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Baxley v. Alaska Dep't. of Natural Resources (5/15/98), 958 P 2d 422
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
CLYDE BAXLEY, individually, )
and on behalf of the citizens ) Supreme Court No. S-8155
of the State of Alaska, and )
THE REPUBLICAN MODERATE PARTY,) Superior Court No.
a political group, on behalf ) 3AN-97-708 CI
of the citizens of the State )
of Alaska, )
) O P I N I O N
Appellants, )
) [No. 4988 - May 15, 1998]
v. )
)
STATE OF ALASKA, and )
JOHN SHIVELY, Commissioner, )
Department of Natural )
Resources, and BP EXPLORATION )
(ALASKA), INC., )
)
Appellees. )
______________________________)
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Michael J. Wolverton, Judge.
Appearances: Jody Patrick Brion, Leutwyler,
Brion & Associates, Anchorage, for Appellants.
Lawrence Z. Ostrovsky, Jeffrey D. Landry, Camille Oechsli,
Assistant Attorneys General, Anchorage, and Bruce M. Botelho,
Attorney General, Juneau, for Appellees State of Alaska and John
Shively. Jeffrey M. Feldman and Susan Orlansky, Young & Feldman,
Anchorage, and Alan L. Sullivan, Van Cott, Bagley, Cornwall &
McCarthy, Salt Lake City, Utah, for Appellee BP Exploration
(Alaska), Inc. John E. Havelock, Ely & Havelock, Anchorage, for
Amicus Curiae Oilwatch, Alaska, Inc.
Before: Matthews, Chief Justice, Compton,
Eastaugh, Fabe, and Bryner, Justices.
EASTAUGH, Justice.
I. INTRODUCTION
Citizen-taxpayers filed suit challenging a legislative
enactment approving and giving effect to modifications of four
State oil and gas leases in the Northstar Oil Field. Reasoning
that the modifications were a narrowly tailored response to a
unique situation, and that the legislature had not given the lessee
preferential treatment, the superior court granted summary judgment
for the defendants. Because we agree with that analysis, we
affirm.
II. FACTS AND PROCEEDINGS
A. Facts
The Northstar Unit is an oil field in the Beaufort Sea,
approximately six miles from Prudhoe Bay. It contains tracts of
land now subject to five State and two federal oil and gas leases.
In 1979 Amerada Hess submitted the winning bid in a sale of four of
the State's leases. They are the subject of this litigation.
The four leases were unusual, partially because the "net
profit share"was the bid variable for the 1979 auction. When the
State sells oil and gas leases, the Commissioner of the Alaska
Department of Natural Resources (DNR) analyzes the tracts of state
land to be leased and determines, in advance of the sale, which
lease terms to establish as fixed or variable. AS 38.05.180(f)(1),
(3); Hammond v. North Slope Borough, 645 P.2d 750, 763-64 (Alaska
1982). The Commissioner determines which bidding method (the
combination of fixed and variable lease terms) is in the state's
best interest. AS 38.05.180(f)(1); see also Hammond, 645 P.2d at
763-64 (discussing some of the factors the Commissioner considers
when selecting bidding methods); Kelly v. Zamarello, 486 P.2d 906,
912-13 (Alaska 1971). Typically, the bid variable is the bonus,
the royalty share, the net profit share, or some combination of
those terms. AS 38.05.180(f)(3)(A)-(G).
A royalty is "a share of the product or profit reserved
by the owner of land for permitting another to develop his land for
oil or gas." Earl A. Brown, The Law of Oil and Gas Leases sec.
6.00
(1967). Royalties are usually expressed as fractions (such as a
royalty of one-eighth of production), and they usually continue
throughout the life of the lease, whether the lessee reaps a net
profit or not. Kelly, 486 P.2d at 913 (citing Griffith v. Taylor,
291 S.W.2d 673, 676 (Tex. 1956)); see also Richard W. Hemingway,
The Law of Oil and Gas sec. 2.5, at 57-58 (3d ed. 1991). A bonus
is a definite sum (not a fraction of production), to be paid in
cash
or out of production, for the execution of the lease. Kelly, 486
P.2d at 913; Hemingway, The Law of Oil and Gas sec. 2.4, at 56.
A net profit share (NPS), like a royalty, is a percentage
of the lessee's production. 5 Eugene Kuntz, A Treatise on the Law
of Oil and Gas sec. 63.5, at 254 (1991) [hereinafter Kuntz]. The
lessor, however, only collects on the NPS interest when the
lessee's operations yield a profit, after the lessee has recouped
its expenditures for exploration and development. 11 Alaska
Administrative Code (AAC) 83.207-219; see also Kuntz sec. 63.5, at
254. The Alaska Administrative Code allows lessees to establish
special development accounts to recover all of their development
costs before any NPS payments become due to the State. 11 AAC
83.207-214.
