BILL ANALYSIS Ó AB 2756 Page 1 Date of Hearing: April 12, 2016 ASSEMBLY COMMITTEE ON JUDICIARY Mark Stone, Chair AB 2756 (Thurmond) - As Amended April 7, 2016 SUBJECT: Oil and gas operations: enforcement actions KEY ISSUE: should the enforcement and investigatory powers of the division of Oil, Gas, and geothermal resources be increased, so as to increase the division's ability to deter environmentally harmful violations by oil and gas operations? SYNOPSIS The Division of Oil, Gas, and Geothermal Resources (DOGGR) - a division of the California Department of Conservation - regulates oil and gas production in the state. Specifically, DOGGR supervises the drilling, operation, maintenance, and plugging and abandonment of onshore and offshore oil, gas, and geothermal wells. While much of DOGGR's history has focused on balancing the productive use and conservation of these important natural resources, DOGGR has more recently turned its attention to issues of public health and environmental protection, as evidenced in an October, 2015 report of DOGGR. This bill aims to enhance the power of DOGGR to carry out its mission. To begin with, the bill enhances penalties. Whereas existing law allows DOGGR to impose penalties not to exceed $25,000 per violation, this bill would amend this penalty provision so that AB 2756 Page 2 each day the violation continues constitutes a separate violation. In short, while existing law authorizes a penalty of $25,000 per violation, this bill authorizes a penalty of $25,000 per violation, per day. The author believes that these changes will ensure that penalties are "commensurate to violations." While the bill enhances the civil penalty, it at the same time authorizes DOGGR to offer the violator the opportunity to undertake a "supplemental environmental project" (SEP). This would allow a violator to voluntarily undertake a beneficial environmental project in exchange for offsetting up to 50% of the civil penalty. This bill also includes a number of other changes designed to enhance the power and efficiency of DOGGR. The changes proposed by this bill can be roughly grouped in the following categories: penalties; offsets for supplemental environmental projects; shut-in orders and stays pending appeal; investigatory powers; and hearing and appeal procedures. Each category is discussed more fully in the analysis. This bill is sponsored by the Department of Conservation and supported by environmental and public health groups. The bill is opposed by the Western States Petroleum Association. The bill recently passed out of the Assembly Natural Resources Committee on a 7-2 vote. SUMMARY: Enhances the authority of the Division of Oil, Gas, and Geothermal Resources (DOGGR) to impose penalties, issue shut-in orders, and conduct hearings and investigations of oil and gas operations. Specifically, this bill: 1)Provides that each day a violation continues it may be treated, at the discretion of the Supervisor of DOGGR, as a separate violation. 2)Authorizes the Supervisor of DOGGR to consider the following conditions, as well as any other relevant conditions, when establishing the amount of the civil penalty: AB 2756 Page 3 a) The extent of harm or potential harm caused by the violation; b) The persistence of the violation; c) The pervasiveness of the violation; d) The number of prior violations by the same violator; e) The degree of culpability of the violator; f) Any economic benefit to the violator resulting from the violation; g) The violator's assets, liabilities, and net worth; and, h) The Supervisor's prosecution costs. 3)Requires the operator to cease injection operations as soon as it is safe to do so when ordered to do so by DOGGR. 4)Authorizes DOGGR to permit environmentally beneficial projects in lieu of up to 50% of the civil penalty amount. 5)Modifies requirements for appeals and for emergency order hearings and removes the option for either party to electronically record the hearing. 6)Allows the Supervisor to impose a state tax lien against the AB 2756 Page 4 real and personal property of the operator for civil penalties assessed by DOGGR. 7)Authorizes the Supervisor or Director to require an operator to furnish, under penalty of perjury, technical or monitoring reports that the Supervisor or Director requires. 8)Authorizes the Department of Conservation (DOC) or DOGGR to inspect the well site or production facilities of any operator to ascertain whether the operator is complying with the requirements of the state's oil and gas laws or regulations. Specifies that inspection will be conducted with the consent of the operator or with a warrant. Authorizes DOC or DOGGR, in the event of an emergency affecting the public health or safety, to inspect a well site or production facilities without consent or a warrant. 9)Requires civil penalties to be deposited in the Oil and Gas Environmental Remediation Fund to be used for specified remedial purposes. EXISTING LAW: 1)Requires the state's Oil and Gas Supervisor (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. (Public Resources Code Sections 3200-3228.) 