PWSA’s 5-Year Plan

Summary: The Pittsburgh Water and Sewer Authority (PWSA) was placed by the state Legislature under the oversight of the state Public Utility Commission (PUC) in 2017.  The PUC was tasked with making sure the PWSA brought its operating procedures up to its guidelines and with forcing the agency to craft a long-term plan to replace/upgrade its aging infrastructure.  The first five-year plan has been released and this Brief looks at some of its details.

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2017 was a momentous year for the PWSA.  After a couple of water system issues spotlighted a frail and aging system that would be very costly to repair, the state Legislature placed the PWSA under the regulatory oversight of the state PUC (see Policy Briefs Vol. 17, Nos. 14, 29 and 49).  Act 65 of 2017 compels the PWSA to do two things: 1) bring its operating system into compliance with the rules and regulations of the PUC, and 2) put together a long-term infrastructure improvement plan for the replacing/upgrading of its systems, both water and sewer conveyance.

PWSA’s plan, covering the first five years, 2018 to 2023, was submitted to the PUC in September 2018 and is now being reviewed by the PUC.  News reports note that after obtaining public input, the PUC has until November 2019 to accept outright, accept pending the PUC’s recommended changes or reject the plan.

The proposed plan spells out the details of the two systems’ infrastructure components.  The water system is very old and much of it is well past its expected life span with an estimated average age of over 80 years.  Forty percent of the system was installed prior to 1920 and 86 percent was built prior to 1970.  It is comprised of over 1,000 miles of water lines of which 964 miles are water mains.

While the entire system has not yet been adequately cataloged and updated, the PWSA says it is using a Geographic Information System that is constantly being updated to get a more accurate picture of the system’s health. However, given the extreme age of much of the system, estimates of needed immediate and near-term replacements are just that. It is almost impossible to know with certainty where potentially calamitous breaks might occur.

The water system contains two treatment plants (one rapid sand and one microfiltration), eight distribution pump stations, four reservoirs (three covered, one not), 10 distribution storage tanks/reservoirs, two finished water pumps, one raw water pump on the Allegheny River, 24,900 valves and 7,450 public fire hydrants.

While the PWSA does not treat sewage—the Allegheny County Sanitary Authority (ALCOSAN) does—it does have a conveyance system to ALCOSAN that needs to be looked at as well. There are 1,213 miles of sanitary, storm and combined sewer lines in the system.  The system also has four wastewater pump stations, 30,000 inlets, 29,000 manhole covers, 185 storm sewer outfalls and 38 combined sewer overflow outfalls.  Approximately 77 percent of the sewer system is combined with storm water, which by federal consent decree, must be separated. There are 24 neighboring municipalities that convey wastewater through PWSA lines for which they do not provide a cost share to PWSA.

Obviously, the system is immense and will take many years and billions of dollars to fix it in its entirety.  The proposed five-year plan covering 2018 through 2023 will be the first of several such plans. Recall that a similar comprehensive plan by an engineering firm from 2012 proposed a 40-year time frame recommending eight five-year plans, for overhauling the entire system.

According to the five-year capital improvement plan submitted to the PUC, the top priorities are “the Aspinwall Water Treatment Plant, replacement or rehabilitation of the two major (treated) or finished water pumping stations, upgrades to storage facilities; replacement of critical transmission lines; continuation of the lead service line replacement program; and acceleration of the small diameter water main replacement program with an overall five-year budget of approximately $775 million.”  Small diameter pipes (8 inches or smaller) are scheduled to be replaced in one percent of the system (720 miles) in the next five years.  The lead service line replacement program has been well underway, replacing more than 2,700 lines from 2016 to 2018 and plans to be finished by 2026. It has been under a Pennsylvania Department of Environmental Protection order to do so since 2016.

As was mentioned in a state Auditor General’s report from 2017, the city had an agreement with PWSA to provide bulk water to city properties (600 million gallons per year) and that many city properties were not metered.  As part of this plan, the PWSA will also be installing meters at approximately 200-400 sites that are currently unmetered along with another 500 properties that pay a flat rate but do not have a meter.  The cost of this part of the program will be billed to these customers and is expected to take five years to complete.  The PWSA does not provide an estimated cost per meter.