The State and BP Exploration (Alaska), Inc. argue that
NPS terms allow the lessor to reap the benefits of rising oil
prices in the future, especially if the lessee finds cost-effective
ways of developing the field and extracting the oil. According to
the State and BP (collectively, the State), leases with high NPS
terms are the most risky for the lessor, because the lessor will
receive little or nothing if the field is unprofitable, or if the
lessee develops the field in an inefficient manner. See, e.g.,
Kuntz sec. 63.5, at 258 ("[T]he owner of the [net profit] interest
is
dependent upon the activity of the lessee to generate net
profits.").
During a brief period in the late 1970s, some lessors
experimented with NPS terms, which were, and still are,
controversial. [Fn. 1] The State notes that some observers
theorize that leases with high NPS terms have a fundamental
problem: under these leases, the lessors' and lessees' interests
are misaligned because "the oil company [has] no incentive to
develop the leases promptly or to economize costs during the
development." Furthermore, lessees receive very little income
after the NPS payments begin; for instance, according to the State,
the Northstar lessee was predicted to receive a profit of less than
fifty cents per barrel once the NPS payments began. When the
lessee begins paying a large percentage of its profits to the
State, along with taxes and royalties, it has very little incentive
to operate efficiently. The lessee also may be tempted to
discontinue its operations and abandon the field prematurely,
because it retains only a small portion of the profits after it has
recouped its development costs.
In the late 1970s, however, oil prices had been rising,
and experts predicted that they would climb to $60 to $100 per
barrel. In addition, research indicated that the Northstar Unit
contained massive reserves of oil -- perhaps up to one billion
barrels. [Fn. 2] Thus, in 1979 the State chose to auction four of
its Northstar lease tracts using NPS as the bid variable.
The four leases auctioned in 1979 had a fixed cash bonus
and a fixed royalty of 20%. [Fn. 3] Amerada Hess submitted the
winning bids, with NPS terms ranging from 85.26% to 93.2%. [Fn. 4]
The winning NPS figure averaged about 89%, meaning that after the
leaseholder recovered its expenses, the State would receive 89% of
the profits.
According to the State, from 1979 to 1994 Amerada Hess
invested approximately $260 million in attempting to develop the
Northstar Unit. Because of the NPS terms (which allowed the lessee
to recoup all of its development costs before beginning to make net
profit share payments to the State), the State's chances of
receiving the NPS payments seemed increasingly slim, as Amerada
Hess invested in development with little prospect of producing. A
1993 study by the federal Department of Energy concluded that
"Northstar was uneconomic largely due to the net profit provision."
Amerada Hess estimated that its development costs would approach
$1.4 billion. The combination of the development costs, the 89%
NPS, and the fact that optimistic projections of Northstar's
reserves and world oil prices had not materialized convinced
Amerada Hess to abandon its plans to develop its Northstar
holdings. Amerada Hess did not submit a required development plan
to the State, and DNR issued a notice of default to Amerada Hess in
November 1994.
Instead of curing the default, Amerada Hess sold its
interest in the leases to BP in 1995. [Fn. 5] The State was not
involved in the sale negotiations, nor were the terms or prices
disclosed to the public. [Fn. 6] BP submitted a brief plan of
development to DNR, which extended the time for submitting a more
detailed plan. In March 1995 BP submitted, and DNR approved, a
revised and more comprehensive three-year development plan. [Fn. 7]
The revised plan increased the development time from two years to
three years. Under this plan, production would probably not begin
until 2002.
Both DNR and BP asserted that BP's development of the
Northstar leases would be profitable under the original lease
terms. BP, however, has estimated that its rate of return later in
the life of the field would be 21% without the NPS lease terms, and
only 10% with the NPS terms. According to an Arthur D. Little Co.
report cited in findings of fact issued by the Senate Resources
Committee, oil companies tend to look for rates of return around
15%. In early 1995 BP intimated to DNR that it hoped to revise the
NPS terms. BP and DNR, however, decided not to pursue that issue
at that time.
Later that year, BP's president testified that
with the net profit arrangement in place, at
the level that it exists, BP would not be prepared to go ahead with
the development of a Northstar project, even though, if you run the
economics, you can show that the return on investment for the
project is a sound sort of return on investment.
BP made this announcement after DNR had approved the plan of
development (which included a three-year period in which very
little development would occur). [Fn. 8]
DNR's Petroleum Investment Manager stated that, to his
knowledge, this was the first time that a lessee had ever informed
the State "that it would be economical to produce a field, but that
it is unwilling to do so unless the State renegotiates its
competitively bid terms."[Fn. 9]
In the fall of 1995, after BP's announcement, DNR and BP
conducted confidential negotiations regarding possible amendments
to the leases. The negotiations yielded the following proposed
amendments: the State's NPS (which had averaged 89%) would be
eliminated; the State's royalties would be at least 20% for all of
the leases, and a variable "supplemental royalty"of 7.5% could be
added to that; a "use it or lose it"provision would be added,
allowing the State to terminate the leases (without litigation) if
BP did not begin development within a certain period; and BP
committed to employing Alaskans in the construction and operation
of its facilities.
