NEW LAWS PREVENT CITIES FROM RESTRICTING OIL AND GAS OPERATIONS

GERALD J. PELS, LOCKE LORD LLP, HOUSTON

THE RECENT 84th Texas State legislature concluded with a bang - or more appropriately - a shot across the bow at local lawmakers. During the session, the Texas legislature passed two bills limiting local jurisdictions' authority (i) to restrict oil and gas operations, including fracking and disposal operations and (ii) to curtail the extent of fines that may be recovered by a local government for environmental infractions occurring within the local jurisdiction.

While the statutes have raised the ire of some local politicians as well as environmental groups, arguably they represent a continuation of mainstream judicial thought and a respect for deference to agency action. The two statutes in question are HB 40, which expressly addresses pre-emption of local regulation of oil and gas operations and HB 1794, which caps the amount of environmental penalties a local jurisdiction may seek against a regulated actor.

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HB 40

HB 40 was signed into law by Governor Greg Abbott on May 18, 2015. It precludes what are often called "Home Rule Bans" and amends the Texas National Resources Code to make clear that oil and gas operations are subject to the State's exclusive jurisdiction. Thus, under HB 40, a local jurisdiction cannot enact or enforce an ordinance that "bans, limits, or otherwise regulates" an "oil and gas operation." Oil and gas operation is defined broadly to include most any aspect of the oil and gas production process, including drilling, fracking, stimulation, reworking, completion, disposal, plugging and abandoning, and remediation. Leaving no question, HB 40 provides that local jurisdictions are specifically pre-empted from enacting legislation governing oil and gas operations, subject only to very limited exceptions.

WHAT HB 40 DOES AND DOES NOT DO

HB 40 is short and sweet. The statute:

Makes clear that oil and gas operations are within the State's exclusive jurisdiction.
Provides that Texas state statutory authority expressly preempts local ordinances seeking to regulate oil and gas operations.
Defines oil and gas operations broadly - from drilling to remediation.

HB 40 does not wholly limit local, police power type authority. It does not prohibit local jurisdictions from regulating activities occurring above the surface, including fire and emergency response, typical nuisance conditions like noise or lighting, or requirements concerning notice or setbacks.

Where, however, a local jurisdiction acts within these limited parameters, it must enact a "commercially reasonable" ordinance, meaning the ordinance must allow a reasonably prudent operator to fully and effectively develop, produce and transport oil and gas. Moreover, the local ordinance cannot otherwise be pre-empted by a state or federal law. HB 40 sets up a presumptive standard that a local ordinance will be considered commercially reasonable if two conditions are met. First, the local ordinance must have been in effect for at least five years. Second, the local ordinance must have allowed oil and gas operations to continue during that period.

ANALYSIS OF HB 40

In many ways HB 40 makes clear that under the National Resources Code, the State of Texas has exclusive jurisdiction over statewide oil and gas operations. While the National Resources Code provided that the Railroad Commission had jurisdiction over, among other things: (i) common carrier pipelines, (ii) oil and gas wells, including their owners and operators, and (iii) persons engaged in drilling or operating oil or gas wells, the amendments to the Code definitively establish that such jurisdiction is exclusive and pre-emptive. Express language like that in HB 40 is a touchstone to ensure state statutory supremacy. HB 40 likely draws on recent decisions in other jurisdictions addressing local bans and their potentially detrimental effect on business.

Left unchecked, these Home Rule Bans could materially damage businesses through creating a labyrinthine patchwork of bridges and tunnels that businesses would have to traverse to conduct operations throughout the state. It is hard to imagine (or justify) competing operational frameworks from city to city and town to town within just miles of one another. Judicial touchstones exist to appreciate under what circumstances courts will invalidate Home Rule Bans. Home Rule Bans are typically invalidated where state statutes contain "supercedure" provisions making clear that the "field" is exclusively occupied by the state and that state laws will pre-empt local acts covering the same subject matter. This is what HB 40 seeks to do.

HB 40 also mitigates the possibility that Home Rule Bans could contradict Agency permitting authority - whether for drilling, disposal, remediation, or other facets of operation. Absent HB 40, a traditional legal basis for agency oversight of specialized operations could be undermined. That is, in highly specialized areas, like oil and gas production or environmental regulation - states entrust specialized agencies like the Railroad Commission or Texas Commission on Environmental Quality (TCEQ) to administer the laws of the state, by implementing regulations, conducting permitting hearings, and enforcing compliance.

If local authorities could in essence undermine permitting decisions - already designed to address public health, safety, and public participation, businesses could be hamstrung by a lack of predictability from city to city and town to town. In addition, Home Rule Bans could skew well established permitting processes by giving protestors multiple bites at the apple to stall or prevent initiation of operations, even where State statutory safeguards have been observed and satisfied.

HB 1794

On June 16, 2015, Governor Abbott signed into law HB 1794, which limits local governments' authority to recover fines and penalties for environmental violations alleged against regulated actors. By all accounts, the legislation is one of the first of its type in the country and has sparked sharp debate between the regulated community, local governmental officials, and environmental advocacy groups.

