 
a small entity is $1,750.
    If a payor reports for Federal mineral leases located in only one 
State, we estimate no additional burden hours or costs imposed by this 
rule because the payor is already required to send in the same 
production reports and royalty payments but to a different address. A 
$1,750 annual cost for a small business to comply with this rule is not 
considered a significant impact on a typical small entity in the oil 
and gas extraction industry.
    This rulemaking will not have a significant economic impact on a 
substantial number of small entities.

Executive Order 12630

    The Department certifies that the rule does not represent a 
governmental action capable of interference with constitutionally 
protected property rights. Thus, there is no need to prepare a Takings 
Implication Assessment under Executive Order 12630, ``Governmental 
Actions and Interference with Constitutionally Protected Property 
Rights.''

Executive Order 12866

    This rule was determined to be significant by the Office of 
Management and Budget (OMB). Although this rule will result in an 
increased reporting burden, there will be an offsetting benefit of 
incentives to States to participate in Federal activities. MMS 
estimates the economic impact of this rule to be about $7 million.

Executive Order 12988

    The Department has certified to OMB that this proposed regulation 
meets the applicable standards provided in sections 3(a) and 3(b)(2) of 
E.O. 12988.

Paperwork Reduction Act

    The Office of Management and Budget approved the information 
collection requirements contained in this rule under 44 U.S.C. 3501 et 
seq., and assigned OMB Control Number 1010-0088, titled: Delegation of 
Authority to States. This OMB approval has an expiration date of June 
30, 2000.

National Environmental Policy Act of 1969

    We have determined that this rulemaking is not a major Federal 
action significantly affecting the quality of the human environment, 
and a detailed statement under section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) is not 
required.

Unfunded Mandates Reform Act of 1995

    The Department has determined and certifies according to the 
Unfunded Mandates Reform Act, 2 U.S.C. 1502 et seq., that this rule 
will not impose a cost of $100 million or more in any given year on 
local, tribal, State governments or the private sector.

List of Subjects in 30 CFR Parts 227, 228 and 229

    Coal, Continental shelf, Geothermal energy, Government contracts, 
Mineral royalties, Natural gas, Petroleum, Public lands--mineral 
resources, Reporting and recordkeeping requirements.

    Dated: July 26, 1997.
Bob Armstrong,
Assistant Secretary, Land and Minerals Management.

    For the reasons set out in the preamble, Title 30, Chapter II of 
the Code of Federal Regulations is amended as follows:

    1. Part 227 is added to read as follows:

PART 227--DELEGATION TO STATES

Sec.

[[Page 43085]]

Delegation of MMS Royalty Functions

227.1  What is the purpose of this part?
227.10  What is the authority for information collection?
227.101  What royalty management functions may MMS delegate to a 
State?
227.102  What royalty management functions will MMS not delegate?

Delegation Proposals

227.103  What must a State's delegation proposal contain?
227.104  What will MMS do when it receives a State's delegation 
proposal?

Hearing Process

227.105  What are the hearing procedures?

Delegation Process

227.106  What statutory requirements must a State meet to receive a 
delegation?
227.107  When will the MMS Director decide whether to approve a 
State's delegation proposal?
227.108  How will MMS notify a State of its decision?
227.109  What if the MMS Director denies a State's delegation 
proposal?
227.110  When and for how long are delegation agreements effective?

Existing Delegations

227.111  Do existing delegation agreements remain in effect?

Compensation

227.112  What compensation will a State receive to perform delegated 
functions?

States' Responsibilities to Perform Delegated Functions

227.200  What are a State's general responsibilities if it accepts a 
delegation?
227.201  What standards must a State comply with for performing 
delegated functions?
227.300  What audit functions may a State perform?
227.301  What are a State's responsibilities if it performs audits?
227.400  What functions may a State perform in processing production 
reports and royalty reports?
227.401  What are a State's responsibilities if it processes 
production reports or royalty reports?
227.500  What functions may a State perform to ensure that reporters 
correct erroneous report data?
227.501  What are a State's responsibilities to ensure that 
reporters correct erroneous data?
227.600  What automated verification functions may a State perform?
227.601  What are a State's responsibilities if it performs 
automated verification?
227.700  What enforcement documents may a State issue in support of 
its delegated function?

Performance Review

227.800  How will MMS monitor a State's performance of delegated 
functions?
227.801  What if a State does not adequately perform a delegated 
function?
227.802  How will MMS terminate a State's delegation agreement?
227.803  What are the hearing procedures for terminating a State's 
delegation agreement?
227.804  How else may a State's delegation agreement terminate?
227.805  How may a State obtain a new delegation agreement after 
termination?

    Authority: 30 U.S.C. 1735; 30 U.S.C. 196; Pub L. 102-154.

Delegation of MMS Royalty Functions


Sec. 227.1  What is the purpose of this part?

