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PA Supreme Court Declares Several Provisions of “Act 13” Unconstitutional

12/30/2013

By: Ian Haley

In February 2012, Governor Tom Corbett of Pennsylvania signed Act 13 into law. Act 13 amended the states previous Oil and Gas Act, 58 P.a.C.S. §§ 601.101 – 601.605, and provided significant changes regarding natural gas drilling operations. Portions of the Act essentially allowed the state government to supersede local governmental control and mandate local ordinance changes to accommodate the natural gas industry. Under Act 13, local governments lose their ability to zone and restrict oil and gas drilling and must instead defer to statewide policies on zoning regulations.

The intent of Act 13 is to permit optimal development of the Commonwealth’s oil and gas resources, to protect the safety of personnel and facilities in covered industries, to protect the safety and property rights of persons residing in areas hosting oil and gas operations, and to protect natural resources, environmental rights and values secured by the Constitution of Pennsylvania. See 58 Pa.C.S. § 3202 (Declaration of purpose of chapter).

However, in March 2012, the constitutionality of Act 13 was challenged on several grounds. As expected, the case climbed the judicial ladder and December 19, 2013, the Pennsylvania Supreme Court issued a decision finding several provisions of Act 13 unconstitutional. See Robinson Township v. Pennsylvania’s Pub. Util. Comm’n, No. 63 MAP 2012 (Pa. Dec. 19, 2013).

The Courts decision relied heavily on the 1971 Environmental Rights Amendment to the Pennsylvania Constitution. In part, the amendment provides,

“[t]he people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and esthetic values of the environment. Pennsylvania’s public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.”

PA Const. art. I, § 27.

The Supreme Court’s decision found portions of section 3215 of Act 13 unconstitutional as well as found sections 3304 and 3303 in violation of the Environmental Rights Amendment.

Section 3215 allows the Department of Environmental Protection to grant waivers for setback requirements from water sources even over the objection of the municipality. Section 3304 required municipalities that had land use ordinances to conform those ordinances to a set of uniform standards set out in the statute. Section 3303 declared that all local regulation of oil and gas activities was preempted. All, as mentioned, were found to be in violation of Pennsylvania’s Constitution.

Act 13 also included an important provision regarding impact fees on drilled wells. The constitutionality of this provision was not at issue.

In the end, this historic decision is a win for local governments and municipalities but also acts as a major strike against the oil and gas industry. Local governments are able to retain their power to regulate and zone oil and gas production like they do other activities.

A copy of the decision can be found through the Pittsburgh Post-Gazette’s web-page or by clicking here.

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Pennsylvania’s Act 13: The Inability of Impact Fees To Keep Pace with Value of Gas Production

12/12/2013

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By: Ian Haley

You cannot talk about the “Shale Boom” without talking about Pennsylvania. Coal and steel were once the lifeblood of the Keystone State but today’s industry is being re-born thanks to the natural gas reserves in the Marcellus Shale. The Appalachian range that stretches from the Southwest corner of the state to the Northeastern corner has provided a substantial large deposit of natural gas reserves for Pennsylvania.

In February 2012, Pennsylvania passed Act 13, providing a complete overhaul of the states natural gas drilling law. See P.a.C.S. §§ 3201 – 3274. Act 13 amended the states old Oil and Gas Act, 58 P.a.C.S. §§ 601.101 – 601.605, and provided significant changes regarding natural gas drilling operations. The amendment provided for enhanced environmental protections for the development of unconventional natural gas resources by authorizing the imposition, collection and distribution of an impact fee on the development of unconventional natural gas resources and to provide for municipal ordinances and zoning standards related to oil and gas development.

This enactment of Act 13 immediately created a flurry of debate. Most significant was the Acts limitations on local zone ordinances. A number of municipalities and counties challenged the Act and argued it violated local governments due process rights by restricting local governments abilities to zone and regulate drilling. In fact, on July 26, 2012, the Pennsylvania Supreme Court ruled zoning portion of Act 13 unconstitutional.

Outside of the constitutionality of Act 13, much debate has surrounded the states choice to impose an impact fee rather than severance tax on the gas industry. First, it is important to understand how Act 13’s impact fee works. An impact fee is essentially a flat rate fee and the law gives each county the power to impose a $40,000 - $60,000 flat fee on a well in its first year of operation, with the fee declining over the next 15 years. The fee is based on the price of natural gas and the year in which a well is drilled. Therefore the revenue from impact fees is based on the number of wells drilled each year and the price of natural gas. In contrast, a severance tax is structured like any other tax. Instead of a flat rate fee, the tax is a percentage and based on the amount of production.

