State of Ohio v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior, Public Service Electric and Gas Co., Asarco Inc., Intervenors. National Wildlife Federation v. Department of the Interior and United States of America, Edison Electric Institute, American Mining Congress, Public Service Electric and Gas Co., Chemical Manufacturers Association, American Petroleum Institute, Asarco Inc., Intervenors. State of New Jersey, Department of Environmental Protection v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior and United States of America, Edison Electric Institute, American Petroleum Institute, American Mining Congress, Asarco, Inc., Public Service Electric and Gas Co., Chemical Manufacturers Association, Intervenors. State of Colorado v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior and United States of America, Edison Electric Institute, American Mining Congress, Public Service Electric and Gas Co., American Petroleum Institute, Asarco Inc., Chemical Manufacturers Association, Intervenors. State of New York v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior and United States of America, American Mining Congress, Public Service Electric and Gas Co., American Petroleum Institute, Edison Electric Institute, Asarco, Inc., Chemical Manufacturers Association, Intervenors. Commonwealth of Massachusetts v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior and United States of America, American Mining Congress, Public Service Electric and Gas Co., American Petroleum Institute, Edison Electric Institute, Asarco Inc., Chemical Manufacturers Association, Intervenors. People of the State of California, Ex Rel. John K. Van De Kamp, Attorney General of California v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior and United States of America, American Mining Congress, Public Service Electric and Gas Co., American Petroleum Institute, Edison Electric Institute, Asarco Inc., Chemical Manufacturers Association, Intervenors. Chemical Manufacturers Association v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior and United States of America, Edison Electric Institute, Asarco Inc., National Wildlife Federation, Intervenors. Public Service Electric & Gas Company, and Dana Corporation v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior and United States of America, Edison Electric Institute, Asarco Inc., National Wildlife Federation, Intervenors. National Wildlife Federation v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior, State of New York v. United States Department of the Interior, Manuel Lujan, Jr., Secretary of Department of the Interior

Petitioners are 10 states, three environmental organizations ("State and Environmental Petitioners"), a chemical industry trade association, a manufacturing company and a utility company ("Industry Petitioners"), who seek review of regulations promulgated by the Department of the Interior ("DOI" or "Interior") pursuant to Sec. 301(c)(1)-(3) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or the "Act"), as amended, 42 U.S.C. Sec. 9651(c). The regulations govern the recovery of money damages from persons responsible for spills and leaks of oil and hazardous substances, to compensate for injuries such releases inflict on natural resources.2 Damages may be recovered by state and in some cases the federal governments, as trustees for those natural resources.

Petitioners challenge many aspects of those regulations. State and Environmental Petitioners raise ten issues, all of which essentially focus on the regulations' alleged undervaluation of the damages recoverable from parties responsible for hazardous materials spills that despoil natural resources. Industry Petitioners attack the regulations from a different vantage point, claiming they will permit or encourage overstated damages. In addition, three public interest organizations ("Environmental Intervenors") defend the regulations from the attacks of Industry Petitioners, and a collection of corporations and industry groups ("Industry Intervenors") defend the regulations from the attacks of State and Environmental Petitioners.

We hold that the regulation limiting damages recoverable by government trustees for harmed natural resources to "the lesser of" (a) the cost of restoring or replacing the equivalent of an injured resource, or (b) the lost use value of the resource is directly contrary to the clearly expressed intent of Congress and is therefore invalid. We also hold that the regulation prescribing a hierarchy of methodologies by which the lost-use value of natural resources may be measured, which focuses exclusively on the market values for such resources when market values are available, is not a reasonable interpretation of the statute. We remand the record to DOI for a clarification of its interpretation of its own regulations concerning the applicability of the CERCLA natural resource damage provisions to privately owned land that is managed or controlled by a federal, state or local government. We reject all other challenges to Interior's regulations.

