TITLE: B-307767, Department of Interior--Royalty-in-Kind Oil and Gas Preferences, November 13, 2006
BNUMBER: B-307767
DATE: November 13, 2006
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B-307767, Department of Interior--Royalty-in-Kind Oil and Gas Preferences, November 13, 2006

   B-307767

   November 13, 2006

   The Honorable Wayne Allard

   United States Senate

   The Honorable Ken Salazar

   United States Senate

   Subject: Department of Interior--Royalty-in-Kind Oil and Gas Preferences

   This responds to your request for our opinion regarding the Secretary of
   Interior's authority, under section 342(j) of the Energy Policy Act of
   2005, to "grant a preference" in the disposal of royalty oil or gas
   received by the United States.
   42 U.S.C. sect. 15902(j)(1). The purpose of section 342(j) is to provide
   "additional resources to any Federal low-income energy assistance
   program." Id. In this regard, you ask whether section 342(j) provides
   sufficient authority for the Secretary to provide such programs with oil
   and gas at a discount to fair market value.

   The Department of Interior maintains that section 342(j) of the Energy
   Policy Act does not permit such oil and gas sales at a discount to fair
   market value. Although not necessarily the only reading of the provision,
   we agree with Interior that this is the better reading of section 342(j).
   As we explain below, the issue posed presents a close question of
   statutory construction. In our, and Interior's view, the phrase "grant a
   preference" in section 342 does not mean to grant a discount to fair
   market value where the same section requires sales or transfers to be at
   not less than market value and there is no indication that Congress
   intended "preference" to include a discount to fair market value.[1]

   BACKGROUND

   The United States leases federal lands containing oil and gas deposits
   under two specific programs: the Mineral Land Leasing Act of 1920
   (MLLA)[2] governs land deposits and the Outer Continental Shelf Lands Act
   of 1953 (OCSLA)[3] governs lease of oil and gas deposits from offshore or
   submerged lands.

   The MLLA authorizes the Secretary of the Interior to lease oil and gas
   deposits, and certain federal lands containing oil and gas deposits, to
   U.S. citizens, associations, corporations, or municipalities. 30 U.S.C.
   sect. 181. Lessees must pay the United States a royalty of at least 12.5
   percent of the value of the oil or gas removed or sold from the leased
   land. 30 U.S.C. sect. 226(b)(1).[4] As an alternative to collecting cash
   royalty payments, the Secretary may take a percentage of the value of
   royalties in actual barrels of oil or volumes of natural gas, a so-called
   "royalty in kind" or "royalty oil and gas." 30 U.S.C. sect. 192. MLLA
   authorizes the Secretary to sell to the public royalty oil and gas
   accruing to the United States under such leases except when, in the
   Secretary's judgment, it is desirable to retain the oil and gas for the
   use of the United States, such as filling the nation's Strategic Petroleum
   Reserve. Id. Under MLLA, the Secretary must "grant preference" to
   refineries not having their own source of supply for crude oil, but sales
   to such refineries must be "at not less than the market price." Id.

   Similarly, the OCSLA authorizes the Secretary of the Interior to lease oil
   and gas deposits from offshore or submerged lands on the outer continental
   shelf off the United States. 43 U.S.C. sections 1335, 1337. Like their
   onshore counterparts, offshore oil and gas lessees must pay the United
   States a royalty of not less than 12.5 percent, which the Secretary also
   may demand in kind. 43 U.S.C. sections 1335, 1337, and

   1353(a)(1).[5] OCSLA also authorizes the Secretary to sell royalty oil and
   gas to the public or to transfer such oil or gas upon request to the
   Secretaries of Defense or

   Energy or the Administrator of the General Services Administration for
   federal use.

   43 U.S.C. sect. 1353. Royalty oil or gas sold under OCSLA must not be sold
   for more than its regulated price or, if no regulated price applies, must
   not be sold at less than its fair market value. Id.

   Section 342 of the Energy Policy Act of 2005[6] governs Interior's program
   on oil and gas royalties in kind. It applies to all royalties accepted in
   kind under any federal oil or gas lease or permit under section 36 of MLLA
   (30 U.S.C. sect. 192), section 27 of OCSLA (43 U.S.C. sect. 1353), or any
   other federal law governing leasing of federal land for oil and gas
   development. 42 U.S.C. sections 15902(a). It requires the Secretary to
   sell royalties taken in kind at not less than fair market value. 42 U.S.C.
   sections 15902(b)(3)(A).

