BILL ANALYSIS �
AB 2711
Page 1
ASSEMBLY THIRD READING
AB 2711 (Muratsuchi)
As Amended May 23, 2014
2/3 vote. Urgency
NATURAL RESOURCES 5-3 APPROPRIATIONS 11-1
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|Ayes:|Chesbro, Garcia, |Ayes:|Gatto, Bocanegra, |
| |Muratsuchi, Stone, | |Bradford, |
| |Williams | |Ian Calderon, Campos, |
| | | |Eggman, Gomez, Holden, |
| | | |Pan, Quirk, Weber |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Dahle, Bigelow, Patterson |Nays:|Ridley-Thomas |
| | | | |
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SUMMARY : Loans the City of Hermosa Beach (City) $11.5 million
to pay the liability it will incur if City voters reject a
November 2014 local ballot initiative to approve an offshore oil
lease on City tidelands. Specifically, this bill :
1)Authorizes an $11.5 million loan from the state's oil and dry
gas revenues, which shall be paid to the City if the City is
obligated to make payment pursuant to Section IV.4.6.c of "The
Settlement Agreement and Release" entered into on March 2,
2012, between Macpherson Oil Company (Macpherson), Windward
Associates, E&B Natural Resources Management Corporation
(E&B), and the City. (Section IV.4.6.c of the settlement
agreement is explained in more detail below.)
2)Requires the City to annually pay the state at least $500,000
until the loan is paid in full.
3)If the City fails to make a payment, requires the Controller
to deduct the payment from the City's sales and use taxes.
EXISTING LAW :
1)Creates the California Coastal Sanctuary Act of 1994, which
does all of the following:
a) Makes findings and declarations that offshore oil and
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gas production in certain areas of state waters poses an
unacceptably high risk of damage and disruption to the
marine environment of the state.
b) Establishes the California Coastal Sanctuary, which
includes all state waters subject to tidal influence west
of the Carquinez Bridge, except as to oil or gas leases in
effect on January 1, 1995, unless the lease is deeded or
otherwise reverts to the state after that date.
c) Generally prohibits a state agency or state officer from
entering into any new lease for the extraction of oil or
gas from the California Coastal Sanctuary.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, one-time General Fund appropriation of $11.5 million
to be repaid by the City at the rate of at least $500,000 per
year until it is paid.
COMMENTS :
Background. In 1919, the Legislature granted the City, in
trust, administrative control of the state's tide and submerged
lands located off of the City's coast. The City must manage
these lands for the benefit of the people of California and
consistent with the public's right to use California's waterways
for commerce, navigation, fishing, boating, natural habitat
protection, and other water oriented activities.
In 1932, the voters of the City enacted a ban on all oil and gas
operations within the City, declaring such activity to be both
unlawful and a public nuisance. In 1984, the voters adopted
Propositions P and Q, which were ballot measures that would
allow slant drilling from two onshore sites into oil and gas
deposits located within the City's granted tide and submerged
lands.
The City and Macpherson entered into an oil and gas lease in
1992. After signing the lease, Macpherson began efforts to
obtain permits and governmental approvals necessary for
production of oil and gas on City-owned property. On August 10,
1993, after an extended review process, the City approved a
conditional use permit for the Macpherson project. The permit
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contained 140 conditions, requiring submission to and approval
by the City of a number of additional reports, plans, and
analyses prior to the issuance of any permit for commencing
work.
Beginning in April 1994, the Hermosa Beach Stop Oil Coalition
(Stop Oil) began a campaign to qualify a ballot initiative to
end the Macpherson project and to reinstate the comprehensive
prohibition on oil drilling in the City. The measure,
Proposition E, appeared on the November 1995 ballot and was
approved with 56% of the vote.
Notwithstanding Proposition E's adoption by the voters, the City
continued to perform under its lease with Macpherson based on
its concern that it would face legal exposure if it terminated
the lease agreement. When notified of the City's decision to
continue to respect the lease agreement, Stop Oil commenced a
lawsuit on June 9, 1997, for declaratory and injunctive relief
to require the City to apply Proposition E to the Macpherson
project. Stop Oil named the City as a defendant and identified
Machperson as the real party in interest.
In its complaint, Stop Oil asserted that application of
Proposition E was not an unconstitutional impairment of the
City's contractual lease obligations with Macpherson, and that
the lease gave the City the right, as a matter of contract, to
apply Proposition E to terminate the project and to terminate
the City's contractual obligations to Macpherson without any
liability to the City.
Meanwhile, in February 1998, the City retained a company to
perform a risk analysis on the project. On September 17, 1998,
the City Council held a meeting regarding the risk analysis
report. A contributor to the report testified that the
production of methane from the project posed a "substantial"
risk to the health and safety of nearby residents.
