Time to tighten Act 13 reporting

Summary: In February 2012, Act 13 was adopted not only to establish an impact fee for drillers in Pennsylvania’s shale formations, but also to set up rules governing both the allocation of the fee revenue to local and state government as well as to specify how the money can be used by the municipalities and counties receiving the funds.  All are required to report to the Pennsylvania Public Utility Commission how Act 13 proceeds have been spent.  However, not all municipalities are diligent in meeting those reporting requirements.

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From 2011 to 2016 municipalities in the seven-county Pittsburgh Metropolitan Statistical Area (MSA)—Allegheny, Armstrong, Beaver, Butler, Fayette, Washington and Westmoreland counties— received $104,623,116 from the impact fee collections. While “fracking” has received plenty of attention, little attention has been paid to local accountability regarding Act 13 revenue usage. This Brief will look at municipalities in the Pittsburgh MSA.

Municipalities receiving impact fee revenue must submit annually paperwork to the Pennsylvania Public Utility Commission (PUC) demonstrating how the payments have been used in the 13 legislatively designated categories.

They are: 1) Construction, reconstruction, maintenance and repair of roadways, bridges and public infrastructure;

2) Water, storm water and sewer systems;

3) Emergency preparedness and public safety, including law enforcement and fire services, as well as hazardous material response, 911 and equipment;

4) Environmental programs, including trails, parks and recreation, open space, flood plain management, conservation districts and agricultural preservation;

5) Preservation and reclamation of surface and subsurface waters and water supplies;

6) Tax reductions, including homestead exclusions;

7) Housing projects to increase safe and affordable housing;

8) Records management, geographic information systems and information technology;

9) Social services;

10) Judicial services;

11) Career and technical centers for training of oil and gas industry workers;

12) Local or regional planning initiatives under the Pennsylvania Municipalities Planning Code;

13) Placed in the municipality’s capital reserve fund that can later be used in the aforementioned categories.

It’s important to note that municipalities are not obligated to spend Act 13 funds in the year they are received. The municipality’s capital reserve fund can act as a savings account for the assets to be used at a later date.

Within the Pittsburgh MSA the most popular categories for municipal fund use have been capital reserve fund and public infrastructure/construction.

Municipalities in Allegheny County, that did report, placed 39 percent of their Act 13 revenue in their capital reserve funds from 2011 to 2016. Over the same period, Allegheny County municipalities spent 30 percent of their impact fee allocation on public infrastructure and construction.

Act 13 mandates municipalities submit a yearly report to the PUC disclosing expenditures. This basic form requires the municipality to indicate the dollar amount spent or allocated for future use within the 13 categories.  Yet many municipalities have failed to meet the reporting requirement. Under Act 13 regulations if a municipality fails to submit the annual Municipal Approved Budget Report, the municipality will be limited to a maximum of $500,000 in annual future distributions from the Unconventional Gas Well fund. But within the Pittsburgh MSA, a penalty has never been assessed because none of the municipalities failing to report ever received more than $500,000 a year from Act 13 fees and, presumably, never expected to get as much as $500,000.

In 2016, 45 municipalities out of a total of 130 in Allegheny County failed to report their Act 13 details to the PUC. This has improved since 2012 when 95 municipalities failed to do so. The best year for reporting was 2015 when just 31 municipalities did not report.

For example, since the impact fee was established, the City of Pittsburgh has disclosed the use of its shale dollars one time, in 2013. Brentwood Borough, McKeesport City, Pleasant Hills Borough and Sewickley Borough have never reported how their impact money was used.

Meanwhile, municipalities in other counties had lower rates of reporting non-compliance.  In 2016, four municipalities out of 57 in Butler; Washington, five municipalities out of 66; Armstrong, eight municipalities out of 45; Fayette, nine municipalities out of 43; Westmoreland, 18 municipalities out of 65.

Since Act 13 passed, the mandate that municipalities report annually how they spend their impact fee allocations has been obeyed by the vast majority of municipalities in the seven counties of the Pittsburgh MSA. Overall, municipalities within the MSA have improved their reporting from 2011 to 2016.

Allegheny County municipalities received a total of $2,797,742 from 2011 to 2016 compared to Washington County’s municipalities’ $55,412,444. Clearly, municipalities in Washington County have a substantial amount of fees to lose if they fail to comply with reporting and thus are more motivated to report fund usage than municipalities in Allegheny County. Washington County’s municipalities have received the largest amount of fees in the MSA, followed by those in Butler, Fayette, Westmoreland, Armstrong, Allegheny and Beaver counties.

However, municipal accountability should not be contingent upon the dollar amount received but upon the principle of financial accountability and transparency.

Governments must be responsible for all actions including accounting for where all revenues are spent. Municipalities receiving Act 13 funds, regardless of the amount, are required to report the use and should do so. It’s not a municipal choice but an obligation.

The Legislature should revisit Act 13 and amend it to penalize municipalities that fail to report how impact fee revenues are used by withholding all future allocations regardless of the amount they would have received until they are in compliance by submitting reports for all past years when no reports were filed.

Failure to correct this loophole leaves open too much opportunity for funds to be used as municipalities wish as opposed to the uses designated by law.

2012 Drilling Fee Revenue Slips Below 2011 Collections

On April 1st, drillers operating in Pennsylvania’s Marcellus Shale formation were required to pay their annual well fees to the Commonwealth.  As discussed in Policy Briefs Volume 12, Numbers 11, 21 and 51, Act 13 of 2012 gave counties with unconventional (Shale) drilling within their borders the option of charging a fee on each well.  All counties have in fact done so.  Revenue from this new fee, collected in 2012, provided $206 million to be shared among state agencies, counties, and municipalities.  However, in 2013 fee revenue slipped to $198 million.  Is the revenue reduction a one-time event, or the start of a trend?