    This part provides procedures to delegate Federal royalty 
management functions to States under section 205 of the Federal Oil and 
Gas Royalty Management Act of 1982 (the Act), 30 U.S.C. 1735, as 
amended by the Federal Oil and Gas Royalty Simplification and Fairness 
Act of 1996, Pub. L. 104-185, August 13, 1996, as corrected by Pub. L. 
104-200. This part also provides procedures to delegate only audit and 
investigation functions to States under Pub. L. 102-154 for solid 
mineral leases, geothermal leases and leases subject to section 8(g) of 
the Outer Continental Shelf Lands Act, 43 U.S.C. 1337(g). This part 
does not apply to any inspection or enforcement responsibilities of the 
Bureau of Land Management for onshore leases or the MMS Offshore 
Minerals Management program for leases on the Outer Continental Shelf.


Sec. 227.10  What is the authority for information collection?

    (a) The information collection requirements contained in this part 
have been approved by Office of Management and Budget (OMB) under 44 
U.S.C. 3501 et seq. and assigned OMB Control Number 1010-0088. We will 
use the information collected to review and approve delegation 
proposals from States wishing to perform royalty management functions.
    (b) Public reporting burden is estimated as follows. MMS estimates 
400 annual burden hours per function for each State performing the 
delegated functions. The Federal Government will reimburse some of 
these costs as provided by statute. However, States could incur 
additional start-up costs, such as purchasing equipment necessary to 
perform a delegated function, that may not be reimbursable. MMS 
estimates that, if applicable, each payor or reporter would spend 50 
burden hours annually coordinating their interactions and 
communications among the several States and with MMS. Send comments 
regarding this burden estimate or any other aspect of this collection 
of information, including suggestions for reducing burden, to the 
Information Collection Clearance Officer, Minerals Management Service, 
1849 C Street, NW, Washington, DC 20240; and to the Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Attention: Desk Officer for the Interior Department, OMB Control Number 
1010-0088, 725 17th Street, NW, Washington, DC 20503.


Sec. 227.101  What royalty management functions may MMS delegate to a 
State?

    (a) If there are oil and gas leases subject to the Act on Federal 
lands within your State, MMS may delegate the following royalty 
management functions for all such Federal oil and gas leases to you 
under this part:
    (1) Conducting audits and investigations;
    (2) Receiving and processing production or royalty reports;
    (3) Correcting erroneous report data;
    (4) Performing automated verification; and
    (5) Issuing demands, subpoenas, and orders to perform restructured 
accounting, including related notices to lessees or their designees, 
and entering into tolling agreements under section 115(d)(1) of the 
Act, 30 U.S.C. 1725(d)(1).
    (b) If there are oil and gas leases offshore of your State subject 
to section 8(g) of the Outer Continental Shelf Lands Act, 43 U.S.C. 
1337(g), or solid mineral leases or geothermal leases on Federal lands 
within your State, MMS only may delegate authority to conduct audits 
and investigations for all such Federal leases to you under this part. 
MMS will not delegate other functions that may be delegated for oil and 
gas leases on Federal lands.


Sec. 227.102  What royalty management functions will MMS not delegate?

    This section lists the principal royalty management functions that 
MMS will not delegate to a State. MMS will not delegate to a State the 
following functions:
    (a) MMS must collect all moneys received from sales, bonuses, 
rentals, royalties, civil penalties, assessments and interest. MMS also 
must collect any moneys a lessee or its designee pays because of audits 
or other actions of a delegated State;
    (b) MMS must compare all cash and other payments it receives with 
payments shown on royalty reports or other documents, such as bills, to 
reconcile payor accounts. MMS also must disburse all appropriate moneys 
to States and other revenue recipients, including refunds and interest 
owed to lessees and their designees;
    (c) The Department of the Interior will receive, process, and 
decide all administrative appeals from demands or

[[Page 43086]]

other orders issued to lessees, their designees, or any other person, 
including demands or orders a delegated State issues;
    (d) Only MMS may take enforcement actions other than issuing 
demands, subpoenas and orders to perform restructured accounting. MMS 
or the appropriate Federal agency will issue notices of non-compliance 
and civil penalties, collect debts, write off delinquent debts, pursue 
litigation, enforce subpoenas, and manage any alternative dispute 
resolution. MMS will conduct, coordinate and approve any settlement or 
other compromise of an obligation that a lessee or its designee owes;
    (e) MMS will decide all valuation policies, including issuing 
valuation regulations, determinations, and guidelines, and interpreting 
valuation regulations; and
    (f) MMS may reserve additional authorities and responsibilities not 
included in paragraphs (a) through (f) of this section.

Delegation Proposals


Sec. 227.103  What must a State's delegation proposal contain?

