BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Hannah-Beth Jackson, Chair 2015-2016 Regular Session AB 2756 (Thurmond) Version: June 1, 2016 Hearing Date: June 28, 2016 Fiscal: Yes Urgency: No TH SUBJECT Oil And Gas Operations: Enforcement Actions DESCRIPTION This bill significantly revises the current penalty structure for assessing civil penalties against operators of oil, gas, and geothermal wells. Among other things, this bill authorizes the Division of Oil, Gas, and Geothermal Resources (DOGGR) to distinguish between major and minor violations, to assess penalties for violations on a per day basis, and to allow violators to complete supplemental environmental projects in lieu of paying assessed penalties. This bill also makes certain changes to provisions governing discovery in the context of an informal hearing before the Director of DOGGR, and makes changes to the procedures governing an informal hearing before the Director. 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. AB 2756 (Thurmond) Page 2 of ? This bill would allow the Supervisor to consider additional factors in setting a civil penalty for a violation of laws and regulations committed by operators of oil, gas, and geothermal wells, and would allow the Supervisor to classify a violation as either "major" or "minor," depending on the nature of the violation, and would specify civil penalty limits for each category. This bill additionally authorizes the Supervisor to allow a violator to complete a "supplemental environmental project," which is simply an environmentally beneficial project, in lieu of paying up to 50 percent of the civil penalty amount. This bill also makes certain changes to the procedures related to appealing civil penalty assessments imposed by the Supervisor to the Director of Conservation. Among other things, this bill revises exceptions for when a notice of appeal operates as a stay of an order; revises what costs will be refunded if an emergency order is set aside or modified on appeal; and revises the circumstances in which appeals are to be heard in a formal hearing process before an administrative law judge, instead of in an informal hearing before the director. This bill authorizes the director to extend the date of a hearing for good cause, revises the authorization for the hearing to be electronically recorded, revises the timeline in which the director is required to grant or deny a petition to order the testimony of a witness at the hearing, and provides that obtaining subpoenas may be considered good cause to extend the date of the hearing. Additionally, this bill makes certain changes to discovery rules in the context of an informal hearing before the director, and prohibits the division and the department from making available to the public for inspection portions of a report that might disclose trade secrets, well data granted confidential status, or other confidential or privileged information, when requested by the owner or operator furnishing the report. CHANGES TO EXISTING LAW 1.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 State Oil and Gas Supervisor (Supervisor) to supervise the drilling, operation, AB 2756 (Thurmond) Page 3 of ? 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 a person who violates regulations for the operation of oil and gas wells is subject to a civil penalty not to exceed $25,000 for each violation, and a person who violates specified provisions related to well stimulation treatment is subject to a civil penalty of not less than $10,000 and not to exceed $25,000 per day per violation. Existing law states that the Supervisor shall consider, in addition to other relevant circumstances, all of the following when establishing the amount of the civil penalty: the extent of harm caused by the violation; the persistence of the violation; the pervasiveness of the violation; and the number of prior violations by the same violator. (Pub. Res. Code Sec. 3236.5.) This bill additionally authorizes the Supervisor to consider the following when establishing the amount of the civil penalty: the degree of culpability of the violator; any economic benefit to the violator resulting from the violation; the violator's ability to pay the civil penalty amount, as determined based on information publicly available to the division; and the supervisor's prosecution costs. This bill authorizes the Supervisor to classify a violation as a "major violation" based on one or more of the following: a violation that results in harm to persons or property or presents a significant threat to human health or the environment; a knowing, willful, or intentional violation; a chronic violation or one that is committed by a recalcitrant violator; or a violation where the violator derived significant economic benefit, either by significantly reduced costs or a significant competitive advantage. AB 2756 (Thurmond) Page 4 of ? This bill specifies that the civil penalty amount for a major violation shall be not less than $2,500 and not more than $25,000 per violation. This bill authorizes the Supervisor to classify a violation that is not a major violation as a "minor violation," as specified. This bill specifies that the civil penalty amount for a minor violation shall be not more than $2,500 per violation. This bill provides, at the Supervisor's discretion, that each day a major or minor violation continues or is not cured may be treated as a separate violation. This bill authorizes the Supervisor to permit completion of a supplemental environmental project in lieu of not more than 50 percent of the total civil penalty amount. 