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Aftermath of PA Act 13 Ruling: Widespread Uncertainty

As a clearer picture emerges from the Pennsylvania Supreme Court's recent ruling that struck down key provisions of the state's most comprehensive oil and gas legislation, the court's decision is likely to have repercussions for a decade or more, sources say, with the impact extending across the spectrum and touching more than just the pace of the industry's operations in the Marcellus Shale.

In fact, many agree that the decision will largely not affect exploration and production companies' work in the state. Instead, it will force operators to deal with a bit more red tape and send them back to a time before Act 13 -- a sweeping piece of legislation passed in February 2012 that updated the state's aging energy laws -- when municipalities had more power to say when and where drilling could take place.

In other words, operators may simply have to pay closer attention to where they decide to do business.

"We tend to see the most friction on these kind of land-use issues on the periphery of development in areas close to where drilling is occurring, but not inside them," said Blaine Lucas, chairman of the Pittsburgh-based law firm Babst Calland's public sector services group. "We don't tend to see as many issues in cities or boroughs; those aren't rural areas and there's not much development there. More often than not, there are also no zoning areas in the rural communities."

Lucas, who is also a member of Babst Calland's energy law group, said the new law will play out in suburban areas where land-use conflicts are more common.

Michael Krancer, former secretary of the Pennsylvania Department of Environmental Protection (DEP), said "we'll be seeing cases from this decision for the next 10 years or more.” And because of Pennsylvania’s role as a leader in setting the boundaries for the new oil and gas industry, its influence could spread. Krancer said he wouldn’t be surprised to see the Pennsylvania Supreme Court decision cited in similar cases in other states.

"When environmentalists start building into this ruling and choices are made they're going to be concerned," said Krancer, who now works as a Philadelphia-based energy attorney at Blank Rome LLP.

When Gov. Tom Corbett signed Act 13 into law, it repealed parts of the existing Pennsylvania Oil and Gas Act and added six new chapters to it (see Shale Daily, Feb. 15, 2012). It was billed as a grand bargain where local governments received direct impact fee payments in exchange for adhering to state drilling rules. Since the high court's ruling on Dec. 19, many have chosen to focus on the two chapters it struck down, which defined statewide limitations on oil and gas development and prohibited local regulation of oil and gas operations.

When it overturned those chapters, the court handed back to municipalities their right to enforce or change local zoning laws to better govern the orderly development of their land  (see Shale Daily, Dec. 20). Conversely, it appeared to leave some jurisdictions which had no local regulations in place without the protection of the state statute.

Uncertainty Prevails

The ruling remanded other parts of Act 13 back to a lower court, including a decision on whether the state's impact fee is substantial enough, and whether doctors should be required to disclose the potential health impacts of horizontal hydraulic fracturing (fracking) to their patients.

For now, though, the supreme court's decision has left stakeholders to track a host of moving parts and what they might mean for communities, operators, environmentalists and others with a vested interest in development of Pennsylvania's natural resources. 

It also remains unclear if Act 13 has lost its teeth altogether or has just been significantly weakened. That matter will play out in lower courts across the state and in the halls of the  capital as time goes on.

One key part of the ruling was the court's decision to strike down a requirement that allowed the DEP to grant a waiver on setbacks for drilling activities near water bodies, so long as an operator submitted a plan that showed those bodies of water would not be severely impacted.

That provision, though, was so closely intertwined with other setback and environmental regulations included in Act 13 that the court was forced to throw out those as well -- leaving vulnerable nearly half of all the rural townships where drilling is taking place that don't have zoning ordinances or environmental safeguards.

Krancer said this part of the court's ruling has been grossly overlooked, and he said it's unclear just how those townships will now decide to deal with the lack of regulations. If anything, he said, a host of stakeholders will make a lobbying push and be forced back to the drawing board to craft new legislation that fixes some of the holes the ruling left wide open.

"This is not the end all be all of drilling in the state," he said. "Development will continue to occur at a regular pace as it has, but there will be a number of parties from environmentalists and industry, to legal and others at the table because the law, at this point, represents too many unknowns. Going forward, there will have to be some sort of legislative solution."

Thousands of Possibilities

According to the Pennsylvania Association of Township Supervisors, there are 1,454 townships with a population density of less than 300 people per square mile in the state. Ginni Linn, a spokeswoman for the organization, confirmed that many do not have zoning ordinances. But each has a governing body, she said, and some could decide to implement new zoning laws.