   Another subsection, section 342(j), permits the Secretary, in the sale of
   royalty oil and gas, to "grant a preference to any person, including any
   Federal or State agency, for the purpose of providing  additional
   resources to any Federal low-income energy assistance program." 42 U.S.C.
   sect. 15902(j). It is this subsection which is at issue here. Under the
   Low-Income Home Energy Assistance Program (LIHEAP),[7] the federal
   government provides block grants to states, the District of Columbia, U.S.
   territories, and Indian tribes to assist low-income households that pay a
   high proportion of household income for home energy needs. 42 U.S.C. sect.
   8621. Grantees provide assistance through payments to eligible households,
   energy suppliers, and weatherization providers. The question before us is
   whether section 342(j) authorizes the Secretary to sell royalty-in-kind
   oil or gas at a discount to fair market value.

   DISCUSSION

   As noted above, section 342(b)(3)(A) clearly states that the Secretary may
   not sell or dispose of any royalty production taken in kind for less than
   the market price. Thus, we need to examine whether the phrase "grant a
   preference" or the term "preference" means a discount to fair market value
   and supersedes the specific provision precluding sale at not less than
   fair market value.

   Neither section 342(j) nor other sections of the Energy Policy Act define
   the phrase "grant a preference" or the term "preference." Nothing in the
   Act indicates that

   "preference" means a discount to fair market value. There is little
   legislative history except for a floor statement by Senator Salazar, who
   offered his interpretation of the

   provision when the conference report was being considered. 151 Cong. Rec.
   S9269

   (July 28, 2005) (statement of Senator Salazar). Senator Salazar described
   section 342(j) as authorizing

   "the Secretary of Interior [to] begin a demonstration program that would
   provide royalty in kind natural gas to low-income energy consumers at
   below market cost. In order to do so, the Secretary could enter into
   agreements with natural gas distribution companies to provide them natural
   gas at below market value as long as they guarantee [that] such gas will
   be delivered to low-income energy consumers. In practice, the transfer
   would occur through accounting mechanisms, not the actual exchange of
   natural gas molecules."

   Id. Obviously, Senator Salazar deemed the preference to be a discount to
   fair market value because he states it would provide natural gas to
   consumers "at below market costs." The problem is that the language of the
   statute does not say "price preference," but only "preference," and
   another provision of the same section of the statute specifically requires
   disposal at not less than fair market value. The Supreme Court has found
   that while floor statements provide an individual member's reasons for
   offering an amendment or supporting particular legislation, they do not
   necessarily represent the meaning and purpose of the lawmaking body
   collectively. Duplex Printing Press Co. v. Deering, 254 U.S. 443, 474
   (1921).

   In the absence of some indication to the contrary, Congress is usually
   deemed to use words in their common, ordinary sense. B-303495, Jan. 4,
   2005, citing Mallard v. United States District Court, 490 U.S. 296, 300-01
   (1989). One measure of the common, ordinary meaning of words is a standard
   dictionary. Id. Black's Law Dictionary, for example, defines "preference"
   as "the act of favoring one person or thing over another." Black's Law
   Dictionary 1197 (7^th ed. 1999). Similarly, the Merriam-Webster's
   Collegiate Dictionary defines "preference" as "the power or opportunity of
   choosing." Merriam-Webster's Collegiate Dictionary 916
   (10^th ed. 2001). These definitions lead us to read "preference" as a
   priority in access or the choosing or favoring of one person over another.
   We acknowledge that preference could also mean choosing or favoring one
   person over another by offering one person a lower price. With respect to
   this situation, however, there is a specific provision requiring sales or
   transfers to be at not less than market value, which we cannot ignore.

