Pennsylvania's House of Representatives and Senate finally reached an agreement on drilling impact fee legislation by passing an amendment to the Oil and Gas Act, 58 P. S. § 601.101, et seq. As stated in the Committee Report to H.B. 1950, the Amendment is designed to provide for enhanced environmental protection, to authorize an impact fee on unconventional natural gas resources and to provide for municipal ordinances and zoning standards related to oil and gas development. For example, besides the enactment of an impact fee, the bill imposes chemical disclosure requirements and establishes limits on the ability of municipalities to pass ordinances that regulate drilling activities. This bill is described in more detail below.
Drilling Impact Fee
H.B. 1950 permits the governing body of a county that has a "spud" unconventional gas well located within its borders to elect whether to impose a fee. The local impact fee, called an "unconventional gas well fee," will be imposed on every producer. The purpose of the impact fee is to provide funding to local governments which may be "impacted" by drilling and production activities, as well as to provide funds to a variety of state agencies (some of which are not involved in drilling activities). The term "Producer" is defined broadly in this legislation, as follows:
H.B. 1950 now proceeds to Governor Corbett, who will likely sign the bill. Once the bill is signed into law, counties will have 60 days to pass a specific ordinance authorizing an impact fee within their borders. A county that does not adopt such an ordinance is prohibited from receiving funds during the distribution of the fees. After the initial 60-day time period, municipalities will have the opportunity to override any county commissioners who opt out of the impact fee. If a municipality would like to impose a fee, it must pass a specific resolution. If more than half of a county's municipalities do so within 60 days, the county's fee will be enacted. The fee will also go into effect if the municipalities representing more than 50 percent of the county's total population pass the resolution.
The impact fee will be structured on a sliding scale from $40,000 to $60,000 for the first year, and subsequently, the fee will be dependent on the price of natural gas and inflation. The bill authorizes retroactive fees for 2011, which are due on September 1, 2012. Senate leaders have estimated that this fee will generate $180 million if every drilling county opts to impose the fee. 2012 fees are due on April 1, 2013. The rates for these fees will be charged on a sliding scale set by the Public Utility Commission ("PUC") on January 31, 2013 based on changes in the Consumer Price Index and 2012 natural gas rates. Because natural gas rates frequently fluctuate, the PUC will set the rates by averaging the total of New York Mercantile Exchange's natural gas price from the last day of every month. Legislative leaders have estimated that the 2012 fees will generate approximately $212 million. If a fee is not paid in accordance with the prescribed deadlines, interest will be assessed and a penalty will be imposed up to 25 percent of the amount of the fee. The money raised by the fee will primarily go to local governments where the drilling activity is taking place, but approximately 40 percent of the fees will go to state environmental and infrastructure programs. The PUC is delegated enforcement authority under the bill to ensure compliance; the enforcement authority includes the ability to issue enforcement orders and to assess administrative penalties. The PUC will have the authority to inspect books and records to verify the accuracy of a producer's reports and to compel the production of records, if necessary, among other examination powers.
Environmental Requirements
Notably, H.B. 1950 establishes chemical disclosure requirements that apply to hydraulic fracturing of any unconventional wells performed on or after the date that the bill becomes law. Specifically, the bill requires "a service provider who performs any part of a hydraulic fracturing treatment and a vendor who provides hydraulic fracturing additives directly to the operator for a hydraulic fracturing treatment" to furnish the operator with the required disclosures no later than 60 days after the commencement of the hydraulic fracturing. Further, within 60 days after the conclusion of the hydraulic fracturing, "the operator of the well shall complete the chemical disclosure registry form and post the form on the chemical disclosure registry... in a format that does not link chemicals to their respective hydraulic fracturing additive." The bill anticipates that by January 1, 2013, this chemical disclosure information will be presented in a manner that permits searching and sorting by geographic area, chemical ingredient, chemical abstract service number, time period, and operator. If this deadline is not met, the department will examine the possibility of providing these functions on its website.
In addition, the bill contains exceptions for trade secrets and confidential proprietary information. "If the vendor, service provider or operator claims that the specific identity of a chemical or the concentration of a chemical, or both, are a trade secret or confidential proprietary information," then "the operator of the well must indicate that on the chemical disclosure registry form, and the vendor, service provider or operator shall submit a signed written statement that the record contains a trade secret or confidential proprietary information." Further, "[i]f a chemical is a trade secret, the operator shall include in the chemical registry disclosure form the chemical family or similar description associated with the chemical."
The bill includes new requirements for well permits to ensure greater environmental protection; these requirements demonstrate that the concerns raised by local communities as well as environmental groups have been received and "heard" by the Pennsylvania Legislature. For example, notices for well permit applications must be provided to municipalities and adjacent municipalities, permits may be denied for continuing violations by the permittee, its parent or subsidiary, an approved water management plan must be obtained, 24 hour notice of certain well operations including well stimulation will be required, and new well location restrictions are detailed in the bill. New environmental protections include: the rebuttable presumption that a well operator is responsible for groundwater contamination within 2,500 feet of a water supply, new containment plans and systems for unconventional well pads, corrosion control requirements for pipelines and aboveground and underground tanks and the requirement to submit an air source report which identifies and quantifies the actual air contaminant emissions from ANY air contamination source.
Limits on Municipalities and the Public Utility Commission
Finally, this new legislation will limit the ability of municipalities to regulate the drilling industry. In fact, with the exception of local ordinances adopted pursuant to the Pennsylvania Municipalities and Planning Code and the Flood Plain Management Act, all local ordinances purporting to regulate oil and gas operations that fall under Chapter 32 of this legislation (relating to development) are superseded. The legislation specifically provides that "all local ordinances regulating oil and gas operations shall allow for the reasonable development of oil and gas resources." In addition, the bill compels municipalities to allow "oil and gas operations, other than activities at impoundment areas, compressor stations and processing plants, as a permitted use in all zoning districts." This is an important and controversial aspect of the legislation because it permits drilling in residential-zoned areas, and permits well pads to be as close as 300 feet to an existing building, with certain exceptions. However, this provision is beneficial to the natural gas drilling industry, because it provides uniform statewide rules and avoids a patchwork of local ordinances. The Public Utility Commission ("PUC") has been given the authority pursuant to H.B. 1950 to determine if a particular municipality's ordinance is too restrictive. If the PUC decides that an ordinance is too restrictive, then the municipality can be denied any impact fees coming to it. The PUC's decision may be appealed to the Commonwealth Court.
Summary
Industry has thus far remained largely silent with respect to H.B. 1950, but several Democrats and environmental groups have spoken out against the legislation. Illustrating the vast difference in opinion, Governor Corbett described the legislation as "an appropriate balance between our great economic opportunity and our environmental responsibility," while House Minority Leader Frank Dermody stated that "This is the biggest corporate giveaway in Pennsylvania history." Yet, despite the differences in opinion, this legislation addresses and provides certainty with respect to many unsettled issues in Pennsylvania relating to drilling activities. Most importantly, at least for the foreseeable future, this legislation settles the debate as to whether an impact fee or a severance tax should be imposed on the natural gas industry.
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