Additionally, operators of bay and offshore wells may be eligible for a reduced financial security amount either administratively or after a hearing if an administrative reduction is denied. Finally, under the proposed amendments, operators can reduce the amount of additional financial security required for inactive bay and offshore wells by restoring any shut-in wells to active production.

Ms. Savage has also estimated the cost to individual, small, and micro-business operators of compliance with the proposed amendments to §3.14 and §3.78 relating to universal bonding. This cost will consist of annual premiums for individual or blanket performance bonds and any applicable bank fees for issuance of letters of credit. Loss of use of capital filed as financial security in the form of a cash deposit or pledged as collateral to obtain a performance bond or letter of credit may also be a cost factor for individual, small, and micro-business operators. Depending on the circumstances of a particular operator, these costs of compliance may be offset, in whole or in part, by savings realized as a result of elimination of nonrefundable annual fees as forms of financial security and elimination of annual fees for obtaining plugging extensions for inactive wells.

The Commission does not have access to definitive data regarding the amount of annual premiums charged to operators subject to the Commission's jurisdiction for the issuance of individual or blanket performance bonds or bank fees charged to such operators for issuance of letters of credit. For the purpose of its analysis of the cost of compliance with the proposed amendments to §3.78 relating to financial security requirements for operators of bay and offshore wells, the Commission assumed an annual bond premium of not more than 12.5%.

The Commission estimates that a substantial majority of individual, small, and micro-business well operators have fewer than 100 wells. An individual, small business, or micro-business operator of 10 or fewer wells paying a bond premium of 12.5% of the face amount of the required $25,000 blanket bond would incur an annual bond cost of $3,125. A similar operator of more than 10 but fewer than 100 wells paying a bond premium of 12.5% of the face amount of the required $50,000 blanket bond would incur an annual bond cost of $6,250. These are the same annual costs that are incurred by operators filing financial security in the form of the nonrefundable annual fee provided by current §3.78(d)(4), now proposed to be deleted, and also, such operators currently are required to pay an annual fee of $300 per inactive well to obtain plugging extensions pursuant to current §3.14(b)(2)(A)(iv) and §3.78(b)(6), which are also proposed to be deleted.

Presently, individual, small business, and micro-business operators who are eligible to file financial security in the form of the annual nonrefundable fee provided by current §3.78(d)(3), now proposed to be deleted, incur an annual cost of $1,000, but operators filing this form of financial security currently are required to pay the annual $300 per inactive well fee to obtain plugging extensions, a fee being eliminated by the proposed universal bonding amendments to §3.14 and §3.78.

The Commission estimates that the 12.5% annual bond premium assumed by the Commission for the purpose of estimating the cost of compliance with the proposed amendments by individual, small business, and micro-business operators is the maximum premium any such operator will be required to pay. The Commission anticipates that the actual annual premium to these operators will be a lesser amount. In the course of the 2003 rulemaking involving previous amendments to §3.78, the Texas Alliance of Energy Producers, believed by the Commission to be an association whose members are primarily individual, small business, and micro-business operators, filed comments informing the Commission that in an April 2003 survey of its members, only 5.8% of the respondents stated that they were experiencing annual bond premiums of more than 3%. The Commission also anticipates that bank fees incurred by individual, small business, and micro- business operators to obtain issuance of letters of credit will be substantially less than 12.5% of the face amount of the letters of credit.

While the Commission does not have access to data disclosing gross receipts, number of employees, or hours of labor of operators subject to the Commission's jurisdiction enabling it to make a definitive analysis of the precise economic effect of the proposed universal bonding amendments on small and micro- businesses of the type required by Texas Government Code, §2006.002, Ms. Savage has nonetheless estimated the cost of compliance per employee and per $100 of sales for these operators. Production during 2003 of oil and gas by operators that filed an alternate form of financial security and the 2003 average domestic first purchase price of $27.45 per barrel of crude oil and average wellhead price of $5.09 per mcf of natural gas, as reported by the Energy Information Administration through November 2003 for crude oil and through September 2003 for natural gas have been used in these estimates.

Texas Government Code, §2006.001 defines "micro-business" as a legal entity that, among other things, has not more than 20 employees, and a "small business" as a legal entity that, among other things, has fewer than 100 employees or less than $1 million in annual gross receipts. The Commission's estimates assume that: (1) an operator filing an alternate form of financial security and reporting 2003 production which, at 2003 prices, accounts for gross receipts of less than $500,000, is a micro-business operator; (2) an operator filing an alternate form of financial security and reporting 2003 production which, at 2003 prices, accounts for gross receipts of at least $500,000 but less than $1 million in annual gross receipts, is a small business operator.

From 2003 production records and records of the Commission's P-5/Financial Assurance Unit, Ms. Savage has determined that the average "small business" operator, as previously defined, that filed an alternate form of financial security operated 12 wells and had production which, at 2003 prices, accounted for $704,546 in gross receipts. On this basis, the Commission estimates that the per $100 of sales cost to the "average" small business operator of compliance with the proposed universal bonding amendments to §3.14 and §3.78 will be approximately: (1) $0.89, if a $50,000 blanket bond covering 12 wells is filed and the annual bond premium is 12.5% of the bond amount; or (2) $0.21, if a $50,000 blanket bond covering 12 wells is filed and the annual bond premium is 3% of the bond amount.

From the same data, Ms. Savage has determined that the average micro-business operator, as previously defined, that filed an alternate form of financial security operated 12 wells and had 2003 production which, at 2003 prices, accounted for approximately $80,155 in gross receipts. On this basis, the Commission estimates that the per $100 of sales cost to the "average" micro-business operator of compliance with the proposed universal bonding amendments to §3.14 and §3.78 will be approximately: (1) $7.80, if a $50,000 blanket bond covering 12 wells is filed and the annual bond premium is 12.5% of the bond amount; or (2) $1.87, if a $50,000 blanket bond covering 12 wells is filed and the annual bond premium is 3% of the bond amount.

Assuming that the "average" small business operator, as previously defined, has 30 employees, the annual per employee cost of compliance with the proposed universal bonding amendments to §3.14 and §3.78 will be approximately; (1) $208.33, if a $50,000 blanket bond is filed and the annual bond premium is 12.5% of the bond amount; or (2) $50.00, if a $50,000 blanket bond is filed and the annual bond premium is 3% of the bond amount. Assuming that the "average" micro-business operator, as previously defined, has 6 employees, the annual per employee cost of compliance with the universal bonding amendments to §3.14 and §3.78 will be approximately: (1) $1,041.67, if a $50,000 blanket bond is filed and the annual bond premium is 12.5% of the bond amount, or (2) $250.00, if a $50,000 blanket bond is filed and the annual bond premium is 3%.

The Commission has considered that the amount of the required bond under §3.78 is a function of the total depth of all wells operated, in the case of individual performance bonds, and a function of the number of wells operated, in the case of blanket performance bonds. Individual small business and micro-business operators may therefore incur actual compliance costs per $100 of sales and per employee that are lower or higher than those the Commission has estimated for the "average" small business or micro-business operator, depending on the depth or number of wells operated, the number of employees of the operator, and the operator's gross receipts. The incremental per $100 of sales and per employee cost of compliance with the proposed universal bonding amendments to §3.78 for small business and micro- business operators that have previously filed an alternate form of financial security will be materially less than the cost estimated in the previous analyses or will be zero, because the annual cost of obtaining a bond or letter of credit will be offset, in whole or in part, by the annual nonrefundable fees these operators now file as financial security and the annual fees they are required to pay to obtain plugging extensions for inactive wells. The Commission has considered also that some small business and micro-business operators now file an individual or blanket performance bond, letter of credit, or cash deposit as financial security and that the proposed universal bonding amendments to §3.14 and §3.78 will not increase the cost of compliance to these operators.

Comparison of the cost to small business and micro-business operators of compliance with the proposed universal bonding amendments to §3.14 and §3.78 with the cost of compliance to the largest businesses affected by the proposed amendments is complicated by the fact that most all of the largest operators subject to the Commission's jurisdiction are not affected by the amendments. These large operators, for the most part, already file a performance bond, letter of credit, or cash deposit as financial security. The largest operator, in terms of gross receipts identified by the Commission based on 2003 production of oil and gas, that filed an alternate form of financial security operates 10 wells and had 2003 production which, at 2003 prices, accounted for gross receipts of approximately $44,997,000. Assuming that this operator filed a blanket bond in the amount of $25,000, the annual per $100 of sales cost of compliance with the proposed universal bonding amendments to §3.14 and §3.78 would be a fraction of one cent whether the annual bond premium is 12.5% or 3% of the bond amount.