The Pennsylvania Public Utility Commission (PUC) is responsible for collecting the revenue generated from the impact fees and dispersing the funds. Generally speaking, sixty percent of the funds generated remain at the local level, going directly back to the counties and communities that are affected. The remaining funds are given to state run agencies responsible for maintaining and regulating the states drilling. Act 13 also allows for local governments to use the funds for roads, bridges, schools, environmental projects, and other area affected by the influx of the gas industry.

According to a Pennsylvania 2013 Governor Report, in 2011 Act 13’s impact fees generated approximately $204 million for local counties and municipalities. Due to declining natural gas prices, 2012 saw a slight decrease in revenue, with the fees bringing in approximately $202 million.

However, studies suggest more revenue can be generated through a severance tax. In fact, most energy producing states impose severance taxes rather than impact fees. Pennsylvania neighboring states of Ohio and West Virginia both employ severance taxes. North Dakota, another state experiencing a boom in shale oil production, also employs a severance tax.

The problem with Pennsylvania’s impact fee is that as gas production increases, the revenue generated from the fees remains relatively flat. The volume of natural gas production since 2008 has grown significantly. Historical statistics show that production rose from 1.3 trillion cubic feet in 2011 to over 2 trillion cubic feet in 2012. This dramatic increase in production has had no significant impact on what the impact fees brought in from 2011-2012, as they remained the same.

Using a conservative outlook, the PA Budget and Policy Center has estimated that a 4% severance tax could generate an additional $206 million dollars in 2013-2014 in place of the existing impact fee. A further outlook goes on to suggest that in 2019-2020, the 4% severance tax would generate an additional $326 million dollars. Using a more moderate future outlook, the 4% tax is expected to generate an additional $261 million and $867 million in 2013-14 and 2019-20 respectively. The difference between the conservative and moderate outlooks is simply the projected new wells drilled and increase in gas prices where the moderate approach simply predicts are larger growth. A more detailed analysis can be found on the PA Budget and Policy Center’s Briefing.

Now, Pennsylvania has defended its choice of an impact fee over severance tax mainly on the grounds that the gas industry is new and the state already imposes a large number of other taxes. Thus, it does not want to discourage the growth of the industry by imposing more taxes on production. However, despite having the low impact fee, Pennsylvania saw a decrease in the amount of new wells drilled in 2012.

Although Pennsylvania believes it can encourage more growth in its energy industry through the imposition of impact fees rather than severance taxation, it is clear that this choice could ultimately cost the state potential revenue. Yes, the industry is still relatively new and impact fees make Pennsylvania more competitive and attractive. However, if Pennsylvania were to switch to a severance tax, it is unlikely gas companies would venture elsewhere as the demand for Marcellus Shale in Pennsylvania is too great. Furthermore, statistics have shown that Pennsylvania is lagging behind other states in terms of revenue generated. The potential revenue that can be generated through the use of a severance tax is too great to be ignored and Pennsylvania should reconsider the use severance tax on the ever expanding gas industry.

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Looking Ahead: Global Leaders Predict Future Economic Growth Will Be Dominated By Traditional Fossils Fuels, Not Renewable Energy

12/12/2013

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By: Ian Haley

Today’s energy industry is driven by a multitude of factors. Most importantly, the world has recognized the scarcity of fossil fuels and the importance of focusing development on energy sources that are more sustainable, renewable, and efficient. However, three of the world’s largest energy companies, Exxon Mobil Corporation, BP, and Statoil, predict that oil and gas will continue to remain the most demanded energy sources well into the future. In fact, the three energy tycoons all similarly suggest that oil and gas will fuel the world’s economic growth as far into the future as 2040.

Each year, Platts, an energy research company, reports the 250 Top Energy Company Rankings. This system ranks the world’s largest energy companies based on individual companies’ assets, revenue, profits, and return on investment capital. According to the 2012 ranks, Exxon Mobil, BP, and Statoil all were among the world’s top 10 leaders in energy. Exxon Mobil retained the top spot in the Platt rankings, a spot it has held since 2007. BP ranked 4th on Platt’s 2012 rankings, moving all the way up from the 118th spot it held in 2011. Finally, Statoil was ranked 6th in the global energy company rankings, up five spots from its 2011 ranking of 11th.

According to Exxon Mobil’s “2012 The Outlook for Energy: A View to 2040”, the world’s energy demand is expected to increase 35% by 2040 even in the wake of increased energy use efficiency. This large increase projection is directly correlated to the anticipated world population growth from 7 billion today to nearly 9 billion by 2040.

Not surprisingly, Exxon Mobil suggests oil will remain the world’s top fuel. However, natural gas is expected to overtake coal as the world’s second leading fuel because of increased investment and technological advancements in the area of natural gas. Together, oil and gas are predicted to supply 60% of global demand by 2040. In addition, Exxon Mobil believes gas is the “energy of the future”, and expects global gas supplies to rise 65% by 2040.