CERCLA, popularly known as Superfund, was enacted in 1980. Pub.L. No. 96-510, 94 Stat. 2767 (1980). Congress amended it in 1986, in the Superfund Amendments and Reauthorization Act ("SARA"), Pub.L. No. 99-499, 100 Stat. 1613 (1986). Unless otherwise specified, references to CERCLA in this opinion refer to the statute as amended.

CERCLA furnishes the executive branch with the authority to respond to actual and threatened releases of "hazardous substance[s]" and "pollutant[s] or contaminant[s]." Sec. 104(a)(1), 42 U.S.C. Sec. 9604(a)(1). Response actions may include both "removal" (i.e., cleanup of the spilled substance) and "remedial action" (e.g., dredging, repair of leaking containers, collection of rainfall runoff, relocation of displaced residents). Sec. 101(23)-(25), 42 U.S.C. Sec. 9601(23)-(25). CERCLA established the Superfund as a source of expeditious payment for response actions, although ultimately the liability for response costs is placed on specified classes of responsible parties: past and present owners and operators of vessels and facilities; waste generators or other persons who arranged for disposal, treatment or transport of hazardous substances; and transporters of hazardous substances. Secs. 111(a)(1), 107(a), 42 U.S.C. Secs. 9611(a)(1), 9607(a). Responsible parties may be required to pay the response costs or, in some cases, to perform the response actions themselves. Secs. 106(a), 107(a)(A)-(B), 42 U.S.C. Secs. 9606(a), 9607(a)(A)-(B).

The relevant provisions of CERCLA in this case, however, go beyond the mere removal or remedying of spills. CERCLA provides that responsible parties may be held liable for "damages for injury to, destruction of, or loss of natural resources, including the reasonable costs of assessing such injury, destruction, or loss resulting from such a release." Sec. 107(a)(C), 42 U.S.C. Sec. 9607(a)(C). Liability is to "the United States Government and to any State for natural resources within the State or belonging to, managed by, controlled by, or appertaining to such State." Sec. 107(f)(1), 42 U.S.C. Sec. 9607(f)(1).3 The Act provides for the designation of federal and state "trustees" who are authorized to assess natural resource damages and press claims for the recovery of such damages, both under CERCLA and under Sec. 311 of the Federal Water Pollution Control Act (commonly referred to as the "Clean Water Act"), 33 U.S.C. Sec. 1321. CERCLA Sec. 107(f)(2), 42 U.S.C. Sec. 9607(f)(2).

Congress conferred on the President (who in turn delegated to Interior) the responsibility for promulgating regulations governing the assessment of damages for natural resource injuries resulting from releases of hazardous substances or oil, for the purposes of CERCLA and the Clean Water Act's Sec. 311(f)(4)-(5) oil and hazardous substance natural resource damages provisions, 33 U.S.C. Sec. 1321(f)(4)-(5). These regulations originally were required to be in place by December 1982. Sec. 301(c), 42 U.S.C. Sec. 9651(c). CERCLA prescribed the creation of two types of procedures for conducting natural resources damages assessments. The regulations were to specify (a) "standard procedures for simplified assessments requiring minimal field observation" (the "Type A" rules), and (b) "alternative protocols for conducting assessments in individual cases" (the "Type B" rules). Sec. 301(c)(2), 42 U.S.C. Sec. 9651(c)(2). Both the Type A and the Type B rules were to "identify the best available procedures to determine such damages." Id. The regulations must be reviewed and revised as appropriate every two years. Sec. 301(c)(3), 42 U.S.C. Sec. 9651(c)(3). Under the Act, a trustee seeking damages is not required to resort to the Type A or Type B procedures, but CERCLA as amended provides that any assessment performed in accordance with the prescribed procedure is entitled to a rebuttable presumption of accuracy in a proceeding to recover damages from a responsible party. Sec. 107(f)(2)(C), 42 U.S.C. Sec. 9607(f)(2)(C).

