BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 2453
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          Date of Hearing:  April 20, 2010

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                  AB 2453 (Tran) - As Introduced:  February 19, 2010

                                  PROPOSED CONSENT
           
          SUBJECT  :  OIL AND GAS: OPERATIONS: ENFORCEMENT ACTIONS

           KEY ISSUE  :  SHOULD THE APPEALS PROCESS FOR OIL, GAS, AND  
          GEOTHERMAL WELL OPERATORS SUBJECT TO REGULATORY ORDERS OF THE  
          DEPARTMENT OF CONSERVATION'S OIL AND GAS DIVISION (DOGGR) BE  
          SIGNIFICANTLY REVISED TO INCREASE DUE PROCESS PROTECTIONS IN A  
          MANNER THAT WOULD ALIGN IT WITH APPEALS PROCESSES EMPLOYED BY  
          OTHER STATE AGENCIES? 

           FISCAL EFFECT  :  As currently in print this bill is keyed fiscal.

                                      SYNOPSIS
          
          This non-controversial bill would significantly revise the  
          current appeals process for operators of oil, gas, and  
          geothermal wells to appeal a regulatory order issued by the  
          Department of Conservation, the sponsor of the bill.  According  
          to the author, these significant changes are intended to address  
          purported shortcomings in the oil and gas appeals statute raised  
          by the Court of Appeal in  Termo Company v. Bridgett Luther   
          (2008), 169 Cal. App. 4th 394.  First, the bill does away with  
          the current appeals process in which an appeal of an enforcement  
          order issued by the DOGGR supervisor may be made only by  
          requesting a hearing to be conducted by the Director of the  
          Department of Conservation-the same authority enforcing the  
          order.  In its place, this bill would establish a bifurcated  
          appeals process where certain appeals would be entitled to a  
          formal hearing before an administrative law judge in accordance  
          with the Administrative Procedures Act, with all other appeals  
          subject to an informal hearing before the Department Director.   
          In addition, this bill seeks to improve due process for well  
          operators, including requirements for additional information to  
          be stated in the order itself, increased notice of certain  
          actions, and clarifying timelines for decisions.  Finally, this  
          bill would expressly require the court, upon judicial review of  
          a decision by the Director, to inquire whether the Director  
          committed an abuse of discretion, as defined, and apply the  








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          "substantial evidence" standard of review.  This bill passed the  
          Assembly Natural Resources Committee by a 9-0 vote and has no  
          known opposition.

           SUMMARY  :  Significantly revises the current appeals process for  
          operators of oil, gas, and geothermal wells to appeal a  
          regulatory order issued by the Department of Conservation,  
          establishing specific due process requirements, including notice  
          and timelines for decisions, and the judicial standard of review  
          to be applied, as provided.  Specifically,  this bill  :   

          1)Requires that an enforcement order of the Supervisor to a well  
            operator shall state a clear and concise recitation of the  
            acts or admissions with which the operator is charged, the  
            statutory basis of the regulatory action, the associated  
            penalties and requirements the operator must take, and the  
            right of an operator to appeal.

           Authorizes a formal appeals process for an appeal of an  
          enforcement order issued by DOGGR, as follows  :

          2)Requires a hearing before an administrative law judge (ALJ),  
            pursuant to the procedures and timelines of the Administrative  
            Procedures Act (APA), for any order that:

             a)   Is issued upon a finding that a well is deserted and  
               should be abandoned.
             b)   Imposes a civil penalty greater than $10,000.
             c)   Rescinds an injection project that has already  
               commenced.
             d)   Imposes a left-of-well or life-of-production facility  
               bond.

          3)Provides that the Director shall either adopt or reject the  
            decision of the ALJ in writing, and allows the operator to  
            seek judicial review of an unfavorable result in court with a  
            30-day statute of limitations.  

          4)Prohibits the introduction of new evidence in court and limits  
            the court's inquiry to: (a) whether the Director acted in  
            excess of jurisdiction, (b) whether there was a fair hearing,  
            and (c) whether there is any prejudicial abuse of discretion.

           Authorizes an informal appeals process for an appeal of an  
          enforcement order issued by DOGGR, as follows  :








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          5)Repeals provisions requiring a hearing before the Supervisor  
            on appeal of an order, and eliminates the limitation that  
            judicial review of the supervisor's order may be sought only  
            by writ of mandate.  Instead, provides for a hearing before  
            the Director on appeal of any order that does not qualify for  
            a formal hearing.  