    If you want MMS to delegate royalty management functions to you, 
then you must submit a delegation proposal to the MMS Associate 
Director for Royalty Management. MMS will provide you with technical 
assistance and information to help you prepare your delegation 
proposal. Your proposal must contain the following minimum information:
    (a) The name and title of the State official authorized to submit 
the delegation proposal and execute the delegation agreement;
    (b) The name, address, and telephone number of the State contact 
for the proposal;
    (c) A copy of the legislation, State Attorney General opinion or 
other document that:
    (1) States which State entity or entities are responsible for 
performing delegated functions, and if more than one entity is 
delegated such responsibility, the position of the highest ranking 
State official having ultimate authority over the collection of 
royalties from leases on Federal lands within the State;
    (2) Demonstrates the State's authority to:
    (i) Accept a delegation from MMS; and
    (ii) Receive State or Federal appropriations to perform delegated 
functions;
    (d) The date you propose to begin performing delegated functions;
    (e) A detailed statement of the delegable functions that you 
propose to perform. For each function, describe the resources available 
in your State to perform each function, the procedures you will use to 
perform each function, and how you will assure that you will meet all 
Federal laws, lease terms, regulations and relevant performance 
standards. As evidence that you have or will have the resources to 
perform each delegable function, provide the following information:
    (1) A description of the personnel you have available to perform 
delegated functions, including:
    (i) How many persons you will assign full-time and part-time to 
each delegated function;
    (ii) The technical qualifications of the key personnel you will 
assign to each function, including academic field and degree, 
professional credentials, and quality and amount of experience with 
similar functions; and
    (iii) Whether these persons are currently State employees. If not, 
explain how you propose to hire these persons or obtain their services, 
and when you expect to have those persons available to perform 
delegated functions;
    (2) A description of the facilities you will use to perform 
delegated functions, including:
    (i) Whether you currently have the facilities in which you will 
physically locate the personnel and equipment you will need to perform 
the functions you propose to assume. If not, how you propose to acquire 
such facilities, and when you expect to have such facilities available; 
and
    (ii) How much office space is available;
    (3) Describe the equipment you will use to perform delegated 
functions, including:
    (i) Hardware and software you will use to perform each delegated 
function, including equipment for:
    (A) Document processing, including compatibility with MMS automated 
systems, electronic commerce capabilities, and data storage 
capabilities;
    (B) Accessing reference data;
    (C) Contacting production or royalty reporters;
    (D) Issuing demands;
    (E) Maintaining accounting records;
    (F) Performing automated verification;
    (G) Maintaining security of confidential and proprietary 
information; and
    (H) Providing data to other Federal agencies;
    (ii) Whether you currently have the equipment you will need to 
perform the functions you propose to assume. If not, how you propose to 
acquire such equipment and when you expect to have such equipment 
available;
    (f) Your estimates of the costs to fund the following resources 
necessary to perform the delegation:
    (1) Personnel, including hiring, employee salaries and benefits, 
travel and training;
    (2) Facilities, including acquisition, upgrades, operation, and 
maintenance; and
    (3) Equipment, including acquisition, operation, and maintenance;
    (g) Your plans to fund the resources under paragraph (f) of this 
section, including any items you will ask MMS to fund under the 
delegation agreement;
    (h) A statement identifying any areas where State law, including 
State appropriation law, may limit your ability to perform delegated 
functions, and an explanation of how you propose to remove any such 
limitation;
    (i) A statement that in accordance with section 203 of the Act (30 
U.S.C. 1733) persons who have access to information received under 
delegated functions are subject to the same provisions of law regarding 
confidentiality and disclosure of that information as Federal 
employees. Applicable laws include the Freedom of Information Act 
(FOIA), the Trade Secrets Act, and relevant Executive Orders. In 
addition, your statement must acknowledge that all documents produced, 
received, and maintained as part of any delegation functions are agency 
records for purposes of FOIA. Therefore, persons who have access to 
information received under delegated functions may not use such 
information or provide such information to any other person, including 
State personnel, for purposes other than performing delegated 
functions. However, this limitation does not apply if the person 
submitting the information consents in writing to its use for other 
State purposes.


Sec. 227.104  What will MMS do when it receives a State's delegation 
proposal?

    When MMS receives your delegation proposal, it will record the 
receipt date. MMS will notify you in writing within 15 business days 
whether your proposal is complete. If it is not complete, MMS will 
identify any missing items Sec. 227.103 requires. Once you submit all 
required information, MMS will notify you of the date your application 
is complete.

[[Page 43087]]

Hearing Process


Sec. 227.105  What are the hearing procedures?

    After MMS notifies you that your delegation proposal is complete, 
MMS will schedule a hearing on your proposal, if MMS determines a 
hearing is appropriate, as follows:
    (a) The MMS Director will appoint a hearing official to conduct one 
or more public hearings for fact finding regarding your ability to 
assume the delegated functions requested. The hearing official will not 
decide whether to approve your delegation request;
    (b) The hearing official will contact you about scheduling a 
hearing date and location;
    (c) The MMS will publish notice of the hearing in the Federal 
Register and other appropriate media within your State;
    (d) MMS will publish notice of the proposal in the Federal 
Register. MMS will also post the proposal on the MMS Website, and upon 
request, MMS will send a copy of the delegation proposal to the trade 
associations to distribute to their members, as necessary;
    (e) At the hearing, you will have an opportunity to present 
testimony and written information in support of your proposal;
    (f) Other persons may attend the hearing and may present testimony 
and written information for the record;
    (g) MMS will record the hearing;
    (h) MMS will maintain a record of all documents related to the 
proposal process;
    (i) After the hearing, MMS may require you to submit additional 
information in support of your delegation proposal.

Delegation Process


Sec. 227.106  What statutory requirements must a State meet to receive 
a delegation?

