Marcellus Shale Impact Fees Fall

The Pennsylvania Public Utility Commission (PUC) released the impact fee totals for 2015 at $187.7 million—sixteen percent lower than those collected in 2014.    In fact the high-water mark to date occurred in 2013 when the impact fee garnered $225.7 million.  In 2014 that number fell slightly to $223.5 million.  The impact fee has been collected for five years (since 2011) and had not been less than $200 million (2012 realized $200.5 million).

 

Of course this new total reflects the steep decline in the price of natural gas as traded on the various exchanges based on the sale at various gas hubs—specifically the Henry Hub in Louisiana but also at local Pennsylvania hubs.  As the trading price has fallen, the number of new rigs being drilled has also declined.

 

To refresh our readers’ memories, the impact fee is a graduated fee based on the average price of natural gas as traded on the New York Mercantile Exchange based on activity at the Henry Hub.  It also is dependent upon the age of the rigs as they tend to be charged less as they get older, of course depending upon the price of gas (see Policy Brief Volume 12, Number 11 for a fee schedule).  An upcoming Policy Brief will look at the details more closely.

 

There is no doubt that the low price of natural gas has had a ripple effect throughout the industry.  When the technology first became feasible and the first wells were drilled, news accounts were full of stories of booming towns and growing employment levels.  However, over the last year or so, we have been hearing about falling natural gas prices which have caused natural gas companies to scale back activity.  The stories have been there, but up until now had not seen the tangible results.

 

The Marcellus Shale industry had been propping up the state and local economies for the last five years.  Many counties and municipalities have been relying on the local share payments from the impact fee.  Is 2015 the first sign of a shrinking industry or is it a small drop that is temporary?  One thing is certain it is very foolish to pin economic hopes on one industry, especially one that is so dependent upon supply and demand.

Marcellus Impact Fee Benefits for Western PA Counties

Act 13 of 2012 set an impact fee on drillers for each unconventional well started (spud) into the Marcellus Shale formation within the Commonwealth’s borders.  Act 13 sets the parameters and ranges for the fee which is determined by a formula using the average selling price of natural gas on the market and the age of the well itself.  A description of how the rate is set can be found in Policy Brief Volume 12, Number 11.

 

Each year the Public Utility Commission (PUC) sets the fee for that year, collects payments from the drillers, and then distributes the funds to state agencies, counties, and municipalities across the state.

 

Act 13 also specifies how the impact fee is to be returned to these governmental entities.  The purpose of this Brief is to report the impact fee revenue received by the seven counties that make up the Pittsburgh metropolitan statistical area (MSA) (Allegheny, Armstrong, Beaver, Butler, Fayette, Washington, and Westmoreland) after the first three years of disbursements.

 

There are two sections of Act 13 pertaining to the distribution of revenues to the counties.  The first section, 2314(d), allocates money to counties based on the number of unconventional wells in the county as a proportion of the number of such wells in the Commonwealth.  Funds distributed through this section can be spent only on specified areas. These categories range from public infrastructure to tax reductions to social and judicial services.  The following table shows the amount each county in the MSA received from this section of Act 13 over the first three years.

table 1

 

Act 13 mandates that counties receiving funds from section 2314(d) submit a report to the PUC on how the money was spent.  According to these reports, Allegheny County spent its 2011 and 2012 distribution on the category of emergency preparedness/public safety.  Armstrong County also spent its entire 2011 allocation on this area, but divided its 2012 allocation between this category and on environmental programs.  The PUC did not have either county’s 2013 expenditure report available as of this writing.  The PUC also did not have an expenditure report available for either 2011 or 2013 for Beaver County, but did show 2012’s distribution to have been spent on a capital reserve fund.

 

Butler County was more diverse in spending this portion of its impact fee money.  In 2011 it spent money on social services, emergency preparedness/public safety, its capital reserve fund, environmental programs, and on judicial services.  For 2012 they spread the money even further to include public infrastructure construction, storm water/sewer systems, and on information technology in addition to repeating the same categories from 2011.  2013’s expenditure report is not yet available.

 

Fayette County’s 2011 report consisted of expenditures on emergency preparedness/public safety, information technology, a capital reserve fund, and planning initiatives.  In 2012 they split the money between emergency preparedness/public safety, and the capital reserve fund.  The 2013 report is not yet available.

 

Washington County, which has the most unconventional wells in the Pittsburgh MSA, has received the most money from this part of Act 13.  The 2011 expenditure report for Washington County shows the most money spent on public infrastructure construction followed by their capital reserve fund, information technology, social services, and emergency preparedness/public safety.  In 2012 the list was not as extensive as they spent money on emergency preparedness/public safety, information technology, the capital reserve fund, and social services.  In 2013 the list of expenditures included the capital reserve fund, information technology, public infrastructure construction, emergency preparedness/public safety, social services, and judicial services.