   We looked at other laws that deal with the United States selling or
   transferring something of value to see how Congress has commonly used the
   term "preference" in

   enacting other preference provisions.[8] The Taylor Grazing Act, for
   example, directs

   that "preference shall be given in the issuance of grazing permits . . ."
   43 U.S.C. sect. 315b. This provision has been interpreted as granting a
   priority in access to grazing permits. The Supreme Court described
   preference claims under the Taylor Grazing Act as "first" or "second" or
   as "higher" or "lower" priority claims. Public Lands Council v. Babbitt,
   529 U.S. 728, 733-35 (2000). In other words, those "who bring themselves
   within a preferred class set up by the statute and regulations are
   entitled as of right to permits as against others who do not possess the
   same facilities for economic and beneficial use of the range." Red Canyon
   Sheep Co. v. Ickes, 98 F.2d 308 (D.C. Cir. 1938). The Secretary sets
   grazing fees for these permits without regard to preference rights. See 43
   U.S.C. sect. 315b; 43 C.F.R. sect. 4130.8-1.

   Also, section 9(c) of the Reclamation Project Act of 1939 provides that in
   sales or leases of electric power or power privileges made by the
   Secretary, preference shall be given to municipalities and other public
   corporations or agencies and to cooperatives and other nonprofit
   organizations. 43 U.S.C. sect. 485h(c). The preference clause requires 
   only  that public entities be given a preference over private entities in
   access to power generated by federal reclamation projects. Santa Clara v.
   Andrus, 572 F.2d 660 (9^th Cir. 1978). See also B-210656, Aug. 4, 1983.
   Other laws govern the pricing of these sales or leases. See 10 C.F.R. part
   903 (identifying such laws).

   Interior's Solicitor has concluded that section 342(j) does not provide
   the Secretary with authority to sell royalty-in-kind oil or gas at less
   than fair market value. Letter from R.M. "Johnnie" Burton, Director,
   Minerals Management Service, to Senator Ken Salazar, Jan. 31, 2006. The
   Solicitor found that "section 342(j) left unchanged all the provisions
   requiring sale of [royalty-in-kind] production at not less than the
   `market price' or `fair market value.'" Solicitor's Memo, at 15. We agree.

   We think section 342 should be read as a whole. The better reading is that
   it does not authorize the Secretary to dispose of royalty-in-kind oil and
   gas at less than fair market value. Certainly, section 342(j), standing
   alone without reference to fair market value, might be read as permitting
   a price preference.[9] To read section 342(j)

   alone, however, would require us to disregard section 342(b), which
   requires disposal at market price. It is a cardinal principle of statutory
   construction that a statute

   ought to be so construed that, if it can be prevented, no clause,
   sentence, or word shall be superfluous, void, or insignificant. TRW Inc.
   v. Andrews, 534 U.S. 19, 31 (2001), citing United States v. Menasche, 348
   U.S. 528, 538-39 (1955) ("[i]t is our duty `to give effect, if possible,
   to every clause and word of a statute'" (quoting Montclair v. Ramsdell,
   107 U.S. 147, 152 (1883))).

   We note that section 342(j) also requires the Secretary to submit a report
   to Congress assessing the effectiveness of granting preferences under
   section 342(j) and providing specific recommendations on the continuation
   of the authority to grant preferences. 42 U.S.C. sect. 15902(j)(2). In
   implementing section 342(j), the Department of Interior may wish to
   consult with the Department of Health and Human Services (HHS) on ways to
   offer an access preference to energy distributors. For example, HHS
   officials who administer the LIHEAP program explained to us informally
   that some states which receive LIHEAP block grants negotiate directly with
   utility vendors to provide discounted utility rates for LIHEAP-eligible
   households. Interior and HHS may wish to consider, for example, whether
   granting an access preference in the sale of royalty-in-kind gas to
   utilities that have offered discounted rates to states may indeed provide
   additional resources to the LIHEAP program. If, however, the Secretary
   determines that the section 342(j) preference provision does not
   effectively provide additional resources for any federal low-income energy
   assistance programs, the Secretary should report and make recommendations
   to Congress on legislative reforms to that authority.[10]

   CONCLUSION

   The issue posed presents a close question of statutory construction. The
   Department of Interior maintains that section 342(j) of the Energy Policy
   Act of 2005, which permits it to "grant a preference" in royalty oil and
   gas sales to provide additional resources to any federal low-income energy
   assistance program, does not permit such oil and gas sales at a discount
   to fair market value. Although not necessarily the

   only reading of the provision, we agree with Interior that this is the
   better reading of

   section 342(j). In our, and Interior's view, the phrase "grant a
   preference" in section 342 does not mean to grant a discount to fair
   market value where the same section requires sales or transfers to be at
   not less than market value and there is no indication that Congress
   intended "preference" to include a discount to fair market value.