          6)Requires the Director to provide notice of the time and place  
            of the hearing within 30 days of service of the notice of  
            appeal, and requires the notice to inform the operator of the  
            right to file a written answer to the charges and to present  
            evidence at the hearing.

          7)Requires the Director to issue a written decision within 30  
            days after the hearing that either affirms, sets aside, or  
            modifies the order being appealed, and provides that this  
            decision shall supersede the order of the supervisor from  
            which the appeal was made.

          8)Provides that, after a hearing conducted by the Director, the  
            operator may obtain judicial review of the Director's decision  
            by filing a writ of administrative mandamus in the superior  
            court of the county.

          9)Provides that a penalty or charge imposed on the operator must  
            constitute a state tax lien against the property of the  
            operator if the operator does not appeal or seek judicial  
            review of an order, or if a court affirms the Director's  
            decision on appeal.  

          EXISTING LAW  :  

          1)Creates the Division of Oil, Gas, and Geothermal Resources  
            (DOGGR) in the Department of Conservation ("Department").   
            (Public Resources Code Section 3002.  All further references  
            are to this code unless otherwise noted.)

          2)Requires the Supervisor of DOGGR ("Supervisor") to supervise  
            the drilling, operation, maintenance, and abandonment of oil  
            and gas and geothermal wells, tanks and facilities, including  
            certain pipelines, to prevent damage to life, health,  
            property, and natural resources; damage to underground oil and  
            gas or geothermal deposits; loss of oil, gas, or reservoir  
            energy; and damage to underground and surface waters.   








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            (Section 3106.)

          3)Provides that, upon determination that a violation of  
            regulations for operation of oil and gas wells has been  
            committed by the person charged, the supervisor shall impose a  
            civil penalty of up to $25,000 upon the person, following  
            notice to the person and an opportunity to have an informal  
            hearing before the supervisor, to take place at least 30 days  
            after the notice.  (Section 3236.5(a).)

          4)Provides that an order of the supervisor imposing such a civil  
            penalty shall not be reviewable pursuant to the existing  
            appeals process, and that the person upon whom the civil  
            penalty is imposed may obtain judicial review only by seeking  
            a writ of mandate within 30 days of the final order.  (Section  
            3236.5(b).)

           Pursuant to the appeals process  available to oil and gas well  
          operators (Article 6 of Chapter 1 of Division 3 of the Public  
          Resources Code, commencing with Section 3350) and geothermal  
          well operators (Chapter 4 of Division 3 of the Public Resources  
          Code, commencing with Section 3762) to appeal an order of the  
          DOGGR Supervisor:

          5)Requires the well operator to either comply with the order or,  
            within 10 days from service, file with the supervisor a  
            written statement that the order is not acceptable, and that  
            appeal of the order is taken to the Director of DOGGR.   
            (Section 3350; Section 3762.)

          6)Requires the Director to call for a public hearing, which  
            shall be de novo, immediately upon filing of a notice of  
            appeal.  (Section 3351; Former Section 3763 (repealed.))

          7)Provides that within 10 days from the date of taking the  
            appeal, at least 20 days written notice shall be given to the  
            time and place of the hearing.  (Section 3352; Section 3764.)

          8)Requires the Director, after hearing, to affirm, set aside, or  
            modify the order from which the appeal is taken, and make a  
            written decision within 20 days (for oil and gas appeals) or  
            10 days (for geothermal appeals).  Provides that the decision  
            of the Director shall be final and subject only to review by  
            writ from the superior court.  (Section 3353; Section 3765.)









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          9)Provides that the decision of the Director may be reviewed by  
            writ from the superior court of the county, if taken within 10  
            days from the date the decisions was served on the appellant.   
            (Section 3354; Section 3766.)

          10)Prohibits any new or additional evidence from being  
            introduced in the court, but requires the cause to be heard  
            upon the record of the director.  Limits the scope of what may  
            be determined in the review to whether or not: (1) the  
            Director acted without or in excess of his jurisdiction; (2)  
            the order or decision was procured by fraud; (3) the order,  
            decision or rule is unreasonable; (4) the order, decision or  
            regulation is clearly unsupported by the evidence.  (Section  
            3355; Section 3767.)

          11)Requires any charge, including penalty and interest, imposed  
            by the Director to constitute a lien on real or personal  
            property if an operator does not seek judicial review of an  
            order or the Director's order is affirmed by a court.   
            (Section 3356; Section 3768.)