In August 1986, Interior published a final rule containing the Type B regulations for natural resource damage assessments, the subject of this lawsuit. Shortly thereafter, in October 1986, Congress adopted SARA, amending the natural resources damages provisions of CERCLA in several respects. For example, SARA provided that assessments performed by state as well as federal trustees were entitled to a rebuttable presumption, it provided for the recovery of prejudgment interest on damage awards, and it proscribed "double recovery" for natural resources damages. Secs. 107(f)(2)(C), 107(a), 107(f)(1), 42 U.S.C. Secs. 9607(f)(2)(C), 9607(a), 9607(f)(1). SARA also amended Sec. 301(c) to require Interior to adopt any necessary conforming amendments to its natural resource damage assessment regulations within six months of the effective date of the amendments, "[n]otwithstanding the failure of the President to promulgate the regulations required under this subsection on the required [December 1982] date." Sec. 301(c)(1), 42 U.S.C. Sec. 9651(c)(1).

B. The Natural Resource Damage Assessment Regulations

Interior's response to its assigned task of promulgating regulations for assessing natural resource damages was, to put it charitably, relaxed. In January 1983, after the original statutory deadline had come and gone, Interior issued an advance notice of proposed rulemaking soliciting comments from the public on how to approach the development of the regulations. 48 Fed.Reg. 1,084 (1983). A second advance notice of proposed rulemaking seven months later summarized the comments received in response to the first notice. 48 Fed.Reg. 34,768 (1983). More than a year later, in January 1985, Interior published a notice inviting more public comments and suggesting meetings with interested members of the public. 50 Fed.Reg. 1,550 (1985).

In December 1985, five years after the enactment of CERCLA and three years after the statutory deadline, Interior published a proposed rule setting out (a) regulations concerning the assessment process generally (applicable to both Type A and Type B assessments) and (b) Type B rules in particular. 50 Fed.Reg. 52,126 (1985). A comment period originally set at 45 days was later extended an additional 15 days. 50 Fed.Reg. at 52,126; 51 Fed.Reg. 4,397 (1986).

Ultimately, on August 1, 1986, Interior published a final rule containing general natural resource damage assessment regulations as well as the Type B rules challenged in the present case. 51 Fed.Reg. 27,674 (1986) (codified at 43 C.F.R. Secs. 11.10-11.93 (1987)).

The assessment process established by the Type B regulations has four phases. In the "preassessment phase," a trustee that has become aware of a release of hazardous substances or oil makes an initial determination whether natural resources may have been affected. If further action is deemed warranted, the trustee enters the "assessment plan phase," in which an assessment strategy is mapped out. Next comes the "assessment phase," in which the trustee establishes whether there was in fact an injury to natural resources, quantifies the extent of the injury, and ascertains the appropriate dollar-amount of damages caused by the release. Finally, in the "post-assessment phase," the trustee assembles a report documenting the assessment process and presents the responsible party with a demand for payment of damages. See 51 Fed.Reg. at 27,726-27.

The August 1986 regulations were promptly challenged by state governments, environmental groups, industrial corporations and an industry group.

Shortly after the issuance of the August 1986 regulations, Congress amended CERCLA by enacting SARA. As noted above, SARA gave Interior six months in which to conform its natural resource damage assessment rules to the amended statute. In response to SARA, Interior issued revised rules (following notice and comment) in February 1988. 53 Fed.Reg. 5,166 (1988). A state government and an environmental group filed additional challenges to these revised rules, which this court consolidated with the original case.

Interior's formulation of Type A rules (governing simplified damage assessments) was handled in a separate rulemaking proceeding. Following notice and comment, a set of Type A rules was issued as a final rule in March 1987. 52 Fed.Reg. 9,042 (1987). The Type A rules are the subject of a separate petition for review, which was briefed and argued simultaneously with the present case and is decided today in State of Colorado v. Department of the Interior, 880 F.2d 481 (D.C.Cir. 1989).II. STANDARD OF REVIEW

In reviewing an agency's interpretation of a statute, we first determine "whether Congress has directly spoken to the precise question at issue." Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842, 104 S.Ct. 2778, 2781, 81 L.Ed.2d 694 (1984). If so, then both Interior and this court "must give effect to the unambiguously expressed intent of Congress." Chevron, 467 U.S. at 842-43, 104 S.Ct. at 2781; accord NLRB v. United Food & Comm'l Workers Union Local 23, 484 U.S. 112, 108 S.Ct. 413, 421, 98 L.Ed.2d 429 (1987). This is "Step One" of Chevron analysis.

