Currents Spring 2012: A law at lastMarcellus legislation sets ground rules after years of debate, industry advocates say
After years of wrangling spanning two administrations, Pennsylvania's General Assembly last month passed legislation imposing an impact fee on the Marcellus Shale natural gas industry.
Gov. Tom Corbett on Feb. 13 signed House Bill 1950 into law as Act 13 of 2012. Along with enacting the fee, the law imposes new environmental standards on natural gas drillers and curbs municipalities' ability to regulate the industry through zoning and other ordinances.
"I think above all it provides the level of certainty that our industry and the communities in which we operate needed," said Steve Forde, executive vice president of the Marcellus Shale Coalition industry group.
Act 13 imposes annual fees for the first 15 years of a well's production. Fees range from $5,000 to $60,000, depending on the production year and the annual average price of natural gas.
Impact fees for 2011 will be collected retroactively. The bill's sponsors forecast collections of $180.5 million for 2011 and
$311.5 million by 2014.
The first $23 million will go toward various state programs. The state will divide 60 percent of the remainder among counties and municipalities, and the final 40 percent will go to road, water, sewer and environmental projects.
Corbett's signing started a 60-day clock running. Counties with wells within their borders have until April 13 to pass an ordinance authorizing the impact fee. If a county doesn't, its wells are excluded and it foregoes its share of impact fee revenue. Municipalities can override their county's decision by majority vote.
Within days of Corbett's signing, several counties already had ordinances drafted and publicly advertised, said Doug Hill, executive director of the County Commissioners Association of Pennsylvania.
Most counties are enthusiastic, he said. The one possible exception is Bradford County, whose commissioners are split.
Commissioner Mark Smith supports a fee, Commissioner Daryl Miller opposes one and Commissioner Doug McClinko is undecided, though leaning toward a "no" vote.
"This legislation — I don't like it at all," McClinko told the Towanda Daily Review in a Feb. 15 article.
As of press time, the three commissioners had not acted on an ordinance. Bradford County has the most Marcellus natural gas production in Pennsylvania, and other counties view its participation as critical to the impact fee's success, Hill said.
Other clauses of Act 13 enact statewide requirements for well pad setbacks and other environmental standards.
The law authorizes the Public Utility Commission to collect and distribute impact fee money. A separate law gives the commission the power to enforce federal pipeline safety rules.
"I'm honored the legislature and administration have given us this new authority," PUC Commissioner Pamela Witmer said. "We're appreciative of the confidence they're showing in us."
Debate over a natural gas severance tax or impact fee began during former Gov. Ed Rendell's administration.
A severance tax is assessed on either the value or volume of gas pumped: the more gas, the more revenue. An impact fee is imposed on wells, not gas quantities, and is supposed to be limited to paying the otherwise uncompensated public costs that drilling operations incur.
Tax proponents pointed out that all other natural gas-producing states impose industry-specific taxes, and noted that Pennsylvania's abundance of gas and proximity to markets makes it a readily profitable location for drillers, a tax notwithstanding.
The industry's rapid expansion has led to increased demand for environmental regulation, cleanup and road repair, and to increased burdens on emergency responders and social services, the proponents said.
Opponents said a tax would deter drilling companies from investing in Pennsylvania and amounted to unfair targeting of an industry that already pays billions in other taxes.
Gov. Tom Corbett opposed any and all tax increases during his 2010 campaign, having signed onto Grover Norquist's well-known pledge, but came out in favor of an impact fee last year.
Many observers say the impact fee's county-by-county enactment and collection scheme is intended to forestall accusations that it is a tax increase in disguise.
"This 'deal' is clearly a tax and not a fee," the conservative Commonwealth Foundation's President Matthew Brouillette wrote in a memo to legislators just before the passage of Act 13.
Left-leaning public policy groups, meanwhile, called Act 13's impact fee too low and its environmental protections too weak.
The fee works out to an effective tax rate of about 2.6 percent, the lowest among major gas-producing states, according to the Pennsylvania Budget and Policy Center. Texas' rate, by comparison, is 5.4 percent.
"The 'impact fee' … is an insult to Pennsylvania taxpayers," the environmental group PennFuture wrote in a memo shortly before Act 13's passage.
The same memo called the law's environmental protections "a total sham."
"I think local governments have paid a high price," in lost regulatory power for the revenue they will receive, Pennsylvania Budget and Policy Center Executive Director Sharon Ward said.
Acting on the drilling industry's desire for uniform standards, Act 13 prohibits municipalities from enacting stricter zoning or environmental regulations than the state and gives the Public Utility Commission authority to nullify ordinances deemed objectionable.
But "ensuring there is not a patchwork of ordinances … is essential" to industry operation, the Marcellus Shale Coalition's Forde said. "There is still an element of municipal flexibility."
By and large, counties are satisfied with the balance that was struck, said Hill of the county supervisors' association.
"Across the board, these are improvements from where the law had stood," he said.