BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE JUDICIARY COMMITTEE
                           Senator Ellen M. Corbett, Chair
                              2009-2010 Regular Session


          AB 2453 (Tran)
          As Introduced
          Hearing Date: June 29, 2010
          Fiscal: Yes
          Urgency: No
          BCP:jd
                    

                                        SUBJECT
                                           
                     Oil and Gas Operations: Enforcement Action

                                      DESCRIPTION  

          This bill would significantly revise the current appeals process  
          for operators of oil, gas, and geothermal wells in order to  
          respond to a recent decision by the Fourth Circuit Court of  
          Appeal.  Specifically, this bill would, among other things:
                 require administrative orders to provide a clear and  
               concise recitation of the acts or omissions with which the  
               operator is charged, and the right to file an appeal; 
                 bifurcate the process for hearing any appeals into a  
               formal and informal process; and
                 provide that judicial review shall be limited to whether  
               the director acted without or in excess of jurisdiction,  
               whether there was a fair hearing, and whether there is any  
               prejudicial abuse or discretion.

                                      BACKGROUND  

          The Division of Oil, Gas, and Geothermal Resources (DOGGR), part  
          of the Department of Conservation, is headed by the State Oil  
          and Gas Supervisor.  The Supervisor oversees the drilling,  
          operation, maintenance, and removal or abandonment of tanks,  
          facilities, wells, and certain pipelines.  Upon determination  
          that a violation of oil and gas regulations has occurred, the  
          supervisor may impose a civil penalty of up to $25,000 for each  
          violation.  Operators may appeal the orders of a supervisor  
          through an administrative appeals process, and may seek judicial  
          review of the administrative decision.

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          This bill seeks to substantially revise that administrative  
          appeal process in response to the holding of the Fourth Circuit  
          Court of Appeal in Termo Company v. Bridgett Luther (2008), 169  
          Cal.App.4th 394.  That decision found that the current statutory  
          administrative procedures lack due process protections and  
          clarity.  This bill seeks to correct those deficiencies by  
          creating a bifurcated appeals process, providing greater notice,  
          and additional time to seek judicial review.

          This bill was approved by the Senate Committee on Natural  
          Resources and Water on June 22, 2010.

                                CHANGES TO EXISTING LAW
           
           Existing law  establishes the Division of Oil, Gas, and  
          Geothermal Resources (DOGGR) in the Department of Conservation  
          for purposes of regulating the operation of oil, gas, and  
          geothermal wells, as specified.  (Pub. Res. Code Sec. 3000 et  
          seq.)

           Existing law  requires the Supervisor of the DOGGR (supervisor)  
          to supervise the drilling, operation, maintenance, and  
          abandonment of wells and the operation, maintenance, and removal  
          or abandonment of tanks and facilities attendant to oil and gas  
          production, so as to prevent, as far as possible, damage to  
          life, health, property, and natural resources, as specified.  
          (Pub. Res. Code Sec. 3106.)

           Existing law  provides that, upon determination that a violation  
          of regulations for the 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, 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.   
          (Pub. Res. Code Sec. 3236.5.(a).) 

           Existing law  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.   
          (Pub. Res. Code Sec. 3236.5(b).)

           Existing law  establishes the procedure for oil, gas, and  
          geothermal well operators to appeal an order of the DOGGR  
          supervisor, as follows:
                                                                      



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                 Operators must either comply with the order or, within  
               10 days of 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.  (Pub. Res.  
               Code Secs. 3350, 3762.)
                 The Director of Conservation (director) must call for a  
               public hearing, which shall be de novo, immediately upon  
               filing a notice of appeal by an oil or gas well operator.   
               (Pub. Res. Code Sec. 33511.)
                 At least 20 days written notice of the time and place of  
               the hearing shall be given to the appellant.  That notice  
               must be given within 10 days from the date of taking the  
               appeal.  (Pub. Res. Code Secs. 3352, 3764.)
                 The director, after hearing, must 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).  That decision is  
               final and subject only to review by writ from the superior  
               court.  (Pub. Res. Code Secs. 3353, 3765.)
                 The decision of the director may be reviewed by a writ  
               from the superior court of the county, if taken within 10  
               days from the date the decision was served upon the  
               appellant.  (Pub. Res. Code Secs. 3354, 3766.)
                 No new or additional evidence shall be introduced in the  
               court, and the cause shall be heard upon the record of the  
               director.  The review may not be extended further than to  
               determine 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. (Pub. Res. Code Secs.  
               3355, 3767.)
                 Any charge, including penalty and interest, imposed by  
               the director shall 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.   
               (Pub. Res. Code Secs. 3356. 3768.)

