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Texas Sunset Commission Makes Recommendations on Review of Railroad Commission

Texas’ Sunset Advisory Commission has issued its Staff Reports on review of three of the state’s most important regulatory agencies: the Texas Railroad Commission (RRC), the Texas Commission on Environmental Quality (TCEQ), and the Public Utility Commission (PUC). These reports will frame the debate on legislation to renew the mandates of these regulatory bodies in the coming legislative session. Landowners should be aware of the Sunset Commission’s recommendations and be prepared to weigh in on those issues that affect landowners’ interests. Links to the full staff reports of the Sunset Commission can be found on the Commission’s website at . Below is a summary of some key facts and recommendations on the RRC.

The Texas Railroad Commission is one of the oldest state administrative agencies in the nation. It was created by constitutional amendment in 1890 to regulate rates and operations of railroads and other common carriers.  It was given authority over oil and gas pipelines in 1917, and later was given authority to regulate all aspects of oil and gas exploration and production in Texas. In 1894, Texas voters amended their constitution to provide that the RRC would be governed by a board of three elected members serving six-year staggered terms. That method of choosing the Commission has remained in effect ever since. It is the only state agency whose members are elected.  The boards of the PUC, the TCEQ, and the Texas Workforce Commission, for example, are all governed by three part-time commissioners appointed by the governor.

The RRC’s jurisdiction over railroads was taken away entirely in 2005. Today it regulates oil and gas exploration and production, pipeline safety, surface mining, and gas utility rates. The RRC has a staff of 662, 279 of whom operate out of 13 field offices. Its total budget in FY 2009 was $85.3 million, $29 million of which came from general appropriations.  (For comparison, the TCEQ had 2,935 staff and a budget of $658 million.)

The issues and recommendations of the Sunset staff report included the following:

Create Texas Oil and Gas Commission, governed by a part-time appointed board, to take over RRC’s regulatory duties.

The report recommends that the Commission’s name be changed to reflect its function, and that it be governed by a three-member part-time appointed board. The report says that this would save taxpayers $1.2 million annually by eliminating the full-time Commissioners’ salaries and staff. The report concludes that state-wide election of Commissioners creates the appearance of conflicts: “Elected officials rely on campaign contributions to seek office, re-election or otherwise, creating an opportunity for regulated entities to help elect commissioners they believe will be sympathetic to their issues. In contrast, Governor-appointed, part-time policymaking boards or commissions govern most Texas state agencies and have long been established as a way of ensuring accountability for state agencies and their activities.”

The report discusses whether some or all of the responsibilities of the RRC should be taken over by the TCEQ, since many of the functions of the RRC involve enforcement of laws intended to protect the environment, and the overlap in jurisdiction between the two agencies is often confusing. The report recognizes that the RRC’s record of environmental enforcement has not been a good one and needs improvement, but it concludes that the Commission should remain a separate agency and responsible for enforcement of environmental laws in the oil and gas exploration and production sector. The report reasons that the ultimate remedy for non-compliance with RRC rules is to prohibit the operator from producing its wells until it comes into compliance, something the TCEQ could not easily do if it separately regulated environmental laws governing production operations.

Require that the RRC’s regulatory programs be self-supporting by raising fees on the industry.

The report says that about $23.4 million or close to half othe the RRC’s oil and gas regulatory budget for FY 2011 comes from general revenue that is not reimbursed by fees or other collections.  “This use of General Revenue does not follow the standard for most regulatory agencies, whose regulatory programs are self-supporting. Ideally, funding from General Revenue for regulatory functions and staff, including benefits, should be offset by fees or other collections from the regulated industry and deposited to General Revenue.” Most of the fees the RRC collects from the industry are set by statute. The report recommends that the RRC be given authority to set its own fees so as to offset the cost of the agency’s regulation. The report recognizes that this would substantially increase fees. As examples, the report suggests that the fee for a drilling permit should go from $267 per well to a fee of $133 plus $0.10 per foot of well depth; that there should be a surcharge for horizontal well permits of an additional $0.10 per foot of horizontal drilling; and that the annual license fee for operators should increase from $495 to $495 plus $25 per well operated.  These suggested surcharges would raise an additional $25 million in revenues.

This recommendation could resonate with the Legislature this session, which will be looking for ways to raise money without raising taxes. The industry is sure to protest, arguing that it already pays the State more than $2 billion in severance taxes, which are unique to the industry.

Recommendations for Improvement of RRC’s Regulatory Enforcement

The most interesting part of the Sunset report is its discussion of the RRC’s enforcement practices. The report concludes that “current enforcement processes hinder the Commission’s ability to prevent future threats to the environment and public safety.”  Some facts found by the report:

– RRC inspectors conducted more than 128,000 inspections in FY 2009, finding more than 80,000 violations. The field staff forwarded less than 4 percent of those violations to the central office for enforcement action. (In contrast, the TCEQ forwarded about 20 percent of its more than 11,000 violations for enforcement action in the same year.) The Commission issued 379 penalties, assessing more than $2 million in fines.

– In FY 2009, the Commission found more than 18,000 water protection violations. it took enforcement action on less than 1 percent of those violations, about 150.

– The Commission received 681 complaints related to oil and gas production in FY 2009, and found 1,997 violations based on those complaints. But those complaints resulted in only 91 enforcement actions.

The report concludes that the RRC does not make enough use of penalties for violations: “The efficient and fair use of penalties plays a key role in deterring and punishing violators, and thus increases compliance. The Commission and its field staff go to great lengths to ensure complaince through monitoring and inspections; however, the Commission takes relatively few enforcement actions, resulting in a lack of deterrence for future non-compliance.”

The report notes that complaints of limited enforcement action taken by the RRC are not new. The issue was raised in the 2001 Sunset review of the RRC. The report notes that oil and gas drilling has moved into urban areas and is having greater potential impact on underground water resources, which will result in greater scrutiny for the industry and RRC enforcement. “A lack of consistent enforcement can contribute to a public perception that the Commission is not willing to take strong enforcement action.”

The report also criticizes the RRC for not adequately tracking violations, so that it is unable to determine when repeat violators deserve harsher penalties.

To force the RRC to increase its enforcement activities, the report recommends thatL

  • The RRC be required to develop, by rule, an enforcement policy to guide staff in evaluating and ranking violations.
  • The RRC be required to deveop and adopt a rule establishing penalty guidelines, assigning penalties to different violations based on their risk and severity.
  • Hearings on enforcement actions should be conducted before the State’s independent State Office of Admistrative Hearings, rather than before administrative law judges that are employees of the RRC.
  • The RRC be directed to establish a method of tracking violations and enforcement actions and develop a clear and consistent method for analyzing violation data and trends.
  • The RRC be directed to publish additional complaint and enforcement data on its website.

The Legislature has its hands full in the upcoming session, and it will be difficult to enact any meaningful reforms of agencies, like the RRC, up for sunset review. The Sunset Commission’s report highlights problems with the RRC’s lack of enforcement of regulations to protect the land and environment and recommends changes that could force the agency to improve its practices. Landowners who like the report’s recommendations should tell their legislators.

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