Whether Congress has made its intent clear and unambiguous does not depend on whether a particular phrase of the statutory text standing all alone resolves the matter. Rather, the court must look beyond "the particular statutory language at issue" and examine "the language and design of the statute as a whole." K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 108 S.Ct. 1811, 1817, 100 L.Ed.2d 313 (1988). "It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme." Davis v. Michigan Dept. of Treasury, --- U.S. ----, 109 S.Ct. 1500, 1504, 103 L.Ed.2d 891 (1989). Moreover, as the Supreme Court indicated in Chevron and has reiterated since then, the reviewing court must "employ[ ] traditional tools of statutory construction"--including, when appropriate, legislative history--to determine whether Congress "had an intention on the precise question at issue." Chevron, 467 U.S. at 843 n. 9, 104 S.Ct. at 2781 n. 9; accord United Food & Comm'l Workers Union, 108 S.Ct. at 421; INS v. Cardoza-Fonseca, 480 U.S. 421, 446-48, 107 S.Ct. 1207, 1220-22, 94 L.Ed.2d 434 (1987). If the court, having studied the statutory text, structure and history, is left with the unmistakable conclusion that Congress had an intention on the precise question at issue, "that intention is the law and must be given effect." Chevron, 467 U.S. at 843 n. 9, 104 S.Ct. at 2781 n. 9.

If, on the other hand, the statute is ambiguous or is silent on a particular issue, this court must assume that Congress implicitly delegated to the agency the power to make policy choices that " 'represent[ ] a reasonable accommodation of conflicting policies that were committed to the agency's care by the statute.' " Chevron, 467 U.S. at 844-45, 104 S.Ct. at 2783, quoting United States v. Shimer, 367 U.S. 374, 383, 81 S.Ct. 1554, 1560, 6 L.Ed.2d 908 (1961). In that event, the court must defer to the agency's interpretation of the statute so long as it is reasonable and consistent with the statutory purpose. Id. This is "Step Two" of Chevron analysis.

We first take up the ten issues raised by State and Environmental Petitioners, followed by the one issue raised by Industry Petitioners.

The most significant issue in this case concerns the validity of the regulation providing that damages for despoilment of natural resources shall be "the lesser of: restoration or replacement costs; or diminution of use values." 43 C.F.R. Sec. 11.35(b)(2) (1987) (emphasis added).

State and Environmental Petitioners challenge Interior's "lesser of" rule, insisting that CERCLA requires damages to be at least sufficient to pay the cost in every case of restoring, replacing or acquiring the equivalent of the damaged resource (hereinafter referred to shorthandedly as "restoration"). Because in some--probably a majority of--cases lost-use-value will be lower than the cost of restoration, Interior's rule will result in damages award too small to pay for the costs or restoration. Petitioners point to a section of CERCLA providing that recovered damages must be spent only on restoration as evidence that Congress intended restoration cost-based damages to be the norm. As further proof of such a norm, the same section goes on to state that the measure of damages "shall not be limited by" the sums which can be used for restoration. Petitioners maintain that the "shall not be limited by" language clearly establishes restoration costs as a "floor" measure of damages. Petitioners also rely on the legislative history of CERCLA and of SARA, claiming that it reinforces the sense of the text and documents Congress' primary emphasis on restoration of natural resources. In particular, they point to a House report on SARA, insisting that it, together with the other statutory indicators, proves conclusively that Congress intended restoration costs to be a minimum measure of damages in natural resource cases.

