Act 13’s Impact Fee

The unconventional gas well fee of Act 13 (“impact fee”) sparked heated discussion.

Under Section 2302 of Act 13, the governing body of a county may elect to impose a fee on each individual unconventional gas well drilled (or “spudded”) in the county. The oil and gas industry considers the techniques used to extract shale gas, including hydraulic fracturing (“fracking”) to be unconventional. Thus, counties can impose the fee on most Marcellus Shale wells drilled in Pennsylvania.

An impact fee requires an oil and gas operator to pay a flat rate on each unconventional well drilled. The initial fee is determined based on a formula that includes the year that the well was drilled and the average annual price for natural gas in that calendar year. The fee is highest in the well’s initial year of operation, and decreases at a specific rate each year for the next fifteen years. The impact fee [PDF] for unconventional wells drilled in 2013 was $50,000.

The Pennsylvania Public Utility Commission (“PUC”) manages the collection and distribution of impact fees to participating counties. To participate, counties must have an unconventional well within its borders. Counties were also required to formally impose an impact fee by ordinance within 60 days of the effective date of Act 13. Without an ordinance in favor of impact fees, a county is prohibited from receiving funds from the collected fees.

Although some municipalities feared that they would not receive adequate funds from the PUC if they participated in the program, the impact fee generated $630 million between 2011-2013. Portions of the funds have been disseminated [PDF] as grants for programs that help convert vehicle fleets from gasoline to natural gas. Analysis [PDF] of the impact fee suggests that, although it generates less revenue than states that have imposed a severance tax, the amount distributed to municipalities has thus far been adequate to manage increased local government costs.

During the 2014 election campaign, gubernatorial candidates Tom Corbett and Tom Wolf debated the possibility of a severance tax to make up a $1.5 billion shortfall in the state budget. Corbett was opposed, while Wolf considered it a possibility.

Wolf won the election, and publicly proposed a severance tax on February 11, 2015. Wolf’s suggested tax would include a 5% tax on the value of natural gas at the wellhead, and an additional 4.7 cents per thousand cubic feet pulled out of the ground. The 4.7 cents would be used to hedge against wild fluctuations in natural gas prices. This severance tax would replace the impact fee, and most of the proceeds of the tax would go into Pennsylvania’s public education system – although an exact formula for distribution has not yet been developed.

Voices for the oil and gas industry opposed the severance tax when it was first proposed during the campaign, claiming that the cost of the tax would be passed along to consumers and could negatively affect job creation in the region. Current concerns question whether the tax would be distributed back to regions which experience the largest impact from drilling, or whether the funds would be sent to cities like Harrisburg, Pittsburgh and Philadelphia.