This five-year plan also includes wastewater system renewal priorities that have a budget of $155 million over the five years.  The total budget for the three project areas comes to $930 million.

In sum, this plan calls for spending a very large amount of money.  And it represents only the first five years of repairs and replacements.  As was noted in an earlier Policy Brief (Vol.17, No. 14), the PWSA carries a large amount of debt.  In 2015 the amount of net total bonds and loans stood at $763 million before increasing to $866 million at the end of 2017 (2017 audited financial statement).  The net position of the PWSA at the end of 2017 was negative $43.8 million—up from 2015’s negative $35.7 million but better than 2014’s negative $59.1 million net position. And this figure depends on what can only be an estimated value of the system’s infrastructure.

In the plan, the PWSA states that “current planned improvements will be funded through both current rates and rate increases, as well as through revenue bonds, a capital line of credit, pay-as-you-go funding, and PennVest low interest loans.”  It will also explore federal funding through the Water Infrastructure Finance and Innovation Act of 2014, which offers low fixed-interest rates and flexible terms.  It will also look to potential private-public partnerships where possible—and if allowed by the mayor and council who have been unalterably opposed to privatization.

In September 2018 it was reported the PWSA petitioned the PUC to increase rates across its customer base, including 17 percent on residential customers and 10 percent on educational and health care organizations. In 2018 the PWSA’s budget show receipts from water totaled $109.7 million.  With an estimated composite average rate hike of 13.5 percent, those receipts should climb another $14.8 million. If approved the new rates will take effect in April 2019 and remain through 2020.  It will likely be the first of a several rate increases for PWSA customers in the coming years.

And, of course, the plan’s estimates of costs are just the direct monetary cost of the replacement and repair to be borne by the PWSA. There will be other huge costs, some non-monetary, imposed on the citizenry as streets are closed during work on the water lines. Add to that the lost revenue and output of businesses whose patrons and employees cannot get to them.  Nor do the PWSA’s costs include the serious inconvenience of water service being cut off to communities for extended periods.

According to the plan, in 2014 through 2017 annual capital spending was under $40 million per year. Spending increased to $70 million in 2018 and is projected to balloon to $330 million by 2021 before dropping a bit to $265 million in 2023—in all $1.35 billion over five years.

But this is the price that has to be paid because of years of failing to address the problem of antiquated system components. Bear in mind, too, that PWSA funds were misused by past administrations to shore up city budgets rather than investing in needed repairs.

Still this plan, though too long in coming and purposely delayed, is the first step of many to insure a properly functioning reliable water and sewer system for Pittsburgh.

PUC to Begin Exercising its Jurisdiction over the PWSA

Summary: The Pennsylvania Public Utility Commission (PUC) officially begins its oversight of the Pittsburgh Water and Sewer Authority (PWSA) on April 1st. This will be a monumental task. The PUC has moved quickly to get its arms around that task by approving a tentative implementation order specifying how it will carry out its duties and provides deadlines the PWSA must meet to accomplish the mandates specified by the Legislature.

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On Dec. 21, 2017, Governor Wolf signed Act 65 of 2017 into law. The statute amends the Pennsylvania Public Utility Code to give the PUC regulatory jurisdiction over the PWSA with regard to the provision of utility water, wastewater and storm water service. The law also establishes regulatory deadlines for the PWSA. The law went into effect immediately upon the governor signing the legislation. Section 3202 of the amending legislation provides a date certain on which PWSA will become subject to commission jurisdiction: Sunday, April 1, 2018.

A December 2017 Allegheny Institute Policy Brief (Vol. 17, No. 47) summarized the myriad  issues and problems facing the PWSA. An auditor general report concluded that, “the City [Pittsburgh] has over-extended authority regarding the PWSA,” and the PWSA was never intended to be a truly independent organization. Indeed, the city has maintained ownership and leases the infrastructure and equipment to the PWSA. In part, the PWSA was used to help the city with its financial problems.

Then, too, the PWSA has piled up enormous debts that reached $750 million by the end of 2016. The massive debt has crippled the authority’s ability to spend on needed infrastructure replacement. Replacement is now estimated to cost upwards of $5 billion.