           COMMENTS  :  This bill would significantly revise the current  
          appeals process for operators of oil, gas, and geothermal wells  
          to appeal a regulatory order issued by the Department of  
          Conservation, the sponsor of the bill.  Instead, this bill would  
          establish a bifurcated appeals process where certain appeals  
          would be entitled to a formal hearing before an administrative  
          law judge, with all other appeals subject to an informal hearing  
          before the Department Director.  This bill would establish  
          specific due process requirements, including notice, timelines  
          for decisions, and judicial standard of review for each step in  
          the appeals process.  When all is said and done, this bill would  
          align the appeals process for DOGGR enforcement orders with  
          appeals processes already being used by some state agencies for  
          their regulated communities.

          The author writes in support:

               AB 2453 strengthens procedural safeguards and ensures  
               ample protection of due process rights for oil, gas,  
               and geothermal well operators subject to enforcement  
               orders issued by DOGGR.  Without these additional  
               procedural safeguards, courts must independently  
               determine whether certain enforcement actions are  
               merited, forgoing the regulatory expertise of DOGGR.   








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               AB 2453 will benefit operators subject to a regulatory  
               action greater protection by providing additional due  
               process safeguards not currently in statute.   
               Furthermore, the statutory changes sought in AB 2453  
               would align DOGGR's appeals process with the process  
               used by other State agencies.

          The author also states that these statutory changes are intended  
          "to address the procedural concerns raised by the court in the  
          Termo Company v. Luther decision, (as well as) similar concerns  
          that might be raised by other courts in the future."

           Background on Termo Company v. Luther:   In Termo Company v.  
          Bridgett Luther (2008), 169 Cal. App. 4th 394, the California  
          Court of Appeal (4th Dist.) held that the trial court  
          incorrectly applied a "substantial evidence" standard of review  
          when it upheld an order of the Director requiring an operator to  
          abandon 28 oil wells in Huntington Beach that were allegedly  
          posing a threat to public health and safety and the environment.  
           The Court of Appeal held that the trial court was not justified  
          in departing from the normal "independent judgment" standard of  
          review, required by Code of Civil Procedure Section 1094.5,  
          because the statute at issue (Public Resources Code Sections  
          3350 et seq.) does not contain sufficient procedural safeguards  
          that otherwise might allow the court to employ a "substantial  
          evidence" standard of review (pursuant to Tex-Cal Land  
          Management v. Agricultural Labor Relations Board (1979) 24  
          Cal.3d 335.)  The Court also found that although the applicable  
          Public Resource Code set forth a standard of review to be  
          applied, it does not clearly express a "substantial evidence"  
          standard, and that, in any case, the requisite due process  
          safeguards are lacking that would justify use of that standard.

           This bill increases due process safeguards and requires  
          application of the "substantial evidence" standard.   The Termo  
          court found that the applicable statutory scheme in the Public  
          Resources Code for appeals and review was less than optimal in  
          three areas.  First, the statute lacks adequate separation of  
          prosecutorial and adjudicatory functions.  Second, the statute  
          provides inadequate notice provisions and other procedural  
          safeguards.  Finally, the statute does not specify a clear  
          standard of review or the court to apply to the evidence on the  
          record.

          This bill proposes significant changes to the appeals and review  








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          process for oil and gas well operators (commencing with Section  
          3350) and geothermal well operators (commencing with Section  
          3762) to address the shortcomings raised by the Court in its  
          Termo decision.  First, the bill does away with the current  
          appeals process in which an appeal of an enforcement order  
          issued by the DOGGR supervisor may be made only by requesting a  
          hearing to be conducted by the Director of the Department of  
          Conservation-the same authority enforcing the order.  Currently,  
          judicial review of an unfavorable decision by the Director is  
          only available by seeking a writ of mandate in the superior  
          court.  Instead, this bill creates a bifurcated appeals process  
          which, depending on the penalties imposed by the order,  
          prescribes "formal" and "informal" processes for appealing  
          enforcement actions administratively prior to seeking judicial  
          review, if necessary.  (A general description of how formal and  
          informal hearings are conducted appears below.)  

          This bill also provides for greater notice and other due process  
          safeguards.  For example, the bill requires that an order of the  
          Supervisor to state a clear and concise recitation of the acts  
          or admissions with which the operator is charged, the statutory  
          basis of the regulatory action, the associated penalties and  
          requirements the operator must take, and the right of an  
          operator to appeal.  Importantly, it extends the statute of  
          limitations to file a lawsuit by 20 days (a total of 30 days)  
          which comports with other statutory schemes.  Most notably, for  
          an order that imposes penalties greater than $10,000 or could  
          terminate operations, this bill provides for a "formal" hearing  
          to be conducted by an administrative law judge subject to the  
          due process requirements of the Administrative Procedures Act  
          (APA).  After this hearing, the ALJ must issue a written  
          decision, which the Director must adopt or reject in writing.   
          The operator would still retain the ability to obtain judicial  
          review by writ if the Director's result is unfavorable to the  
          operator.  