Assuming that a large business operator has 100 employees, the annual per employee cost to the operator of compliance with the proposed universal bonding amendments to §3.78 would be approximately: (1) $31.25, if a blanket bond in the amount of $25,000 is filed and the annual bond premium is 12.5% of the bond amount; (2) $7.50, if a blanket bond in the amount of $25,000 is filed and the annual bond premium is 3% of the bond amount; (3) $62.50, if a blanket bond in the amount of $50,000 is filed and the annual bond premium is 12.5% of the bond amount; (4) $15.00, if a blanket bond in the amount of $50,000 is filed and the annual bond premium is 3% of the bond amount; (5) $312.50, if a blanket bond in the amount of $250,000 is filed and the annual bond premium is 12.5% of the bond amount; or (6) $75.00, if a blanket bond in the amount of $250,000 is filed and the annual bond premium is 3% of the bond amount.

The Commission does not foreclose the possibility that some individual, small business, and micro-business operators may have difficulty in obtaining a performance bond or letter of credit or be unable to file a cash deposit. However, under Texas Natural Resources Code, §§91.103 and 91.104, as amended by Senate Bill 310, 77th Legislature (2001), effective September 1, 2004, the Commission does not have the discretion to exempt small and micro-business operators from the requirement that all non-exempt operators file financial security in the form of an individual or blanket performance bond, letter of credit, or cash deposit. As of April 28, 2004, there were 5,689 operators having activities which as of that date required the filing of financial security, and of these, 5,122 had filed financial security in the form of an individual or blanket performance bond, letter of credit, or cash deposit. As of January 18, 2001, only 8.6% of all operators had filed one of these forms of financial security. Senate Bill 310, amending Texas Natural Resources Code, §§91.103 and 91.104, to require universal bonding effective September 1, 2004, was enacted in 2001, and the Commission anticipates that operators will have had sufficient time to prepare for universal bonding so that the number of operators that are unable to comply will be minimal.

Ms. Savage has estimated that there will be no economic effect on small business and micro-business operators of the proposed technical amendments to §§3.5, 3.8, 3.32, 3.37, 3.38, 3.57, 3.73, 3.86, and 3.96, because the amendments are non-substantive in nature.

James M. Doherty, Hearings Examiner, Hearings Section, Office of General Counsel, has determined that for each year of the first five years that the amendments will be in effect, the primary public benefit will be the implementation of universal bonding and additional financial security for bay and offshore wells required by the Legislature. This additional financial security should reduce the amount of funds required from the OFCUF to plug inactive and abandoned wells, including bay and offshore wells. Funds from the OFCUF will then be available for clean-up and plugging operations in the areas of greatest need.

The Commission proposes that the amendments will become effective on September 1, 2004. This proposed effective date is required in order to comply with Texas Natural Resources Code, §§91.103, 91.104, 91.1041, 91.1042, 91.107, and 91.109.

Comments on the proposal may be submitted to Rules Coordinator, Office of General Counsel, Railroad Commission of Texas, P.O. Box 12967, Austin, Texas 78711-2967; online at www.rrc.state.tx.us/rules/commentform.html; or by electronic mail to rulescoordinator@rrc.state.tx.us. The Commission will accept comments for 30 days after publication in the Texas Register . Comments should refer to Docket No. 20-0239008. The Commission encourages all interested persons to submit comments no later than the deadline. The Commission cannot guarantee that comments submitted after the deadline will be considered. For further information, call James M. Doherty at (512) 463-7152. The status of Commission rulemakings in progress is available at www.rrc.state.tx.us/rules/proposed.html.

The Commission proposes the amendments to §§3.5, 3.8, 3.14, 3.32, 3.37, 3.38, 3.57, 3.73, 3.78, 3.86, and 3.96 pursuant to subsection (b) of Texas Government Code, §2001.006, which authorizes the Commission to adopt rules in preparation for the implementation of legislation that has become law but has not taken effect; and pursuant to Texas Natural Resources Code, §§81.051 and 81.052, which provide the Commission with jurisdiction over all persons owning or engaged in drilling or operating oil or gas wells in Texas and the authority to adopt all necessary rules for governing and regulating persons and their operations under the jurisdiction of the Commission, and under the provisions of Texas Natural Resources Code, §§91.103, 91.104, 91.1041, 91.1042, 91.107, and 91.109 which relate to financial security requirements for operators subject to the Commission's jurisdiction.

Texas Natural Resources Code, §§81.051, 81.052, 81.0521, 81.0522, 85.202, 85.2021, 88.011, 91.101, 91.1013, 91.103, 91.104, 91.1041, 91.1042, 91.105-91.108, 91.109, 91.1091, 91.111-91.113, and 91.142, are affected by the proposed amendments.

Statutory authority: Texas Government Code, §2001.006, and Texas Natural Resources Code, §§81.051, 81.052, 81.0521, 81.0522, 85.202, 85.2021, 88.011, 91.101, 91.1013, 91.103, 91.104, 91.1041, 91.1042, 91.105-91.108, 91.109, 91.1091, 91.111-91.113, and 91.142.

Cross-reference to statutes: Texas Government Code, §2001.006, and Texas Natural Resources Code, §§81.051, 81.052, 81.0521, 81.0522, 85.202, 85.2021, 88.011, 91.101, 91.1013, 91.103, 91.104, 91.1041, 91.1042, 91.105-91.108, 91.109, 91.1091, 91.111-91.113, and 91.142.

Issued in Austin, Texas on June 8, 2004.

§3.5.Application To Drill, Deepen, Reenter, or Plug Back.

(a) - (c) (No change.)

(d) Testing of existing wells in other reservoirs inside the casing. For an existing well, an operator may request authorization to commence operations to deepen inside the casing or plug back prior to the granting of a permit to deepen or plug back.

(1) (No change.)

(2) Operations of deepening inside the casing or plugging back shall not be commenced until the district office has reviewed and approved the request. Testing pursuant to this authorization shall be completed within 90 days from the date the district office approves the request.

(A) - (B) (No change.)

(C) Within 30 days of completion of testing, the operator must either file an application for a permit to produce a reservoir tested pursuant to this subsection or file an amended completion report in accordance with §3.16 of this title (relating to Log and Completion or [ of ] Plugging Report) (Statewide Rule 16) with a copy of the request signed by the district office and a statement that a permit to produce a tested reservoir is not being sought, or if the well has been plugged and abandoned, a plugging report including reservoir and perforation data. If a permit is not obtained for the tested reservoirs and/or an allowable is not assigned, the producer shall report all test production in the producer's monthly report filed for the last permitted reservoir in which the well was completed and may request authorization to sell the test production. The test production may be sold after such authorization is granted.

(e) (No change.)

(f) Drilling permit fee. With each application or materially amended application, the applicant shall submit to the commission a nonrefundable fee as determined by §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds, and Alternate Forms of Financial Security Required To Be Filed~~ ]) (Statewide Rule 78).

(g) (No change.)

(h) Plats. An application to drill, deepen, plug back, or reenter shall be accompanied by a neat, accurate plat, with a scale of one inch equals 1,000 feet. The plat for the initial well on the lease, pooled unit, or unitized tract shall show the entire lease, pooled unit, or tract, including all tracts being pooled. If necessary to show the entire lease, the scale may be one inch equals 2,000 feet. Plats for subsequent wells on a lease or pooled unit shall show at least the lease or pooled unit line nearest the proposed location and the nearest survey/section lines. The Division Director or the director's delegate may approve plats with other scales upon request.

(1) - (2) (No change.)

(3) Requirements for plats as provided for in §3.11, §3.37, §3.38, and §3.86 of this title (relating to Inclination and Directional Surveys Required, Statewide Spacing Rule, Well Densities, and Horizontal Drainhole Wells) may supplement or replace the plat requirements set out above.

§3.8.Water Protection.

(a) - (c) (No change.)

(d) Pollution control.

(1) Prohibited disposal methods. Except for those disposal methods authorized for certain wastes by paragraph (3) of this subsection, subsection (e) of this section, or §3.98 of this title (relating to Standards for Management of Hazardous Oil and Gas Waste), or disposal methods required to be permitted pursuant to §3.9 of this title (relating to Disposal Wells) (Rule 9) or §3.46 of this title (relating to Fluid Injection into Productive Reservoirs) (Rule 46), no person may dispose of any oil and gas wastes by any method without obtaining a permit to dispose of such wastes. The disposal methods prohibited by this paragraph include, but are not limited to, the unpermitted discharge of oil field brines, geothermal resource waters, or other mineralized waters, or drilling fluids into any watercourse or drainageway, including any drainage ditch, dry creek, flowing creek, river, or any other body of surface water. [ For any disposal method required to be permitted pursuant to §3.75 of this title (relating to Discharges to Waters of the State) (Rule 77), no permit issued under this section or authorization contained in this section satisfies the requirements of §3.75. ]

(2) - (9) (No change.)