    The MMS Director will decide whether to approve your delegation 
request and will ask the Secretary of the Interior to concur in the 
decision. That decision is solely within the MMS Director's and the 
Secretary's discretion. The MMS Director's decision, which the 
Secretary concurs in, is the final decision for the Department of the 
Interior. The MMS Director may approve a State's request for delegation 
only if, based upon the State's delegation proposal and the hearing 
record, the MMS Director finds that:
    (a) It is likely that the State will provide adequate resources to 
achieve the purposes of the Act;
    (b) The State has demonstrated that it will effectively and 
faithfully administer the MMS regulations under the Act in accordance 
with subsections (c) and (d) of section 205 of the Act;
    (c) Such delegation will not create an unreasonable burden on any 
lessee;
    (d) The State agrees to adopt standardized reporting procedures MMS 
prescribes for royalty and production accounting purposes, unless the 
State and all affected parties (including MMS) otherwise agree;
    (e) The State agrees to follow and adhere to regulations and 
guidelines MMS issues under the mineral leasing laws regarding 
valuation of production; and
    (f) Where necessary for a State to carry out and enforce a 
delegated activity, the State agrees to enact such laws and promulgate 
such regulations as are consistent with relevant Federal laws and 
regulations.


Sec. 227.107  When will the MMS Director decide whether to approve a 
State's delegation proposal?

    The MMS Director will decide whether to approve your delegation 
proposal within 90 days after your delegation proposal is considered 
complete under Sec. 227.104. MMS may extend the 90-day period with your 
written consent.


Sec. 227.108  How will MMS notify a State of its decision?

    MMS will notify you in writing of its decision on your delegation 
proposal. If MMS approves your delegation proposal, then MMS will hold 
discussions with you to develop a delegation agreement detailing the 
functions that you will perform, the standards and requirements you 
must comply with to perform those functions, and any required 
transition period.


Sec. 227.109  What if the MMS Director denies a State's delegation 
proposal?

    If the MMS Director denies your delegation proposal, MMS will state 
the reasons for denial. MMS also will inform you in writing of the 
conditions you must meet to receive approval. You may submit a new 
delegation proposal at any time following a denial.


Sec. 227.110  When and for how long are delegation agreements 
effective?

    (a) Delegation agreements are effective for 3 years from the date 
the MMS Director signs the delegation agreement. However, during the 
development of the State's delegation proposal under Sec. 227.108 of 
this part, MMS, the delegated State, and any other affected person will 
determine an appropriate transition period for lessees and their 
designees to modify their systems to comply with any new requirements 
under a delegation agreement. MMS will publish notice of the effective 
date of a State's delegation agreement in the Federal Register and that 
notice will inform lessees and their designees of any transition 
period. MMS also will post the proposals on the MMS Website at 
www.mms.gov, and upon request, will send a copy of the delegation 
proposals to trade associations to distribute to their members.
    (b) You may ask MMS to renew the delegation for an additional 3 
years no less than 6 months before your 3-year delegation agreement 
expires. You must submit your renewal request to the MMS Associate 
Director for Royalty Management as follows:
    (1) If you do not want to change the terms of your delegation 
agreement for the renewal period, you need only ask to extend your 
existing agreement for the 3-year renewal period. MMS will not schedule 
a hearing unless you request one;
    (2) If you want to change the terms of your delegation agreement 
for the renewal period, you must submit a new delegation proposal under 
this part.
    (c) The MMS Director may approve your renewal request only if MMS 
determines that you are meeting the requirements of the applicable 
standards and regulations. If the MMS Director denies your renewal 
request, MMS will state the reasons for denial. MMS also will inform 
you in writing of the conditions you must meet to receive approval. You 
may submit a new renewal request any time after denial.
    (d) After the 3-year renewal period for your delegation agreement 
ends, if you wish to continue performing one or more delegated 
functions, you must request a new delegation agreement from MMS under 
this part. MMS will schedule a hearing on your request, if MMS 
determines a hearing is appropriate. As part of the decision whether to 
approve your request for a new delegation, the MMS Director will 
consider whether you are meeting the requirements of the applicable 
standards and regulations under your existing delegation agreement.
    (e) If you do not request a hearing under paragraphs (b)(1) or (d) 
of this section, any other affected person may submit a written request 
for a hearing under those paragraphs to the MMS Associate Director for 
Royalty Management.

Existing Delegations


Sec. 227.111  Do existing delegation agreements remain in effect?

    This section explains your options if you have a delegation 
agreement in effect on the effective date of this regulation.

[[Page 43088]]

    (a) If you do not want to perform any royalty management functions 
in addition to those authorized under your existing agreement, you may 
continue your existing agreement until its expiration date. Before the 
agreement expires, if you wish to continue to perform one or more of 
the delegated functions you performed under the expired agreement, you 
must request a new delegation agreement meeting the requirements of 
this part and the applicable standards.
    (b) If you want to perform royalty management functions in addition 
to those authorized under your existing agreement, you must request a 
new delegation agreement under this part.
    (c) MMS may extend any delegation agreement in effect on the 
effective date of this regulation for up to 3 years beyond the date it 
is due to expire.