           This bill  would significantly revise the above appeals process  
          for operators of oil, gas, and geothermal wells as follows:
                 Require an order to provide a clear and concise  
               recitation of the acts or omissions 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.
                 Provide that the filing of a written notice of appeal  
                                                                      



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               shall operate as a stay of the order, except when an order  
               for remedial work or an order to cease and desist  
               operations is issued as an emergency order, as specified.
                 Bifurcate the process for hearing any appeals into a  
               formal and informal appeals process based on severity of  
               the action.

             Formal appeals process  

                 Require a hearing before an administrative law judge  
               pursuant to the Administrative Procedures Act (APA), for  
               any order that: (1) is issued pursuant to a finding that  
               the operator's wells are deserted and should be plugged and  
               abandoned; (2) imposes a civil penalty of more than  
               $10,000; (3) rescinds an injection project that has already  
               commenced; or (4) imposes a life-of-well or  
               life-of-production facility bond.
                 An operator may obtain judicial review of the above  
               decision pursuant to the procedures in the APA.

             Informal appeals process
             
                 For appeals that do not qualify for a formal hearing,  
               the hearing shall be conducted by the Director.  The  
               Director must provide notice of the time and place of the  
               hearing within 30 days of service of the notice of appeal;  
               that notice must inform the operator of their right to file  
               a written answer to the charges and to present evidence at  
               the hearing.
                 Within 30 days after the close of a hearing, the  
               director must issue a written decision that either affirms,  
               sets aside, or modifies, the order being appealed.  That  
               decision must be filed with the supervisor and served on  
               the operator, at which time shall be deemed final, and  
               shall supercede the order of the supervisor from which the  
               appeal was made.
                 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.

           This bill  would additionally provide that when an operator seeks  
          judicial review of a decision of the director, including a  
          decision following a hearing conducted in accordance with the  
          APA, the court shall hear the cause on the record before the  
          director or an administrative law judge.  
                                                                      



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                 New or additional evidence shall not be introduced in  
               court, and the court's inquiry shall extend to whether the  
               director acted without or in excess of jurisdiction,  
               whether there was a fair hearing, and whether there is any  
               prejudicial abuse of discretion.
                 Abuse of discretion would be established if the  
               administrative proceeding has not been conducted in the  
               manner required by law, the decision is not supported by  
               the findings, or the findings are not supported by  
               substantial evidence in light of the whole record.

           This bill  would provide that a penalty or charge imposed on the  
          operator shall 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.  

           This bill  would authorize the director to adopt emergency  
          regulations for the purposes of implementing the above  
          provisions.  Those regulations must be filed with, but not be  
          repealed by, the Office of Administrative Law and shall remain  
          in effect until revised by the director.

                                        COMMENT
           
          1.   Stated need for the bill  

          According to the author:

            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.   The amendments sought in AB  
            2453 will benefit operators subject to a regulatory action  
            greater protection by providing additional due process  
            safeguards not currently in statute.  

          2.   Termo Company v. Bridgett Luther  

          This bill seeks to respond to deficiencies found in the current  
          appeals process by which oil, gas, and geothermal operators  
          appeal orders from the State Oil and Gas Supervisor.  In Termo  
          Company v. Bridgett Luther (2008), 169 Cal. App.4th 394, the  
                                                                      



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          Fourth District Court of Appeal found that the existing  
          provisions do not provide the requisite safeguards to assure the  
          essentials of due process.  (Id. at 411.)  That case involved  
          the appeal of an administrative order that directed the plugging  
          and abandonment of 28 oil wells - that order was objected to by  
          parties that sought to resume production from those wells.  The  
          court determined that the right at issue was a fundamental  
          vested right and applied an "independent judgment standard of  
          review" (as opposed to a substantial evidence review) because  
          the Public Resources Code provisions do not satisfy the due  
          process requirements of Tex-Cal Land Management v. Agric. Labor  
          Relations Bd. (1979) 24 Cal.3d 335.  (Tex-Cal requires a statute  
          to assure the essentials of due process, and provides that the  
          requirement is satisfied "when the statutory scheme in question  
          provides the parties to the administrative proceeding with  
          procedural safeguards equivalent to those provided in Labor Code  
          section 1140 et seq." Termo Co. at 411.)  Those two standards  
          differ in that the "independent judgment" standard permits the  
          court to independently review the evidence and make a decision,  
          while the "substantial evidence" standard defers to the judgment  
          of the agency and only looks to whether there is substantial  
          evidence supporting the decision.