          Finally, this bill amends the Public Resources Code to require a  
          court, upon judicial review of the decision of the Director, to  
          inquire whether the Director committed an abuse of discretion,  
          as defined, and expressly requires the court to apply the  
          "substantial evidence" standard.  Supporters of the bill contend  
          that the Termo decision unnecessarily requires a court to make a  
          judgment on the validity of certain DOGGR orders de novo,  
          whereas it is more reasonable to allow the court to give some  
          deference to the judgment and expertise of the Department in  








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          matters involving oil, gas, and geothermal well operations.  By  
          increasing due process safeguards in the appeals process, this  
          bill provides an appropriate basis to allow a court to employ  
          the "substantial evidence" standard.

           Formal and Informal Hearings  .  This bill revises the "informal  
          hearing" process under current law, and simultaneously creates a  
          separate "formal hearing" process for appeals of certain orders.  
           If the order imposes civil penalties greater than $10,000 or  
          threatens the economic viability of an operator (for example, an  
          order to abandon wells or to cease a project that has already  
          begun), then the operator is entitled to a formal hearing  
          conducted by an administrative law judge following procedures  
          prescribed by the APA.

          According to information provided by the author:

               Formal hearings under the APA are conducted by an  
               administrative law judge (ALJ) at the Office of  
               Administrative Hearings.  In essence, there is little  
               difference between a formal hearing and an informal  
               hearing: both sides are given an opportunity to  
               present their case through witness testimony and  
               documentary evidence.  Based on that evidence, the ALJ  
               drafts a written decision, which is subject to  
               approval by the Director of the Department.

               Formal hearings involve a number of procedural  
               requirements and mechanisms that differ from the  
               barebones procedural requirements of informal  
               hearings.  These procedural requirements and  
               mechanisms serve to ensure that the respondent has a  
               meaningful opportunity to be heard, guard against  
               abuse of process by the respondent, and ensure that  
               thorough and complete administrative record is  
               available to a reviewing court.

          By contrast, informal hearings are conducted by a delegate of  
          the Director (known as a hearing officer) who is a member of the  
          Department's executive staff.  The hearing officer is advised by  
          a Department attorney, both of whom are expected not to have  
          substantive involvement in the action being appealed.  Since  
          there are no regulations governing the hearing process, the  
          hearing officer is empowered to determine such things as  
          timeframes and admissibility of evidence.  These hearings are  








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          considered part of the administrative record so they are either  
          recorded or transcribed.  The appellant can choose to be legally  
          represented and is entitled to bring witnesses and to question  
          the Supervisor's witnesses.  After the hearing, the officer  
          issues a written decision based on the testimony and evidenced  
          presented.  Neither the hearing officer nor his legal advisor  
          should have had any substantive involvement in the matter being  
          considered.

           Several State Departments currently use bifurcated appeals  
          processes.   The Committee's research verifies the author's  
          contention that several state departments, including the  
          Departments of Food and Agriculture, Toxics Substances Control,  
          Public Health, and Pesticide Regulation all employ similar  
          bifurcated appeals processes allowing for hearings before either  
          the Director of the Department or an administrative law judge,  
          based on the severity of the enforcement action.  In addition,  
          the Division of Recycling in the Department of Conservation, the  
          sponsor of this bill, utilizes a similar process for appeals of  
          various penalties and certificate orders.  

          This bill would adopt a similar general model for DOGGR, without  
          replicating any single statutory scheme already in use.  This  
          bill would, however, create uniformity between the appeals  
          process specified for oil and gas well operators and that  
          specified for geothermal well operators.  Even though oil, gas,  
          and geothermal well operators are all subject to enforcement  
          orders by the DOGGR supervisor, the respective appeals statutes  
          are not identical for historical reasons because they were  
          enacted many years apart.
           
          REGISTERED SUPPORT / OPPOSITION  :   

           Support 

           Department of Conservation (sponsor)
          Western States Petroleum Association (WSPA)

           Opposition 

           None on file
           
          Analysis Prepared by  :  Anthony Lew / JUD. / (916) 319-2334