The technological advancements that continue to push supplies of oil and gas are numerous. For example, Exxon Mobil points to the production of crude oil from deep water, oil sands, and tight oil resources as a major advancement. For gas, the company highlights the technological advancements allowing production from areas such as tight oil resources in North Dakota, deepwater developments in the Gulf of Mexico, and Canadian oil sands. Not until recently, these areas of production were unattainable because of technological limitations.

Even with the rise in demand, production, and use of crude oil, Exxon Mobil estimates that by 2040 more than half of the world’s total supply of those resources will have yet to be produced. Furthermore, it is estimated that there is enough natural gas left in the world to meet current demands for the next 200 or more years. Overall, the future vision appears to show a continued heavy reliance on conventional energy resources.

Turning to BP, the world’s 4th largest energy company predicts a similar future. According to the company’s annual “Energy Outlook 2030”, global energy demand for energy will see a steady increase of approximately 1.6% per year through 2030. Overall, we should expect a total demand increase of around 40% by 2030. Similar to Exxon Mobil, BP suggests that traditional fossil fuels will continue to dominate the market.

Unlike Exxon Mobil, BP forecasts that oil, while occupying the largest market share of energy, will see a demand increase of only .8% through 2030. In comparison, gas is expected to be the fastest growing fuel with demand increasing at an average of 2% per year through 2030.

Interestingly, BP attributes the growing energy demand to developing parts of the world such as China, India, and the Middle East. Like Exxon Mobil, BP points to an increase in supply growth in North America and specifically points to the U.S. tight oil and Canadian oil sands supplies. It is estimated that North America will account for nearly 73% of the world’s gas production in 2030.

In their annual “Energy Perspectives: Long-term macro and market outlook”, Statoil’s predictions through 2040 are in accord with Exxon Mobil and BP. The company predicts that global energy demand will increase by as much as 40% by 2040 with traditional fossil fuels dominating an estimated 72.5% of total market demand in 2040. Similar to other predictions, oil is expected to have the slowest growth at an average rate of .5% per year. Statoil bases the slow decline in oil demand growth to be due to factors including environmental policies, increasing prices, and energy efficiency in the transport sector. Furthermore, gas once again is considered the “energy of the future” and demand is expected to grow 60% by 2040.

Overall, the three industry leaders are consistent in two major areas. First, traditional fossils fuels will continue to dominate the world’s energy demand well into the future due in large part to technological advancements and investments. Second, the recent surge in natural gas production is not a fluke, but rather an industry that is expected to climb in demand faster than any other. And finally, all three major companies show very little promise by way of renewable energy. In fact, according to Statoil predictions, renewable energy will account for less than 20% of total energy production in 2040.

Although the outlook presented by Exxon Mobil, BP, and Statoil sounds promising economically, the fact still remains that the world continues to burn through fossils fuels at an increasingly faster pace than yesterday and does so without much of an outlook for renewable energy.

As the world continues to rely on traditional fuels, individual countries have taken steps to promote the use of renewable energy. For example, the United States adopted The Energy Policy Act of 2005, which provided tax credits for residential property that used certain forms of renewable energy. See 26 U.S.C. § 25d. Other countries have taken more direct approaches to enforce alternative energy development. For example, the European Union has recently implemented the EU Emissions Trading Scheme which places strict standards on domestic and international aircraft emissions in an attempt to promote energy efficiency and renewability. See NBAA.org, European Union Emissions Trading Scheme (ETS), http://www.nbaa.org/ops/environment/eu-ets/.

However, the forecasts of Exxon Mobil, BP, and Statoil indicate that the individual attempts by countries to promote alternative energy have had little impact on future demand. Instead, a more international approach to alternative and renewable energy development needs to be used. Some international organizations such as the International Renewable Energy Agency (IRENA) have recently been established and it is up to the nations of these agencies to collectively come together and change the future of renewable energy demand.

Exxon Mobil, in its annual report, properly quoted, “[w]hen it comes to energy – the future is not predetermined.” I believe the collection of these long term forecasts show just how important it is that more effort be put into renewable energy sources.

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Pennsylvania’s Clean and Green Act: Amendments to Balance Land Preservation with Energy Development

12/12/2013

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by Ian Haley

In 1974, Pennsylvania passed into effect Act 319 entitled, “The Pennsylvania Farmland and Forest Land Assessment Act”. More commonly known as the “Clean and Green Act”, this act provides a preferential tax assessment for land used for agricultural and forestry purposes. The purpose of the act is to encourage landowners to retain and protect their land for agricultural, recreational, and forest development by providing property tax relief. See 72 Pa. C.S. § 5490.1 et seq. However, a volatile economy and surge in energy development has forced Pennsylvania to adopt amendments to the Clean and Green Act focusing on encouraging and balancing environmental protection with energy development. Today, the PA Department of Agriculture estimates that more than 9.3 million acres are enrolled under Clean and Green.