Compensation


Sec. 227.112  What compensation will a State receive to perform 
delegated functions?

    You will receive compensation for your costs to perform each 
delegated function subject to the following conditions:
    (a) Compensation for costs is subject to Congressional 
appropriations;
    (b) Compensation may not exceed the reasonably anticipated 
expenditures that MMS would incur to perform the same function;
    (c) The cost for which you request compensation must be directly 
related to your performance of a delegated function and necessary for 
your performance of that delegated function;
    (d) At a minimum, you must provide vouchers detailing your 
expenditures quarterly during the fiscal year. However, you may agree 
to provide vouchers on a monthly basis in your delegation agreement;
    (e) You must maintain adequate books and records to support your 
vouchers;
    (f) MMS will pay you quarterly or monthly during the fiscal year as 
stated in your delegation agreement; and
    (g) MMS may withhold compensation to you for your failure to 
properly perform any delegated function as provided in section 227.801 
of this part.

States' Responsibilities To Perform Delegated Functions


Sec. 227.200  What are a State's general responsibilities if it accepts 
a delegation?

    For each delegated function you perform, you must:
    (a) Operate in compliance with all Federal laws, regulations, and 
Secretarial and MMS determinations and orders relating to calculating, 
reporting, and paying mineral royalties and other revenues. You must 
seek information or guidance from MMS regarding new, complex, or unique 
issues. If MMS determines that written guidance or interpretation is 
appropriate, MMS will provide the guidance or interpretation in writing 
to you and you must follow the interpretation or guidance given;
    (b) Comply with Generally Accepted Accounting Principles (GAAP). 
You must:
    (1) Provide complete disclosure of financial results of activities;
    (2) Maintain correct and accurate records of all mineral-related 
transactions and accounts;
    (3) Maintain effective controls and accountability;
    (4) Maintain a system of accounts that includes a comprehensive 
audit trail so that all entries may be traced to one or more source 
documents; and
    (5) Maintain adequate royalty and production information for 
royalty management purposes;
    (c) Assist MMS in meeting the requirements of the Government 
Performance and Results Act (GPRA) as well as assisting in developing 
and endeavoring to comply with the MMS Strategic Plan and Performance 
Measurements;
    (d) Maintain all records you obtain or create under your delegated 
function, such as royalty reports, production reports, and other 
related information. You must maintain such records in a safe, secure 
manner, including taking appropriate measures for protecting 
confidential and proprietary information and assisting MMS in 
responding to Freedom of Information Act requests when necessary. You 
must maintain such records for at least 7 years;
    (e) Provide reports to MMS about your activities under your 
delegated functions. MMS will specify in your delegation agreement what 
reports you must submit and how often you must submit them. At a 
minimum, you must provide periodic statistical reports to MMS 
summarizing the activities you carried out, such as:
    (1) Production and royalty reports processed;
    (2) Erroneous reports corrected;
    (3) Results of automated verification findings;
    (4) Number of audits performed; and
    (5) Enforcement documents issued.
    (f) Assist MMS in maintaining adequate reference, royalty, and 
production databases as provided in the Standards issued under 
Sec. 227.201 of this part and the delegation agreement;
    (g) Develop annual work plans that:
    (1) Specify the work you will perform for each delegated function; 
and
    (2) Identify the resources you will commit to perform each 
delegated function;
    (h) Help MMS respond to requests for information from other Federal 
agencies, Congress, and the public;
    (i) Cooperate with MMS's monitoring of your delegated functions; 
and
    (j) Comply with the Standards as required under Sec. 227.201 of 
this part.


Sec. 227.201  What standards must a State comply with for performing 
delegated functions?

    (a) If MMS delegates royalty management functions to you, you must 
comply with the Standards. The Standards explain how you must carry out 
the activities under each of the delegable functions.
    (b) Your delegation agreement may include additional standards 
specifically applicable to the functions delegated to you.
    (c) Failure to comply with your delegation agreement, the 
Standards, or any of the specific standards and requirements in the 
delegation agreement, is grounds for termination of all or part of your 
delegation agreement, or other actions as provided under Secs. 227.801 
and 227.802.
    (d) MMS may revise the Standards and will provide notice of those 
changes in the Federal Register. You must comply with any changes to 
the Standards.


Sec. 227.300  What audit functions may a State perform?

    An audit consists of an examination of records to verify that 
royalty reports and payments accurately reflect actual production, 
sales, revenues and costs, and compliance with Federal statutes, 
regulations, lease terms, and MMS policy determinations.
    (a) If you request delegation of audit functions, you must perform 
at least the following:
    (1) Submitting requests for records;
    (2) Examining royalty and production reports;
    (3) Examining lessee production and sales records, including 
contracts, payments, invoices, and transportation and processing costs 
to substantiate production and royalty reporting;
    (4) Providing assistance to MMS for appealed demands or orders, 
including preparing field reports, performing remanded actions, 
modifying orders, and providing oral and written briefing and testimony 
as expert witnesses.
    (b) If necessary for a particular audit, you may also perform any 
of the following:
    (1) Issuing engagement letters;
    (2) Arranging for entrance conferences;

[[Page 43089]]

    (3) Scheduling site visits; and
    (4) Issuing record releases and audit closure letters; and
    (5) Holding closeout conferences.