          As further background, case law interpreting Code of Civil  
          Procedure Section 1094.5 generally provides that when a  
          fundamental vested right is at issue, an independent judgment  
          standard of review shall be applied.  An exception to that  
          general rule arises if the Legislature mandates a substantial  
          evidence standard of review.  Even when mandating that review,  
          the substantial evidence standard only applies when certain due  
          process safeguards are met.  In applying the "independent  
          judgment standard of review" in the Termo case, the court  
          stated:

            Even were we to agree that Public Resources Code section  
            3355, subdivision (d) articulated a substantial evidence  
            standard of review, we still would not hold that standard  
            applicable given the statutory scheme as a whole. This is  
            because the apposite Public Resources Code provisions do not  
            provide the requisite procedural safeguards. Tex-Cal []  
            requires that for a statutory substantial evidence standard  
            of review to be applied in lieu of an otherwise applicable  
            independent judgment standard, the statutory scheme in  
            question must "assure[] the essentials of due process." The  
            due process requirement is satisfied when the statutory  
            scheme in question provides the parties to the  
                                                                      



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            administrative proceeding with procedural safeguards  
            equivalent to those provided in Labor Code section 1140 et  
            seq. 
            . . .
            Consequently, even were we to construe the standard of review  
            set forth in Public Resources Code section 3355, subdivision  
            (d) as a substantial evidence standard of review, we would  
            still hold that the independent judgment standard of review  
            must nonetheless be applied, because the apposite Public  
            Resources Code provisions do not satisfy the due process  
            requirements of Tex-Cal.  The Termo Co. v. Luther (2008) 169  
            Cal. App. 4th 394, 411, 413 (citations omitted).

          To address that decision, this bill would substantially revise  
          the existing appeals process so that the "substantial evidence  
          standard" may be used as the measure for review.  Under that  
          standard, the question for the court is only whether there is  
          "substantial evidence" to support the administrative decision -  
          as opposed to the "independent judgment" standard which permits  
          the court to examine the administrative record for errors of law  
          and exercise independent judgment upon the evidence (without  
          giving deference to DOGGR's expertise).  

          The author states that "[w]ithout these additional procedural  
          safeguards, courts must independently determine whether certain  
          enforcement actions are merited, forgoing the regulatory  
          expertise of DOGGR."

          3.   Procedural safeguards and clarifications  

          The Termo court found deficiencies with regards to several  
          components of existing law regarding oil, gas, and geothermal  
          wells.  Those deficiencies include: (1) no separation of  
          prosecutorial functions; (2) inadequate notice of violation; (3)  
          that several code sections do not provide a right to file an  
          answer to charges or require the proceedings to be conducted in  
          accordance with the Evidence Code; and (4) the statute does not  
          specify a clear standard of review.

          Under existing law, oil, gas, and geothermal well operators may  
          appeal an order of the DOGGR supervisor by filing a written  
          statement with the supervisor within 10 days of service.   
          Although similar, those appeal processes are separated out into  
          those for oil and gas wells (Pub. Res. Code Sec. 3350 et seq.)  
          and geothermal wells (Pub. Res. Code Sec. 3762 et seq.).  Upon  
          receiving a written statement of appeal, the director must call  
                                                                      



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          for a public hearing - the appellant must receive at least 20  
          days written notice of the time and place of that hearing.   
          After the hearing, the director must make a written decision to  
          either affirm, set aside, or modify the order.  That decision  
          may be reviewed by a writ from the Superior Court, and that  
          ability to review is limited to determining whether: (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 was unreasonable; and (4) the order, decision,  
          or regulation is clearly unsupported by the evidence. (Pub. Res.  
          Code Secs. 3355, 3767.)

          To address the above concerns of the Termo court, this bill  
          would revise the above process by, among other things, creating  
          a bifurcated appeals process.

            a.   Bifurcated appeals process  

            The proposed bifurcated process consists of a "formal" and  
            "informal" procedure for administrative appeals of enforcement  
            actions, prior to the ability to seek judicial review.   

            The "formal" process would require a hearing before an  
            administrative law judge pursuant to the Administrative  
            Procedures Act for any order that: (1) is issued pursuant to a  
            finding that the operator's wells are deserted and should be  
            plugged and abandoned; (2) imposes a civil penalty of more  
            than $10,000; (3) rescinds an injection project that has  
            already commenced; or (4) imposes a life-of-well or  
            life-of-production facility bond.  Committee staff notes that  
            the first type of case - those dealing with deserted wells -  
            would appear to directly address the appeal process at issue  
            in the Termo case.  As noted above, that case involved a  
            finding that wells should be plugged and abandoned.

            The author notes that "[s]hifting certain appeals from an  
            informal hearing to a formal hearing process affords operators  
            significant procedural safeguards.  A formal hearing is  
            conducted by an independent Administrative Law Judge (ALJ)  
            employed by the Office of Administrative Hearings (OAH), and  
            is conducted in accordance with procedures set forth in the  
            Administrative Procedures Act, which, among other thing,  
            affords the operator an opportunity to review the evidence  
            against it before the hearing."

            For those appeals that do not fall under the "formal" process,  
                                                                      



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            the proposed "informal process" would require the director to  
            provide a notice of the time and place of the hearing that  
            informs the operator of their right to file an answer and  
            present evidence.  The director must issue a written decision  
            within 30 days after the close of the hearing, and must serve  
            that decision on the operator.  The operator may obtain  
            judicial review of the decision by filing a writ in superior  
            court.