(e) (No change.)

(f) Oil and gas waste haulers.

(1) A person who transports oil and gas waste for hire by any method other than by pipeline shall not haul or dispose of oil and gas waste off a lease, unit, or other oil or gas property where it is generated unless such transporter has qualified for and been issued an oil and gas waste hauler permit by the commission. Hauling of inert waste, asbestos-containing material regulated under the Clean Air Act (42 USC §§7401 et seq), polychlorinated biphenyl (PCB) waste regulated under the Toxic Substances Control Act (15 USCA §§2601 et seq), or hazardous oil and gas waste subject to regulation under §3.98 of this title (relating to Standards for Management of Hazardous Oil and Gas Waste), is excluded from this subsection. This subsection is not applicable to the hauling of oil and gas wastes for recycling. For purposes of this subsection, injection of salt water or other oil and gas waste into an oil and gas reservoir for purposes of enhanced recovery does not qualify as recycling. A person who has a salt water hauler permit does not need to apply for an oil and gas waste hauler permit until the person is scheduled to file an application for permit renewal.

(A) Application for an oil and gas waste hauler permit will be made on the commission-prescribed form, and in accordance with the instructions thereon, and must be accompanied by:

(i) the permit application fee required by §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds, and Alternate Forms of Financial Security Required To Be Filed~~ ]) (Statewide Rule 78);

(ii) - (iv) (No change.)

(B) - (C) (No change.)

(2) (No change.)

(g) (No change.)

(h) Penalties. Violations of this section may subject a person to penalties and remedies specified in the Texas Natural Resources Code, Title 3, and any other statutes administered by the commission. The certificate of compliance for any oil, gas, or geothermal resource well may be revoked in the manner provided in §3.73 [ ~~§3.68~~ ] of this title (relating to Pipeline Connection; Cancellation of Certificate of Compliance; Severance [ ~~Pipeline Connection and Severance~~ ]) (Rule 73) or violation of this section.

(i) Coordination between the Railroad Commission of Texas and the Texas Commission on Environmental Quality or its successor agencies. The Railroad Commission and the Texas Commission on Environmental Quality both have adopted by rule a memorandum of understanding regarding the division of jurisdiction between the agencies over wastes that result from, or are related to, activities associated with the exploration, development, and production of oil, gas, or geothermal resources, and the refining of oil. The memorandum of understanding is adopted in §3.30 of this title (relating to Memorandum of Understanding between the Railroad Commission of Texas (RRC) and the Texas Commission on Environmental Quality (TCEQ)). [ Adoption of memorandum of understanding by reference. The memorandum of understanding between the Railroad Commission of Texas, the Texas Water Commission, and the Texas Department of Health, which concerns the division of jurisdiction among the agencies over wastes that result from, or are related to, activities associated with the exploration, development, and production of oil, gas, or geothermal resources, and the refining of oil, is adopted by reference. The effective date of the memorandum of understanding adopted by reference is December 1, 1987. Copies of the memorandum of understanding are available upon request from the Railroad Commission of Texas, Oil and Gas Division, Underground Injection Control Section, P.O. Drawer 12967, Austin, Texas 78711-2967, (512) 463-6790. ]

(j) Consistency with the Texas Coastal Management Program. The provisions of this subsection apply only to activities that occur in the coastal zone and that are subject to the CMP rules.

(1) Specific Policies.

(A) (No change.)

(B) Discharge of Oil and Gas Waste to Surface Waters. The following provisions apply to discharges of oil and gas waste that occur in the coastal zone:

(i) no discharge of oil and gas waste to surface waters may cause a violation of the Texas Surface Water Quality Standards adopted by the Texas Commission on Environmental Quality or its successor agencies [ ~~Natural Resource Conservation Commission~~ ] and codified at Title 30, Texas Administrative Code, Chapter 307;

(ii) - (iv) (No change.)

(v) the commission shall notify the Texas Commission on Environmental Quality or its successor agencies [ ~~Natural Resource Conservation Commission~~ ] and the Texas Parks and Wildlife Department upon receipt of an application for a permit to discharge oil and gas waste that is comprised, in whole or in part, of produced waters to waters under tidal influence.

(2) - (3) (No change.)

§3.14.Plugging.

(a) Definitions and application to plug.

(1) The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise:

(A) - (K) (No change.)

(L) Unbonded operator--An operator that has a current and active organization report on file with the Commission that filed a nonrefundable annual fee as financial security prior to September 1, 2004, and is not required by §3.78 of this title (relating to Fees and Financial Security Requirements) to file an individual performance bond, blanket performance bond, letter of credit, or cash deposit as its financial security until the first date for annual renewal of the operator's organization report after September 1, 2004 [ but that does not have a current individual performance bond, blanket performance bond, letter of credit, or cash deposit as its financial security under §3.78 of this title (relating to Fees, Performance Bonds, and Alternate Forms of Financial Security Required to be Filed) (Statewide Rule 78) ].

(M) - (N) (No change.)

(2) The operator shall give the Commission notice of its intention to plug any well or wells drilled for oil, gas, or geothermal resources or for any other purpose over which the Commission has jurisdiction, except those specifically addressed in §3.100(e)(1) [ ~~§3.100(f)(1)~~ ] of this title (relating to Seismic Holes and Core Holes) (Statewide Rule 100), prior to plugging. The operator shall deliver or transmit the written notice to the district office on the appropriate form.

(3) - (5) (No change.)

(b) Commencement of plugging operations , [ ~~and~~ ] extensions , and testing .

(1) (No change.)

(2) Plugging operations on each dry or inactive well shall be commenced within a period of one year after drilling or operations cease and shall proceed with due diligence until completed. Plugging operations on delinquent inactive wells shall be commenced immediately unless the well is restored to active operation. For good cause, a reasonable extension of time in which to start the plugging operations may be granted pursuant to the following procedures.

(A) Plugging of inactive wells operated by unbonded operators. During the interim period between September 1, 2004, and the first date for annual renewal of an unbonded operator's organization report after September 1, 2004, the [ ~~The~~ ] Commission or its delegate may administratively grant an extension of up to one year of the deadline for plugging an inactive well that is operated by an unbonded operator if the following criteria are met:

(i) The well and associated facilities are in compliance with all other laws and Commission rules;

(ii) The operator's organization report is current and active;

(iii) The operator has, and upon request provides evidence of, a good faith claim to a continuing right to operate the well; and

[ ~~(iv)~~ The operator has paid the proper fee as provided in §3.78 of this title (relating to Fees, Performance Bonds, and Alternate Forms of Financial Security Required To Be Filed) (Statewide Rule 78); and]

(iv) [ ~~(v)~~ ] The operator has tested the well in accordance with the provisions of paragraph (3) of this subsection [ ~~subparagraph (D) of this paragraph~~ ] and files with its application proof of either:

(I) a fluid level test conducted within 90 days prior to the application for a plugging extension demonstrating that any fluid in the wellbore is at least 250 feet below the base of the deepest usable quality water stratum; or,

(II) a hydraulic pressure test conducted during the period the well has been inactive and not more than four years prior to the date of application demonstrating the mechanical integrity of the well.

(B) Plugging of inactive wells operated by bonded operators. An operator that maintains valid, Commission-approved financial security in the form of an individual performance bond, blanket performance bond, letter of credit, or cash deposit as provided in §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds, and Alternate Forms of Financial Security Required to be Filed~~ ]) (Statewide Rule 78) will be granted a one-year plugging extension for each well it operates that has been inactive for 12 months or more at the time its annual organizational report is approved by the Commission if the following criteria are met:

(i) The well and associated facilities are in compliance with all laws and Commission rules; and,

(ii) The operator has, and upon request provides evidence of, a good faith claim to a continuing right to operate the well.

(i) The Commission or its delegate may revoke a plugging extension if the operator of the well that is the subject of the extension fails to maintain the well and all associated facilities in compliance with Commission rules; fails to maintain a current and accurate organizational report on file with the Commission; fails to provide the Commission, upon request, with evidence of a continuing good faith claim to operate the well; or fails to obtain or maintain financial security as required by §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds, and Alternate Forms of Financial Security Required to be Filed~~ ]) (Statewide Rule 78).

(ii) If the Commission or its delegate declines to grant or continue a plugging extension or revokes a previously granted extension, the operator shall either return the well to active operation or, within 30 days, plug the well or request a hearing on the matter.

(3) [ ~~(D)~~ ] The operator of any well more than 25 years old that becomes inactive and subject to the provisions of this subsection [ ~~paragraph~~ ] or the operator of any well for which a plugging extension is sought under the terms of subparagraph (A) of paragraph (2) of this subsection [ ~~this paragraph~~ ] shall plug the well or successfully conduct a fluid level or hydraulic pressure test establishing that the well does not pose a potential threat of harm to natural resources, including surface and subsurface water, oil and gas.