Sec. 227.301  What are a State's responsibilities if it performs 
audits?

    If you perform audits you must:
    (a) Comply with the MMS Audit Procedures Manual and the Government 
Auditing Standards issued by the Comptroller General of the United 
States;
    (b) Follow the MMS Annual Audit Work Plan and 5-year Audit 
Strategy, which MMS will develop in consultation with States having 
delegated audit authority;
    (c) Agree to undertake special audit initiatives MMS identifies 
targeting specific royalty issues, such as valuation or volume 
determinations;
    (d) Prepare, construct, or compile audit work papers under the 
appropriate procedures, manuals, and guidelines;
    (e) Prepare and submit MMS Audit Work Plans. You may modify your 
Audit Work Plans with MMS approval; and
    (f) Comply with procedures for appealed demands or orders, 
including meeting timeframes, supplying information, and using the 
appropriate format.


Sec. 227.400  What functions may a State perform in processing 
production reports or royalty reports?

    Production reporters or royalty reporters provide production, 
sales, and royalty information on mineral production from leases that 
must be collected, analyzed, and corrected.
    (a) If you request delegation of either production report or 
royalty report processing functions, you must perform at least the 
following:
    (1) Receiving, identifying, and date stamping production reports or 
royalty reports;
    (2) Processing production or royalty data to allow entry into a 
data base;
    (3) Creating copies of reports by means such as electronic imaging;
    (4) Timely transmitting production report or royalty report data to 
MMS and other affected Federal agencies as provided in your delegation 
agreement and the Standards;
    (5) Providing training and assistance to production reporters or 
royalty reporters;
    (6) Providing production data or royalty data to MMS and other 
affected Federal agencies; and
    (7) Providing assistance to MMS for appealed demands or orders, 
including meeting timeframes, supplying information, using the 
appropriate format, performing remanded actions, modifying orders, and 
providing oral and written briefing and testimony as expert witnesses.
    (b) If you request delegation of either production report or 
royalty report processing functions, or both, you may perform the 
following functions:
    (1) Granting exceptions from reporting and payment requirements for 
marginal properties; and
    (2) Approving alternative royalty and payment requirements for unit 
agreements and communitization agreements.
    (c) You must provide MMS with a copy of any exceptions from 
reporting and payment requirements for marginal properties and any 
alternative royalty and payment requirements for unit agreements and 
communitization agreements you approve.


Sec. 227.401  What are a State's responsibilities if it processes 
production reports or royalty reports?

    In processing production reports or royalty reports you must:
    (a) Process reports accurately and timely as provided in the 
Standards and your delegation agreement;
    (b) Identify and resolve fatal errors to use in subsequent error 
correction that the State or MMS performs;
    (c) Accept multiple forms of electronic media from reporters, as 
MMS specifies;
    (d) Timely transmit required production or royalty data to MMS and 
other affected Federal agencies;
    (e) Access well, lease, agreement, and reporter reference data from 
MMS and provide updated information to MMS;
    (f) For production reports, maintain adequate system software edits 
to ensure compliance with the provisions of 30 CFR part 216, the PAAS 
Onshore Oil and Gas Reporter Handbook, the PAAS Reporter Handbook-
Lease, Facility/Measurement Point, and Gas Plant Operators, any 
interagency memorandums of understanding to which MMS is a party, and 
the Standards;
    (g) For royalty reports, maintain adequate system software edits to 
ensure compliance with the provisions of 30 CFR part 218, the Oil and 
Gas Payor Handbook, Volume II, ``Dear Payor'' letters, and the 
Standards; and
    (h) Comply with the procedures for appealed demands or orders, 
including meeting timeframes, supplying information, and using the 
appropriate format.


Sec. 227.500  What functions may a State perform to ensure that 
reporters correct erroneous report data?

    Production data and royalty data must be edited to ensure that what 
is reported is correct, that disbursement is made to the proper 
recipient, and that correct data are used for other functions, such as 
automated verification and audits. If you request delegation of error 
correction functions for production reports or royalty reports, or 
both, you must perform at least the following:
    (a) Correcting all fatal errors and assigning appropriate 
confirmation indicators;
    (b) Verifying whether production reports are missing;
    (c) Contacting production reporters or royalty reporters about 
missing reports and resolving exceptions;
    (d) Documenting all corrections made, including providing 
production reporters or royalty reporters with confirmation reports of 
any changes;
    (e) Providing training and assistance to production reporters or 
royalty reporters;
    (f) Issuing notices, orders to report, and bills as needed, 
including, but not limited to, imposing assessments on a person who 
chronically submits erroneous reports; and
    (g) Providing assistance to MMS for appealed demands or orders, 
including preparing field reports, performing remanded actions, 
modifying orders, and providing oral and written briefing and testimony 
as expert witnesses.


Sec. 227.501  What are a State's responsibilities to ensure that 
reporters correct erroneous data?

