Delegation of Royalty Management Functions

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Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations

between 9 a.m. and 4 p.m., Monday
through Friday.

DEPARTMENT OF THE INTERIOR

1. Soffritti, M., C. Maltoni, F. Maffei, and
R. Biagi, ‘‘Formaldehyde: An Experimental
Multipotential Carcinogen,’’ Toxicology and
Industrial Health, vol. 5, No. 5, pp. 699–730,
1989.
2. Til, H. P., R. A. Woutersen, V. J. Feron,
V. H. M. Hollanders, H. E. Falke, and J. J.
Clary, ‘‘Two-Year Drinking Water Study of
Formaldehyde in Rats,’’ Food Chemical
Toxicology, vol. 27, No. 2, pp. 77–87, 1989.
3. Memorandum of conference concerning
‘‘Formaldehyde;’’ meeting of the Cancer
Assessment Committee, FDA; April 24, 1991,
and March 4, 1993.
4. Bushy Run Research Center,
‘‘Ethylenediamine Dihydrochloride TwoYear Feeding Study in the Rat; Report 46–
27,’’ Mellon Institute-Union Carbide Corp.,
Export, PA.
5. Memorandum of conference concerning
‘‘Ethylenediamine Dihydrochloride
(EDA•2HCl);’’ meeting of the Cancer
Assessment Committee, FDA; June 7, 1996.

Minerals Management Service

List of Subjects in 21 CFR Part 175
Adhesives, Food additives, Food
packaging.
Therefore, under the Federal Food,
Drug, and Cosmetic Act and under
authority delegated to the Commissioner
of Food and Drugs, 21 CFR part 175 is
amended as follows:
PART 175—INDIRECT FOOD
ADDITIVES: ADHESIVES AND
COMPONENTS OF COATINGS
1. The authority citation for 21 CFR
part 175 continues to read as follows:
Authority: Secs. 201, 402, 409, 721 of the
Federal Food, Drug, and Cosmetic Act (21
U.S.C. 321, 342, 348, 379e).

2. Section 175.300 is amended in
paragraph (b)(3)(viii)(b) by
alphabetically adding a new entry to
read as follows:
§ 175.300 Resinous and polymeric
coatings.

*

*
*
*
*
(b) * * *
(3) * * *
(viii) * * *
(b) * * *
*
*
*
*
*
3-Pentadecenyl phenol mixture
(obtained from cashew nutshell liquid)
reacted with formaldehyde and
ethylenediamine in a ratio of 1:2:2 (CAS
Reg. No. 68413–28–5).
*
*
*
*
*
Dated: August 5, 1997.
William K. Hubbard,
Associate Commissioner for Policy
Coordination.
[FR Doc. 97–21292 Filed 8–11–97; 8:45 am]
BILLING CODE 4160–01–F

30 CFR Parts 227, 228, and 229
RIN 1010–AC25

Delegation of Royalty Management
Functions to States
Minerals Management Service,
Interior.
ACTION: Final rulemaking.
AGENCY:

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 [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.
SUMMARY:

l

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

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations
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
§ 227.100 with proposed § 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

43077

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

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Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations

modified § 227.300 to provide for
flexibility in this function. Section
227.300(a) shows the activities that
must be performed under an audit,
while § 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
§ 227.103(e). Therefore, we modified the
final rule by deleting the requirements
of §§ 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.

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations
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 § 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 § 227.103(i). Thus, we have
deleted the semicolon and the word
‘‘and.’’ In addition, to clarify what we
mean by the phrase in § 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:

43079

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.

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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 6month 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 90day 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 § 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
§ 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 §§ 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 § 227.105(d) in
response to this comment. See also
§ 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

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations
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 § 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 §§ 227.400(b)(1) and
(2) in this rulemaking. With respect to
§ 227.400(b)(1), RSFA provides, in the
section applicable to allocation of
production to leases within a unit or

43081

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
§ 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 § 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
§ 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

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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 § 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 § 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
§ 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
§ 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
§ 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 § 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

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations
management functions. We believe that
it may be helpful for States with
delegations and MMS to work
informally together through a Stateinitiated 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
§ 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 § 227.100
with this section for clarity purposes.
At § 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 § 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 § 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 § 227.103(e)(2), we deleted
paragraphs (ii) and (iv) in response to
comments.
At § 227.103(i), we added language to
clarify the responsibilities of handling
confidential information.

43083

Section 227.110 When and for how
long are delegation agreements
effective?
We changed the section title to add
clarity. We added information at
§ 227.110(a) to clarify our language
regarding the effective date for
delegation agreements. We added new
language at § 227.110(d) to clarify our
original proposal.
In response to comments, we added
§ 227.110(e) to further explain the
hearing process.
Section 227.111 Do existing delegation
agreements remain in effect?
We added language at § 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 § 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 § 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 § 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 § 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
§ 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
§ 227.301(f) of the proposed rule to
clarify our requirements regarding the
appeals process.

Section 227.105 What are the hearing
procedures?

Section 227.400 What functions may a
State perform in processing production
reports or royalty reports?
We modified § 227.400(a)(7) to clarify
our requirements regarding the appeals
process.