It was these and other serious and unaddressed problems that prompted the Legislature to pass with overwhelming majorities the bill giving the PUC a major role in fixing the problems at the PWSA. On January 18th , the PUC approved a Tentative Implementation Order (TIO) in which it lays out how it intends to proceed with its regulation of the PWSA under the requirements spelled out in the law.

Under its regulatory authority regarding rate-setting, the TIO states, “This section provides that PWSA prior tariff rates and terms will have the force and effect of law as of April 1, 2018.  That Prior Tariff will continue in effect until modifications are approved by the Commission.”  Moreover, the TIO says “In practical terms, beginning Monday, April 2, 2018, the Commission will entertain informal and formal complaints from PWSA customers as it would any other regulated utility.  For PWSA, this will mark the end of its current Exoneration Hearing Board as an adjudicative body.”

The PUC expects the PWSA to submit a tariff filing by July 2, 2018.  The PUC also would prefer the PWSA to utilize  a method similar to the Philadelphia Gas Works’ cash flow ratemaking method as it is likely most appropriate for PWSA to gauge compliance with its bond covenants.”  In addition, the PWSA will within 180 days—by Sept. 28, 2018—file a “compliance plan with the commission which shall include provisions to bring an authority’s existing information technology, accounting, billing, collection and other operating systems and procedures into compliance with the requirements applicable to jurisdictional water and wastewater utilities.”

A still larger part of the Legislature’s charge to the PUC, as it assumes regulatory control over the PWSA, is to see to it that the PWSA “develop and file its proposed compliance plan, including a long-term infrastructure improvement plan (LTIIP). This plan will also be submitted by Sept. 28, 2018. According to the TIO, the LTIIP should include any metrics that PWSA uses to track and evaluate the effectiveness of infrastructure improvements, e.g., lost or unaccounted for water, main breaks or non-revenue water.  PWSA should also provide detail on how the programs and property eligible for LTIIP consideration were determined and targeted, e.g., a risk-based approach, age, material type, lost or unaccounted for water, non-revenue water, regulatory directive or audit findings.”

The TIO explains that it will require the PWSA to include a schedule for eligible property repair and replacement by class and category for each year for the duration of the LTIIP. To carry out this effort the PWSA will “project its annual capital expenses including detailed estimates of expenses by category to ensure that the LTIIP is cost effective.”

In more detail the TIO lays out what it expects to see in in the PWSA’s LTIIP in terms of achieving cost effectiveness:

i. the competitive bidding process or other means of choosing contractors;

ii. how contractors are evaluated in terms of work quality, safety and cost effectiveness;

iii. how much LTIIP work will be performed by contractors and/or competitively bid and the process for determining what projects are done by contractors;

iv.how materials are economically procured and vendors are chosen;

v. the salvage and scrapping process/program

The LTIIP will also show how PWSA will accelerate the replacement of aging infrastructure and how repair, improvement or replacement will maintain safe and reliable service.

In addition to the LTIIP, the PUC will request that PWSA provide it with an Annual Asset Optimization Plan (AAOP).  “The AAOP includes associated expenditure information for completed LTIIP work for the reporting year and the projected year.  AAOP data is broken out by individual projects completed in the reporting year.”

Obviously, a major overhaul of the PWSA’s infrastructure will be very expensive and revenues must increase to cover those expenses. The PUC addresses this by allowing the PWSA to “petition the commission for the establishment of a distribution system improvement charge (DSIC).”

The PUC says in the TIO that it understands that PWSA does not currently collect a DSIC surcharge.  If PWSA wishes to reinstate its DSIC after April 1, 2018, the law will require PWSA to petition for approval of a DSIC that is fully compliant with statutory requirements.  In order to recover costs through a DSIC, the PWSA must first submit a LTIIP.

In sum, the PUC, following the requirements set out in the recently amended utilities law, will within the next year or so put the PWSA on a course of better day-to-day management and a long term plan of overhauling its old and rapidly deteriorating distribution systems. Further, it has the authority to grant the PWSA permission to levy a distribution system improvement charge on water and sewer bills to pay for the costly repairs and replacements.

The inability and or the unwillingness of the city to manage its water and sewer system effectively and keep it in good shape have forced the Legislature to take the drastic step of placing a municipal authority under the regulatory control of the PUC and has given the PUC specific mandates as to steps that must be taken to fix the problems at the PWSA.