The Commissioner has the statutory authority to make
changes to royalty provisions of oil and gas leases without
obtaining the legislature's approval. AS 38.05.180(j). [Fn. 10]
But the statute is silent on whether the Commissioner may amend NPS
provisions. The Commissioner therefore negotiated proposed terms
with BP and presented the negotiated proposed lease amendments to
the Alaska legislature for consideration. The lease amendments
were to take effect only upon approval by the legislature. After
investigation by committees in the House and Senate, and testimony
from DNR, BP, and the public, a bill for an act authorizing
amendment of the Northstar Unit leases (the Act) passed both houses
in May 1996. Governor Knowles signed the bill into law in July
1996. Since then, BP has approved development of the tracts covered
by the leases.
B. Proceedings
This case began in January 1997 when Clyde Baxley and the
Republican Moderate Party brought a declaratory judgment action
against the State and John Shively, Commissioner of the Department
of Natural Resources. [Fn. 11] Baxley and the Party (collectively
Baxley) asserted that they had citizen-taxpayer standing to
challenge the Act. Baxley argued that the Act violates the Uniform
Application Clause and the Public Notice Clause of the Alaska
Constitution, and that it violates competitive bidding statutes and
laws proscribing material amendments to competitively bid
contracts. [Fn. 12] Baxley also contended that the Commissioner
lacked the authority to modify the leases. BP intervened as a
party defendant under Alaska Rule of Civil Procedure 24.
The State moved to dismiss for lack of standing. Both
sides then filed motions for summary judgment. The superior court
found that all plaintiffs had standing as citizen-taxpayers. It
denied Baxley's motion for summary judgment and granted the State's
motion for summary judgment. The court concluded that the rule
against material amendments did not apply to amendments by the
legislature. The court also reasoned that the legislature had
conducted adequate public hearings, had not given BP privileged
status, and, in passing the Act, had created a narrowly tailored
response to a unique problem. Baxley appeals.
III. DISCUSSION
A. Standard of Review
We review a grant of summary judgment with our
independent judgment. Reeves v. Alyeska Pipeline Serv. Co., 926
P.2d 1130, 1134 (Alaska 1996). We will affirm a grant of summary
judgment if the evidence in the record, viewed in the light most
favorable to the non-moving party, fails to disclose a genuine
issue of material fact, and the moving party is entitled to
judgment as a matter of law. Metcalfe Inv., Inc. v. Garrison, 919
P.2d 1356, 1360 (Alaska 1996).
A party raising a constitutional challenge to a statute
bears the burden of demonstrating the constitutional violation. A
presumption of constitutionality applies, and doubts are resolved
in favor of constitutionality. A. Fred Miller, Attorneys at Law,
P.C. v. Purvis, 921 P.2d 610, 618 (Alaska 1996); Bonjour v.
Bonjour, 592 P.2d 1233, 1237 (Alaska 1979).
B. Standing
Following vigorous debate on the issue, the superior
court held that Baxley had standing as a citizen-taxpayer to
present the issues raised in his complaint. The State suggests on
appeal that we may resolve Baxley's Uniform Application Clause
claim "on standing grounds, without reaching the merits."
We decline to disturb the superior court's finding that
Baxley has standing as a citizen-taxpayer. [Fn. 13] A plaintiff
must meet two requirements in order to establish citizen-taxpayer
standing. First, the case "must be one of public significance."
Trustees for Alaska v. State, 736 P.2d 324, 329-30 (Alaska 1987).
A plaintiff who raises constitutional issues is likely to meet this
requirement. Id. Second, the plaintiff must be an "appropriate"
party to bring the case. Id. Appropriateness has three main
facets: the plaintiff must not be a "sham plaintiff"with no true
adversity of interest; he or she must be capable of competently
advocating his or her position; and he or she may still be denied
standing if "there is a plaintiff more directly affected by the
challenged conduct in question who has or is likely to bring suit."
Id. The citizen-taxpayer standing requirements ensure that the
plaintiff will serve as a true and strong adversary, even if the
conduct in question did not directly affect the plaintiff.
Baxley argues that the Act violates constitutional
provisions, may reduce the State's income, undermines public
confidence in the integrity of the bidding system, and violates the
public trust. Those issues have public significance. [Fn. 14] The
State asserted below that Baxley is not an appropriate plaintiff;
it suggested that a competing oil company, for instance, would have
been a more appropriate challenger. The mere possibility that
another party might sue, however, does not necessarily justify a
denial of standing. See Trustees, 736 P.2d at 330. Baxley's
interests are sufficiently adverse to those of the State and BP.
He is adequately represented and can advocate his position
competently. We conclude that the superior court did not err in
determining that Baxley has citizen-taxpayer standing.