Interior defends its rule by arguing that CERCLA does not prescribe any floor for damages but instead leaves to Interior the decision of what the measure of damages will be. DOI acknowledges that all recovered damages must be spent on restoration but argues that the amount recovered from the responsible parties need not be sufficient to complete the job. DOI suggests two alternative meanings of the "shall not be limited by" phrase that do not construe it as a damages floor. Finally, DOI argues that the legislative history, like the statutory text, is ambiguous and that Interior's rule for measuring damages is a reasonable one.

Although our resolution of the dispute submerges us in the minutiae of CERCLA text and legislative materials, we initially stress the enormous practical significance of the "lesser of" rule. A hypothetical example will illustrate the point: imagine a hazardous substance spill that kills a rookery of fur seals and destroys a habitat for seabirds at a sealife reserve. The lost use value of the seals and seabird habitat would be measured by the market value of the fur seals' pelts (which would be approximately $15 each)4 plus the selling price per acre of land comparable in value to that on which the spoiled bird habitat was located.5 Even if, as likely, that use value turns out to be far less than the cost of restoring the rookery and seabird habitat, it would nonetheless be the only measure of damages eligible for the presumption of recoverability under the Interior rule.

After examining the language and purpose of CERCLA, as well as its legislative history, we conclude that Interior's "lesser of" rule is directly contrary to the expressed intent of Congress.

A. The Contours of "the Precise Question at Issue"

Commencing our Chevron analysis, we must first decide exactly what "the precise question at issue" is in the present case. Chevron, 467 U.S. at 842, 104 S.Ct. at 2781. Much depends on accurately identifying that issue so as to decide whether Congress has "directly spoken" on it; if so, under Chevron 's "Step One" we must give effect to that unambiguously expressed intent. If not, we proceed instead to "Step Two" and determine whether Interior's construction of CERCLA is reasonable and consistent with the statutory purpose.

State and Environmental Petitioners posit that the precise question at issue in this case is what measure of damages must be applied in natural resource damage actions. They argue that Congress did address the precise question at issue by deciding that damages must at a minimum encompass the full cost of restoration in every case. See Pet. Br. 18-22. Therefore, petitioners say, this court must strike down the "lesser of" rule on Chevron Step One grounds.

Interior also assumes that the precise question at issue here is what measure of damages must be applied in natural resource damage actions. Interior's position, however, is that Congress did not definitively address that question. See Resp. Br. 25-27; 51 Fed.Reg. 27,705. To support this view, Interior points out that Congress did not choose a particular measure of damages, opting instead to authorize the President to draft regulations governing the assessment of damages. Sec. 301(c)(2), 42 U.S.C. Sec. 9651(c)(2) (regulations shall "identify the best available procedures to determine ... damages" and shall "take into consideration" certain listed factors, among others). Since Congress delegated the matter to the President (who turned it over to DOI), DOI argues that this case is governed by Chevron Step Two and that its "lesser of" rule must be upheld if not unreasonable or inconsistent with the statutory purpose.

We find both parties' arguments flawed in one important respect. Both fail to properly describe the "precise question at issue" in the "lesser-of" rule. That question is not what measure of damages should apply in any or all cases which are brought under the Act. As to that larger question, Interior is obviously correct in asserting that Congress delegated to it a considerable measure of discretion in formulating a standard. See Sec. 301(c)(2), 42 U.S.C. Sec. 9651(c)(2). The precise question here is a far more discrete one: whether DOI is entitled to treat use value and restoration cost as having equal presumptive legitimacy as a measure of damages.6