This process will be painful for customers of the PWSA. But years of neglect and misuse of the PWSA by city officials has made the actions taken by the Legislature necessary.  Now the city’s elected officials can blame the PUC and Harrisburg when the inevitable detours and serious inconveniences due to construction get underway and higher water bills start arriving in mailboxes. Will the electorate and customers accept the blame-shifting?

State Legislature Weighs in on Pittsburgh Water and Sewer Authority

Summary: The plight of the Pittsburgh Water and Sewer Authority has caught the attention of the Pennsylvania Legislature.  The State House has unanimously passed a bill which would place the PWSA under the oversight of the state Public Utility Commission.  The bill would require the PWSA to bring their operating system under PUC compliance and put together a long-term plan to address long-standing infrastructure issues.

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A Policy Brief (Volume 17, Number 14) from April outlined the troubles of the Pittsburgh Water and Sewer Authority (PWSA), specifically its aging infrastructure and the trouble they have with high debt levels which may preclude them from seeking help from a private operator as proposed by the Mayor.  That Brief also noted an engineering report from 2012, commissioned by the PWSA, which had inventoried the entire system and gave recommendations on how to begin to a replacement program at a cost of $2.51 billion (in 2011 dollars).  Other recent estimates put the replacement at four to five billion dollars. The Brief noted that the engineering report recommendations have largely been ignored by the PWSA at its own peril.

It turns out that the State House has also paid attention to the issues of the PWSA and has unanimously passed HB 1490 that has now been sent to the Senate. This bill places the PWSA under the oversight of the Pennsylvania Public Utility Commission (PUC).  HB 1490 adds a new chapter (Chapter 32) to Title 66 of the Pennsylvania Consolidated Statutes (Public Utilities) giving the PUC some limited power over the PWSA.

Chapter 32 will compel the PWSA to do two things:  1) bring their operating system into compliance with the rules and regulations of the PUC, and 2) put together a long-term infrastructure improvement plan for the replacing/upgrading of their distribution system.

The first point is fairly self-explanatory.  The bill states that the PWSA would have 180 days from the effective date of passage to file a compliance plan which would “…bring an authority’s existing information technology, accounting, billing, collection and other operating systems and procedures into compliance with the requirements applicable to jurisdictional water and wastewater utilities…”  This is a great first step as the City Controller recommended in an audit from earlier this year that the PWSA needs to improve their asset management capabilities so they will know what assets need repair and to prioritize them.

The second point is perhaps the most important—putting together a long-term plan to fix the aging system.

In the same section that orders the PWSA to put together a compliance plan for their management system (3204b), comes another directive to “…include a long-term improvement plan in accordance with subchapter B of Chapter 13….”  Title 66, Chapter 13, subchapter B (§ 1352a) outlines what the long-term improvement plan needs to include:  a general description of what needs to be repaired, where it is located, and an initial schedule of the planned repairs or replacements.  Furthermore the subsection requires projected annual expenditures to implement the plan and how the repair/replacement will ensure and maintain safe, reliable, and reasonable service.  If the PUC deems the plan to be insufficient, it can order a new or revised plan.

Section 1353 would allow the PWSA to implement a service charge to pay for the repairs/replacements.  “…[A] utility may petition the commission, or the commission, after notice and hearing, may approve the establishment of a distribution system improvement charge to provide for the timely recovery of the reasonable and prudent costs incurred to repair, improve or replace eligible property….”

To do so, the PWSA would have to submit information about the base rate charged to customers called the “initial tariff” which the PUC will consider when setting/allowing the distribution system improvement charge.  The PWSA would then have to justify the improvement charge by demonstrating that it is in the public interest and will help finance the long-term plan.  The PWSA would be allowed to update the charge quarterly as appropriate.  It would also have to let customers know the about the charge and if adjustments have been made through their bills.

If the PWSA is granted a distribution system charge to pass along to customers, it will have to file an annual asset optimization plan (§1356).  This will require the PWSA to file an annual plan that must include a description of all eligible property that had been improved or replaced within the previous year as well as a description of work to be done over the next year.  This requirement should hold the PWSA’s feet to the fire and compel them to get the necessary repairs/upgrades done.