C. The Uniform Application Clause
Baxley contends that the Act violates the Uniform
Application Clause of the Alaska Constitution. That clause
provides, "Laws and regulations governing the use or disposal of
natural resources shall apply equally to all persons similarly
situated with reference to the subject matter and purpose to be
served by the law or regulation." Alaska Const. art. VIII, sec.
17.
In recognition of the importance of citizens' equal
access to natural resources, we interpret the Uniform Application
Clause to require legislation dealing with natural resources to
satisfy a heightened level of equal protection scrutiny. Gilbert
v. State, 803 P.2d 391, 398 (Alaska 1990); Baker v. State, 878 P.2d
642, 644 (Alaska App. 1994).
The protections of the Uniform Application Clause,
however, extend only to persons similarly situated with respect to
the subject matter and purpose of the legislation. Alaska Const.
art. VIII, sec. 17; Reichmann v. State, 917 P.2d 1197, 1200 (Alaska
1996). "Concluding that two classes are not similarly situated
necessarily implies that the different legal treatment of the two
classes is justified by the differences between the two classes."
Shepherd v. State, 897 P.2d 33, 44 n.12 (Alaska 1995). [Fn. 15]
The superior court held that the Uniform Application
Clause does not apply because it found that BP's status as sole
lessee of the Northstar leases rendered it uniquely situated with
respect to the Act. [Fn. 16] The superior court also held that,
even if the Uniform Application Clause did apply, the Act would
satisfy the clause's equal protection requirements.
We agree that the Uniform Application Clause does not
apply. Land use statutes, for instance, sometimes favor existing
land users over others. See, e.g., AS 38.05.035(b)(5), .035(f).
We also allow some changes to existing lessees' competitively bid
contracts without requiring new public auctions. See KILA, Inc. v.
State, 876 P.2d 1102, 1108-09 (Alaska 1994) (upholding State's
decision to negotiate with successful bidder and accept a
substitute site for government building); Kenai Lumber Co. v.
LeResche, 646 P.2d 215, 218-22 (Alaska 1982) (allowing nonmaterial
modifications to a long-term timber contract).
Not all persons in the state with an interest in a
resource are similarly situated for purposes of the Uniform
Application Clause. [Fn. 17] BP, as sole lessee of the Northstar
leases, is uniquely situated with respect to the Act. Because no
other entity is similarly situated, we hold that the Act does not
violate the Uniform Application Clause.
D. Special Legislation
Baxley next argues that the Act was special legislation
prohibited by article II, section 19 of the Alaska Constitution.
Although we ordinarily do not consider on appeal issues not
presented to the lower court, [Fn. 18] we choose to address
Baxley's special legislation argument. It does not depend on new
facts, and it could have been gleaned from the pleadings because it
is closely related to Baxley's Uniform Application Clause argument
that the State gave BP privileged status. The issue therefore
satisfies the requirements of Zeman v. Lufthansa German Airlines,
699 P.2d 1274, 1280 (Alaska 1985) (discussing bases for reaching
appellate issues not preserved in lower court). Moreover, the
State has not suggested that it has been prejudiced by introduction
of this argument on appeal; on the contrary, it has conceded that
the court may properly consider this issue.
The Alaska Constitution states: "The legislature shall
pass no local or special act if a general act can be made
applicable. Whether a general act can be made applicable shall be
subject to judicial determination." Alaska Const. art. II, sec.
19.
We evaluate challenges under this provision according to the test
applied to nonsuspect classifications in equal protection cases.
[Fn. 19] State v. Lewis, 559 P.2d 630, 643 (Alaska 1977)
(upholding a three-way exchange of land, and the minerals it
contained, among the State of Alaska, the United States, and a
regional Native corporation); Boucher v. Engstrom, 528 P.2d 456,
463 (Alaska 1974) ("The classification must bear a reasonable and
proper relationship to the purposes of the act and the problem
sought to be remedied."). Thus, when the legislature has singled
out an area or group, we examine the
legislative goals and the means used to
advance them [to] determine whether the legislation bears a "fair
and substantial relationship"to legitimate purposes. If this
standard is satisfied, the bill will not be invalid because of
incidental local or private advantages. Legislation need not
operate evenly in all parts of the state to avoid being classified
as local or special.
Lewis, 559 P.2d at 643 (footnotes omitted). This is the "minimum
level of equal protection scrutiny in Alaska"; it is more demanding
than its federal counterpart. Principal Mut. Life Ins. v. State,
780 P.2d 1023, 1026 (Alaska 1989).
The State argues that the Act is not local or special
legislation because it "addresses a matter of statewide concern,"
and that, even though the Act focuses on one locality, it is
constitutional because the high NPS terms made these leases unique
and made general legislation inappropriate.
We conclude that the Act is not special legislation.