On December 8, 1998, the City Council adopted Resolution No.
98-5950. Relying on the risk analysis report, the resolution
stated that the Macpherson project "presents an unreasonable
risk of harm to persons who live, work and recreate in close
proximity to the project site." The resolution further stated
that "[t]hose who live and work in proximity to the project site
should not be forced to live in perpetual fear of occurrence of
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a catastrophic and potentially fatal event."
Macpherson filed a cross-complaint on December 10, 1998, against
the City for breach of contract, alleging that the risk analysis
report did not demonstrate any previously unknown or undisclosed
risk that had not already been appropriately mitigated or
dismissed as not significant. The City answered, asserting that
it was entitled to exercise its discretion to deny further
permits and thus to terminate the project based on public safety
concerns identified in the report.
On November 17, 1999, the trial court entered final judgment
denying Stop Oil's complaint for injunctive and declaratory
relief. The trial court found that application of Proposition E
to the oil project would "constitute a total and
unconstitutional impairment" of the lease between Macpherson and
the City. Stop Oil appealed the judgment.
On December 8, 2000, while the appeal was pending, the trial
court entered judgment on Macpherson's cross-complaint. The
trial court found that Macpherson's sole remedy was specific
performance and ordered the City to honor the lease.
On January 24, 2001, the appellate court issued a judgment on
Stop Oil's appeal. The essential issue was "whether
reinstatement of a total ban on oil drilling within the City,
adopted through the initiative process in November 1995
(Proposition E), constitutes an unconstitutional impairment of
the 1992 lease agreement between Macpherson and the City for oil
and gas exploration and production on City-owned property." The
court held that Proposition E did not unconstitutionally impair
the lease and thus reversed the trial court's judgment on Stop
Oil's complaint. However, the court did not reach the issue of
whether Macpherson had a viable claim against the City for
breach of the lease based upon the voter's 1995 passage of
Proposition E.
The parties subsequently engaged in protracted litigation over
whether Macpherson had a claim for damages for breach of the
lease. Macpherson was seeking more than $700 million in
damages. The City asserted that it did not breach the lease
because the passage of Resolution No. 98-5950 "precluded City
officials from issuing McPherson a drilling permit, the
procurement of which was a condition precedent to McPherson's
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contractual right to drill for oil."
During the litigation over damages, E&B, an unrelated
third-party oil company interested in obtaining the rights to
Macpherson's lease, approached the City and Macpherson with a
plan to settle the case. A settlement agreement was executed by
all of the parties on March 2, 2012, which consists of the
following terms:
1)E&B will provide Macpherson with a settlement payment and a
small percentage of the oil revenues in exchange for
assignment of the oil lease to E&B.
2)The City will place a measure on the ballot for the electorate
to decide whether E&B should be allowed to drill. (The
measure will likely be placed on the November 2014 ballot.)
3)If the ballot measure passes, the City will pay E&B $3.5
million through deductions from royalties otherwise due to the
City through the lease.
4)If the ballot measure fails, or if the measure passes but the
lease is denied for any reason other than an action or
inaction undertaken solely by and under the control of E&B,
the City will pay E&B $17.5 million. (This specific provision
is contained in Section IV.4.6.c of the settlement agreement
and is referenced in the bill.)
5)The City and Macpherson will dismiss their pending lawsuit.
The ballot measure is currently planned for the November 2014
election.
E&B's Proposed Operations. According to the draft environmental
impact report for the E&B project, the project will include "an
onshore drilling and production facility site that would utilize
directional drilling of 34 wells (30 oil, four water injection)
to access the oil and gas reserves in the tidelands and in an
onshore area known as the uplands." In addition, the project
"would result in the installation of offsite underground
pipelines for the transportation of the processed crude oil and
gas from the Project Site to purchasers, extending through the
Cities of Redondo Beach and Torrance." The lease provides for a
35-year drilling period.
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If the ballot measure fails, how will the city pay the $17.5
million due to E&B? According to the City's Web site:
The city has earmarked $6 million already to pay for a
portion of the debt, and it may need to issue
municipal debt in order to raise some of the funds to
pay E&B the remainder of the $17.5 million, payable
over 20 or 30 years. It may not be necessary to adopt
new or increased taxes to pay the principal and
interest payments on the debt, but it is presently
uncertain whether some services would be reduced or
eliminated in the absence of some type of increase in
revenues. The city's Cost/Benefit Study will include
an examination of ways to pay the debt and the
potential financial impacts on the city.
Analysis Prepared by : Mario DeBernardo / NAT. RES. / (916)
319-2092
FN: 0003760