 

Finally, Westmoreland County in 2011 put its money toward capital reserves and social services.  In 2012 the money was spent mostly on emergency preparedness/public safety with only a very small fraction being used for environmental programs.  2013’s report is not yet available.

 

Act 13 also sets up the Marcellus Legacy Fund to deal specifically with environmental issues. Section 2315(a.1)(5), distributes money to counties from this fund.  All counties, regardless of whether or not they host an unconventional well, receive revenues from this section.  This money is allocated based on population of the county as a proportion of the statewide population.  There is a minimum of $25,000 allotted for the smallest of counties and of course the allocation depends on available funds.  The following table shows how each county fared under this section of Act 13.

table 2

 

As mentioned above these funds are restricted to environmental purposes, but they do not have to be reported to the state.  The areas for which this money can be spent include the development, rehabilitation, and repair of greenways, recreational trails, water resource management, and community and beautification projects.  It can also be used for land damaged or prone to drainage by storms or flooding.

 

Thus counties in the Pittsburgh MSA have been the direct beneficiary of the Marcellus Shale natural gas boom.  Over the first three years of impact fee distributions, counties in the MSA have received a total of $10.38 million, $10.84 million, and $13.44 million respectively.   Of course while these funds have been restricted in their usage from the specific sections of Act 13, it does free up money from their general fund budget for use elsewhere.  How much money they will receive going forward remains to be seen.  The impact fee, and thus the amount received by these counties, is affected by variables such as the price of natural gas, age of wells, and number of wells not only within each county, but across the Commonwealth as a whole.

 

Across Pennsylvania as a whole, the total amount of impact fee revenues distributed to counties and municipalities reached $632.4 million by 2013 with another significant allocation coming from the 2014 collections.  The Governor’s plan to impose a severance tax and flat per thousand cubic foot fee would require the elimination of the impact fee, setting up substantial resistance from local governments who are benefitting from the impact fee revenues. Likely this will mean that if the severance tax bill is to have any chance at all of being passed, there will have to be a provision that will essentially replace the dollars lost by the local governments.  Not to mention the impact fee revenue that is allocated to state programs. What will happen to them?

Marcellus Impact Fee Revenue: What’s Happening?

Act 13 of 2012 imposed an impact fee on natural gas wells in the Marcellus Shale reserve lying beneath the Commonwealth.  The levied fee is based on the price of natural gas as traded on the exchange market (and thus could fluctuate from year to year as that price changes) and the age of wells from the time they are spud—the actual start of drilling an unconventional well—through fifteen years.  The revenues are shared among the counties, municipalities, and state agencies according to provisions in Act 13.  Even counties and municipalities that do not contain any wells will receive some money.  After two years of collections, how have the counties and state agencies fared?

 

The well count is determined by the Pennsylvania Department of Environmental Protection (DEP) while the responsibility for fee collection and distribution falls to the Pennsylvania Public Utilities Commission (PUC).  According to DEP production reports, there were 4,333 wells spud in 2011 and prior years. Drilling in the Marcellus Shale formation began in 2007 but the first year of the impact fee was imposed on all wells spud up to and including 2011. Another 1,275 were spud in 2012.  In 2011 the impact fee produced $204.2 million in revenue and in 2012 just under $202.5 million was collected.

 

Act 13 was very specific as to how the money would be distributed.  Eight state agencies, such as the PUC ($1 million) and DEP ($6 million), receive $23 million off the top.  Of the remaining revenues, sixty percent is distributed to the counties and municipalities and forty percent is deposited into the Marcellus Shale Legacy Fund for statewide initiatives.

 

There are seven statewide initiatives that share in the Marcellus Legacy Fund, each on a percentage basis.  For 2011 and 2012 the Legacy Fund received $72.5 million and $71.8 million respectively.  Twenty five percent goes to the highway bridge improvement restricted account in the Motor License Fund.  This money is to be redistributed to counties to assist in the replacement of locally owned bridges.  Another 25 percent is dedicated to water and sewer projects to be split evenly between the PA Infrastructure Investment Authority and the Commonwealth Financing Authority (CFA) for the H2O PA Program.  The CFA is also to receive another 20 percent for other specific initiatives such as mine acid abatement and cleanup, green-space initiatives such as trails and parks, and watershed projects.  In 2011 this amount was approximately $14.5 million and $14.4 million in 2012.  (For more on the CFA please see Policy Brief, Volume 14 Number 8).  Furthermore the CFA must set aside 25 percent of this allocation for flood control projects.  All told the CFA received $23.6 million in 2011 and another $23.3 million in 2012 (32.5 percent of the Legacy Fund share).