2)Provides that a person who violates the state's oil and gas laws or regulations is subject to a civil penalty not to exceed $25,000 for each violation. Requires the Supervisor to consider specified circumstances when establishing the amount of the civil penalty such as the extent of harm caused by the AB 2756 Page 5 violation, the persistence of the violation, the pervasiveness of the violation; and the number of prior violations by the same violator. (Section 3236.5.) 3)Establishes procedures for an operator of a well or production facility to appeal to the Director of Conservation (Director) for an order of the Supervisor or a district deputy, including the following: a) Requires appeal to be filed within 10 days of the service of the order or waive its rights to challenge the order; b) Requires a notice of appeal to be filed with the Supervisor or with the district deputy who issued the order; c) Requires a written notice of appeal to operate as a stay of a shut-in order, except in the case of an emergency order, which require two hearings to issue; and, d) Requires the Supervisor to reimburse operators for their costs to perform remedial work or tests if the emergency order is set aside or modified. (Public Resources Code Sections 3250-3257.) FISCAL EFFECT: As currently in print this bill is keyed fiscal. COMMENTS: California produced more than 200 barrels of oil in 2014, making it one of the top five oil-producing states in the nation. While oil and gas production makes a significant contribution to the state's economy, it can also create AB 2756 Page 6 potential environmental harms, including harm to the state's precious groundwater supply. Since 1915, the Department of Conservation's Division of Oil, Gas, and Geothermal Resources (DOGGR) has supervised the drilling, operation, maintenance, and plugging and abandonment of onshore and offshore oil, gas, and geothermal wells. In October of 2015, DOGGR released a plan outlining a number of reforms that the division intends to take in order to protect public health and the environment in and around the state's oil fields. This bill is apparently intended to help in that project. According to the author, the purpose of this bill is to enhance DOGGR's authority to regulate the oil and gas industry. Most significant, the bill would allow DOGGR to issue penalties of $25,000 per day, per violation. In addition to the enhanced penalties, this bill also includes a number of other changes designed to enhance the regulatory and investigatory work of DOGGR. The changes proposed by this bill can be roughly grouped in the following categories: penalties; offsets for supplemental environmental projects; shut-in orders and stays pending appeal; investigatory powers; and procedural and due process concerns. Each category is discussed below. Penalties: Under existing law, a person who violates regulations relating to oil and gas operations is subject to a civil penalty not to exceed $25,000 per violation. Existing law requires the Supervisor of DOGGR to consider a number of factors when setting the amount of a fine, but the penalty cannot exceed $25,000 no matter the seriousness of the violation, the degree of harm done, or the culpability of the operator. This bill would add to the list of existing considerations the following: the extent of the potential harm caused by the violation (not just the actual harm, as is in existing law); the economic benefit to the violator resulting from the violation; the violator's assets and liabilities, and the Supervisor's prosecution costs. Perhaps most significantly, while existing law permits a $25,000 penalty per violation, this bill would permit the Supervisor, at his or her discretion, to impose the penalty per violation per day, treating each day that the violation continues as a separate violation. The penalty for AB 2756 Page 7 this per day violation cannot be less than $10,000 per day. As under existing law, the penalty imposed by the DOGGR Supervisor constitutes a tax lien. Finally, as most recently amended, the enhanced civil penalties assessed under this bill shall be deposited in the Oil and Gas Environmental Remediation Account, to be used for specified purposes, including conducting remedial work on sites that could pose a danger to life, health, water quality, wildlife, or natural resources. Offsets for Supplemental Environmental Projects: While the civil penalties would be significantly enhanced by this bill, especially where the violation is on-going, at the same time the Supervisor would be authorized, again at his or her discretion, to offer the violator the opportunity to undertake a Supplemental Environmental Project (SEP) - that is, some project that has a beneficial or restorative environmental effect on the affected area or community - in exchange for up to a 50% reduction in the civil penalty. According to the author, SEPs will allow the affected communities to benefit by making environmentally beneficial projects a part of the civil penalty settlement. Shut-in Orders and Stays Pending Appeal: Under existing