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Sunset Advisory Commission Staff Report on Texas Railroad Commission

The Sunset Advisory Commission staff have issued their draft report on the Texas Railroad Commission. Sunset review of the RRC has been controversial. This is the third time the agency has gone through sunset review since 2010, although most agencies aren’t reviewed by the Sunset Commission more than once every twelve years. Previous sunset review reports, like the current draft, have been critical of some aspects of the RRC’s structure and work. Because the RRC’s principal jurisdiction is over the regulation of oil and gas exploration and production and pipelines, its functioning is important to land and mineral owners, and those owners should be familiar with how the RRC works and what its responsibilities are and should consider weighing in on issues raised by the Sunset Commission Report.

First, a little background on the sunset review process. The Sunset Commission is required by statute to periodically review the performance of all state agencies and make recommendations on whether they should continue to exist and how they could improve their performance. The idea is that all agencies “sunset” — cease to exist — unless the legislature re-authorizes the agency after review by the Sunset Commission. About 130 state agencies are subject to review under the Texas Sunset Act. Agencies typically undergo sunset review every 12 years.

The Sunset Advisory Commission consists of 12 members: five senators, five members of the House, one public member appointed by the Lieutenant Governor, and one public member appointed by the Speaker of the House. Each agency under review submits a self-evaluation report to the Sunset Commission. The Sunset staff then conducts a review of the agency and prepares a draft report with recommendations. The Sunset Commission holds public hearings and may adopt or revise the draft report. It then submits its report to the legislature for action. The recommendations may result in legislation amending the structure and responsibilities of the agency, or even abolishing the agency. Details about the Sunset process can be found here.

The RRC went through Sunset review in 2011 and again in 2013. Each of those times the legislature failed to take action on the Sunset Commission’s recommendations but instead re-authorized the RRC with no change. In the last legislative session, the legislature required the RRC to again undergo sunset review for the upcoming session beginning January 2017.

Some of the Sunset staff recommendations in the current draft report repeat recommendations from previous Sunset reports. For example, each sunset report has recommended that the agency’s name be changed to reflect the agency’s purpose – to regulate the energy industry. Although the RRC was originally formed to regulate railroads, its jurisdiction was later enlarged to cover the oil and gas and coal industries, and it no longer has any jurisdiction over railroads. Remarkably, the industry and some legislators opposed changing the agency’s name. Some have surmised that the industry would like the agency’s name unchanged because it would prefer that the public not know the agency’s functions.

Prior sunset reports have recommended that the structure of the agency be changed. The RRC is the only state agency run by three elected commissioners, who run state-wide. In 2011 the Sunset Commission recommended that the three-commissioner model be replaced by one elected commissioner. This recommendation was viewed by some as one of the reasons that the sunset bill for the RRC failed in that legislative session. In its 2013 report, the Sunset Commission recommended limits on campaign contributions to commissioners and a requirement that commissioners resign from office if they decide to become a candidate for another elected office. Those proposed changes were opposed by the Railroad Commissioners and were viewed as a likely reason that the 2013 RRC sunset bill failed to pass. So, this sunset report concludes that the legislature is well aware of the Sunset Commission’s prior recommendations “and can choose to address them during the upcoming legislative session.” The Sunset Commission chose not to discuss how many commissioners there should be, whether or how they should be elected, or limits on their ability to raise campaign contributions.

I will address the sunset report’s draft recommendations in this and later posts on this site. The recommendation I would like to discuss for this post is the report’s “Issue 2”:

Contested Hearings and Gas Utility Oversight Are Not Core Commission Functions and Should Be Transferred to Other Agencies to Promote Efficiency, Effectiveness, Transparency, and Fairness.