Of course a distribution system charge will not sit well with PWSA customers, or even the City’s elected officials.  Past administrations and councils have been reluctant to raise water rates on city customers, a major reason the water department was spun off to its own authority. Thus, placing the PWSA under PUC oversight and direction should go a long way to push the authority to do what everyone knows must be done but that heretofore has been the proverbial can being kicked down the road.  With HB 1490 requirements, local politicians can blame Harrisburg for higher rates.

PUC oversight will come with a price.  HB 1490 subsection 3207b allows the PUC to “…impose an assessment on an authority based on the authority’s proportional share of the commission’s expenses relating to the commission’s utility group…on an annual basis….”  Considering that the PWSA currently operates with thin margins and may not be able to absorb this cost internally, this may be another addition to customers’ bills.

However, the PWSA will retain most of its autonomy and nothing in the proposed bill will prevent an audit by the City Controller.

The problem with aging infrastructure has been known for quite some time but the urgency to take the necessary steps is just now getting the attention it deserves. At a cost of over $2.5 billion (or more) upgrading the PWSA’s water and sewage conveyance systems is going to be very difficult to accomplish. Decades of neglect are finally being addressed seriously by the Legislature.  It is unfortunate that local political games playing have forced the State Legislature to take action to prevent major water and sewer system disasters.

Would Reversing the Laurel Pipeline Flow Benefit Western Pennsylvania?

Summary:  A recent request by the owner of the Laurel Pipeline, which brings gasoline and other fuels from east to west across Pennsylvania, to reverse the flow from PA’s western edge eastward to Altoona is being considered by the Pennsylvania Public Utility Commission.  Proponents suggest greater domestic supplies from the Midwest would provide a cheaper, more reliable fuel source.  Opponents claim it would hurt refineries in the Philadelphia area.  A decision is expected to be made by year’s end.

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Most people filling their cars are unaware of the system of pipelines crisscrossing the country that bring gasoline from refineries to their area. In Pennsylvania, the Laurel Pipeline transports gasoline and other fuels from refineries in the Philadelphia area to markets across the southern half of Pennsylvania through Harrisburg, Altoona, Pittsburgh, and on to Midland in Beaver County.  Other pipelines supply fuel to the region from the north and west.

Recently the owner of the Laurel Pipeline asked the Pennsylvania Public Utility Commission (PUC) for permission to reverse the flow of gasoline from Midland to Altoona. This reversal would bring gasoline along with diesel, jet fuel, and other products from refineries in the Midwest, rather than from the Philadelphia region, to the western and central Pennsylvania markets.  This request has prompted objections from Philadelphia area refiners as well as retailers based in Altoona and Pittsburgh. Concerns of the Philadelphia area refiners are easy to understand. The flow reversal would result in the loss of a major market for their product.

There are seven refineries producing transport fuels in the Eastern part of the country—down from nine in 2010. Five are in the Philadelphia area, with two in Pennsylvania, two in nearby New Jersey, and one in Delaware. There is another in Warren County, Pennsylvania and one in West Virginia.  Data from the U.S. Energy Information Agency showed that through July 2016 the seven refineries produced on average 0.53 million barrels of gasoline and 0.32 million barrels of diesel and heating oil per day—just 16 percent of demand for gasoline and  27 percent of demand for diesel and fuel oil in the Northeast. The rest of the demand for fuels in the region is met by supplies from the Gulf Coast via pipeline (Colonial pipeline), tankers, and barges as well as supplies arriving from Canada and overseas.

A further concern of the Philadelphia area refiners is that the reversal of the Laurel Pipeline flow to Altoona will eventually extend into Philadelphia, further shrinking their market. However, the Philadelphia refineries have more than the pipeline to be worried about.  As noted in a recent Philadelphia Inquirer article, “While the proposed Laurel Pipe Line reconfiguration represents a setback for Philadelphia refiners, industry analysts and the pipeline operators say it’s not the cause of the Mid-Atlantic refining industry’s ills.”  The problem? These refiners are apparently not cost competitive with either Midwestern or Gulf Coast refiners.  The Inquirer article notes that “Gulf Coast producers, which are tied directly to oilfields, can produce fuel at such a discount to East Coast refiners that it more than covers the 5- to 10-cents per gallon cost of moving the fuel by pipeline….”  And that is the real long term nemesis of the Philadelphia refineries.

