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PA Supreme Court Favors Home Rule, Spreads Uncertainty in Marcellus

The Pennsylvania Supreme Court’s decision to overturn a foundational provision of the state’s most comprehensive oil and gas legislation has put a rather large question mark over just how the new regulatory framework could hinder future Marcellus Shale development, leaving the industry scrambling for answers.

After more than a year of waiting for the high court to decide if municipalities would regain their ability to have a say in where and how oil and gas development occurs within their borders under local zoning laws, a late-breaking ruling on Thursday sent statements and speculation flying from all corners of the state’s industry, its critics and other outliers.

At this point, though, concrete answers are not in the offing.

The high court largely diminished Act 13 -- a sweeping piece of legislation that updated the state's oil and gas laws and imposed an impact fee on natural gas production early last year (see Daily GPI, Feb. 15, 2012) -- undercutting the kind of centralized regulation that the industry favors by returning to municipalities their ability to enforce local zoning laws. 

To what extent the ruling will affect the industry's operations in the state, where exploration and production companies are developing the Marcellus and Upper Devonian shale formations at breakneck speed, is unclear. The issue of local control has been a bone of contention in Appalachia in recent years as Ohio, West Virginia and Pennsylvania have all made far-reaching changes to their energy laws in order to keep pace with the rapid development of shale gas.

A similar case is expected to be heard in Ohio, where the high court will consider a challenge in the near future against the preemptive authority of the Ohio Department of Natural Resources, the state's chief oil and gas regulatory agency, which has the final say in all well permitting matters.

“Regulatory certainty creates an atmosphere where companies can and will invest and create jobs, with good economic and environmental return,” wrote Pennsylvania-based Consol Energy Inc. spokeswoman Kate O’Donovan in a statement. “While there is no doubt that this decision is a significant setback, we remain confident that the legislature will revisit the issue swiftly to provide a clear and predictable framework to encourage continued development of this generational opportunity for our region and the Commonwealth.”

Interacting with cities and townships across the region, oil and gas companies have said zoning issues are a matter of circumstance, with many expressing little interest for surface operations in heavily populated or industrialized areas.

One thing is for sure, though, at about 160 pages, the Pennsylvania high court's ruling has left many industry-backers disappointed and uncertain, with many in a hurry to review the ruling for a better understanding of what exactly it means going forward.

"There's no doubt we work with municipalities regularly, but this is a huge blow striking down a major piece of Act 13," Stephanie Catarino Wissman, executive director of the Associated Petroleum Industries of Pennsylvania, told NGI's Shale Daily. "Local zoning provisions are important to our members. They need to know the rules of the road per se. Each municipality is very different with regard to permitting. That provision gave us relief and what this means is still developing. We're still weeding through the decision to sort of digest everything here."

Lisa Kasianowitz, a spokeswoman for the Pennsylvania Department of Environmental Protection (DEP), which argued against the challenge to Act 13, said she couldn’t comment on what the ruling would mean for how the agency permits wells or how municipalities would be involved.

“DEP is currently studying the opinion from the Act 13 ruling by the Pennsylvania Supreme Court,” she said in an e-mail. “In the meantime, the department will continue the regulatory process to develop the [chapter] 78 proposed regulations that address a multitude of critical reforms at oil and gas well sites across Pennsylvania.”

Meanwhile, the marketplace seemed underwhelmed by the decision. One financial analyst called the ruling a “non-issue” because he said money will continue to pour into the state, which has been pushed into the rank of the nation’s third-largest natural gas producer -- and is moving closer to second -- by prolific well results.

Range Resources Corp., which holds about 1 million net acres in the state, said it believed that Pennsylvania has missed an opportunity to establish a standard set of rules to help guide development in a uniform fashion there.

“Range will continue to work closely with the communities where we work, just as we had prior to the enactment of Act 13,” said Range spokesman Matt Pitzarella. “We have a large inventory of drilling locations in communities where we have excellent relationships, which will enable us to continue with our work while creating jobs and lowering domestic energy prices.”

The case made its way to the court on appeal after a lawsuit filed by seven municipalities and the Delaware Riverkeeper Network in 2012 that challenged Act 13 (see Daily GPI, July 30, 2012). The plaintiffs argued that the law unfairly trumped local authority and failed to provide adequate time to pass necessary zoning laws, with critics arguing that drillers would establish operations near residential buildings, schools and other urban areas.

A trial court had sided with the townships and on appeal the high court said in its ruling that the zoning provision -- which gave discretion to state regulators -- violated the state's constitution and citizens' rights to clean air, pure water and the "esthetic values of the environment."

"Economic development cannot take place at the expense of an unreasonable degradation of the environment," the court concluded, adding that, as originally written, the law provided for a "maximally favorable environment for industry operators to exploit Pennsylvania's oil and natural gas resources."

The court's six members voted largely along party lines, with the ruling upheld at 4-2. Three Democrats were in the majority, while two Republicans dissented. Chief Justice Ronald Castille, a Republican, tipped the scales and voted with the majority.

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