One of the criticisms by some of the RRC’s structure is that the Commissioners act both as an advocate promoting exploration and development of the state’s hydrocarbon resources and as an adjudicatory body, deciding what are commonly known as “contested cases.” There are many kinds of contested cases, involving the granting or revoking of permits, fines for violation of commission rules, well spacing, field rules, and other matters. Those controversies are heard in hearings presided over by “examiners,” who are RRC employees in the RRC’s Hearings Division. Some examiners are attorneys and some are petroleum engineers or geologists. Most hearings take place before a legal examiner and a technical examiner. After a hearing, at which the examiners may hear testimony and admit evidence, the examiners prepare a “proposal for decision” or PFD, making findings of fact and conclusions of law, for submission to the three Commissioners. PFD’s are presented to the Commissioners at Commission hearings, and the Commissioners vote to accept or reject the examiners’ recommendations.

The draft sunset report recommends that contested case hearings on RRC contested matters be handled by the State Office of Administrative Hearings (SOAH). This same recommendation was made in 2011 and 2013. Industry opposed the change. SOAH handles contested case hearings for all other agencies in the State. The sunset report criticizes the current system because the in-house examiners are employees of the Commissioners who hire them and set their salaries, and Commissioners receive substantial campaign contributions from the industry they regulate, “raising inevitable concerns about the potential influence [of the industry] on decision making.” The sunset report also concludes that the Commission’s “final orders lack transparency”:

As the final administrative decision maker, an agency’s commission or board can accept, modify, or vacate a proposal for decision issued by an administrative law judge [at SOAH]. For cases heard by SOAH, an agency’s changes to a proposal for decision must be placed in writing in the agency’s final order. Any such change must indicate whether the ALJ failed to properly apply or interpret applicable law, rules, policies, or prior administrative decisions; that a prior administrative decision on which the ALJ relied is incorrect or should be changed; or that a technical error in a finding of fact should be changed.

In comparison, the Railroad Commission provides no written explanation why its final order differs from the proposal for decision issued by the commission’s in-house ALJ. Railroad Commission final orders simply insert substitute findings of act or conclusions of law or note when the commission declines to adopt a recommendation. Requiring a written explanation places an appropriate and higher burden on an agency’s board or commission to explain its reasoning since its members did not hear all the testimony, evidence, and cross-examination directly that the administrative law judge did. The practice of providing a written explanation also provides clarity to parties in a case and for purposes of judicial review, since the court’s review is generally confined to the agency record, except for evidence of procedural irregularities. This practice discourages an agency’s commission or board from arbitrarily or capriciously changing a finding of fact or conclusion of law.

Industry spokesmen have already criticized the draft sunset report. “We believe that the special expertise necessary to understand and regulate the industry lies within the Railroad Commission,” the Texas Alliance of Energy Producers said in a statement. “We are hesitant, especially in these difficult times for the oil field, to weaken the state regulator and re-assign duties to other less experienced entities.”

I have personal experience with a contested case hearing in which the Commission reversed a proposal for decision with no written explanation. As I have written before, our firm represented the Klotzman family in a contested case hearing over an application for a drilling permit by EOG Resources. (enter “Klotzman” on search box to the right to read about the case.) EOG proposed to drill what has come to be known as an “allocation well.” The Klotzmans opposed the application, arguing that their lease did not authorize drilling allocation wells and no rule of the RRC authorized it to issue a permit for an allocation well. The hearing examiners agreed with the Klotzman family:

The examiners find no Texas statute, Commission Statewide Rule or Commission Final Order authorizing “allocation” wells. There is no Commission form on which to apply for “allocation” wells. … Further, the Commission has no authority, by Final Order or rule, to legitimize permits for “allocation” wells insofar as they are wells composed of leased acreage lacking pooling authority. EOG does not have a good faith claim to drill its proposed Klotzman (Allocation) Well No. 1H.

The Commission refused to adopt the examiners’ PFD, instead instructing them to revise the final order to recite a finding that EOG had a good-faith claim of right to drill its well and that the RRC has authority to issue the permit, without any explanation of its reasoning for doing so.

Other recommendations of the draft sunset report will be discussed in future posts.



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