Several features of the Northstar leases distinguish them from the
State's other oil and gas leases. The Northstar leases were the
State's only oil and gas leases auctioned with NPS as the bid
variable. They are also the only State leases with NPS terms
greater than 85%. (NPS terms in most State leases average about
30% to 40%.) The high NPS terms present the State with a unique
problem: in the later years of the lease, the lessee would reap
only a slight profit from continuing to extract oil, giving the
lessee a strong incentive to abandon the field before extracting
all the oil. [Fn. 20]
Other features of the Northstar Unit distinguish these
leases. The development account the Northstar lessees amassed over
seventeen years is evidence of the difficulty of developing the
fields. Development of the Northstar Unit will require new
technology, including the first undersea pipeline in the Arctic
Ocean -- a technological advance that the legislature predicts will
increase the value of other North Slope leases and increase State
revenues. No State lessee had previously been obliged to develop
such holdings under such lease terms.
The legislature conducted numerous public hearings and
debates on the propriety of the proposed Act. It concluded that,
if the leases were not amended, production in the Northstar Unit
would probably not begin before 2002. It found that amending the
leases "will maximize the economic benefits of oil and gas
production to the people of the state by encouraging timely
production from the unit." It also concluded that BP's timely
development of the Northstar unit "may result in technological
breakthroughs and other cost savings that may make other
development opportunities in Alaska economically feasible." These
legislative findings express the legitimate purposes of encouraging
and providing for development of state resources for the benefit of
the people. See Alaska Const. art. VIII, sec.sec. 1-2. [Fn. 21]
Because the Act's exclusive focus on the Northstar leases
reflects their unique nature, and because the Act fairly and
substantially relates to legitimate state purposes, we hold that it
is not special legislation. See Lewis, 559 P.2d at 643.
E. The Commissioner's Authority
Baxley asserts that the Commissioner did not "have
statutory authority under AS 38.05.180(j) to unilaterally reduce
the net profit share in any Alaska oil lease."[Fn. 22] Baxley
argues that, although the Commissioner has statutory authority to
change royalty payments, the Commissioner has no statutory
authority to change NPS payments.
Baxley's argument, however, depends on our acceptance of
his characterization of the Commissioner's actions. The
Commissioner did not unilaterally reduce the NPS terms. The
Commissioner merely negotiated a proposed reduction, which the
legislature then approved. The negotiations would have had no
binding effect unless the legislature approved the proposed
amendments.
Baxley correctly notes that the Alaska Land Act (AS
38.05) does not grant or deny the Commissioner authority to
negotiate proposed changes in the NPS terms. But particular
provisions of the Alaska Land Act suggest that the Commissioner at
least had the authority to negotiate the amendments, whether or not
the Commissioner could have approved the lease amendments absent
the 1996 Act here at issue. The Commissioner has broad supervisory
power over the "administration of the division of lands." AS
38.05.020(a). The Commissioner may "enter into agreements
considered necessary to carry out the purposes of this chapter,
including agreements with federal and state agencies." AS
38.05.020(b)(2). The Commissioner may also "exercise the powers
and do the acts necessary to carry out the provisions and
objectives of this chapter." AS 38.05.020(b)(4). The
Commissioner's broad powers appear to us to include the authority
to negotiate with a lessee wishing to change the terms of its
lease; such negotiations with respect to a given lease and the
pertinent circumstances may be acts necessary to further the
objectives of the Alaska Land Act. We do not interpret AS
38.05.180(j) to prevent, expressly or impliedly, the Commissioner
from negotiating proposed NPS amendments subject to legislative
approval. [Fn. 23]
The Commissioner's broad statutory powers authorized
these negotiations; subsection .180(j) did not preclude them. We
hold that the Commissioner did not exceed his authority.
F. Public Notice Clause
Baxley argues that the Act violates the Public Notice
Clause of the Alaska Constitution, which provides, "No disposals or
leases of state lands, or interests therein, shall be made without
prior public notice and other safeguards of the public interest as
may be prescribed by law." Alaska Const. art. VIII, sec. 10.
Baxley
concedes that the public received notice of the legislature's
approval of the proposed amendments. [Fn. 24] He argues that the
public should have received notice before the negotiations, and
that, at the public hearings, other options (besides the proposed
amendments negotiated by DNR and BP) should have been presented.
The Alaska Constitution does not express a requirement of
pre-negotiation notice, and instead can be read to require notice
before the State commits to an agreement requiring it to dispose of
or lease state lands or interests in state lands. We assume for
sake of discussion that amendment of the lease terms was a disposal
or lease of an interest in state land. Regardless of the exact
extent and timing of the notice required by the Public Notice
Clause, we think that the process followed here satisfied that
clause. The Commissioner presented the proposed amendments to the
legislature, and nearly five weeks of spirited debate followed. We
disagree with Baxley's contention that the "ink on the agreement
was dry before it was submitted to the legislature": the public was
still free to comment on the bill, and the legislature was still
free to reject it. Because the public had ample opportunity to
comment on the proposed lease amendments before the legislature
authorized any binding changes, see Part III.D., supra, at 18, we
conclude that the State did not violate the Public Notice Clause.