law, DOGGR has the authority to issue so-called "shut-in" orders that call upon the operator to cease and desist the operation of "injection wells," which can have an adverse impact on groundwater aquifers. Under existing law, when an operator files an appeal, the appeal operates as a stay on the cease and desist order, and the potentially harmful injections continue. The only time the order is not stayed by an appeal is when the order qualifies as an "emergency" order. However, under this bill, a cease and desist order against injections - that is, a "shut-in" order - will not be automatically stayed by the appeal. Investigatory Powers: The bill makes a number of procedural and AB 2756 Page 8 substantive changes that enhance DOGGR's ability to conduct investigations and discover violations. Among the more important changes are those granting DOGGR subpoena power that is similar to what other agencies, including the State Water Board, already possess. This enhanced subpoena power may not be as great as opponents of the bill fear. According to the California Department of Conservation - the sponsor of this bill - any attorney (including attorneys for DOGGR) has the power to obtain a subpoena. Another important investigatory tool that this bill would grant to DOGGR is the power to conduct investigations of oil and gas operations without a warrant in an emergency situation. However, this power to conduct warrantless inspections is only justified where there is "an emergency affecting the public health or safety," which appears consistent with other areas of law in which warrantless searches are permitted under judicially defined "exigent circumstances." Procedural Changes and Due Process Concerns: This bill implements a number of procedural changes that, according to the author, streamline the process for hearings and appeals, but, according to the Western States Petroleum Association, amount to a denial of due process. As noted above, one of these procedural changes provides that, in the case of a cease and desist order against injection wells, the appeal will no longer operate as a stay on the order. However, the author and supporters of this bill reasonably justify this change by noting that it is necessary to stop irreparable damage that may result from the injection process. If the order is stayed, it may be impossible to undo the damage. The bill provides that if an order is later set aside, the DOGGR Supervisor must refund any reasonable costs incurred by the operator during an emergency shut down. The bill makes a number of other seemingly reasonable changes to the process and procedures for an informal hearing. For example, the bill authorizes DOGGR to extend the date of the hearing for good cause shown; removes a provision that authorized the hearing to be electronically recorded by either party; revises the timeline in which DOGGR may grant or deny a petition to hear the testimony of a witness; and provides AB 2756 Page 9 that the obtaining of subpoenas may be considered good cause to extend the date of the hearing. Finally, in conducting a proceeding or investigation, the supervisor or director may require the operator, under penalty of perjury, to furnish specified technical and monitoring reports, so long as DOGGR identifies the evidence that supports requiring the reports. ARGUMENTS IN SUPPORT: According to the author, this bill will increase the powers of DOGGR in the following ways: First, the bill will ensure that penalties issued by the Division will serve as sufficient deterrents to those operators who may otherwise behave irresponsibly. Second, the bill allows for impacted communities to potentially benefit from penalty actions taken against violators by giving the Division specific authority to approve environmentally beneficial projects as part of the civil penalty settlement. Third, AB 2756 would ensure that injection wells that could potentially impact underground sources of drinking water can be shut-in without complicated hearing procedures. Fourth, it gives the Division some of the same investigative authorities as the Water Board during investigations about alleged violations. Finally, the bill clarifies and streamlines due process if an operator appeals the Supervisor's order, such as in cases where penalties are appealed. Collectively, these are important changes that will better enable the Division to ensure that the state's natural resources are extracted AB 2756 Page 10 safely and responsibly. The Environmental Defense Fund (EDF) supports this bill because it will allow revenue collected from civil penalties to be spent on environmentally beneficial projects, and that it will enhance the division's "ability to investigate potential violations by giving them authority to issue investigatory orders." EDF argues that oil and gas operations "have the potential to cause significant environmental damage by polluting our air, water, and soil." EDF contends that this bill gives DOGGR the authority to "issue investigative orders and subpoenas during an investigation and would allow DOGGR to