According to Act 13 of 2012, which sets the Marcellus Shale impact fee on drillers, the payment for the impact fee was due to the Pennsylvania Public Utility Commission (PUC) by September 1, 2012 for any well spud from 2007 through 2011. In mid-September, the PUC published a list of drillers, the number of wells they owned, how much money was due, as well as how much was paid. The thirty-seven counties opting to impose the fee, along with their municipalities, should start to see their share of the fee revenue roll in soon.
Act 13 requires the State Department of Environmental Protection (DEP) to keep track of the number of unconventional wells (Marcellus Shale) and turn that information over to the PUC which is to collect the fees and see to the proper distribution of those funds. As we wrote in an earlier Policy Brief (Volume 12, Number 21) the DEP reported 4,930 unconventional wells in thirty-seven counties across the Commonwealth.
However, the PUC lists 4,449 wells, a difference of almost 500, about ten percent. The PUC also has categorized the wells by type-vertical and horizontal-a distinction not made by the DEP in the general count although they did differentiate between the two in production reports. This distinction is important because vertical wells use a single vertical bore to extract gas from the Marcellus Shale formation as opposed to the multiple bores used for horizontal wells. Act 13 sets the fee for vertical wells at 20 percent of the fee established for horizontal wells and shall not apply after the tenth year of operation. The PUC has determined that of the 4,449 unconventional wells in the Commonwealth, 418 are vertical wells and thus subject to the lower rate.
Act 13 specifies that the impact fee per well be based on the price of natural gas as traded on the New York Mercantile Exchange by taking the closing price on the last day of each month for a calendar year and finding the arithmetic mean. For 2011 the mean was $4.08 which triggered an impact fee of $50,000 for the horizontal wells, but since the vertical wells are assessed 20 percent of that fee, they will pay only $10,000. The company paying the most in impact fees is Chesapeake Appalachia ($30.8 million) followed by Talisman Energy ($26.4 million) and Range Resources ($23.7 million). The PUC puts the amount of impact fees owed by fifty-eight producers at $205.7 million. As of September 12th $201.6 million had been collected with five producers disputing well status.
As we mentioned in the previous Brief, of the impact fees collected the state will take $23 million off the top to be shared by various state agencies. If the full amount owed is collected roughly $182.7 million will be available to be allocated among the thirty-seven counties (and their municipalities) that imposed the impact fee and the state. Counties and their municipalities are to receive 60 percent of that amount, or $109.6 million, while the other 40 percent is dedicated to state initiatives such as water quality and watershed programs.
Counties will receive an amount based on the number of wells in the county as a percentage of wells spud across the state. For example, based on DEP production reports from 2007-2011 there were eight wells spud in Allegheny County. With 4,449 unconventional wells spud across the Commonwealth during that time, Allegheny County (and its municipalities) will get to share 0.18 percent (8/4,449) of the money available. Meanwhile, Washington County, which has the area’s largest number of spud wells with 617, will get to share 13.89 percent (617/4,449). Thus, Allegheny County and its municipalities should divide $197,146 ($109.638 million times 0.18 percent) and Washington County and its municipalities will share $15.2 million.
Interestingly enough both Allegheny and Washington Counties will get back about sixty percent of the impact fees collected in their respective counties. In Allegheny County there are eight wells, six horizontal and two vertical. With horizontal wells charged $50,000 and vertical wells charged $10,000, drillers in Allegheny County will pay a total of $320,000. The $197,000 being returned to the County is approximately 61 percent of fees paid. In Washington County there are 489 horizontal wells and 128 vertical wells for a total impact fee of $25.7 million. The $15.2 million being returned is just under 60 percent of the total fees generated in the County.
Of the funds coming back to the counties and municipalities, 36 percent goes to the county government, 37 percent to the municipalities with wells and the remaining 27 percent to municipalities without wells. For Allegheny County, the County government should receive roughly $71,000 while municipalities with wells (Fawn, Frazer, and Plum) will divide nearly $80,000. The remaining 127 municipalities without wells will split about $46,200.
Meanwhile, Washington County will divide up a much larger pot of money. County government should receive more than $5.4 million while municipalities with wells (27) will divide more than $5.6 million and municipalities without wells will share the remaining $4.1 million. But there is a cap on how much money one municipality can receive. According to Act 13, the amount received shall not exceed the greater of $500,000 or 50 percent of a municipality’s total budget for the prior fiscal year (starting with 2010 and then adjusted for inflation thereafter). Any money remaining due to this provision is placed into a Housing and Affordability Rehabilitation Fund.
But this represents only the first payment for the wells that were spud prior to 2012. The fee structure over time is set up to take into account two things: the trading price of natural gas and the age of the well. As the average price declines (as it has through the first three quarters of 2012 to an average of $2.57) so will the impact fee. Likewise as the well ages its impact fee also falls each year for the next few years (unless the average price rises sharply above $5.99 in the second year) until it drops sharply for years four through ten. Thus, unless significantly more wells are spud across the Commonwealth, and keep in mind the number of wells paying the impact fee in 2012 were spud over the course of five years, or the price of gas rises dramatically over time, the revenue from impact fees and the amount shared by the State and counties is likely to decline next year and in subsequent years. The gas based revenue boost for the state and local governments could be short lived depending on how strong the gas market is in the future.