1.Existing law provides that if an operator does not appeal an order from the Supervisor, if the operator does not timely seek judicial review of a decision affirming or modifying an order, or if the operator has timely sought and obtained judicial review and the court has affirmed the decision, then any charge, including penalty and interest, that the decision permits the Supervisor to impose on the operator for work performed by the Supervisor or the Supervisor's agents shall constitute a state tax lien against the real and personal property of the operator, as specified. (Pub. Res. Code Sec. 3356.) This bill provides that in addition to a state tax lien, the Supervisor may apply to the appropriate superior court for a clerk's judgment. The application, which shall include a certified copy of the final agency order or decision, shall constitute a sufficient showing to warrant the issuance of the judgment. The court clerk shall enter the judgment immediately in conformity with the application. The judgment so entered shall have the same force and effect as, and shall be subject to all the provisions of law relating to, a judgment in a civil action, and may be enforced in the same manner as any other judgment of the court. 2.Existing law provides that in any proceeding before the director, and in any proceeding instituted by the Supervisor for the purpose of enforcing or carrying out the provisions of AB 2756 (Thurmond) Page 5 of ? this division, or for the purpose of holding an investigation to ascertain the condition of any well or wells complained of, or which in the opinion of the Supervisor may reasonably be presumed to be improperly located, drilled, operated, maintained, or conducted, the Supervisor and the director shall have the power to administer oaths and may apply to a judge of the superior court of the county in which the proceeding or investigation is pending for a subpoena for witnesses to attend the proceeding or investigation. Upon the application of the Supervisor or the director, the judge of the superior court shall issue a subpoena directing the witness to attend the proceeding or investigation, and such person shall be required to produce, when directed, all records, surveys, documents, books, or accounts in the witness' custody or under the witness' control, as specified. The Supervisor or the director may in such case cause the depositions of witnesses residing within or without the state to be taken in the manner prescribed by law for like depositions in civil actions, and may, upon application to a judge of the superior court of the county within which the proceeding or investigation is pending, obtain a subpoena compelling the attendance of witnesses and the production of records, surveys, documents, books, or accounts at such places as the judge may designate. (Pub. Res. Code Sec. 3357.) This bill additionally provides that in conducting a proceeding or investigation, the Supervisor or director may require an owner or operator to furnish, under penalty of perjury, technical or monitoring reports that the Supervisor or director requires, as specified. This bill states that when requested by the owner or operator furnishing the report, neither the division nor the department shall make available to the public for inspection portions of a report that might disclose trade secrets, well data granted confidential status, or other confidential or privileged information. The division or department shall make that confidential or privileged information available to other public agencies as needed for regulatory purposes and in accordance with a written agreement with the other public agency regarding the sharing of the information. This bill states that in conducting a proceeding or investigation, the Supervisor or director, or his or her inspector, may inspect the well site or production facilities AB 2756 (Thurmond) Page 6 of ? of any owner or operator to ascertain whether the owner or operator is complying with the requirements of or authorized by this division. The inspection shall be made with the consent of the owner or operator or, if consent is withheld, with a warrant duly issued, but in the event of an emergency affecting the public health or safety, an inspection may be performed without consent or a warrant. This bill makes further changes and clarifications to the hearings and appeals process conducted by the Division of Oil, Gas, and Geothermal Resources. COMMENT 1.Stated need for the bill According to the author: This bill would improve and clarify the Department of Conservation's Division of Oil, Gas, and Geothermal Resources' penalty and enforcement capabilities. 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 safely and responsibly. 2.Enhanced investigatory and penalty assessment authority This bill modifies several aspects of the Division of Oil, Gas, and Geothermal Resources' existing penalty, enforcement, and investigatory capabilities. Among other things, this bill authorizes the Supervisor to assess penalties in-line with the AB 2756 (Thurmond) Page 7 of ? harm they cause by creating a new penalty classification framework. This bill streamlines the appeals process within DOGGR by concentrating most appeal decisionmaking responsibility with the DOGGR's director. This bill also gives the Division enhanced authority to subpoena information relevant to an ongoing investigation under the supervision of a superior court judge. Writing in support, the Environmental Defense Fund states: AB 2756 . . . [would strengthen] the Division of Oil, Gas and Geothermal Resources' (DOGGR) ability to regulate oil and gas operations by enhancing civil penalties, authorizing DOGGR to immediately plug any oil injection projects that pose a risk to groundwater, and allowing penalty revenue to be spent on environmentally beneficial projects. Furthermore, this bill enhances DOGGR's ability to investigate potential violations by giving them authority to issue investigative orders. Oil and gas production operations have the potential to create costs from significant environmental damage by polluting our air, water, and soil. This bill would give DOGGR explicit statutory authority to issue investigative orders and subpoenas during an investigation and would allow DOGGR to immediately stop injection projects that are believed to impact beneficial use waters. Existing law also limits penalties and types of factors that can be considered for addressing most violations related to oil and gas production. AB 2756 would permit DOGGR, in determining the amount of [a] civil penalty, to consider the harm or potential harm, the degree of culpability, and the economic benefit gained by committing the violation and to issue penalties of up to $25,000 per violation per day until the violation has been remediated. Communities most burdened by oil and gas activities with directly benefit from enforcement actions through environmentally beneficial projects. 