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F I S C A L I M P A C T R E P O R T

SPONSOR Trujillo

DATE TYPED 2/23/05

HB 871

SHORT TITLE Oil Conservation Division Appeals

SB

ANALYST Ford

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

Minimal

Oil and Gas Fa-

cilities Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates SB 777

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

Minimal

Oil and Gas Facili-

ties Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Energy, Minerals and Natural Resources Department (EMNRD)

Environment Department (NMED)

Office of the State Engineer (OSE)

SUMMARY

Synopsis of Bill

House Bill 871 amends the New Mexico Oil and Gas Act and the Geothermal Resources Con-

servation Act to clarify the authority of the Oil Conservation Division (OCD) to regulate dis-

charges and potential discharges of water contaminants at oil and gas production and processing

facilities, to increase penalties for certain violations, and to clarify and streamline provisions for

appeals from decisions of the Oil Conservation Commission (OCC). The bill creates a new fund,

House Bill 871 -- Page 2

the oil and gas facilities fund to be administered by EMNRD. Money is appropriated from the

fund to ENMRD for administering the program.

Significant Issues

Discharge Permits: The bill would consolidate the authorization to issue discharge permits and

collect fees, currently issued under authority of both the Water Quality Act (WQA) and the Oil

and Gas Act, under the Oil and Gas Act. The fees collected would be deposited in the newly

created Oil and Gas Facilities Fund, analogous to the Water Quality Fund, which would be ap-

propriated to defray the costs of administering the program.

According to EMNRD, the provisions of the bill regarding permits and fees are not designed to

change existing OCD regulatory practices, but are designed to consolidate OCD regulation of the

disposition of contaminants under the Oil and Gas Act. Issues have arisen as to whether certain

facilities can properly be regulated using current law, and whether the discharge permit require-

ments of the WQA apply to potential or unintended discharges of water contaminants. The bill

would specifically authorize OCD to adopt, under the Oil and Gas Act, permitting requirements

analogous to those it now administers under the WQA.

The bill would further authorize OCD to charge permitting fees for discharge permits specifi-

cally authorized by the bill, which are currently authorized by the WQA. The bill limits OCD to

charging fees sufficient to defray the estimated cost of investigation, issuance, modification and

renewal of such permits.

Penalties: The penalty provisions with respect to the Oil and Gas Act and the Geothermal Act

make the following changes in existing law:

1.

OCD will no longer have to prove that a violator acted "knowingly and willfully" in order

to assess civil penalties,

2.

Maximum civil penalties for violations which result in the unauthorized release of water

contaminants are increased from $1,000 per day ($2,500 per day under the Geothermal

Act) to $10,000 per day,

3.

OCD will have express power to assess civil penalties by administrative hearing, and will

not have to sue violators in court, except to collect penalties already assessed, and

4.

Penalties for criminal violations are increased from $10,000 per day to $15,000 per day.

According to EMNRD, the Oil and Gas Act was enacted in 1935 and the provision for civil pen-

alties for violations of the Act not exceeding $1,000 per offense, per day, limited to “knowing

and willful” violations," was part of the original act. The provision for “recovery” of civil penal-

ties by suit in district court led one district court recently to conclude that the OCD cannot assess

civil penalties by administrative process. The penalty provisions of the Geothermal Act provide

for a $2,500 per day maximum, but otherwise track the Oil and Gas Act.

Much has changed since 1935. At that time the principal purpose of oil and gas regulation was

to control competitive practices within the industry that resulted in wasteful methods of produc-

tion. Increasingly in recent years the focus has shifted to protection of the environment. The

OCD and the rules it adopts under the Oil and Gas Act are now the primary means by which the

State of New Mexico protects its water resources from deterioration that could result from im-

prudent oil and gas industry activity. Also the years since the Legislature adopted the $1,000 per

House Bill 871 -- Page 3

day maximum penalty for violations of the Oil and Gas Act have witnessed an increase in the

market price of crude oil from less than $1 per barrel to more than $40 per barrel. To perform its

responsibility to protect New Mexico's environment and water resources under present day eco-

nomic conditions OCD needs enforcement tools comparable to those provided in other environ-

mental laws.

Other New Mexico environmental statutes uniformly provide for strict liability for civil penal-

ties. That is, a violator is subject to penalty for any violation regardless of knowledge or intent,

thereby placing affirmative responsibility upon industry to conduct its activities in such a way as

to prevent violations from occurring. Virtually all such statutes provide for higher penalties than

does the Oil and Gas Act and for assessment of civil penalties by administrative process.

Appeals: The appeal provisions in the bill clarify the time when an appeal from a decision of the

OCC must be filed in district court, eliminate provisions of existing law mandating the filing of a

motion for rehearing with the OCC as a prerequisite to appeal to district court, and repeal a pro-

vision for appeal of OCC decisions to the Secretary of Energy Minerals and Natural Resources.

According to EMNRD, the provision that allows appeals of final decisions of the OCC to the

Secretary has been used only once in 28 years. The Oil and Gas Act already allows for two ad-

ministrative hearings. The bill also improves administrative efficiency by eliminating require-

ments that parties desiring to appeal OCC decisions must first file applications for rehearing.

These provisions have made it necessary for parties to OCC proceedings to file such motions,

and for the OCC to address them, even when OCC had already fully considered all issues.

FISCAL IMPLICATIONS

The discharge and permit fee provisions of the bill will maintain the current funding level to

OCD. Currently, the authority to charge these fees is derived from the WQA. If some permitted

facilities are successful in establishing that they are not subject to the WQA, OCD would lose

some operational funding. The penalty provisions will obviate the need for OCD to go to court

to enforce its rules and orders, thereby avoiding possible costs of increased staff.

Continuing Appropriations

This bill creates a new fund and provides for continuing appropriations. The LFC objects to in-

cluding continuing appropriation language in the statutory provisions for newly created funds.

Earmarking reduces the ability of the legislature to establish spending priorities.

ADMINISTRATIVE IMPLICATIONS

House Bill 871 streamlines much of OCD’s operations and should therefore result in improved

administrative efficiency.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

This bill is a duplicate of Senate Bill 777.

House Bill 871 -- Page 4

TECHNICAL ISSUES

NMED raises a possible technical issue, noting that the term “water contaminant” is not defined.

NMED suggests an amendment to use the definition of “water contaminant” that is contained in

the WQA.

In Section 4 of the bill, subsection B establishes that the civil penalty for unauthorized discharge

of any water contaminant into the environment shall be $10 thousand per day. In subsection C,

the bill provides that the OCD or the OCC shall take into account the seriousness of the violation

and any good-faith efforts to comply with the applicable requirement when assessing the penalty.

These two sections seem to conflict. Subsection B establishes a mandatory penalty while sub-

section C seems to imply that the OCD or OCC shall have some discretion in assessing penalties.

EF/yr