    To ensure the correction of erroneous data, you must:
    (a) Ensure compliance with the provisions of 30 CFR parts 216 and 
218, any applicable handbook specified under 30 CFR 227.401 (f) and 
(g), interagency memorandums of understanding to which MMS is a party, 
and the Standards;
    (b) Ensure that reporters accurately and timely correct all fatal 
errors as designated in the Standards. These errors include, for 
example, invalid or incorrect reporter/payor codes, incorrect lease/
agreement numbers, and missing data fields;
    (c) Submit accepted and corrected lines to MMS to allow processing 
into the Auditing and Financial System (AFS) and the Production 
Accounting and Auditing System (PAAS) in a timely manner as provided in 
the Standards and 30 CFR part 219; and
    (d) Comply with the procedures for appealed demands or orders, 
including meeting timeframes, supplying

[[Page 43090]]

information, and using the appropriate format.


Sec. 227.600  What automated verification functions may a State 
perform?

    Automated verification involves systematic monitoring of production 
and royalty reports to identify and resolve reporting or payment 
discrepancies. States may perform the following:
    (a) Automated comparison of sales volumes reported by royalty 
reporters to sales and transfer volumes reported by production 
reporters. If you request delegation of automated comparison of sales 
and production volumes, you must perform at least the following 
functions:
    (1) Performing an initial sales volume comparison between royalty 
and production reports;
    (2) Performing subsequent comparisons when reporters adjust royalty 
or production reports;
    (3) Checking unit prices for reasonable product valuation based on 
reference price ranges MMS provides;
    (4) Resolving volume variances using written correspondence, 
telephone inquiries, or other media;
    (5) Maintaining appropriate file documentation to support case 
resolution; and
    (6) Issuing orders to correct reports or payments;
    (b) Any one or more of the following additional automated 
verification functions:
    (1) Verifying compliance with lease financial terms, such as 
payment of rent, minimum royalty, and advance royalty;
    (2) Identifying and resolving improper adjustments;
    (3) Identifying late payments and insufficient estimates, including 
calculating interest owed to MMS and verifying payor-calculated 
interest owed to MMS;
    (4) Calculating interest due to a lessee or its designee for an 
adjustment or refund, including identifying overpayments and excessive 
estimates;
    (5) Verifying royalty rates; and
    (6) Verifying compliance with transportation and processing 
allowance limitations;
    (c) Issuing notices and bills associated with any of the functions 
under paragraphs (a) and (b) of this section; and
    (d) Providing assistance to MMS for any of these delegated 
functions on appealed demands or orders, including meeting timeframes, 
supplying information, using the appropriate format, taking remanded 
actions, modifying orders, and providing oral and written briefing and 
testimony as expert witnesses.


Sec. 227.601  What are a State's responsibilities if it performs 
automated verification?

    To perform automated verification of production reports or royalty 
reports, you must:
    (a) Verify through research and analysis all identified exceptions 
and prepare the appropriate billings, assessment letters, warning 
letters, notification letters, Lease Problem Reports, other internal 
forms required, and correspondence required to perform any required 
follow-up action for each function, as specified in the Standards or 
your delegation agreement;
    (b) Resolve and respond to all production reporter or royalty 
reporter inquiries;
    (c) Maintain all documentation and logging procedures as specified 
in the Standards or your delegation agreement;
    (d) Access well, lease, agreement, and production reporter or 
royalty reporter reference data from MMS and provide updated 
information to MMS; and
    (e) Comply with procedures for appealed demands and orders, 
including meeting time frames, supplying information, and using the 
appropriate format.


Sec. 227.700  What enforcement documents may a State issue in support 
of its delegated function?

    This section explains what enforcement actions you may take as part 
of your delegated functions.
    (a) You may issue demands, subpoenas, and orders to perform 
restructured accounting, including related notices to lessees and their 
designees. You also may enter into tolling agreements under section 
15(d)(1) of the Act, 30 U.S.C. 1725(d)(1).
    (b) When you issue any enforcement document you must comply with 
the requirements of section 115 of the Act, 30 U.S.C. 1725.
    (c) When you issue a demand or enter into a tolling agreement under 
section 15(d)(1) of the Act, 30 U.S.C. 1725(d)(1), the highest State 
official having ultimate authority over the collection of royalties or 
the State official to whom that authority has been delegated must sign 
the demand or tolling agreement.
    (d) When you issue a subpoena or order to perform a restructured 
accounting you must:
    (1) Coordinate with MMS to ensure identification of issues that may 
concern more than one State before you issue subpoenas and orders to 
perform restructured accounting; and
    (2) Ensure that the highest State official having ultimate 
authority over the collection of royalties signs any subpoenas and 
orders to perform restructured accounting, as required under section 
115 of the Act, 30 U.S.C. 1725. This official may not delegate 
signature authority to any other person.

Performance Review


Sec. 227.800  How will MMS monitor a State's performance of delegated 
functions?