(A) [ ~~(i)~~ ] In general, a fluid level test is a sufficient test for purposes of this paragraph [ ~~subparagraph~~ ]. The operator shall give the district office written notice specifying the date and approximate time it intends to conduct the fluid level test at least 48 hours prior to conducting the test; however, upon a showing of undue hardship, the district director or the director's delegate may grant a written waiver or reduction of the notice requirement for a specific well test. The director or the director's delegate may require alternate methods of testing if necessary to ensure the well does not pose a potential threat of harm to natural resources. Alternate methods of testing may be approved by the director or the director's delegate by written application and upon a showing that such a test will provide information sufficient to determine that the well does not pose a threat to natural resources.

(B) [ ~~(ii)~~ ] No test other than a fluid level test shall be acceptable without prior approval from the district director or the director's delegate. The district director or the director's delegate shall be notified at least 48 hours before any test other than a fluid level test is conducted. Mechanical integrity test results shall be filed with the district office and fluid level test results shall be filed with the Commission in Austin. Test results shall be filed on a Commission-approved form, within 30 days of the completion of the test. Upon request, the operator shall file the actual test data for any mechanical integrity or fluid level test that it has conducted.

(C) [ ~~(iii)~~ ] Notwithstanding the provisions of subparagraph (B) of this paragraph [ ~~clause (ii) of this subparagraph~~ ], a hydraulic pressure test may be conducted without prior approval from the district director or the director's delegate, provided that the operator gives the district office written notice specifying the date and approximate time for the test at least 48 hours prior to the time the test will be conducted, the production casing is tested to a depth of at least 250 feet below the base of usable quality water strata, or 100 feet below the top of cement behind the production casing, whichever is deeper, and the minimum test pressure is greater than or equal to 250 psig for a period of at least 30 minutes.

(D) [ ~~(iv)~~ ] If the operator performs a hydraulic pressure test in accordance with the provisions of subparagraph (C) of this paragraph [ ~~clause (iii) of this subparagraph~~ ], the well shall be exempt from further testing for five years from the date of the test, except to the extent that [ ~~compliance with paragraph (2) of subsection (b) of this section requires more frequent testing. Further,~~ ] the Commission or its delegate may require the operator to perform testing more frequently to ensure that the well does not pose a threat of harm to natural resources. The Commission or its delegate may approve less frequent well tests under this paragraph [ ~~subparagraph~~ ] upon written request and for good cause shown provided that less frequent testing will not increase the threat of harm to natural resources.

(E) [ ~~(v)~~ ] A well subject to the testing requirements of this paragraph [ ~~subparagraph~~ ] shall not be returned to active operation unless a fluid level test of the well has been performed within 12 months prior to the return to activity or a mechanical integrity test of the well has been performed within 60 months prior to the return to activity.

[ ~~(3)~~ Transfer of operatorship. A transfer of operatorship submitted for any well or lease will not be approved unless the operator acquiring the well or lease has on file with the Commission financial security as provided in §3.78 of this title (relating to Fees, Performance Bonds, and Alternate Forms of Financial Security Required to be Filed) (Statewide Rule 78).]

(4) - (5) (No change.)

§3.32.Gas Well Gas and Casinghead Gas Shall Be Utilized for Legal Purposes.

(a) The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Fugitive emissions--Releases of gas from lease production, gathering, compression, or gas plant equipment components, including emissions from valve stems, pressure relief valves, flanges and connections, gas-operated valves, compressor and pump seals, pumping well stuffing boxes, casing-to-casing bradenheads subject to the provisions of §3.17 of this title (relating to Pressure on Bradenhead [ ~~in Oil, Gas or Geothermal Resource Operations~~ ]), pits, and sumps, that cannot reasonably be captured and sold or routed to a vent or flare.

(2) - (5) (No change.)

(b) Activities authorized by this section may be subject to rules and regulations promulgated by the United States Environmental Protection Agency under the federal Clean Air Act or the Texas Commission on Environmental Quality [ ~~Natural Resources Conservation commission~~ ] under the Texas Clean Air Act.

(f) Gas Releases in Oil and Gas Production Operations.

(1) The following releases of gas resulting from routine oil and gas production operations are necessary in the efficient drilling and operation of oil and gas wells and are hereby authorized subject to the requirements of subsection (e) of this section. The released gas shall be measured or estimated in accordance with §3.27 of this title (relating to Gas To Be Measured and Surface Commingling of Gas ) and reported and charged against lease allowable production.

(A) - (E) (No change.)

(2) The commission or the commission's delegate may administratively grant or renew an exception to the requirements or limitations of this subsection subject to the requirements of subsection (h) to allow additional releases of gas if the operator of a well or production facility presents information to show the necessity for the release. The volume of gas that is released must be measured or estimated in accordance with §3.27 of this title (relating to Gas To Be Measured and Surface Commingling of Gas ) and reported on the appropriate commission form and shall be charged to the operator's allowable production. Necessity for the release includes, but is not limited to, the following situations:

(A) - (E) (No change.)

(g) Gas releases from gas gathering system, gas plant or gas handling operations.

(1) The operator of a gas gathering system, gas plant, gas compressor facility or other gas handling equipment not directly associated with lease production of gas, shall not intentionally allow gas to be released for a period of more than 24 hours after the start of an upset condition. The operator shall notify the appropriate commission district office by telephone or facsimile as soon as reasonably possible after the release of gas begins. The volume of gas that is released must be measured or estimated in accordance with §3.27 of this title (relating to Gas To Be Measured and Surface Commingling of Gas ) and reported on the appropriate commission form. The provisions of this subsection do not apply to accidental releases which are subject to or reported pursuant to any other commission rule.

(2) (No change.)

(h) Exceptions. The commission or the commission's delegate may administratively grant an exception authorized by this section provided that the requirements of this subsection are met.

(1) The request for an exception shall be accompanied by the fee required by §3.78(b)(5) of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds and Alternate Forms of Financial Security Required To Be Filed~~ ]).

(2) - (7) (No change.)

(8) One application for exception to the requirements of this section may be filed for multiple releases from gas wells, commission-designated oil leases, gas gathering systems, gas compressors or other gas handling facilities when the release of gas is the result of a full or partial shut-down of a gas gathering system, gas plant, gas compressor or other gas handling facility under subsection (f)(1)(C) or (g)(1). Each well, lease or facility must be clearly identified by the applicant and a single fee paid under §3.78(b)(5) of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds and Alternate Forms of Financial Security Required To Be Filed~~ ]).

(i) Renewal and Amendment of Exceptions.

(1) - (2) (No change.)

(3) An operator shall file an application and fee for renewal of an exception with the commission 21 days prior to expiration of the existing exception authority. The request for renewal shall be accompanied by the fee required by §3.78(b)(5) of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds and Alternate Forms of Financial Security Required To Be Filed~~ ]).

(4) - (6) (No change.)

(j) (No change.)

§3.37.Statewide Spacing Rule.

(a) Distance requirements.

(1) (No change.)

(2) When an exception to this section is desired, application shall be made by filing the proper fee as provided in §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds, and Alternate Forms of Financial Security Required To Be Filed~~ ]) and the appropriate form according to the instructions on the form, accompanied by a plat as described in subsection (c) of this section. A person acquainted with the facts pertinent to the application shall certify that all facts stated in it are true and within the knowledge of that person.

(A) - (B) (No change.)

(3) (No change.)

(b) - (m) (No change.)

§3.38.Well Densities.

(a) - (f) (No change.)

(g) Filing requirements.

(1) Application. An application for permit to drill shall include the fees required in §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds, and Alternate Forms of Financial Security Required To Be Filed~~ ]) and shall be certified by a person acquainted with the facts, stating that all information in the application is true and complete to the best of that person's knowledge.

(2) - (4) (No change.)

(5) Certifications. Certifications required under paragraphs (3) and (4) of this subsection shall be filed on Form W-1A [ ~~(revised 5/2001)~~ ], Substandard Acreage Certification.

(A) - (E) (No change.)

(h) - (i) (No change.)

§3.57.Reclaiming Tank Bottoms, Other Hydrocarbon Wastes, and Other Waste Materials.

(a) (No change.)

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Tank bottoms--A mixture of crude oil or lease condensate, water, and other substances that is concentrated at the bottom of producing lease tanks and pipeline storage tanks (commonly referred to as basic sediment and water or BS&W ).

(2) - (5) (No change.)

(1) - (9) (No change.)

(10) Reclamation plants permitted under this section shall file financial security as required under §3.78(l) [ ~~§3.78(r)~~ ] of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds and Alternate Forms of Financial Security Required To Be Filed~~ ]).