 

 

The fee as outlined in Act 13 is based in part on the market price of natural gas and is structured so that, over time, the charge on wells drilled in earlier years decreases.  There is also a distinction made for vertical wells in the Marcellus Shale formation which are only charged twenty percent of the fee since they are deemed less intrusive than multi-bore horizontal wells.  The Public Utility Commission (PUC) recognized 4,449 total wells in the formation with 4,031 wells being designated as horizontal wells subject to the $50,000 fee (the remainder was classified as vertical).  As 2012 dawned, these wells graduated into year two of the fee structure while any wells drilled in 2012 entered the first year in the system.

 

To understand why the fee revenue for 2012 is lower than 2011, we need to examine the two most important factors in this determination-the price of natural gas and the drilling activity that actually took place in 2012.

 

The fee structure takes into account the spot price of natural gas as traded on the market.  In 2011, the annual average price came in at just over $4.00 triggering the $50,000 per well fee.  But the price had fallen by more than 30 percent in 2012 to $2.79.  At this price, any well drilled (spud) in 2012 (their year one) will be charged $45,000.  Also, the second year wells will see their fee reduced by $15,000 to $35,000.  Therefore the wells that had generated $206 million in 2011 generated approximately $144 million in 2012. The other $54 million or so is coming from new well fees.  So as a result of the lower price there has been a reduction in the fee amount per well-both new and existing. The advent of extraction in the Marcellus Shale formation has increased the supply of natural gas, putting downward pressure on the trading price, helping to trigger the lower fees.  Through the first quarter of 2013 the price has begun to rise, reaching an average of $3.61 and could boost per well fees in 2013. Bear in mind that fees will fall again for older wells due to the aging provision. 

 

And of course the amount of money collected is also dependent upon the number of wells spud.  As mentioned above 4,449 total wells had been spud through the end of 2011.  In 2012, the PUC has documented 1,357 new wells.  This is a thirty percent drop from 2011 when 1,937 wells were spud.  In fact, 2011 represents the high water mark for activity.  In 2010 there were 1,454 wells spud and only 763 in 2009.  Thus it appears as though the increase in the supply in natural gas and the resulting drop in price has also curtailed new drilling in the Commonwealth. 

 

Where are the wells concentrated?  It has been suggested that the Marcellus formation is producing both wet and dry gas.  Wet gas, primarily found in the western Pennsylvania counties (as well as in Ohio and West Virginia), contains other compounds such as ethane that can be separated (cracked) and sold for other uses.  Dry gas, found mostly in the north/central counties is more limited in use.  The lower price of gas makes the wet gas more desirable as money can be made on the other compounds as well. 

 

Through 2011 there were 37 counties that contained wells linked to Marcellus Shale.  Two more counties, Crawford and Mercer, added wells in 2012 for a total of 39.  However as noted above, there were fewer wells drilled in 2012 than in 2011.  In fact twenty-two counties saw a decrease in drilling activity including northern tier stalwarts Bradford (-60 percent), Tioga (-53 percent) and Lycoming (-29 percent).  Only three of these counties were located in western Pennsylvania-Greene (-4 percent), Indiana (-91 percent) and Westmoreland (-35 percent).    Thirteen counties had an increase in drilling activity with only Sullivan (42 percent) not in the western part of the state.  The remaining four (Bedford, Huntingdon, Luzerne, and Wayne), not only did not have any change in activity they did not have any wells spud in either 2011 or 2012.

 

However, a drop in new wells being spud does not necessarily translate into a decrease in production.  State law requires that drilling companies report their output to the Department of Environmental Protection.  While this data is raw, it does allow us to approximate overall production statewide as well as within each county.  Total Marcellus Shale drilling production in Pennsylvania for 2011 was reported to be 1.070 billion mcf (thousand cubic feet).  Production in 2012 was reported at 2.065 billion mcf-an increase of 93 percent.  Thus even though fewer new wells came online in 2012, overall production from this formation nearly doubled. 

 

At the county level, of the 34 counties that produced gas from Marcellus Shale formation from 2011 to 2012, only four counties reported a decrease in production:  Cambria, Cameron, Potter, and Warren with the latter the only western county.  And with the exception of Potter (73), the other three don’t have many wells within their borders-Cambria (7), Cameron (14), and Warren (3).  In fact eleven counties reported output levels that had doubled from 2011. 

 

Even though there were fewer wells drilled in 2012 than 2011 or 2010, there remain a large number of permits issued that have yet to be used, which suggests that drilling in the Marcellus Shale formation will continue for quite some time. Bear in mind that the amount received by the state and then distributed to the counties and municipalities will vary from year to year as market conditions change.  Thus it would be unwise for any level of government to view the amount of revenues from Act 13 as set in stone.

Counties Vote to Impose Gas Well Fee

When Act 13, the Unconventional Gas Well Impact Fee Act, was signed into law on February 14th, it gave counties with such wells the option of imposing an impact fee.  The counties, thirty-seven in all, had sixty days or until April 16th to adopt the fee. As that deadline passed all had chosen to opt in, as have fourteen counties who as of yet don’t have any of these wells within their borders. While the basics of Act 13 were outlined in a previous Policy Brief (Volume 12, Number 11), now that the counties have opted to enact the fee, we can take a more in-depth look at how much fee revenue will be collected in this first year and how it will be distributed among the various recipients.

 

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