NARO-PA Weighs in on the Impact Fee
Vice-President, National Association of Royalty Owners- Pennsylvania
The recent passage of SB 1100/HB1950, the Impact Fee, is the first major action the state has taken to directly address the financial impact the Marcellus drilling activity has had on the state. Even with the state’s Department of Revenue reporting that the Marcellus drilling companies have paid more than $1.1 billion in taxes since 2006, the Impact Fee gained popular support outside of the major natural gas production counties. Although the energy production companies support the local decision to implement the Impact Fee, the coupling of the new fee with the decreasing price for dry gas, will inevitably have a negative impact on leasing and production activity in the northeastern Marcellus. The National Association of Royalty Owners, PA chapter (NARO-PA), cautions county governments to closely consider the related detrimental impact on both, large energy company operations and local small business, when determining whether to implement the Impact Fee at this time.
An Acceptable Approach
While most Marcellus stakeholders opposed a severance tax, the Impact Fee bill was somewhat more palatable because of its proposed overhaul of the Oil and Gas Act of 1984 and the clarification it provided concerning how development is to proceed in Pennsylvania. Pennsylvania royalty owners feel the fee, estimated to equate to a 3% tax, strikes an acceptable level that will encourage continued development while ameliorating the desires for funding of both related and unrelated statewide environmental and developmental concerns, during stronger gas markets.
The Impact Fee debate was borne out of a desire by populists and their political representatives to redistribute the revenue from natural resources owned by citizens in one part of the state to others who had never sacrificed to attain such ownership. A steady campaign was undertaken by populist media outlets to spotlight a handful of incidents that reflected poorly on the drilling industry, while always coupling that negative press with the observation that Pennsylvania was the only major natural gas producing state without a severance tax. This steady campaign that minimized the potential long term benefit to the entire state (such as the current 40% reduction in costs to UGI’s residential customers) gained popular support in areas that did not see immediate benefit from drilling. In counties where the drilling has greatly benefitted small communities, small businesses, and workers, the attempts to redistribute revenue to non-affected areas is widely rejected. While the Impact Fee promises some attractive payouts in the short term, they pale in comparison to the contributions already made to the communities involved.
Unfortunately, casual observers did not recognize that issues created by the development in local communities were also being solved on the local level with the cooperation of drilling companies. These remedies rarely made headlines, and the populist support for redistribution of wealth continued to build, fueled by the misconception that the industry was not paying any taxes and the implication that drilling has negatively affected citizens outside the Marcellus Areas. Citizens not directly affected by drilling interpret this “FEE” as an improvement but many remain unsatisfied as it does not address their fiscal agenda,
Natural Gas Making A Difference to Communities Already
In Bradford County, in 2010 alone, natural gas companies spent $340 million on road improvements. In 2012, the Impact Fee is estimated to generate $155 million. Included in that number is $23 million dedicated to eight agencies or programs for costs incurred related to gas drilling. After deducting the dedicated $23 million, 60% of the remaining $132 million will go to the counties experiencing Marcellus drilling and 40% will be distributed to counties not under Marcellus development. Pennsylvania royalty owners are concerned that the Impact Fee passage may cause companies operating in the Marcellus to abandon or otherwise sidestep their “Good Neighbor” practices that have turned impacts into improvements and provided local remedies to local problems. Pennsylvania NARO feels that without the continued “Good Neighbor” policies that drilling related companies have voluntarily demonstrated thus far, the 60/40 split will leave Marcellus counties shortchanged in their impact remediation efforts
Pennsylvania’s chapter of NARO realizes there have been, and will continue to be, state costs associated with the increasing development of our gas resources and that there needs to be fees to cover those costs. However, the allocation of some of the fees makes one wonder about the thought process. Fee distributions to the Natural Gas Energy Development Program that are proposed to be $10 million in 2011 but shrink to $2.5 million in 2013 seem to be counter-productive in light of the current energy environment. When companies are leaving Pennsylvania for more profitable environments, we should be increasing not decreasing the development of new markets for our gas. Without new wells there will be decreasing revenues from the Impact Fee, but baring associated state layoffs proportional to the reduction, many costs will be more or less fixed. It would seem this aspect of the fee should be increasing over the next few years in an effort to sustain and build the industry here. Helping to fund the Marcellus Works bundle of bills should be a priority use of revenue.
Low natural gas prices are currently forcing many drilling companies to scale back operations in Pennsylvania. This reduction in drilling activity will result in fewer taxes and general funds revenues from the industry and the workers and royalty owners that are dependent on it. These decreases will not be offset by revenue generated by the Impact Fee or even the “Oft Praised Severance Tax”, since both are entirely dependent on drilling and production. Revenue collected by the state through corporate taxes, sales taxes, employee withholdings, and income taxes resulting from wages and mineral owners’ royalties, are the basis of the general fund.
Ensuring Consistent Reasonable Regulations
Pennsylvania’s royalty owners commend the governor for providing consistent regulation for the development of the resources contained within the state’s boundaries. We applaud the yearly allocation of $6,000,000 to DEP for costs incurred due to drilling activity. We feel a strong, well-funded regulatory body will protect all citizens of the Commonwealth.
Additionally, Pennsylvania’s royalty owners embrace Chapter 33 of the bill, as it protects the rights of private property and royalty owners from the well-documented threats from over-reaching local governments, such as: exclusionary zoning, increased setbacks, noise regulations, fees, environmental regulations, and restrictions that are discriminately applied to oil and gas extraction, while not applied to other commercial and industrial activity.
- Chapter 33 clearly defines the activities townships must allow as “reasonable development” of natural gas production within their borders if they want to receive Impact Fee revenues.
- Chapter 33 requires applications for review by a municipality to be limited to 30 days for a permitted use and no more than 120 days for conditional use applications, preventing rogue townships from manipulating regulatory delays to thwart operations.
- Chapter 33 also provides well operators and royalty owners a methodology to request an Attorney General review of a municipality’s zoning regulations to determine if it is in accordance with the provisions addressed in this chapter, the MPC and judicial decisions of the Commonwealth and provides penalties through civil action for non compliance.
Since, Impact Fee revenues collected by the Public Utility Commission (PUC) will be somewhat dependent on well production rates, NARO-PA hopes the PUC sees the value of well meter certification. Without periodic certification by the Bureau of Weights and Measures, the state cannot be assured of accurate revenues.
Pennsylvania’s royalty owners very much appreciates the much needed overhaul of the environmental standards contained in the Oil and Gas Act of 1984 that is provided by the bill. Some of the updates to the act which we support include:
- The expansion of the drillers’ zone of presumed liability, from 1,000 to 2,500 feet, taking into account increased pressures encountered in drilling, fracking, and producing Marcellus wells.
- The required disclosure of chemicals used during the hydraulic fracturing process and the publication on FracFocus.org, to add validity to the information that is already being voluntarily disseminated by responsible companies.
- The increase in Civil penalties to $75,000 for drillers who violate regulations.
- Improved bond levels for drillers based on the length of well bores and the number of wells the company operates.
NARO-PA has actively advocated for the increase of standards to a responsible level that protects our safety, health, and environment. We commend the legislature and the Corbett administration for these common-sense environmental standards which stop short of discouraging development, while taking a necessary leap forward to protect our most valuable assets, our air, water, and lands. We look forward to working with the administration, the legislature, and regulatory agencies in the future, as we endeavor to improve the prospects for the responsible development of our domestically produced energy resources.
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