G. Remaining Issues
1. Constitutional requirement of forfeiture provisions
Baxley argues that the Commissioner violated article
VIII, sections 8 and 11 of the Alaska Constitution by not requiring
BP to forfeit the leases after BP announced its intention not to
proceed with development. [Fn. 25] We decline to consider this
issue because Baxley did not preserve it below. See Brooks v.
Brooks, 733 P.2d 1044, 1053 (Alaska 1987). This issue presents a
new constitutional theory and raises new fact questions about
whether the leases' forfeiture provisions satisfied sections 8 and
11 and whether BP and the State complied with them. Because we
believe that the State could not have gleaned this new
constitutional argument from the pleadings, we decline to address
it. See Zeman, 699 P.2d at 1280 (discussing bases for reaching on
appeal issues not preserved below).
2. Anticipatory breach
Baxley contends that BP anticipatorily breached the lease
agreements, and that the State should have responded by rescinding
the leases. This contract law argument turns on new facts and
could not have been gleaned from the pleadings. See Zeman, 699
P.2d at 1280. Whether BP committed an anticipatory breach would
depend on the outcome of potential fact disputes and a different
body of case law. For example, it would raise the question of
whether BP's communication to the State was a definite and
unconditional repudiation of the contract, or merely an expression
of concern with certain provisions in the lease. See, e.g.,
Holiday Inns of Am., Inc. v. Peck, 520 P.2d 87 (Alaska 1974). We
therefore decline to address this argument.
3. Separation of powers
Baxley argues that the legislature unlawfully infringed
on the domain of the courts and violated separation of powers
principles. This argument is not closely related to Baxley's
superior court argument that the Commissioner lacked the authority
to negotiate lease amendments; instead, it attacks the
legislature's authority to consider the proposed amendments. This
argument could not have been gleaned from the pleadings. We
therefore decline to address it. See Zeman, 699 P.2d at 1280.
Moreover, Baxley seems to assume that the legislature
made a legal determination that the Commissioner's negotiations
with BP were constitutional. It appears, however, that the
Commissioner presented the legislature with proposed legislation,
and that the legislature conducted its own investigation and
debates on the propriety of the proposed Act and amendments. It
does not appear that the legislature impermissibly intruded on
judicial domain.
4. Rule against material amendments
Baxley asserts that the Act violates the rule against
material amendments to state contracts awarded through a public
bidding process. He reasons that the Act may undermine public
confidence in the integrity of the bidding process because it
changes the leases' terms instead of rescinding them and offering
them in a new auction.
In general, competitively bid contracts involving state
resources cannot be materially amended. Kenai Lumber Co. v.
LeResche, 646 P.2d 215, 221 (Alaska 1982). The rationale behind
this judicially created rule is that the amendment effectively
produces a new contract, which the State should award only after a
new round of public bidding. McKinnon v. Alpetco Co., 633 P.2d
281, 287 (Alaska 1981). [Fn. 26]
We have never applied the rule to bar contract amendments
approved by the legislature. [Fn. 27] The superior court held
that, "where the legislature itself amends a competitively bid
contract, employing the committee and public hearing process, the
need for the judiciary to protect legislative policy is essentially
obviated." The superior court also reasoned that, because the
legislature has the authority to create DNR and pass the leasing
statutes, it would be illogical to conclude that the legislature
lacks the authority to amend the leases. We agree. We believe the
legislature's hearing process satisfies the policy considerations
behind this rule. Therefore, we conclude that the material
amendments doctrine does not apply to amendments approved by the
legislature. We reject Baxley's challenge.
5. Public trust
Finally, Baxley argues that the amendments violate the
public trust doctrine. Baxley argues that the executive branch
violated the public trust by not determining whether similarly
situated parties existed before allocating resources to BP, by not
"telling BP to develop the field or lose it,"and by not offering
the Northstar leases in another sale in January 1995. [Fn. 28] He
asserts that he raised this claim in the superior court, but he
fails to cite where in the record he did so. Baxley did not raise
this argument in his points on appeal and made only passing
references to it in the superior court in connection with his
Uniform Application Clause argument. The State contends that
Baxley has raised this issue for the first time on appeal.
The public trust doctrine provides that the State holds
certain resources (such as wildlife, minerals, and water rights) in
trust for public use, "and that government owes a fiduciary duty to
manage such resources for the common good of the public as
beneficiary." McDowell v. State, 785 P.2d 1, 16 n.9 (Alaska 1989).
We apply basic principles of trust law to public land trusts.
State v. Weiss, 706 P.2d 681, 683 n.3 (Alaska 1985). One basic
principle is that, when a trustee has discretion, a court will only
review the trustee's acts for abuse of discretion. See William F.
Fratcher, 3 Scott on Trusts sec. 187, at 14-19 (4th ed. 1988); see
also Restatement (Second) of Trusts sec. 187 (1959).