immediately stop injection projects" that impact water. The problem with existing law, according to EDF, is that it "limits penalties and types of factors that can be considered for addressing most violations related to oil and gas production." This bill, on the other hand, would permit DOGGR, when determining the proper amount of a civil penalty, "to consider harm, or potential harm, the degree of culpability, and the economic benefit gained by committing the violation" and to issue penalties of $25,000 per day until the violation has been remedied. ARGUMENTS IN OPPOSITION: The Western States Petroleum Association (WSPA) opposes this bill unless amended to "give the Supervisor of [DOGGR] more discretion over the assessment of penalties." WSPA writes that while it recognizes that the intent of the bill is to reflect the gravity of the violation, it contends that "AB 2756 contains several concerning provisions that would prevent operators from obtaining proper due process in cases where they may be facing penalties for violations of the Public Resources Code." WSPA notes in particular that while existing law gives the DOGGR Supervisor discretion to asses a civil penalty of not more than $25,000 for a violation, "AB 2756 would allow the DOGGR Supervisor to issue penalties of up to $25,000 per violation per day until the violation has been remedied, regardless of the severity of the violation." WSPA also notes that under existing law a civil penalty imposed by AB 2756 Page 11 DOGGR is treated as a state tax lien and enforceable in superior court; however, this bill allows the Supervisor to apply to the superior court for a clerk's judgment which would be immediately enforceable without a hearing. WSPA claims that the changes proposed by this bill do not provide any certainty to the operator "that the amount of the civil penalty will be reasonably commensurate with the severity of the violation." Finally, WSPA believes that the Supervisor's expanded power to subpoena evidence, as provided in this bill, "removes any evidentiary protections provided by statute or common law. In essence, it's possible the bill could abrogate the attorney-client privilege without providing due process." WSPA's proposed amendments would create different categories of violations with corresponding maximum penalties and proposes other changes that it believes will ensure sufficient due process. Related Prior Legislation. AB 1882 (Williams, 2016) requires the State Water Resources Control Board (SWRCB) or appropriate regional water quality control board (RWQCB) to review and concur with any Underground Injection Control (UIC) project subject to review or approval. This bill allows SWRCB or the appropriate RWQCB to propose additional requirements for a project, including groundwater monitoring. AB 2729 (Williams, 2016) creates disincentives for operators to maintain large idle well inventories, will ensure that funds are available to plug and abandon idle wells in the event that they are deserted, and will help improve public perception of oil and gas operations. SB 248 (Pavley, 2015) requires DOGGR to review and update its regulations, data management practices, and enhance required reporting. This bill prohibits the use of oil sumps after July 1, 2017. This bill also prohibits injection chemicals, unless DOGGR has complete information about specified properties and AB 2756 Page 12 potential groundwater impacts. SB 4 (Pavley), Chapter 313, Statutes of 2013, established a comprehensive regulatory program for oil and gas well stimulation treatments, which includes, among other things, a study, the development of regulations, a permitting process, and public notification and disclosure. This bill also required DOGGR to assess between $25,000 and $10,000 per day that a violation related to well stimulation occurred. AB 2453 (Tran, Chapter 264, Statutes of 2010) modified the appeals process at DOGGR to clarify that the judicial review of an appealed order be based on the "substantial evidence" standard of review, shifted certain appeals from an informal hearing to a formal hearing, and made other changes relating the issuance of DOGGR orders. AB 1960 (Nava, Chapter 562, Statutes of 2008) substantially strengthened and clarified DOGGR's authority to regulate oil and gas production facilities, imposed additional requirements on operators to minimize frequency and severity of oil spills, and authorized DOGGR to impose life-of-well and life-of-facility bonding on operators under specified circumstances. The bill also increased maximum penalties that DOGGR could impose from $5,000 to $25,000 per violation. REGISTERED SUPPORT / OPPOSITION: Support Department of Conservation (sponsor) AB 2756 Page 13 Alliance for Nurses for Healthy Environments California Interfaith Power and Light California League of Conservation Voters Center for Environmental Health Clean Water Action California Environmental Defense Fund Mainstreet Moms Opposition Western States Petroleum Association (unless amended) Analysis Prepared by:Thomas Clark / JUD. / (916) 319-2334 AB 2756 Page 14