Interior's "lesser of" rule operates on the premise that, as the cost of a restoration project goes up relative to the value of the injured resource, at some point it becomes wasteful to require responsible parties to pay the full cost of restoration. See 51 Fed.Reg. at 27,704-05; 50 Fed.Reg. at 52,141. The logic behind the rule is the same logic that prevents an individual from paying $8,000 to repair a collision-damaged car that was worth only $5,000 before the collision. Just as a prudent individual would sell the damaged car for scrap and then spend $5,000 on a used car in similar condition, DOI's rule requires a polluter to pay a sum equal to the diminution in the use value of a resource whenever that sum is less than restoration cost. What is significant about Interior's rule is the point at which it deems restoration "inefficient." Interior chose to draw the line not at the point where restoration becomes practically impossible, nor at the point where the cost of restoration becomes grossly disproportionate to the use value of the resource, but rather at the point where restoration cost exceeds--by any amount, however small--the use value of the resource. Thus, while we agree with DOI that CERCLA permits it to establish a rule exempting responsible parties in some cases from having to pay the full cost of restoration of natural resources,7 we also agree with Petitioners that it does not permit Interior to draw the line on an automatic "which costs less" basis.

Interior's "lesser of" rule squarely rejects the concept of any clearly expressed congressional preference for recovering the full cost of restoration from responsible parties. The challenged regulation treats the two alternative measures of damages, restoration cost and use value, as though the choice between them were a matter of complete indifference from the statutory point of view: thus, in any given case, the rule makes damages turn solely on whichever standard is less expensive. (An analogy would be a government procurement rule that dictated the purchase of the lowest-priced goods, regardless of whether they were domestically made or imported.) If Congress, however, in enacting CERCLA, clearly expressed an intention that DOI's damage measurement rules incorporate a distinct preference for restoration cost over use value, then the "lesser of" rule is inconsistent with that intent. Congress' expressed preference would mean that restoration cost must normally be preferred over use value despite use value being the "lesser" figure, except in unusual situations where the disadvantages or expenses were extreme. (Returning to our analogy, the lowest-price procurement rule would be invalid under Chevron Step One if it were promulgated under a statute clearly mandating a preference for domestic goods.). Based on the discussion that follows, we conclude that CERCLA unambiguously mandates a distinct preference for using restoration cost as the measure of damages, and so precludes a "lesser of" rule which totally ignores that preference.

CERCLA provides that parties responsible for hazardous substance releases "shall be liable for ... damages for injury to, destruction of, or loss of natural resources, including the reasonable costs of assessing such injury, destruction, or loss resulting from such a release." Sec. 107(a)(C), 42 U.S.C. Sec. 9607(a)(C). The Regulations promulgated pursuant to Sec. 107(a)(C) are to identify procedures for measuring damages that "shall take into consideration factors including, but not limited to, replacement value, use value, and ability of the ecosystem or resource to recover." Sec. 301(c)(2), 42 U.S.C. Sec. 9651(c)(2). While CERCLA thus empowers DOI to formulate a measure of damages, several other provisions of the Act make it clear that replacement cost and use value are not to be accorded equal presumptive legitimacy in the process.

1. Section 107(f)(1) and the Measure of Damages

The strongest linguistic evidence of Congress' intent to establish a distinct preference for restoration costs as the measure of damages is contained in Sec. 107(f)(1) of CERCLA. That section states that natural resource damages recovered by a government trustee are "for use only to restore, replace, or acquire the equivalent of such natural resources." 42 U.S.C. Sec. 9607(f)(1). It goes on to state: "The measure of damages in any action under [Sec. 107(a)(C) ] shall not be limited by the sums which can be used to restore or replace such resources." Id.8

a. Limitation on Uses of Recovered Damages

By mandating the use of all damages to restore the injured resources, Congress underscored in Sec. 107(f)(1) its paramount restorative purpose for imposing damages at all. It would be odd indeed for a Congress so insistent that all damages be spent on restoration to allow a "lesser" measure of damages than the cost of restoration in the majority of cases. Only two possible inferences about congressional intent could explain the anomaly: Either Congress intended trustees to commence restoration projects only to abandon them for lack of funds, or Congress expected taxpayers to pick up the rest of the tab. The first theory is contrary to Congress' intent to effect a "make-whole" remedy of complete restoration,9<