            Given the serious deficiencies found in the existing  
            administrative appeals process, and that the proposed  
            "informal process" is an adaptation of that flawed internal  
            process, the Committee should consider whether all appeals  
            should, instead, proceed through the "formal" process, thereby  
            requiring a hearing before an ALJ pursuant to the  
            Administrative Procedures Act.   Processing all appeals  
            through the "formal" process should also provide greater  
            security to the DOGGR that a subsequent court will not find  
            their appeals process to be statutorily deficient.

            SHOULD ALL APPEALS GO THROUGH THE "FORMAL PROCESS?"

            b.   Additional safeguards and clarification  

            In an effort to address due process issues raised in Termo,  
            the bill seeks to provide greater notice and additional due  
            process safeguards.  Committee staff notes that the end result  
            of all of those safeguards would be to create a situation  
            where a court could use the "substantial evidence" standard  
            for review - thus, deferring to the expertise of the DOGGR, as  
            opposed to conducting the independent review required by  
            Termo.

            Those additional safeguards include: (1) requiring orders to  
            provide a clear and concise recitation of the acts or  
            omissions with which the operator is charged, the statutory  
            basis of the regulatory action, and right to an appeal; (2)  
            extending the time frame for filing a petition for judicial  
            review from 10 to 30 days; and (3) requiring use of the  
            "formal" appeals process for civil penalties of more than  
            $10,000.  The bill would also define the parameters for  
            judicial review of the decision of a Director (including a  
            decision following a hearing conducted in accordance with the  
            APA) - that inquiry would extend to whether the director acted  
            without or in excess of jurisdiction, whether there was a fair  
            hearing, and whether there was any abuse of discretion.  Abuse  
                                                                      



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            of discretion would be established if the proceeding had not  
            been conducted in a manner required by law, the decision is  
            not supported by the findings, or the findings are not  
            supported by "substantial evidence."

            As a result, the author further contends that the bill would  
            address "each of the procedural concerns raised by the court  
            in the Termo decision, and these procedural amendments would  
            apply to a broader set of regulatory enforcement actions than  
            what was considered in the Termo decision.  This makes it  
            likely that the bill will not only address the problems  
            described in the Termo decision, but also address similar  
            concerns that might be raised by other courts in the future."   
                                                                                 Despite that contention, as discussed above, the Committee  
            should consider whether it would be more appropriate to,  
            instead, require all appeals to proceed through the proven  
            requirements of the Administrative Procedures Act instead of  
            attempting to revise an internal appeals process that the  
            court previously found to be flawed.

          4.   Comparison to other state agencies  

          The author, in support of adopting the proposed bifurcated  
          process for DOGGR conteds that "[t]he statutory changes sought  
          in AB 2453 would align DOGGR's appeals process with the process  
          used by other State agencies.  For example, the Department of  
          Resources Recovery and Recycling conducts informal hearings for  
          appeals associated with the denial of an application for  
          certification to operate a recycling or processing center, the  
          termination of a probationary certification, and penalty or  
          restitution actions of $1,000 or less; but it provides for a  
          formal hearing before an ALJ for revocation of a nonprobationary  
          certificate, and for larger penalty or restitution actions.  The  
          California Boating and Waterways Commission must hold a formal  
          hearing if the Department of Boating and Waterways refuses to  
          grant an operator's license, or suspends or revokes an  
          operator's license.  Also, the Department of Forestry and Fire  
          Protection must hold a formal hearing for the appeal of any  
          corrective action."  


          5.   Emergency regulations  

          This bill would also permit the director to adopt emergency  
          regulations for purposes of implementing specified sections, and  
          state that adoption of those regulations are an emergency, and  
                                                                      



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          shall be considered by the Office of Administrative Law as  
          necessary for the immediate preservation of the public peace,  
          health and safety, and general welfare.  Those regulations would  
          be filed with, and could not be repealed by, the Office of  
          Administrative Law and remain in effect until revised by the  
          director.

          Given that this bill would codify that an emergency does, in  
          fact, exist, the Committee should ask the sponsor to fully  
          explain why the present situation is, in fact, an emergency.


           Support  :  None Known

           Opposition  :  None Known

                                        HISTORY
           
           Source  :  Department of Conservation

           Related Pending Legislation  :  None Known

           Prior Legislation  :  None Known

           Prior Vote  :

          Assembly Natural Resources Committee (Ayes 9, Noes 0)
          Assembly Judiciary Committee (Ayes 10, Noes 0)
          Assembly Appropriations Committee (Ayes 17, Noes 0)
          Assembly Floor (Ayes 76, Noes 0)
          Senate Natural Resources Committee (Ayes 8, Noes 0)

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