Baxley's argument consequently turns on a new body of
case law, concerning fiduciary duty, and on new fact questions,
concerning possible abuse of the fiduciary's discretion. Because
this argument is not closely related to Baxley's trial court
arguments and could not have been gleaned from the pleadings, we
decline to address it. See Zeman, 699 P.2d at 1280.
IV. CONCLUSION
Because we reject Baxley's challenges to the Act, we
AFFIRM the superior court's grant of summary judgment to BP and the
State.
FOOTNOTES
Footnote 1:
Philip E. Sorenson, then-visiting Professor of Economics
at the University of California, Santa Barbara, addressed the
Alaska House of Representatives in 1979, prior to the Beaufort Sea
lease sale. He analyzed NPS interests in detail and urged the
legislature not to use NPS as the bid variable in the Northstar
auction.
Footnote 2:
In 1996 the Commissioner stated that the Northstar Unit's
reserves were estimated to contain 130 million barrels. The
State's Brief of Appellee, filed in 1997, asserts that oil prices
had settled around $18 per barrel.
Footnote 3:
The State auctioned its fifth Northstar lease in 1983,
using a bonus as the variable term, a fixed royalty of 12.5%, and
a fixed NPS of 40%.
Footnote 4:
Amerada Hess had the largest, but not the only, share of
the four Northstar leases. The other original lessees were Shell
Oil Co., Enterprise Oil Co., and Murphy Oil Co. Amerada Hess
bought Enterprise's interest for $2 million in 1990.
Footnote 5:
Shell also sold its interests to BP.
Footnote 6:
Oil and gas lessees often sell interests in leases without the
State's involvement; the State may, however, be required to approve
assignments resulting from the sale.
Footnote 7:
The plan called for data gathering, 3-D seismic
acquisition, and construction permit acquisition. The projected
three-year cost of these steps was $12 million.
Footnote 8:
All of the State's oil and gas leases contain an implied
covenant for lessees "to diligently explore and develop their
leases." BP, however, could probably fulfill that obligation by
meeting the requirements of its DNR-approved three-year plan.
Footnote 9:
The lease between Amerada Hess and the State allowed
assignment and conveyance, but required the new lessee to be bound
by all of the terms of the original lease. The lease provides, in
part:
This lease, or any undivided interest herein,
may, with the approval of the State, be assigned, subleased or
otherwise transferred . . . . No assignment, sublease or other
transfer of an interest in this lease, including assignments of
working or royalty interests and operating agreements and
subleases, shall be binding upon the State unless approved by the
State. . . . All covenants, conditions and agreements contained in
this lease shall extend to and be binding upon the heirs,
administrators, successors, and assigns of the State and/or Lessee.
Footnote 10:
AS 38.05.180(j) provides, in part:
The commissioner
(1) may provide for an increase or
decrease or otherwise modify royalty, to allow for production that
would not otherwise be economically feasible, on individual leases
. . . .
(2) may not grant a royalty modification
unless the lessee or lessees requesting the modification make a
clear and convincing showing that a modification of royalty meets
the requirements of this subsection and is in the best interests of
the state . . . .
Footnote 11:
The Republican Moderate Party claims to be a nonprofit
political group. The Republican Party of Alaska asserted below
that the Republican Moderate Party admits it is not a political
party, and that it has no relation to the Republican Party of
Alaska. The Republican Party of Alaska has disclaimed interest in
this case.
Footnote 12:
Baxley also asserted, but later withdrew, a claim that
the Act violated the Privileges and Immunities Clauses of the
Alaska and United States Constitutions, and the Commerce Clause of
the United States Constitution.
Footnote 13:
We review de novo a finding of standing. Earth Movers of
Fairbanks, Inc. v. Fairbanks N. Star Borough, 865 P.2d 741, 742 n.5
(Alaska 1993) (citing Langdon v. Champion, 745 P.2d 1371, 1372 n.2
(Alaska 1987)).
Footnote 14:
See, e.g., Trustees for Alaska v. State, 736 P.2d 324,
330 (Alaska 1987) (granting citizen-taxpayer standing to a
coalition of environmental, Native, and fishing groups challenging
the States's mineral leasing system); State v. Lewis, 559 P.2d 630,
634-36 (Alaska 1977) (granting citizen-taxpayer standing for
challenge of a three-way land trade involving the State, the
federal government, and a Native corporation).
Footnote 15:
The State argues that no other entity is similarly
situated with respect to the Act.
Baxley argues that similarly situated persons
disadvantaged by the Act include: "1) all original bidders on
Northstar; 2) all possible bidders at a potential rebidding of
Northstar; 3) all potential bidders who might wish to bid for the
rights given to BP . . . and 4) all citizen-taxpayers of the State
of Alaska, who have a personal and individual stake in the fair
allocation of Alaska resources."
Footnote 16:
We apply our independent judgment to the question whether BP
is uniquely situated with respect to the Act. See Luedtke v.