At issue is the extent of fines and penalties that may be recovered by a local government for environmental infractions occurring within its jurisdiction. HB 1794 basically establishes a cap of $2.15 million on fines and penalties that may be recovered by a local authority in a lawsuit it brings. It does not affect penalties the state may seek. It also clarifies what factors may be considered when determining penalties in such lawsuits and establishes a better defined limitations period during which such suit may be brought.

Many believe that HB 1794 was directed at Harris County, Texas - but why? Harris County is the home to Houston - which contains one of the largest heavy industrial complexes in the nation. Historically, the Texas legislature authorized local governments, like Harris County, to bring independent suits against regulated entities for environmental violations with or without corresponding action by the State regulatory agency - now the TCEQ. Harris County has become an aggressive plaintiff in these actions. Public accounts indicate the County has brought about 10 such cases per year. Obviously, the potential exists for significant environmental penalties associated with releases from pipelines, transporters, and service industries located in Texas, or other regulatory violations enforced by the TCEQ.

The lawsuit that particularly caught the eye of the regulated community involved alleged violations concerning discharge to groundwater at a commercial/retail facility in Houston. In that lawsuit, Harris County brought claims for fines and penalties against a commercial shopping center owner seeking up to $173 million in fines related to a historic chlorinated solvent release.

WHAT HB 1794 DOES AND DOES NOT DO

HB 1794 is a relatively straight forward two page statute. On its face, the statute:

Caps the recovery of a local government at $2.15 million for civil penalties in a suit it brings. Specifically, the first $4.3 million are split between the State and local government and amounts recovered in excess of $4.3 million are awarded to the State.
Requires the finder of fact to consider the same factors in assessing a penalty that the TCEQ must consider in determining penalties. Note, HB 1794 does not, on its face, require the factors listed in the Water Code to be exclusively used, but does require their consideration. Prior to HB 1794, there was no reference point or penalty matrix that a judge or jury would have to consider in determining appropriate penalties.
The law establishes a five-year statute of limitations beginning on the earlier of the date the regulated entity (i) notifies the TCEQ of a violation or (ii) receives a notice of enforcement from the TCEQ. Stated simply, the language establishing the accrual date for a claim requires the local governmental authority to take action within five years after it has knowledge of a violation.
The law is not retroactive. By its terms, it is inapplicable to violations occurring before its September 1, 2015 effective date.

The law is relatively narrow and does not:

Preclude enforcement action by the TCEQ or the State Attorney General, nor cap penalties the State may seek or recover.
Affect the rights of private litigants to bring claims under state or federal environmental statutes.
Affect the TCEQ's right to compel cleanup under the Texas Health and Safety Code or otherwise.
Affect the State or a local government from bringing a criminal action or seeking criminal penalties.

ANALYSIS OF HB 1794

It is not unreasonable to conclude that the net effect of HB 1794 may be to focus taxpayers' funding of local government expenses on lawsuits addressing environmental conditions, as opposed to being a revenue driver. That is, the law will not affect any governmental authority, whether state or local, from bringing suit seeking appropriate environmental response to address contamination or facility compliance. Moreover, the vast majority of penalties sought by regulatory authorities are well under $2.15 million and are determined with some level of consistency by state environmental authorities using precedent and publicly available penalty matrixes. A far different result could occur in state court actions where a judge or jury unfamiliar with environmental penalty assessments could assign unreasonably disproportionate penalties to a defendant, which typically may not even be exposed to significant penalties for the matter at issue.

HB 1794 neither limits the State's authority to bring actions or recover penalties, nor does it hinder actions to compel cleanup. Moreover, it does not limit any authority - state or local - to pursue criminal actions for environmental infractions. Thus, HB 1794 largely leaves intact the deterrent effect of environmental regulation.

By limiting potential outer lying claims and better establishing a framework for penalty assessments in suits brought by local government, the Act potentially serves a valuable function to both the regulated community and those charged with regulatory oversight. That is, predictability in enforcement will often lead to greater compliance, including disclosure and rectification of violations.

Where potential impediments to this process of violation identification and rectification exist, compliance - is potentially jeopardized, which benefits no one. This could be an unforeseen consequence of local governmental suits seeking penalties that are either unpredictable or potentially materially disproportionate to the alleged violations or activities at issue.

CONCLUSION

The Texas legislature acted wisely in enacting HB 40 and HB 1794. The statutes seek to strike a balance between allowing businesses to operate effectively and protecting communities from disruptive aspects of the oil and gas and in the case of HB 1794, other businesses. By restricting local authorities' ability to ban operations already approved by the state and by limiting local authorities' ability to assert fines in excess of the norm - business planning can embrace predictability and consistency from city to city.

On the other hand, agencies will continue to function in their traditional role. Agencies will implement rules addressing important technical aspects of statutes, and business operations will be less likely to be impeded by local jurisdictions based upon local politics (and funding) du jour. The nature of agency relationships will, of course, be affected over time, not only by changes in science, but also by changes in a state's political direction, each of which will be important regarding the shape of things to come in the Texas oil and gas industry.

ABOUT THE AUTHOR

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Gerald J. Pels is a partner in the law firm Locke Lord LLP's Houston office and has been one of the leaders of the Texas environmental legal community for more than 30 years. His diverse practice focuses on the areas of environmental compliance, counseling, and litigation.

Texas statutes limit local authority

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