The Sunset Advisory Commission has concluded interviews with the Railroad Commission of Texas staff as well as their own analysis and audit and has published the staff report. The overall purpose of the Sunset Advisory Commission’s review is to assess the need to retain the agency, look for potential duplication of programs, and consider changes to improve agency operation. The statutory recommendations adopted at the Sunset Advisory Commission hearing will be considered in Sunset legislation by the 82nd Texas Legislature in 2011.
The Summary from the report and an overview of the recommendations are below.
Summary-
Despite being charged with overseeing Texas’ oil and gas industry – a vital sector of the State’s economy, and one that continues to be fraught with controversy – the Railroad Commission of Texas (Commission) has quietly fulfilled its mission for nearly 120 years. As the State’s oldest regulatory agency, the Commission’s early history is rooted in regulating railroad rates and tariffs, a function for which the agency also acquired its name. However, over time, state and federal law have stripped away the agency’s involvement with railroads. Meanwhile, the Legislature has broadened its regulatory role to include the economic oversight of oil and gas production and, more recently, a greater focus on environmental protection. To illustrate the role of oil and gas production in Texas, Appendix A of this report details the amount of severance taxes paid by the industry.
For most of its lengthy tenure, the Commission primarily interacted with oil and gas producers and citizens, mostly in rural Texas, accustomed to the ways and impacts of oil and gas production. Today, however, as technological advances allow oil and gas exploration in areas of the state previously thought to be economically unfeasible, the Commission faces both
a new set of regulatory challenges and a new constituency.
The Sunset review of the Railroad Commission has occurred in the midst of these game-changing events, as oil and gas exploration continues to move into urban and suburban areas of the state, followed by public outcries against such development. Sunset staff evaluated the structure and functions of the Railroad Commission within this new regulatory environment, and identified several critical concerns with the agency’s oversight, funding, and enforcement processes, as outlined below.
Although historic, the three-member, elected Railroad Commission is an anomaly in Texas government. Few agencies have full-time boards and none of these boards have members elected on a statewide basis. In assessing this unique policy body, staff found no ongoing need for a three-member, elected structure. In fact, critics would argue that elected Commissioners pose a conflict for the agency’s regulatory role, as the costs of a statewide campaign often rely on campaign contributions from the regulated industry. Compounding these concerns is the potential for voters and the public in general to be confused about the actual duties of the office given its outdated name. Interestingly, a recent unsuccessful candidate for the Commission even included railroad safety as part of his campaign platform.
Another unusual aspect of the agency’s structure relates to its funding. While the estimated $186 billion oil and gas industry makes a significant contribution to the State, the Commission relies on General Revenue to fund almost half of its more than $50 million budget for this industry’s oversight. In contrast, most other state regulatory agencies are required by statute or rider to be self-supporting. This current funding model also limits the agency’s ability to react as fluctuations in the industry occur, such as the need for more inspectors when drilling unexpectedly expands.
Enforcement, always a key focus of a Sunset review, revealed that the Commission pursues enforcement action in a very small percentage of the thousands of violations its inspectors identify each year. Part of the reason for the large number of violations is that the Commission’s enforcement process is not structured to deter repeat violations. The Commission also struggles to present a clear picture of its enforcement activities, frustrating the public.
Sunset staff also examined Railroad Commission functions that may be similar to or duplicated by the work of other state entities. Specifically, with respect to the Texas Commission on Environmental Quality, staff found that current split jurisdiction between the two agencies does cause some confusion, but processes exist to address gaps in regulation. Review of other agency functions, such as the Railroad Commission’s promotion of propane as an alternative fuel, did reveal significant duplication of efforts, as well as conflicts with its regulatory role.
To address the problems identified, this report contains various recommendations to reposition the State’s oversight of the oil and gas industry, including a fundamental restructuring of the agency and its governing board. The cumulative impact of these recommendations aims to create an agency poised to provide robust oversight of oil and gas exploration and production. Although many different approaches to this end exist, these recommendations afford an opportunity to address the governance, organizational structure, and funding of the State’s oil and gas regulator.
Another structural issue, identified as part of the Sunset review of the Public Utility Commission, relates to the Railroad Commission’s regulation of gas utilities. With the Railroad Commission, Texas Commission on Environmental Quality, and Public Utility Commission concurrently under Sunset review, timing provided a unique opportunity to evaluate the State’s method of providing utility oversight. While gas utility regulation has a long history at the Railroad Commission, Sunset staff found that the State could benefit from merging all its utility regulatory functions into PUC. Recommendations relating to the transfer of gas utility oversight and ratemaking can be found in the Supplement to the PUC Report, which is also included within this report.
Summary of Issues/Recommendations:
- The 19th Century Design of the Three-Member, Elected Railroad Commission No Longer Aligns With the Agency’s Current-Day Mission
- Using General Revenue to Regulate the Oil and Gas Industry Shifts Oversight Costs From the Industry to Taxpayers
- Current Enforcement Processes Hinder the Commission’s Ability to Prevent Future Threats to the Environment and Public Safety
- The Commission’s Marketing of Propane Is No Longer Necessary
- Texas’ Interstate Pipelines Lack Needed Damage Prevention Oversight to Ensure Public Protection
- Impending Retirements of Key Staff Could Leave the Commission Vulnerable to a Significant Loss of Institutional Knowledge
- The State Could Benefit From Combining Regulatory Functions Related to Gas and Water Utilities in the Public Utility Commission
The complete report can be viewed at: http://www.sunset.state.tx.us/82ndreports/rct/rct_sr.pdf