   Gary L. Kepplinger

   General Counsel

   B-307767

   DIGEST

   Section 342(j) of the Energy Policy Act of 2005, 42 U.S.C. sect. 15902(j),
   does not authorize the Secretary of the Interior to dispose of in-kind
   royalty oil and gas at a discount to fair market value. Section
   342(b)(3)(A) requires the Secretary to sell all royalty oil and gas taken
   in kind at not less than fair market value. We agree with the Department
   of the Interior that the phrase "grant a preference" in section 342 does
   not mean to grant a discount to fair market value where the same section
   requires sales or transfers to be at not less than market value and there
   is no indication that Congress intended "preference" to include a discount
   to fair market value.

   ------------------------

   [1] Our practice when rendering opinions is to obtain the views of the
   relevant federal agency to establish a factual record and to elicit the
   agency's legal position on the subject matter of the request. GAO,
   Procedures and Practices for Legal Decisions and Opinions, GAO-06-1064SP
   (Washington, D.C.: Sept. 2006). In this instance, Senator Salazar's office
   provided us with a copy of a legal memorandum from the Office of the
   Solicitor, Department of the Interior, on the issue addressed in this
   opinion. Memorandum from Associate Solicitors, Divisions of Mineral
   Resources and General Law, Office of the Solicitor, Department of the
   Interior, to the Director, Minerals Management Service, Dec. 28, 2005
   (Solicitor's Memo) (concluding that section 342(j) does not provide the
   Department with the authority to receive less than fair market value for
   the royalty gas or oil). Through informal discussions, we confirmed that
   the December 28, 2005, memorandum continues to represent the Solicitor's
   interpretation of section 342(j).

   [2] MLLA is codified, as amended, in scattered sections of title 30 of the
   United States Code.

   [3] 43 U.S.C. sections 1331-1356a. 

   [4] See also 43 C.F.R. part 3100. See generally Department of the
   Interior, Bureau of Land Management, The Federal Onshore Oil and Gas
   Leasing System, available at
   www.blm.gov/nhp/300/wo310/oandg/docs/LeasingBrochure.pdf (last visited
   Oct. 27, 2006).

   [5] See also 30 C.F.R. parts 256, 260. See generally B-205877, Mar. 16,
   1982; Department of Interior, Minerals Management Service, Leasing Oil and
   Natural Gas Resources--Outer Continental Shelf, available at
   www.mms.gov/ld/PDFs/GreenBook-LeasingDocument.pdf (last visited Oct. 27,
   2006).

   [6] Pub. L. No. 109-58, title III, subtitle E, sect. 342, 119 Stat. 594,
   697 (Aug. 8, 2005), codified at 42 U.S.C. sect. 15902.

   [7] The Low-Income Home Energy Assistance Act of 1981, Pub. L. No. 97-35,
   title XXVI, 95 Stat. 357, 893 (Aug. 13, 1981), as amended, is codified at
   42 U.S.C. sections 8621-8630.

   [8] For a few preference provisions relating to the United States as a
   procurer of goods or services, see B-297889, B-297889.2, Mar. 20, 2006
   (citing preference provisions relating to procurement).

   [9] For example, both sections 342(h) and (i), regarding sales to small
   refineries and federal agencies, require sales at not less than market
   price. We are not persuaded, however, that the lack of a similar
   requirement from section 342(j) compels a construction of section 342(j)
   as permitting disposal of royalty oil and gas at less than market price.
   We will not loosely construe such statutory silence as meaning Congress
   intended to authorize disposal of federal property at less than market
   price, particularly where Congress's constitutional prerogative to dispose
   of United States property is implicated, U.S. Const. Art. IV, sect. 3, Cl.
   2. The Property Clause of the Constitution grants Congress power "to
   dispose of and make all needful Rules and Regulations respecting the
   Territory or other Property belonging to the United States."

   [10] For example, we note a bill pending in the House of Representatives,
   H.R. 5111, 109^th Cong. (2006), which would amend section 342(j) to
   authorize a discount in the sale of royalty-in-kind oil and gas.