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

Section 227.401 What are a State’s
responsibilities if it processes
production reports or royalty reports?
We modified § 227.401(b) to clarify
our requirements for processing fatal

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

V. Procedural Matters

Executive Order 12866

The Regulatory Flexibility Act

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

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.

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.

We modified § 227.500(b) for further
clarity.
Section 227.501 What are a State’s
responsibilities to ensure that reporters
correct erroneous data?
We changed § 227.501(b) for
simplicity. We modified § 227.501(d) to
clarify our requirements regarding the
appeals process.
Section 227.600 What automated
verification functions may a State
perform?
We modified § 227.600(b)(4) as a
result of mining industry comments
regarding the delegation of additional
royalty management functions for solid,
geothermal, and § 8(g) leases.
We deleted § 227.600(b)(7) to correct
this final rulemaking because this item
is not a separate, identifiable automated
verification function. We modified
§ 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 § 227.601(d) to correct a
typographical error. We modified
§ 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
§ 227.700(a) as a result of mining
industry comments regarding the
delegation of additional royalty
management functions for solid,
geothermal, and § 8(g) leases.
Section 227.800 How will MMS
monitor a State’s performance of
delegated functions?
We modified § 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 § 227.802 for clarity purposes.
Section 227.804 How else may a
State’s delegation agreement terminate?
We modified § 227.804 as a result of
industry comments.

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 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.

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations
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
§ 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.
§ 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,

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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.
§ 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.
§ 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

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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
§ 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.
§ 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
§ 227.103 requires. Once you submit all
required information, MMS will notify
you of the date your application is
complete.

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations
Hearing Process
§ 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.

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.
§ 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 § 227.104. MMS may
extend the 90-day period with your
written consent.
§ 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.

Delegation Process

§ 227.109 What if the MMS Director denies
a State’s delegation proposal?

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

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.

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

§ 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
§ 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

43087

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
§ 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.

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(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
§ 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
§ 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 § 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 § 227.201 of this part.
§ 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
§§ 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.
§ 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;

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations
(3) Scheduling site visits; and
(4) Issuing record releases and audit
closure letters; and
(5) Holding closeout conferences.
§ 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.
§ 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.
§ 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.

43089

§ 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.
§ 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

43090

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations

information, and using the appropriate
format.

§ 227.601 What are a State’s
responsibilities if it performs automated
verification?

§ 227.600 What automated verification
functions may a State perform?

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.

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.

§ 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
§ 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 § 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.
§ 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
§ 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
§ 227.802 to terminate all or a part of
your delegation agreement;
(2) Withhold compensation provided
to you under § 227.112; and
(3) Perform the delegated function,
before terminating or without
terminating your delegation agreement,

Federal Register / Vol. 62, No. 155 / Tuesday, August 12, 1997 / Rules and Regulations
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.
§ 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
§ 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.
§ 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 § 227.106
of this part.
§ 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.
§ 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 § 228.3 is added to read as
follows:
§ 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 § 229.3 is added to read as
follows:
§ 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

43091

DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 356
Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds
(Department of the Treasury Circular,
Public Debt Series No. 1–93)
Bureau of the Public Debt,
Fiscal Service, Department of the
Treasury.
ACTION: Final rule.
AGENCY:

The Department of the
Treasury (‘‘Treasury’’ or ‘‘Department’’)
is publishing in final form an
amendment to 31 CFR part 356
(Uniform Offering Circular for the Sale
and Issue of Marketable Book-Entry
Treasury Bills, Notes, and Bonds). This
amendment makes the necessary
changes to accommodate three decimal
competitive bidding, in .005 percent
increments, for regular Treasury bills—
13-, 26-, and 52-week bills—and a
reduction in the net long position
reporting threshold amount for all
Treasury bill auctions (including cash
management bills). The final rule also
makes certain technical clarifications
and conforming changes.
DATES: The effective date is September
11, 1997, except for the change to
§ 356.13 (Net long position) which is
effective November 10, 1997.
ADDRESSES: This final rule has also been
made available for downloading from
the Bureau of the Public Debt’s Internet
site at the following address:
www.publicdebt.treas.gov.
FOR FURTHER INFORMATION CONTACT: Ken
Papaj (Director), Lee Grandy or Kurt
Eidemiller (Government Securities
Specialists), Department of the
Treasury, Bureau of the Public Debt,
Government Securities Regulations
Staff, (202) 219–3632.
SUPPLEMENTARY INFORMATION: 31 CFR
part 356, also referred to as the uniform
offering circular, sets out the terms and
conditions for the sale and issuance by
the Department of the Treasury to the
public of marketable Treasury bills,
notes, and bonds. The uniform offering
circular, in conjunction with offering
announcements, represents a
comprehensive statement of those terms
and conditions.1 The Department
SUMMARY:

1 The uniform offering circular was published as
a final rule on January 5, 1993 (58 FR 412).
Amendments to the circular were published on
June 3, 1994 (59 FR 28773), March 15, 1995 (60 FR
13906), July 16, 1996 (61 FR 37007), August 23,
1996 (61 FR 43626), October 22, 1996 (61 FR
54908), January 6, 1997 (62 FR 846), and May 8,
1997 (62 FR 25113).