(d) Operation of a reclamation plant.

(1) The following provisions apply to any removal of tank bottoms or other hydrocarbon wastes from any oil producing lease tank, pipeline storage tank, or other production facility.

(A) Notwithstanding the provisions of §3.85(a)(8) [ ~~§3.72(a)(8)~~ ] of this title (relating to Manifest To Accompany Each Transport of Liquid Hydrocarbons by Vehicle), an operator of a reclamation plant or an authorized person shall execute a manifest in accordance with §3.85 [ ~~§3.72~~ ] of this title (relating to Manifest To Accompany Each Transport of Liquid Hydrocarbons by Vehicle), upon each removal of tank bottoms or other hydrocarbon wastes from any oil producing lease tank, pipeline storage tank, or other production facility. In addition to the information required pursuant to §3.85 [ ~~§3.72~~ ] of this title (relating to Manifest To Accompany Each Transport of Liquid Hydrocarbons by Vehicle), the operator of the reclamation plant or other authorized person shall also include on the manifest:

(i) - (ii) (No change.)

(B) - (C) (No change.)

(2) - (3) (No change.)

(e) - (h) (No change.)

§3.73.Pipeline Connection; Cancellation of Certificate of Compliance; Severance.

(a) - (f) (No change.)

(g) If a certificate of compliance has been cancelled, the Commission may not issue a new certificate of compliance until the owner or operator of the property covered by the certificate of compliance submits to the Commission a reissuance fee as required by §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds and Alternate Forms of Financial Security Required To Be Filed~~ ]) (Statewide Rule 78); and

(1) - (2) (No change.)

(h) - (j) (No change.)

§3.78. Fees and Financial Security Requirements [ ~~Fees, Performance Bonds and Alternate Forms of Financial Security Required To Be Filed~~ ].

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise:

(1) - (2) (No change.)

~~[ ~~(3)~~ An acceptable record of compliance--]~~

~~[ ~~(A)~~ A record of compliance showing:]~~

~~[ ~~(i)~~ No enforcement orders issued; and]~~

~~[ ~~(ii)~~ No outstanding violations; or]~~

~~[ ~~(B)~~ A record of compliance showing:]~~

[ ~~(i)~~ Only one enforcement order, provided the order specifies that it shall not be considered to meet the elements of subparagraph (A) of this definition and provided the requirements of the order are met;]

~~[ ~~(ii)~~ No enforcement orders issued other than those that are resolved in the order referenced in clause (i) of this subparagraph;]~~

~~[ ~~(iii)~~ No outstanding violations other than those resolved in the order referenced in clause (i) of this subparagraph.]~~

(3) [ ~~(4)~~ ] Commercial facility--A facility whose owner or operator receives compensation from others for the storage, reclamation, treatment, or disposal of oil field fluids or oil and gas wastes that are wholly or partially trucked or hauled to the facility and whose primary business purpose is to provide these services for compensation if:

(A) the facility is permitted under §3.8 of this title (relating to Water Protection);

(B) the facility is permitted under §3.57 of this title (relating to Reclaiming Tank Bottoms, Other Hydrocarbon Wastes, and Other Waste Materials);

(C) the facility is permitted under §3.9 of this title (relating to Disposal Wells) and a collecting pit permitted under §3.8 is located at the facility; or

(D) the facility is permitted under §3.46 of this title (relating to Fluid Injection into Productive Reservoirs) and a collecting pit permitted under §3.8 is located at the facility.

(4) [ ~~(5)~~ ] Financial security--An individual performance bond, blanket performance bond, letter of credit, or cash deposit filed with the Commission.

~~[ ~~(6)~~ Alternate form of financial security--Payment of a nonrefundable annual fee to the Commission.]~~

(5) [ ~~(7)~~ ] Bay well--Any well under the jurisdiction of the Commission for which the surface location is either:

(A) located in or on a lake, river, stream, canal, estuary, bayou, or other inland [ ~~navigable~~ ] waters of the state and which requires plugging by means other than conventional land- based methods, including, but not limited to, use of a barge, use of a boat, dredging, or building a causeway or other access road to bring in the necessary equipment to plug the well ; or,

(B) located on state lands seaward of the mean high tide line of the Gulf of Mexico in water of a depth at mean high tide of not more than 100 feet that is sheltered from the direct action of the open seas of the Gulf of Mexico.

(6) [ ~~(8)~~ ] Land well--Any well subject to Commission jurisdiction for which the surface location is not in or on inland or coastal waters.

(7) [ ~~(9)~~ ] Offshore well--Any well subject to Commission jurisdiction for which the surface location is on state lands in or on the Gulf of Mexico, that is not a bay well.

(8) [ ~~(10)~~ ] Officers and owners--Any persons owning or controlling an organization including officers, directors, general partners, sole proprietors, owners of more than 25% ownership interest, any trustee of an organization, and any person determined by a final judgment or final administrative order to have exercised control over the organization.

(9) [ ~~(11)~~ ] Letter of credit--An irrevocable letter of credit issued:

(A) on a Commission-approved form;

(B) by and drawn on a third party bank authorized under state or federal law to do business in Texas; and

(C) renewed and continued in effect until the conditions of the letter of credit have been met or its release is approved by the Commission or its authorized delegate.

(10) [ ~~(12)~~ ] Bond--A surety instrument issued:

(A) on a Commission-approved form;

(B) by and drawn on a third party corporate surety authorized under state law to issue surety bonds in Texas; and

(C) renewed and continued in effect until the conditions of the bond have been met or its release is approved by the Commission or its authorized delegate.

(11) Director--The director of the Commission's Oil and Gas Division or the director's delegate.

(b) Filing fees. The following filing fees are required to be paid to the Railroad Commission.

(1) - (5) (No change.)

[ ~~(6)~~ With each application for an extension of time to plug a well pursuant to Commission rules, an applicant who has filed an alternate form of financial security as provided for under this rule, shall submit to the Commission a nonrefundable fee of $300.]

(6) [ ~~(7)~~ ] With each application for an oil and gas waste disposal well permit, the applicant shall submit to the Commission a nonrefundable fee of $100 per well.

(7) [ ~~(8)~~ ] With each application for a fluid injection well permit, the applicant shall submit to the Commission a nonrefundable fee of $200 per well. Fluid injection well means any well used to inject fluid or gas into the ground in connection with the exploration or production of oil or gas other than an oil and gas waste disposal well.

(8) [ ~~(9)~~ ] With each application for a permit to discharge to surface water other than a permit for a discharge that meets national pollutant discharge elimination system (NPDES) requirements for agricultural or wildlife use, the applicant shall submit to the Commission a nonrefundable fee of $300.

(9) [ ~~(10)~~ ] If a certificate of compliance for an oil lease or gas well has been canceled for violation of one or more Commission rules, the operator shall submit to the Commission a nonrefundable fee of $300 for each severance or seal order issued for the well or lease before the Commission may reissue the certificate pursuant to §3.58 of this title (relating to Oil, Gas, or Geothermal Resource Producer's Reports) (Statewide Rule 58).

(10) [ ~~(11)~~ ] With each application for issuance, renewal, or material amendment of an oil and gas waste hauler's permit, the applicant shall submit to the Commission a nonrefundable fee of $100.

(11) [ ~~(12)~~ ] With each Natural Gas Policy Act (15 United States Code §§3301-3432) application, the applicant shall submit to the Commission a nonrefundable fee of $150.

(12) [ ~~(13)~~ ] Hazardous waste generation fee. A person who generates hazardous oil and gas waste, as that term is defined in §3.98 of this title (relating to Standards for Management of Hazardous Oil and Gas Waste), shall pay to the Commission the fees specified in §3.98(z).

(13) [ ~~(14)~~ ] A check or money order for any of the aforementioned fees shall be made payable to the Railroad Commission of Texas. If the check accompanying an application is not honored upon presentment, the permit issued on the basis of that application, the allowable assigned, the exception to a statewide rule granted on the basis of the application, [ ~~the extension of time to plug a well,~~ ] the certificate of compliance reissued, or the Natural Gas Policy Act category determination made on the basis of the application may be suspended or revoked.

(14) [ ~~(15)~~ ] If an operator submits a check that is not honored on presentment, the operator shall, for a period of 24 months after the check was presented, submit any payments in the form of a credit card, cashier's check, or cash.