Nabors Alaska Drilling, Inc., 834 P.2d 1220, 1223 (Alaska 1996)
(noting that we review a trial court's application of law to facts
with our independent judgment).
Footnote 17:
See, e.g., Reichmann v. State, 917 P.2d 1197, 1200 (Alaska
1996) (upholding differential treatment of residential and
recreational users of lakeshore land); Shepherd v. State, 897 P.2d
33, 43-44 (Alaska 1995) (upholding Alaska Board of Game regulations
giving hunting preference to residents over nonresidents); Tongass
Sport Fishing Ass'n v. State, 866 P.2d 1314, 1318 (Alaska 1994)
(upholding salmon harvesting regulation giving preference to
commercial fishers because sport and commercial fishers are not
similarly situated); Gilbert v. State, 803 P.2d 391, 399 (Alaska
1990) (upholding distinction in harvest quotas for two fisheries
based on "biological spawning patterns").
Footnote 18:
See Brooks v. Brooks, 733 P.2d 1044, 1053 (Alaska 1987).
Footnote 19:
Baxley is correct in pointing out that this court has
adopted a sliding scale analysis to determine the level of scrutiny
to apply to equal protection claims. See State v. Enserch Alaska
Constr., 787 P.2d 624, 631 (Alaska 1989). He asserts that the
court should use the sliding scale when analyzing his special
legislation challenge. Baxley argues that, to determine where on
the sliding scale the state and individual interests fall, the
court should apply the Uniform Application Clause, which, he
reasons, requires a showing of an important state interest and no
less restrictive alternative to further it.
Our decisions interpreting article II, section 19 of the
Alaska Constitution, however, have applied the less rigorous test
used for nonsuspect classifications in equal protection cases. See
Lewis, 559 P.2d at 643; Abrams v. State, 534 P.2d 91, 94-95 (Alaska
1975). We will analyze this claim under the standard applied in
Abrams and Lewis because they deal specifically with article II,
section 19 challenges instead of equal protection challenges.
Footnote 20:
BP's president stated, "Once the net profit interest cuts in,
. . . some 90% or so of the revenue stream to the [Northstar
lessee] would effectively dry up, and that would lead to the
premature shut-down of the field." He asserted that "it would not
be acceptable for BP, or I believe any other reputable oil company
to continue to operate the field."
Footnote 21:
Article VIII, section 1 of the Alaska Constitution provides:
"It is the policy of the State to encourage the settlement of its
land and the development of its resources by making them available
for maximum use consistent with the public interest."
Article VIII, section 2 of the Alaska Constitution
states: "The legislature shall provide for the utilization,
development, and conservation of all natural resources belonging to
the State, including land and waters, for the maximum benefit of
its people."
Footnote 22:
AS 38.05.180(j) is set out, in part, at note 10, supra.
Footnote 23:
We do not decide here whether the Commissioner would have had
the authority to modify the NPS terms without legislative approval.
Footnote 24:
Baxley argues, "The only aspect of Northstar for which the
public received notice was the subsequent legislative ratification
of a deal already struck, an agreement already made."
Footnote 25:
Article VIII, section 8 of the Alaska Constitution provides:
The legislature may provide for the leasing
of, and the issuance of permits for exploration of, any part of the
public domain or interest therein, subject to reasonable concurrent
uses. Leases and permits shall provide, among other conditions,
for payment by the party at fault for damage or injury arising from
noncompliance with terms governing concurrent use, and for
forfeiture in the event of breach of conditions.
Article VIII, section 11 of the Alaska Constitution
provides, in part:
Discovery and appropriation shall be the basis
for establishing a right in those minerals reserved to the State
which, upon the date of ratification of this constitution by the
people of Alaska, were subject to location under the federal mining
laws. Prior discovery, location, and filing, as prescribed by law,
shall establish a prior right to these minerals and also a prior
right to permits, leases, and transferable licenses for their
extraction. Continuation of these rights shall depend upon the
performance of annual labor, or the payment of fees, rents, or
royalties, or upon other requirements as may be prescribed by law.
Footnote 26:
We have explained:
This rule has been judicially imposed in order
to guard against circumvention of competitive bidding requirements.
Competitive bidding itself is designed to ensure that government
obtains the most favorable terms possible in its contracts, and to
protect the public from the possibility of favoritism, fraud, and
corruption on the part of public officials.
Kenai Lumber Co. v. LeResche, 646 P.2d 215, 220 (Alaska 1982).
Footnote 27:
See, e.g., KILA, Inc. v. State, 876 P.2d 1102 (Alaska
1994); Kenai Lumber, 646 P.2d at 217-23; McKinnon v. Alpetco Co.,
633 P.2d 281, 285 (Alaska 1981)
Footnote 28:
Baxley also seems to suggest that the legislature breached the
public trust. Because he does not develop this argument, we
decline to address it. See State v. O'Neill Investigations, Inc.,
609 P.2d 520, 528 (Alaska 1980) (declining to consider an
inadequately briefed argument).