"There were state environmental restrictions in those areas with no zoning and that's going to have some impact because those protections are out the door with section 3304 gone, basically what this does is put operators in a pre-Act 13 mode," Lucas said. "They'll have to address land-use issues on a municipality-by-municipality basis, and many places have fairly decent relationships with operators. At the end of the day, the court's decision might not matter that much.

"On the other end of the spectrum, in communities that have been contentious to date, there will be a high likelihood of hostility in terms of restrictive local regulations," Lucas added. "It's fair to say that the chances of more local litigation have increased because these issues will have to be resolved on a circumstantial basis."

Another possibility for operators, Lucas said, might be to simply pick and choose which townships to drill in, steering clear of those that oppose drilling and focusing instead on where they are welcome.

Krancer agreed with Lucas in saying that the court's decision to strike down some environmental protections included in Act 13 was unexpected on both sides of the case. As time goes on, that move could prove detrimental for some communities across the state, they said.

The Haves and Have-Nots

In addition to smaller townships, the number of cities, boroughs and heavily populated suburban areas means there are more than 2,000 entities with a governing body in Pennsylvania. Hypothetically, each could decide to amend or create zoning ordinances. Although Fitch Ratings said the ruling could slow the pace of potential revenue growth from oil and gas related activities for local communities, it said municipalities would likely embrace greater oversight and continue to facilitate oil and gas development.

"We believe local governments in Pennsylvania will generally benefit from this legislation as they gain greater control over where and how these activities will take place," Fitch wrote in a press release on the matter. "We also expect many of them to be open to oil and gas exploration as their communities historically grew during decades  of coal mining and their employment growth rates have lagged national averages."

Still, Krancer said the ruling has created a "huge unknown" about how municipalities and the state will now interact during the permitting process, with the court's decision amounting to the creation of more than 2,000 "mini-DEPs."

Perhaps more importantly, for now, is how the ruling has created a division between communities that support drilling and those who oppose it. Moreover, the decision follows another in Colorado this month that stopped fracking in some towns in that state, while local governments in Texas recently passed limitations on the amount and location of drilling activities.

As other states, including Ohio, where the high court will hear a similar challenge to the state's regulatory authority (seeShale Daily, Oct. 14), move forward with new rules on horizontal drilling, the Pennsylvania case could be used to support similarly restrictive measures and stoke further divisions across the country.

"If I was a lawyer arguing one of these cases, I would certainly call on this Pennsylvania ruling," Krancer said. "Some state supreme courts are extremely influential, like California and New York, and I believe Pennsylvania will be influential in oil and gas matters considering the level of development that has taken place here."

A closer look at the plaintiffs involved in the Pennsylvania case shows that four of the six townships who joined the lawsuit against Act 13 last year currently have no oil and gas related activity within their borders. Although E&Ps have shown an interest and they have signed some leases  in Nockamixon, South Fayette, Peters and Yardley, operators have not secured any drilling permits within the boundaries of those four who participated in the lawsuit.

Some residents and township officials have demonstrated a history of opposition to the oil and gas industry in those communities, with critics calling the plaintiffs "well-heeled" and wealthy enough to pay for costly litigation against drilling efforts.

But Peters Township Manager Michael Silvestri said officials there are not at all opposed to drilling. Instead, he said Peters chose to get involved in the case because Act 13 was conflicting with the proceedings of its planning commission and officials there thought that "if one industry gets special treatment, how long is it before others do too."

The township, Silvestri said, will not make any changes to its zoning ordinance because those amendments were passed in October. He said a subsidiary of EQT Corp. has been conducting seismic testing there and the township expects to host drilling activities in the next year or so.

Gary Dovey, vice president of business development at Penn Northwest Development Corp. in Mercer, PA, said the actions of those townships and the ruling itself was unfair to Northwest Pennsylvania, where oil and gas development is just starting to accelerate. He said there have already been some communities in Mercer County that have changed zoning laws to extract more fees from midstream companies planning pipelines in the area.

Dovey added that the companies operating, and even relocating to the region, could now be adversely affected by a set of varying rules there. Some communities, he said, have the time and money to rework their zoning laws, while others don't.

"I don't know what's going to happen up here now," he said. "But I can tell you it's absolutely bad for business."

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