3.Trade secrets Under existing law, DOGGR is authorized to apply to a superior court judge for a subpoena of "records, surveys, documents, books, or accounts" in connection with enforcing or carrying out specified duties under the law, or for the purpose of holding an investigation to ascertain the condition of any well "which in AB 2756 (Thurmond) Page 8 of ? the opinion of the supervisor may reasonably be presumed to be improperly located, drilled, operated, maintained, or conducted." (Pub. Res. Code Sec. 3357.) This bill modifies that subpoena authority by authorizing the Director or Supervisor, under the supervision of a judge, to directly issue subpoenas during certain investigations. It also provides that in conducting specified proceedings and investigations, Supervisor or Director "may require an owner or operator to furnish, under penalty of perjury, technical or monitoring reports," and further provides that "[w]hen requested by the owner or operator furnishing the report, neither the division nor the department shall make available to the public for inspection portions of a report that might disclose trade secrets, well data granted confidential . . . , or other confidential or privileged information." This section appears to provide owners and operators of oil, gas, and geothermal wells with some role - the extent of which is unclear - in designating information in a report as a trade secret, confidential, or privileged, and therefore not subject to public release. Generally speaking, California, like many other states, affords protection to trade secrets not because they are property interests deserving of protection, but instead because commercial ethics impose a general duty of good faith on those to whom trade secret information is disclosed. (See Kewanee Oil Co v. Bicron Corp. (1974) 416 U.S. 470, 481 ["The maintenance of standards of commercial ethics and the encouragement of invention are the broadly stated policies behind trade secret law."].) Protection of trade secrets, like protection given to other confidential or sensitive information shared with a regulator during the course of an investigation, helps establish a trusted pathway between parties to exchange information. However, the protected status given to sensitive information in such arrangements can be misused by parties who seek to prevent the disclosure of damaging or embarrassing information by falsely claiming such information to be a trade secret or otherwise privileged. Given the potential for misuse of trade secret protections by parties seeking to shield information from disclosure, and given the public's broad interest in having access to information held by state agencies, the Committee may wish to consider whether sufficient safeguards exist to ensure that regulators - not regulated parties - make the determination as to whether privilege claims are warranted, and whether sufficient procedures and protocols are in place at DOGGR to evaluate whether information submitted by a regulated AB 2756 (Thurmond) Page 9 of ? party should or should not be protected from public disclosure. Support : Environmental Defense Fund Opposition : None Known HISTORY Source : Department of Conservation Related Pending Legislation : AB 1882 (Williams, 2016) requires the State Water Resources Control Board, or the appropriate regional water quality control board to review and concur with any Underground Injection Control project subject to review or approval, and allows these boards to propose additional requirements for a project, including groundwater monitoring. This bill is in the Assembly Appropriations Committee. AB 2729 (Williams, 2016) revises idle oil and gas well requirements, fees, and indemnity bonds imposed by the Division of Oil, Gas and Geothermal Resources, in order to create a financial incentive for operators to properly plug, rather than idle, low performing wells. This bill is in the Senate Committee on Natural Resources and Water. SB 248 (Pavley, 2015) requires the Division of Oil, Gas, and Geothermal Resources to update and revise its regulations, develop a data management system, and enhance required reporting. This bill also prohibits the use of injection chemicals, unless DOGGR has complete information about specified properties and potential groundwater impacts, and prohibits disposal of water or wastewater associated with oil or gas exploration, development or production into oil sumps. This bill is in the Assembly Appropriations Committee. Prior Legislation : AB 2453 (Tran, Ch. 264, Stats. 2010) clarified the judicial standard of review for an enforcement action of the State Oil and Gas Supervisor, and expanded procedural safeguards for an administrative appeal of an enforcement action, including the use of the Office of Administrative Hearings. Prior Vote : AB 2756 (Thurmond) Page 10 of ? Senate Natural Resources and Water Committee (Ayes 7, Noes 1) Assembly Floor (Ayes 64, Noes 13) Assembly Appropriations Committee (Ayes 14, Noes 6) Assembly Judiciary Committee (Ayes 7, Noes 2) Assembly Natural Resources Committee (Ayes 7, Noes 2) **************