 

Other statewide initiatives receiving money under the Marcellus Legacy Fund are the Environmental Stewardship Fund (ten percent), the Department of Community and Economic Development (five percent for projects related to oil and natural gas), and the final fifteen percent will be sent to the counties.  Under this last designation, the distribution is based on population (as a percent of the statewide total) with every county guaranteed a minimum amount of $25,000 (to the extent funds are available).

 

Fifteen percent of the Legacy Fund provided the Commonwealth’s 67 counties roughly $10.9 million in 2011 and $10.8 million in 2012.  Money sent to the counties under the Marcellus Legacy Fund is based on population and are restricted to rehabilitation of greenways such as trails, open spaces and community conservation projects.  In 2011, the largest amount went to Philadelphia County ($1.29 million) with Allegheny County second ($1.04 million).  In 2012, both Philadelphia and Allegheny County still received the highest allocations even though both received slightly less than their 2011 allotment.  Even small counties without wells (Fulton, Juniata and Montour) collected the minimum $25,000.

 

As mentioned above, sixty percent of the impact fee revenue is to be distributed to counties and their municipalities.  Section 2314(d), allocates 36 percent of these funds to counties based on the number of spud wells within the county as a percentage of the total wells in the state.  In a county with a spud well, municipalities with a well divide 37 percent of the 60 percent while those with no wells divide the remaining 27 percent. The amount a municipality can receive is restricted in Act 13 to “…not exceed the greater of $500,000 or 50% of the total budget for the prior fiscal year…”   This money is restricted by statute for use on any one of thirteen possible purposes ranging from road and bridge maintenance/construction to tax reductions to affordable housing and environmental projects such as conservation and beautification initiatives.  In 2011, the counties under this section shared more than $38.2 million. Bradford County received the highest allotment under this section at just under $8.4 million.  In the Pittsburgh region, Washington County received the highest share ($4.3 million) while Allegheny County picked up $79,400.

 

In 2012 the amount to be shared decreased to just less than $37 million.  But since another 1,275 wells were spud in 2012 the distribution among the counties and municipalities had changed as each county’s share of the statewide total became altered.  For example, even though Bradford claimed the most wells in 2011 (949) and 2012 (1,099), its percentage share dropped from 22 percent in 2011 to 19.6 percent in 2012.  Thus it received less money in 2012 ($7.2 million) than in 2011.  In the Pittsburgh area, Washington County still garnered the most money ($4.5 million).  However, Allegheny County claimed more in 2012 ($145,000) as its share of statewide wells increased with the number of wells climbing from nine in 2011 to 22 in 2012.

 

After the first two years, the impact fee has raised more than $405 million to be distributed to counties, municipalities, and state agencies.  The revenues for 2013 have yet to be reported (drillers are to pay the PUC before April 1st), but it should yield more than either of the two previous years.  As mentioned above the impact fee fluctuates based on the trading price of gas and the age of the well.

 

The main reason the amount collected in 2012 slipped below the 2011 figure, even though more wells were spud, is that the price of natural gas fell by 30 percent, thereby triggering a lower fee based on the schedule.  The fee for first year wells in 2012 was $45,000 compared to $50,000 in 2011.  Second year wells in 2012 (those that were first year wells in 2011) paid a fee of $35,000.   The average annual price of natural gas in 2013 came in at 34 percent greater than the 2012 price and thus first year wells in 2013, roughly 1,200 based on DEP production reports, will once again pay a first year fee of $50,000.  The second year wells (1,275, spud in 2012) will pay $40,000 and the third year wells (4,333, spud in 2011 and earlier) will have a fee of $30,000.  This of course assumes that all wells remain online and have not been deemed exempted from the fee (due to capping or low production).  Taking into account new wells and a higher gas price, a crude estimate of 2013’s impact fee revenue would be roughly $232 million, implying that counties and municipalities around the Commonwealth should receive more money in the coming year.

 

However, while the number of wells throughout the state continues to increase, they do so at a decreasing rate.  The number of wells spud in 2013 (1,200) is the lowest since before 2010.  Should this trend continue, it will begin to take a toll on fee revenue as wells age out and are not replaced. Rising gas prices could offer an offset but of course that is the big question for the fee revenue in the future.

Marcellus Impact Fee Payments Roll In

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. 

 

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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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Assessing the Marcellus Well Impact Fee

Recently, Governor Corbett signed the long awaited bill that imposes fees on Marcellus gas wells. The legislation, known as Act 13, gives counties where unconventional (horizontal) gas wells have been drilled into the Marcellus Shale formation the right to impose an impact fee on such wells. There are many issues surrounding the new fee. This Brief will address three of the most important; namely, the schedule of the new fees per well, what effects on drilling and gas production the fee might have, and how the revenue will be distributed.

 

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