(d) Financial security [ ~~and alternate forms of financial security~~ ]. Except for those operators exempted under subsection (g)(7) of this section, any [ ~~Any~~ ] person, including any firm, partnership, joint stock association, corporation, or other organization, required by Texas Natural Resources Code, §91.142, to file an organization report with the Commission must also file financial security in one of the following forms:

(1) an individual performance bond;

(2) a blanket performance bond; or

~~[ ~~(3)~~ a nonrefundable annual fee of $1,000, if:]~~

[ ~~(A)~~ the Commission or its designee determines that individual and blanket performance bonds as specified by this section are not obtainable at reasonable prices as provided for under subsection (f) of this section;]

[ ~~(B)~~ the person can demonstrate to the Commission an acceptable record of compliance with all Commission rules, orders, licenses, permits, or certificates that relate to safety or the prevention or control of pollution for the previous 48 months and the person has no outstanding violations; and]

[ ~~(C)~~ if the person is a firm, partnership, joint stock association, corporation, or other organization, its officers, directors, general partners, or owners of more than 25% ownership interest or any trustee must also not have any outstanding violations.]

~~[ ~~(4)~~ a nonrefundable annual fee equal to 12.5% of the face amount of the performance bond that otherwise would be required; or]~~

(3) [ ~~(5)~~ ] a letter of credit or cash deposit in the same amount as required for an individual performance bond or blanket performance bond.

(4) An unbonded operator that has a current and active organization report and filed a nonrefundable annual fee as its financial security prior to September 1, 2004, may continue to perform operations subject to the Commission's jurisdiction with such financial security until the first date after September 1, 2004, for annual renewal of the operator's organization report, at which time the operator shall file financial security as required by subsection (g) of this section.

~~[ ~~(e)~~ Eligibility for nonrefundable $1,000 fee.]~~

[ ~~(1)~~ A person filing an organization report for the first time in order to perform any Commission-regulated operations is a new organization and is not eligible to file the nonrefundable fee of $1,000.]

~~[ ~~(2)~~ A person who filed an initial organization report less than 48 months prior to the current filing is not eligible to file the nonrefundable fee of $1,000.]~~

[ ~~(3)~~ A change in name, without any other organizational change, of a person registered with the Commission does not indicate a new organization. If the Commission determines that only a name change has occurred, then a person operating under a new name may file the nonrefundable fee of $1,000 if the person meets all other eligibility requirements.]

[ ~~(4)~~ An individual registered with the Commission as a sole proprietor or who is a general partner of a partnership that is registered with the Commission and who reorganizes his or her oil and gas operations under a new legal entity or establishes a new and separate entity will be considered to have satisfied the 48- month eligibility requirement for filing the nonrefundable fee of $1,000.]

~~[ ~~(5)~~ A surviving or new corporation or other entity resulting from a merger under the Texas Business Corporation Act, Part Five, may file the nonrefundable fee of $1,000 if:]~~

~~[ ~~(A)~~ the existing record of compliance for each entity that is a party to the merger qualifies;]~~

~~[ ~~(B)~~ the records of compliance for the officers and owners of the surviving or new entities qualify; and]~~

~~[ ~~(C)~~ the number of surviving or new entities eligible does not exceed the number of parties registered with the Commission at the time of the merger.]~~

[ ~~(6)~~ In any Commission enforcement proceeding, if a person is determined not to be the responsible party for a violation and is dismissed from the proceeding for that reason, that violation shall not be considered in determining whether that person has an acceptable record of compliance.]

~~[ ~~(f)~~ Availability of bonds.]~~

[ ~~(1)~~ In determining the applicability of the $1,000 nonrefundable fee as provided for under this section, the Commission presumes that individual and blanket performance bonds are obtainable at reasonable prices.]

[ ~~(2)~~ An operator who is otherwise eligible under this section to file a $1,000 nonrefundable annual fee may request an administrative determination that individual and blanket performance bonds are not available to that operator at reasonable prices. In order to support an administrative determination that bonds are not obtainable by a requesting operator at reasonable prices, the operator must submit declination letters to the Commission's P-5/Financial Assurance Department establishing that three companies from a list maintained by the Commission that have issued a bond filed with the Commission in the past 12 months will not issue a bond to the requesting operator or will only issue a bond to the operator for an annual fee in excess of 6% of the face amount of the bond.]

[ ~~(3)~~ If an operator requesting a determination that bonds are not available to it has a bond as its current financial assurance, one of the three declination letters must be from that operator's current surety.]

[ ~~(4)~~ If an operator's application for the $1,000 nonrefundable fee is administratively denied, the operator may request a hearing to determine eligibility for the $1,000 nonrefundable fee. The Commission shall consider cash or other collateral requirements, along with the premium and any other surety company requirements, in determining if bonds are available to the requesting operator at a reasonable price.]

(e) [ ~~(g)~~ ] Forms for financial security. Operators shall submit bonds and letters of credit on forms prescribed by the Commission.

(f) [ ~~(h)~~ ] Filing deadlines for financial security. Operators shall submit required financial security at the time of filing an initial organization report or upon yearly renewal, or as otherwise required under [ ~~subsection (m) of~~ ] this section.

~~[ ~~(i)~~ New operators. A person filing an organization report for the first time is a new organization and is not eligible to file an individual performance bond for the first year of operation.]~~

(g) Amount of financial security. An operator required to file financial security under subsection (d) of this section shall file financial security described in this subsection.

(1) Types and amounts of financial security required.

(A) A person operating one or more wells may file an individual performance bond, letter of credit, or cash deposit in an amount equal to the sum of $2.00 for each foot of total well depth for each well operated.

(B) A person operating one or more wells may file a blanket bond, letter of credit, or cash deposit to cover all wells for which a bond, letter of credit, or cash deposit is required in an amount equal to the sum of the base amount determined by the total number of wells operated. A person performing multiple operations shall be required to file only one blanket bond, letter of credit, or cash deposit unless the person is operating a commercial facility, in which case the person also shall comply with the financial security requirements of subsection (l) of this section. The financial security amount shall be at least the base amount determined by the total number of wells operated or $25,000, whichever is greater. The base amount is determined as follows:

(i) The base amount for a person operating 10 or fewer wells or performs other operations shall be $25,000.

(ii) The base amount for a person operating more than 10 but fewer than 100 wells shall be $50,000.

(iii) The base amount for a person operating 100 or more wells shall be $250,000.

(2) Additional financial security for bay wells.

(A) All operators of bay wells shall file additional financial security of no less than $60,000 in addition to any other financial security that is required under this section for any other Commission-regulated activities.

(B) For each bay well that is not currently producing oil or gas and has not produced oil or gas within the past 12 months, including injection and disposal wells, the operator shall file additional financial security of $60,000. An operator shall not be required to file additional financial security in addition to the $60,000 amount set under subparagraph (A) of this paragraph if the operator operates only a single inactive bay well.

(C) In the case of a bay well that has been inactive for 12 consecutive months or longer and that is not used for disposal or injection, the well shall remain subject to the provisions of subparagraph (B) of this paragraph, regardless of any minimal activity, until the well has reported production of at least 10 barrels of oil for oil wells or 100 mcf of gas for gas wells each month for at least three consecutive months.

(3) Additional financial security for offshore wells.

(A) All operators of offshore wells and operators of both bay wells and offshore wells shall file additional financial security of no less than $100,000 in addition to any other financial security that is required under this section for any other Commission regulated activities.

(B) For each offshore well that is not currently producing oil or gas and has not produced oil or gas within the past 12 months, including injection and disposal wells, the operator shall file an additional amount of financial security of $100,000. An operator shall not be required to file additional financial security in addition to the $100,000 amount set under subparagraph (A) of this paragraph if the operator operates only a single inactive offshore well.

(C) In the case of an offshore well that has been inactive for 12 consecutive months or longer and that is not used for disposal or injection, the well shall remain classified as inactive for purposes of this section, regardless of any minimal activity, until the well has reported production of at least 10 barrels of oil for oil wells or 100 mcf of gas for gas wells each month for at least three consecutive months.

(4) Reduction of the additional financial security that is required for bay and/or offshore wells. An operator may request a reduction of either the additional $60,000 in financial security required for all operators of bay wells, or the additional $100,000 in financial security required for all operators of offshore wells and operators of both bay wells and offshore wells.

(A) The director may administratively approve the reduction if the operator provides documentation that it currently has acceptable financial assurance in place to satisfy any financial assurance requirements established by local authorities. The operator must show that the bond or other form of financial assurance can be called on by or assigned to the Commission under the following circumstances:

(i) a well is likely to pollute or is polluting any ground or surface water or is allowing the uncontrolled escape of formation fluids from the strata in which they were originally located; or

(ii) a well is not being maintained in compliance with Commission rules or state law relating to plugging or the prevention or control of pollution; or

(iii) the operator has failed to renew and maintain an organization report filing as required by §3.1 of this title (relating to Organization Report; Retention of Records; Notice Requirements) and this section.

(B) If the director administratively denies a requested reduction, the operator may request a hearing to determine whether the reduction should be granted.