    This section explains MMS's procedures for monitoring your 
performance of any of your delegated functions.
    (a) A monitoring team of MMS officials will annually review your 
performance of the delegated functions and compliance with your 
delegation agreement, the Standards, and 30 U.S.C. 1735, including 
conducting fiscal examination to verify your costs for reimbursement.
    (b) The monitoring team also will:
    (1) Periodically review your statistical reports required under 
Sec. 227.200(e) to verify your accuracy, timeliness, and efficiency;
    (2) Check for timely transmittal of production report or royalty 
report information to MMS and other affected agencies, as applicable, 
to allow for proper disbursement of funds and processing of 
information;
    (3) Coordinate on-site visits and Office of the Inspector General, 
General Accounting Office, and MMS audits of your performance of your 
delegated functions; and
    (4) Maintain reports of its monitoring activities.


Sec. 227.801  What if a State does not adequately perform a delegated 
function?

    If your performance of the delegated function does not comply with 
your delegation agreement, or the Standards, or if MMS finds that you 
can no longer meet the statutory requirements under Sec. 227.106, then 
MMS may:
    (a) Notify you in writing of your noncompliance or inability to 
comply. The notice will prescribe corrective actions you must take, and 
how long you have to comply. You may ask MMS for an extension of time 
to comply with the notice. In your extension request you must explain 
why you need more time; and
    (b) If you do not take the prescribed corrective actions within the 
time that MMS allows in a notice issued under paragraph (a) of this 
section, then MMS may:
    (1) Initiate proceedings under Sec. 227.802 to terminate all or a 
part of your delegation agreement;
    (2) Withhold compensation provided to you under Sec. 227.112; and
    (3) Perform the delegated function, before terminating or without 
terminating your delegation agreement,

[[Page 43091]]

including, but not limited to, issuing a demand or order to a Federal 
lessee, or its designee, or any other person when:
    (i) Your failure to issue the demand or order would result in an 
underpayment of an obligation due MMS; and
    (ii) The underpayment would go uncollected without MMS 
intervention.


Sec. 227.802  How will MMS terminate a State's delegation agreement?

    This section explains the procedures MMS will use to terminate all 
or a part of your delegation agreement:
    (a) MMS will notify you in writing that it is initiating procedures 
to terminate your delegation agreement;
    (b) MMS will provide you notice and opportunity for a hearing under 
Sec. 227.803 of this part;
    (c) The MMS Director, with concurrence from the Secretary, will 
decide whether to terminate your delegation agreement.
    (d) After the hearing, MMS may:
    (1) Terminate your delegation agreement; or
    (2) Allow you 30 days to correct any remaining deficiencies. If you 
do not correct the deficiency within 30 days, MMS will terminate all or 
a part of your delegation agreement.
    (e) MMS will determine the date your agreement is terminated and 
will notify you of that date in writing. MMS will determine the 
termination date based on the number of delegated functions and the 
impact of the termination on all affected parties.


Sec. 227.803  What are the hearing procedures for terminating a State's 
delegation agreement?

    (a) The MMS Director will appoint a hearing official to conduct one 
or more public hearings for fact finding and to determine any actions 
you must take to correct the noncompliance. The hearing official will 
not decide whether to terminate your delegation agreement;
    (b) The hearing official will contact you about scheduling a 
hearing date and location;
    (c) The hearing official will publish notice of the hearing in the 
Federal Register and other appropriate media within your State;
    (d) At the hearing, you will have an opportunity to present 
testimony and written information on your ability to perform your 
delegated functions as required under this part, your delegation 
agreement, and the Standards;
    (e) Other persons may attend the hearing and may present testimony 
and written information for the record;
    (f) MMS will record the hearing;
    (g) After the hearing, MMS may require you to submit additional 
information; and
    (h) Information presented at each public hearing will help MMS to 
determine whether:
    (1) You have complied with the terms and conditions of your 
delegation agreement; or
    (2) You have the capability to comply with the requirements under 
Sec. 227.106 of this part.


Sec. 227.804  How else may a State's delegation agreement terminate?

    You may request MMS to terminate your delegation at any time by 
submitting your written notice of intent 6 months prior to the date on 
which you want to terminate. MMS will determine the date your agreement 
is terminated and will notify you of that date in writing. MMS will 
determine the termination date based on the number of delegated 
functions and the impact of the termination on all affected parties.


Sec. 227.805  How may a State obtain a new delegation agreement after 
termination?

    After your delegation agreement is terminated, you may apply again 
for delegation by beginning with the proposal process under this part.

PART 228--COOPERATIVE ACTIVITIES WITH STATES AND INDIAN TRIBES

    2. The authority citation for part 228 is revised to read as 
follows:

    Authority: Sec. 202, Pub. L. 97-451, 96 Stat. 2457 (30 U.S.C. 
1732).

    3. A new Sec. 228.3 is added to read as follows:


Sec. 228.3  Limitation on applicability.

    As of the effective date of this rule, September 11, 1997, this 
part does not apply to Federal lands.

PART 229--DELEGATION TO STATES

    4. The authority citation for part 229 is revised to read as 
follows:

    Authority: 30 U.S.C. 1735.

    5. A new Sec. 229.3 is added to read as follows:


Sec. 229.3  Limitation on applicability.

    As of the effective date of this rule, September 11, 1997, this 
part does not apply to Federal lands.

[FR Doc. 97-21162 Filed 8-11-97; 8:45 am]
BILLING CODE 4310-MR-P