Typically, when a county adopts the Clean and Green Program, it assesses two values on each piece of parcel that qualifies. These values include Fair Market Value and Use Value. When a landowner enrolls in the Clean and Green Program, their property is assessed at its Use Value rather than its Fair Market Value. The Use Value of property is typically lower than Fair Market Value, ultimately saving the landowner in taxes significantly. Generally, to qualify for the program landowners must devote at least 10 contiguous acres of land strictly for one of the following:

Agricultural use – land in agricultural production or soil conservation
Agricultural reserve - recreational open space available to the public
Forest reserve – land capable of producing timber or other wood products

Once enrolled in Clean and Green, landowners are obligated to continue to devote the land to one of the prescribed uses that qualified them for the program and are not able to withdraw from the program unless the use of their land changes to one which would not qualify. The program and its benefits continue until the landowner

            In situations where the use of the land does change to a non-qualifying use, the landowner is subject to a “roll-back” tax penalty of 7 years with an annual interest rate of 6%. A non-conforming use on any portion of the parcel results in the entire parcel being penalized. This penalty is calculated from the difference between the preferential taxes paid and the taxes that would have been paid if the land had been assessed at Fair Market Value.

            Everyone benefits either directly or indirectly from the enactment of the Clean and Green Act. Property owners and landowners directly benefit from substantial property tax savings, while the general public indirectly benefits from the preservation of farmlands, woodlands, and the environment. But how does this relate to the recent surge of oil and gas production in Western Pennsylvania?

            With the recent explosion of the oil and gas industry in the region, landowners with large holdings of natural and mineral resources have had the opportunity to lease property for the exploration and extraction of these resources beneath their lands. This resulted in some landowners leasing away property registered under the Clean and Green program to oil and gas extraction companies. Clearly, land that is used for the extraction of oil and gas is not one of the limited uses qualified under the Clean and Green Act. Knowingly or unknowingly, landowners were “double-dipping”, as they received the benefit of a tax reduction from the Clean and Green Program while also receiving royalties and other financial benefits from leasing away their property to oil and gas companies. In contrast, for other Clean and Green landowners the threat of “roll-back” taxes served as a major deterrent to “double-dipping” and exposing themselves to liability for leasing their registered Clean and Green property away to the oil and gas companies. Landowners were caught in a holding pattern between the Acts savings and potential large royalties payments.

Pennsylvania had to find a way to balance environmental protection with energy development. To encourage energy development, on October 27, 2010, Act 88, an amendment to the Clean and Green Act was signed into law that clarified implications concerning oil and gas use on Clean and Green parcels. The amendment made it possible for landowners to lease property for the removal of oil, gas, coal bed methane, and other energy sources without having their entire parcel being subject to the “roll-back” tax penalty. Instead, “roll-back” taxes are only imposed on the portion of land devoted to the energy activities. Essentially, the portion of property where the well-site or other energy production is located is excluded from the tax incentive and subject to a normal tax rate. In contrast, instead of an entire property becoming ineligible for preferential tax assessment and subject to the “roll-back” penalty, the preferential tax treatment will only be revoked on the portion of land no longer capable of being used for agricultural, agricultural reserve, or forest reserve.

Act 88 of 2010 states in part,

2) Portions of land subject to preferential assessment maybe used for exploration for and removal of gas and oil, including the extraction of coal bed methane, and the development of appurtenant facilities, including new roads and bridges, pipelines and other buildings or structures, related to those activities.

(3) Roll-back taxes shall be imposed upon those portions of land actually devoted to activities set forth in paragraph (2),excluding land devoted to subsurface transmission or gathering lines, which shall not be subject to roll-back tax . . .

            This amendment provided a great benefit to Clean and Green landowners and successfully removed the deterrent effect Clean and Green had on energy development in the region. In most cases, landowners can still reap the preferential tax benefit of using their land for agricultural, agricultural reserve, and forest reserve while also capitalizing on the opportunities that oil and gas has brought to Western Pennsylvania. Within a short period of time, the economic and social benefits of the oil and gas industry have grown tenfold and it is important to allow this community to take advantage of its potential and continued growth.

Pennsylvania has made major strides in its attempt to balance environmental protection with energy development. With amendments to the Clean and Green Act, property owners benefit as well as the general public by helping promote oil and gas production while preserving the use of agricultural, open space, and forest development.

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PA Supreme Court Declares Several Provisions of “Act 13” Unconstitutional

Pennsylvania’s Act 13: The Inability of Impact Fees To Keep Pace with Value of Gas Production

Looking Ahead: Global Leaders Predict Future Economic Growth Will Be Dominated By Traditional Fossils Fuels, Not Renewable Energy

Pennsylvania’s Clean and Green Act: Amendments to Balance Land Preservation with Energy Development

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