(5) Reduction in additional financial security required for bay and/or offshore wells that are not actively producing oil and natural gas. An operator may request that Commission consider a reduction in any additional financial security requirement for the operation of bay and/or offshore wells that are not actively producing oil and natural gas or that are used for disposal or injection in an amount not to exceed the remainder of 25% of the operator's certified net worth based on the independently audited calculation for the most recently completed fiscal year minus the Commission's estimate of the operator's total plugging liability for all of the operator's active bay and/or offshore wells.

(A) The director may administratively grant a full or partial reduction if the operator meets the following criteria:

(i) the operator has either five or fewer bay and offshore wells or at least half of the operator's bay and offshore wells are actively producing oil and natural gas;

(ii) the operator provides to the Commission certification of its net worth from an independent auditor that has employed generally accepted accounting principles to confirm the operator's stated net worth based on the most recently available and independently audited calculation;

(iii) the reduction is less than or equal to the remainder of 25% of the operator's certified net worth minus the Commission's estimate of the operator's total plugging liability for all of the operator's active bay and offshore wells;

(iv) none of the operator's wells or operations, including any land-based wells, have been found by Commission staff to be violating or to have violated any Commission rule that resulted in pollution or in any hazard to the health or safety of the public in the last 12 months.

(B) If the director administratively denies the requested reduction, an operator may request a hearing to determine if a full or partial reduction should be granted.

(C) The operator may also request a hearing to challenge the Commission's presumed estimate of the operator's plugging liability for bay and offshore wells as applied to any additional financial security required for any inactive bay and offshore wells. The operator shall present clear and convincing evidence that the estimated plugging liability is less than the amount estimated by the Commission. Notice of the hearing shall be provided by the Commission to the owners of the surface estate and the owners of the mineral estate for any well that is a subject of the requested hearing, and all other affected persons as identified by the operator or otherwise required by the Commission.

[ ~~(j)~~ ~~Amount of bond, letter of credit, or cash deposit.~~ ]

[ ~~(1)~~ A person who operates one or more wells may file an individual performance bond, letter of credit or cash deposit in an amount equal to $2.00 for each foot of total well depth for each well, plus an additional amount to be determined by the Commission in a subsequent rulemaking for each bay and offshore well operated.]

[ ~~(2)~~ A person operating wells may file a blanket bond, letter of credit or cash deposit to cover all wells for which a bond, letter of credit or cash deposit is required in an amount equal to the sum of:]

~~[ ~~(A)~~ A base amount determined by the total number of wells operated, as follows:]~~

~~[ ~~(i)~~ a person who operates 10 or fewer wells shall have a base amount of $25,000;]~~

~~[ ~~(ii)~~ a person who operates more than 10 but fewer than 100 wells shall have a base amount of $50,000; and]~~

~~[ ~~(iii)~~ a person who operates 100 or more wells shall have a base amount of $250,000, plus;]~~

~~[ ~~(B)~~ an additional amount, to be determined by the Commission in a subsequent rulemaking, for each bay well operated, plus]~~

~~[ ~~(C)~~ an additional amount, to be determined by the Commission in a subsequent rulemaking, for each offshore well operated.]~~

(6) [ ~~(3)~~ ] Persons with non-well operations not exempted under paragraph (7) of this subsection. A person performing other operations who is not an operator of wells and who is not a person whose only activity is as a first purchaser, survey company, salt water hauler, gas nominator, gas purchaser or well plugger [ ~~choosing to cover all operations by a blanket performance bond, letter of credit or cash deposit~~ ] shall file financial security [ ~~a bond, letter of credit or cash deposit~~ ] in the amount of $25,000.

(7) [ ~~(4)~~ ] Persons exempt from financial security requirements. No financial security [ ~~bond, letter of credit, cash deposit or alternate form of financial security~~ ] is required of a person who is not an operator of wells if the person's only activity is as a first purchaser, survey company, salt water hauler, gas nominator, gas purchaser and/or well plugger.

(8) [ ~~(5)~~ ] Persons with both well and non-well operations. If a person is engaged [ ~~A person who engages~~ ] in more than one activity or operation, including well operation, for which financial security [ ~~a bond or alternate form of financial security~~ ] is required , the person is not required to file financial security [ ~~a separate bond or alternate form of financial security~~ ] for each activity or operation in which the person is engaged. The person is required to file financial security [ ~~a bond or alternate form of financial security~~ ] only in the greatest amount required for any [ ~~the~~ ] activity or operation in which the person engages [ ~~for which a bond or alternate form of financial security in the greatest amount is required~~ ]. The financial security [ ~~bond or alternate form of financial security~~ ] filed covers all of the activities and operations for which financial security [ ~~a bond or alternate form of financial security~~ ] is required. The provisions of this paragraph do not exempt a person from the financial security required under subsection (l) [ ~~(o)~~ ] of this section.

(9) [ ~~(6)~~ ] Financial security amounts are the minimum amounts required by this section to be filed. A person may file a greater amount if desired.

(h) [ ~~(k)~~ ] Financial security conditions. [ ~~Bond Conditions.~~ ] Any financial security required under this section is subject to the conditions that the operator will plug and abandon all wells and control, abate, and clean up pollution associated with the oil and gas operations and activities covered under the required financial security in accordance with applicable state law and permits, rules, and orders of the Commission.

(i) [ ~~(l)~~ ] Conditions for cash deposits. Operators shall tender cash deposits in United States currency or certified cashiers check only. All cash deposits will be placed in a special account within the Oil Field Clean Up Fund account. Any interest accruing on cash deposits will be deposited into the Oil Clean Up Fund pursuant to Texas Natural Resources Code, §91.111(c)(8). The Commission will not refund a cash deposit until either financial security [ ~~or an alternate form of financial security~~ ] is accepted by the Commission as provided for under this section or an operator ceases all activity.

(j) [ ~~(m)~~ ] Well or lease transfer.

(1) The Commission shall not approve a transfer of operatorship submitted for any well or lease unless the operator acquiring the well or lease has on file with the Commission [ ~~one of the following approved forms of~~ ] financial security in an amount sufficient to cover both its current operations and the wells or leases being transferred[ : ]

~~[ ~~(A)~~ an individual performance bond, letter of credit or cash deposit; or]~~

[ ~~(B)~~ ~~a blanket performance bond, letter of credit or cash deposit~~ ].

(2) Any existing financial security covering the well or lease proposed for transfer shall remain in effect and the prior operator of the well remains responsible for compliance with all laws and Commission rules covering the transferred well until the Commission approves the transfer.

(3) A transfer of a well or lease from one entity to another entity under common ownership is a transfer for the purposes of this section.

[ ~~(4)~~ An operator who has accepted a transfer of operatorship of any well or lease on or after September 1, 2001, with Commission approval based on filing of an individual or blanket performance bond, letter of credit, or cash deposit is deemed to have elected to file one of these forms of financial security and shall file or have on file one of these forms of financial security for each successive year during which it remains the designated operator of any such well or lease.]

(k) [ ~~(n)~~ ] Reimbursement liability. Filing any form of financial security does not extinguish a person's liability for reimbursement for the expenditure of state oilfield clean-up funds pursuant to the Texas Natural Resources Code, §89.083 and §91.113.

(l) [ ~~(o)~~ ] Financial security for commercial facilities. The provisions of this subsection shall apply to the holder of any permit for a commercial facility.

(1) Application.

(A) New permits. Any application for a new or amended commercial facility permit filed after the original effective date of this subsection shall include:

(i) a written estimate of the maximum dollar amount necessary to close the facility prepared in accordance with the provisions of paragraph (4) of this subsection that shows all assumptions and calculations used to develop the estimate;

(ii) a copy of the form of the bond or letter of credit that will be filed with the Commission; and

(iii) information concerning the issuer of the bond or letter of credit as required under paragraph (5) of this subsection including the issuer's name and address and evidence of authority to issue bonds or letters of credit in Texas.

(B) Existing permits. Within 180 days of the original effective date of this subsection, the holder of any commercial facility permit issued on or before the original effective date of this subsection shall file with the Commission the information specified in subparagraph (A)(i)-(iii) of this paragraph.

(2) Notice and hearing.

(A) New permits. For commercial facility permits issued after the original effective date of this subsection, the provisions of §3.8 or §3.57 of this title (relating to Water Protection; and Reclaiming Tank Bottoms, Other Hydrocarbon Wastes, and Other Waste Materials), as applicable, regarding notice and opportunity for hearing, shall apply to review and approval of financial security proposed to be filed to meet the requirements of this subsection.

(B) Existing permits. Notice of filing of information required under paragraph (1)(B) of this subsection shall not be required. In the event approval of the financial security proposed to be filed for a commercial facility operating under a permit in effect as of the original effective date of this subsection is denied administratively, the applicant shall have the right to a hearing upon written request. After hearing, the examiner shall recommend a final action by the Commission.