Given the problems faced by refiners on the East Coast and in the Philadelphia area specifically, it is no wonder they would be concerned about losing access to the central and western Pennsylvania markets.

What about the fuel supplies coming from the Midwest?

According to Morningstar Commodities Research, an independent investment research firm, there are 26 transport fuel refineries in the Midwest with a production capacity of 3.9 million barrels of fuel per day.  Unlike refiners in the East, they have increased production by 0.3 million barrels per day since 2010.  And whereas East Coast refiners are largely cut off from domestic crude supplies, Midwestern refineries are awash in domestic crude as well as crude from Canada.

Bakken Shale oil from North Dakota, which was once shipped by rail to the East Coast refiners when the international market price of oil was high, has become a great benefit to the Midwestern plants.  In 2010, 0.25 million barrels per day of this light crude was produced, and reached 1.26 million barrels per day in December 2014.  Production fell to less than one million barrels per day in 2016 as oil prices plunged but is expected to rebound in 2017. New shale crude is also coming to these refineries from Oklahoma, Colorado, and the Utica Shale formation in Ohio.  As noted in a Morningstar report, “abundant supplies of inland shale crude…rapidly overwhelmed the existing Midwestern crude distribution system in 2012.”

In addition, Canadian crude has been very abundant for Midwestern refiners.  Ninety nine percent of Canadian crude is shipped to the U.S. for refining. Seventy seven percent of the Canadian oil is shipped to Midwestern refineries.  Imports of Canadian crude have increased from 1.2 million barrels per day in 2010 to 2.4 million in 2016.  In short, Midwest refineries are well positioned geographically relative to oil production, now and for the foreseeable future.

As mentioned above, the seven refineries in the East Coast supply just a small fraction of the Northeast’s demand for gasoline, diesel and heating oil.  The situation for Midwestern refineries is very different.  They supply 87 percent of the Midwest’s demand for transport fuels.  Morningstar notes that the demand for transport fuels in the Midwest has been stagnant over the past few years as greater fuel efficiency requirements in autos, coupled with the static population in that region, have led to less fuel consumption and lower demand for refined fuels.  While being landlocked in the center of the country has worked to their advantage for crude supplies, it inhibits the ability of Midwest refineries to export fuels overseas. Thus, extending their supply infrastructure further eastward is a benefit to them as well as the region receiving the product.

On its face, the supply of transport fuels from the Midwestern refineries seems to promise far better long term stability than the refineries on the East Coast.  So why would the two retailers balk at a more stable supply?  While the Laurel Pipeline does bring fuels from the Philadelphia area to the western and central Pennsylvania markets, there are other pipelines bringing fuels from the Midwest to terminals in the Pittsburgh area.  As currently configured, these retailers can choose from which area to purchase their fuels and can choose the lower priced source—an option they are reluctant to relinquish.  However, other local gasoline distributors presumably have the same choices of pipeline as the retailers who oppose reversal, so post-reversal competiveness should not be an issue.  And for the Altoona distributor opposing the reversal, it would still be able to choose East or Midwest supply after the Laurel Pipeline reversal.

The owners of the Laurel Pipeline claim the flow from the East Coast refiners has been drastically cut since 2006 when 100,000 barrels traversed the line.  They say the flow at the beginning of 2017 was down about 80 percent to just above 20,000 barrels.  Given that East Coast refiners are supplying only a fraction of the transport fuels western and central Pennsylvania markets are using, with the rest provided by pipelines from the North and West, the objections to the flow reversal appear to be of very limited or no merit.

In sum, the PUC’s central issue is how heavily to weigh the long term availability and stability of the supply of domestically produced crude and ample supply of refined products in its decision of whether or not to allow the reversal of flow in the Laurel Pipeline. If the Philadelphia area refineries can eventually improve their competitiveness by a significant margin, there will still be a huge market open to them from eastern Pennsylvania to Maine. Thus, the refinery objections should not be a determining factor in the PUC’s decision.  Allowing reversal of the Laurel Pipeline would in effect be forcing East Coast refineries to become more cost competitive. A good thing for everyone in the long run.

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.

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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