The Texas Sunset Act was passed in 1977 to address the escalation of government budgets and the perception that government bureaucracy was not accountable. The Act applies to 130 agencies and other governmental entities. The Texas Sunset Advisory Commission, along with the State Auditor’s Office, the Legislative Budget Board, and the Governor’s Office of Budget and Planning, is charged with monitoring state agency performance. The Sunset Advisory Commission consists of five state representatives, five state senators and two public members.

The Texas Railroad Commission was created more than 125 years ago to regulate the rates and operations of railroads. The Railroad Commission later assumed responsibility for regulating oil and gas production and pipelines. The agency’s name is now a misnomer, as the commission no longer oversees railroad operations in the State.

The first three railroad commissioners were appointed by Gov. Hogg in 1891: John H. Reagan, Judge W.P. McLean and L.L. Foster. In 1984, the Texas Constitution was amended to provide for elective six-year overlapping terms for railroad commissioners who are elected statewide.

The Railroad Commission, in its third Sunset review since 2010, submitted a self-evaluation report in September 2015. In April 2016, the Sunset Commission staff released a full report on the sunset of the agency. A public hearing is set for Aug. 22, 2016, to take testimony on the staff report and the agency overall.

The Sunset Commission turns political every time an agency is under review. Competing interests work to implement their agendas, and this Sunset review is no exception. The recommendations by Sunset Commission staff seem to be out of touch with the promotion of oil and gas exploration in Texas. As the review goes forward, the impact on the industry could be great. Industry leaders and those with understanding of the Railroad Commission’s operations must closely monitor this process.

In the April 2016 full report, the Sunset Commission staff announced key recommendations related to seven issues. The seven key issues addressed are as follows:

  1. Continue the Railroad Commission of Texas for 12 Years With a Name That Reflects the Agency’s Important Functions.
  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.
  3. Oil and Gas Monitoring and Enforcement Need Improvements to Effectively Ensure Public Safety and Environmental Protection.
  4. Insufficient and Inequitable Statutory Bonding Requirements Contribute to the Large Backlog of Abandoned Wells.
  5. Improved Oversight of Texas’ Pipeline Infrastructure Would Help Further Ensure Public Safety.
  6. The Railroad Commission’s Contracting Procedures Are Improving, but Continued Attention Is Needed.
  7. The Railroad Commission’s Statute Does Not Reflect Standard Elements of Sunset Reviews.

There are several fiscal implications of the Sunset Commission’s recommendations:

  • Require production reports to be submitted electronically by Sept. 1, 2018 (an estimated savings of $46,835).
  • Develop a process for issuing expedited penalties (estimated revenue of $2.7 million annually).
  • Change the tier structure of blanket bonds (estimated revenue of $900,000 in 2019 and then $1.3 million annually thereafter).
    • Recommended tier structures:
      • 10 or fewer wells require a $22,500 blanket bond.
      • 11 to 20 wells require a $40,500 blanket bond.
      • 21 to 35 wells require a $74,000 blanket bond.
      • 36 to 60 wells require a $128,000 blanket bond.
      • 61 to 99 wells require a $213,000 blanket bond.
  • Establish a pipeline permit fee (estimated $1.8 million “savings” to the agency).

The current blanket bond requirements were established by statute in 1991. Under current statutory requirements: operators with one to 10 wells file financial assurance for $25,000; operators with 11 to 99 wells file financial assurance for $50,000; and operators with 100 or more wells file financial assurance for $250,000.

During the 2015 legislative session, the politics of the Railroad Commission sunset shined. At the last minute, the Senate conference committee added the Railroad Commission to a bill that would delay the sunset process for the agency until 2023. That change aggravated the agency’s critics, especially those advocating for penalties on industry related to urban drilling and wastewater disposal. The legislation was unsuccessful and the agency is currently in the Sunset process.

Considering the current financial status of the industry, this review process is more important than ever before. Industry focus should be on the upcoming public hearing set for Aug. 22, 2016. The Sunset Advisory Commission Staff Report is an important read. Historical reports are also available.

The public hearing will be live-streamed, and input may be sent to the Sunset Commission by clicking here.