(3) Filing of instrument.

(A) New permits. A commercial facility permitted after the original effective date of this subsection may not receive oil field fluids or oil and gas waste until a bond or letter of credit in an amount approved by the Commission or its delegate under this subsection and meeting the requirements of this subsection as to form and issuer has been filed with the Commission.

(B) Existing permits. Except as otherwise provided in this subsection, after one year from the original effective date of this section, a commercial facility permitted on or before the original effective date of this subsection may not continue to receive oil field fluids or oil and gas waste unless a bond or letter of credit in an amount approved by the Commission or its delegate under this subsection and meeting the requirements of this subsection as to form and issuer has been filed with and approved by the Commission or its delegate.

(C) Extensions for existing permits. On written request and for good cause shown, the Commission or its delegate may authorize a commercial facility permitted before the original effective date of this subsection to continue to receive oil field fluids or oil and gas waste after one year after the original effective date of this section even though financial security required under this subsection has not been filed. In the event the Commission or its delegate has not taken final action to approve or disapprove the amount of financial security proposed to be filed by the owner or operator under this subsection one year after the original effective date of the section, the period for filing financial security under this subsection is automatically extended to a date 45 days after such final Commission action.

(4) Amount.

(A) Except as provided in subparagraphs (B) or (C) of this paragraph, the amount of financial security required to be filed under this subsection shall be an amount based on a written estimate approved by the Commission or its delegate as being equal to or greater than the maximum amount necessary to close the commercial facility, exclusive of plugging costs for any well or wells at the facility, at any time during the permit term in accordance with all applicable state laws, Commission rules and orders, and the permit, but shall in no event be less than $10,000.

(B) The owner or operator of one or more commercial facilities may reduce the amount of financial security required under this subsection for one such facility by the amount, if any, it filed as financial security [ ~~assurance~~ ] under subsection (g)(6) [ ~~(j)(3)~~ ] of this section. The full amount of financial security required under subparagraph (A) of this paragraph shall be required for the remaining commercial facilities.

(C) Except for the facilities specifically exempted under subparagraph (D) of this paragraph, a qualified professional engineer licensed by the State of Texas shall prepare or supervise the preparation of a written estimate of the maximum amount necessary to close the commercial facility as provided in subparagraph (A) of this paragraph. The owner or operator of a commercial facility shall submit the written estimate under seal of a qualified licensed professional engineer to the Commission as required under paragraph (1) of this subsection.

(D) A facility permitted under §3.57 of this title (relating to Reclaiming Tank Bottoms, Other Hydrocarbon Wastes, and Other Waste Materials) that does not utilize on-site waste storage or disposal that requires a permit under §3.8 of this title (relating to Water Protection) is exempt from subparagraph (C) of this paragraph.

(E) Notwithstanding the fact that the maximum amount necessary to close the commercial facility as determined under this paragraph is exclusive of plugging costs, the proceeds of financial security filed under this subsection may be used by the Commission to pay the costs of plugging any well or wells at the facility if the financial security for plugging costs filed with the Commission is insufficient to pay for the plugging of such well or wells.

(5) Issuer and form.

(A) Bond. The issuer of any commercial facility bond filed in satisfaction of the requirements of this subsection shall be a corporate surety authorized to do business in Texas. The form of bond filed under this subsection shall provide that the bond be renewed and continued in effect until the conditions of the bond have been met or its release is authorized by the Commission or its delegate.

(B) Letter of credit. Any letter of credit filed in satisfaction of the requirements of this subsection shall be issued by and drawn on a bank authorized under state or federal law to operate in Texas. The letter of credit shall be an irrevocable, standby letter of credit subject to the requirements of Texas Business and Commerce Code, §§5.101-5.118. The letter of credit shall provide that it will be renewed and continued in effect until the conditions of the letter of credit have been met or its release is authorized by the Commission or its delegate.

(m) [ ~~(p)~~ ] Effect of outstanding violations.

(1) Except as provided in paragraph (2) of this subsection, the Commission shall not accept an organization report or an application for a permit or approve a certificate of compliance for an oil lease or gas well submitted by an organization if:

(A) the organization has outstanding violations; or

(B) an officer or owner [ ~~director~~ ] of the organization , as defined in subsection (a) of this section, was, within seven years preceding the filing of the report, application, or certificate, an officer or owner [ ~~director~~ ] of an organization and during that period, the organization committed a violation that remains an outstanding violation.

(2) The Commission shall accept a report or application or approve a certificate filed by an organization covered by paragraph (1) of this subsection if:

(A) the conditions that constituted the violation have been corrected or are being corrected in accordance with a schedule agreed to by the organization and the Commission;

(B) all administrative, civil, and criminal penalties, and all plugging and cleanup costs incurred by the state relating to those conditions have been paid or are being paid in accordance with a schedule agreed to by the organization and the Commission; and

(3) All fees tendered in connection with a report or application that is rejected under this subsection are nonrefundable.

§3.86.Horizontal Drainhole Wells.

(a) - (e) (No change.)

(f) Drilling applications and required reports.

(1) Application. Any intent to develop a new or existing well with horizontal drainholes must be indicated on the application to drill. An application for a permit to drill a horizontal drainhole shall include the fees required by Statewide Rule 78, §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds, and Alternate Forms of Financial Security Required To Be Filed~~ ]), and shall be certified by a person acquainted with the facts, stating that all information in the application is true and complete to the best of that person's knowledge.

(2) Drilling unit plat. The application to drill a horizontal drainhole shall be accompanied by a plat.

(A) In addition to the plat requirements provided for in §3.5 of this title (relating to Application to Drill, Deepen, Reenter, or Plug Back [ ~~Recomplete, or Reenter~~ ]) (Statewide Rule 5), the plat shall include:

(i) - (vi) (No change.)

(B) (No change.)

(3) - (4) (No change.)

(g) (No change.)

§3.96.Underground Storage of Gas in Productive or Depleted Reservoirs.

(a) - (b) (No change.)

(c) Application. An application to operate a gas storage project shall be filed with the commission by the owner or operator or proposed owner or operator. The application shall include the following:

(1) - (3) (No change.)

(4) water protection letter--a letter from the Texas Commission on Environmental Quality or its successor agencies [ ~~Natural Resource Conservation Commission~~ ] stating the depth to which fresh water strata occur in the project area;

(5) (No change.)

(6) fees--the fees required under §3.78 of this title (relating to Fees and Financial Security Requirements [ ~~Fees, Performance Bonds, and Alternate Forms of Financial Security Required To Be Filed~~ ]) for each gas storage well in the storage project that will be used for injection.

(d) - (e) (No change.)

(f) Notice and hearing.

(1) - (2) (No change.)

(3) Notice by publication. The applicant shall make diligent efforts to ascertain the name and address of each person identified under paragraph (1)(A)-(D) of this subsection. The exercise of diligent efforts to ascertain the names and addresses of such persons shall require an examination of county records where the facility is located and an investigation of any other information of which the applicant has actual knowledge. If, after diligent efforts, the applicant has been unable to ascertain the name and address of one or more persons required to be notified under paragraph (1)(A)-(D) of this subsection, the notice requirements for those persons are satisfied by the publication of the notice of application as required in paragraph (2) of [ f ] this subsection. The applicant must submit an affidavit to the commission specifying the efforts that were taken to identify each person whose name and/or address could not be ascertained.

(4) - (5) (No change.)

(g) - (p) (No change.)

(q) Penalties.

(1) (No change.)

(2) Certificate of compliance. The certificate of compliance for any oil, gas, or geothermal resource well may be revoked in the manner provided in §3.73 [ ~~§3.68~~ ] of this title (relating to Pipeline Connection; Cancellation of Certificate of Compliance; Severance [ ~~Pipeline Connection and Severance~~ ]) for violation of this section.

(r) Applicability of other commission rules.

(1) General. The operator of a gas storage project must comply with the requirements of Chapters 7 and 8 of this title (relating to Gas Services Division, and Pipeline Safety Regulations) [ ~~the Transportation/Gas Utilities Division~~ ] for both pipelines and associated facilities, and other applicable commission rules and orders.

(2) (No change.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on June 8, 2004.

TRD-200403749

Mary Ross McDonald

Managing Director

Railroad Commission of Texas

Earliest possible date of adoption: July 25, 2004

For further information, please call: (512) 475-1295

Part 2. PUBLIC UTILITY COMMISSION OF TEXAS

Chapter 25. SUBSTANTIVE RULES APPLICABLE TO ELECTRIC SERVICE PROVIDERS

Subchapter O. UNBUNDLING AND MARKET POWER