Revenue raised through a proposed impact fee that would cost Marcellus Shale drillers a minimum $10,000 per well annually is needed to help close a project $4.2 billion budget gap in Pennsylvania, according to state Senate President Pro Tempore Joe Scarnati (R-Jefferson).

"I cannot see how we can get the budget process done with all the cuts occurring in so many lines without addressing an impact fee from this industry," Scarnati said during a conference call with reporters Thursday. In addition to the $10,000 base, the fee -- and the state's revenues -- would be substantially increased if production or gas prices move higher. High-performing wells could pay fees 40% higher than average-producing wells, according to Scarnati.

The proposed impact fee would raise an estimated $45 million in its first year and $172 million annually by 2015. Scarnati's proposal would send 73% of the revenue to counties and municipalities with producing unconventional gas wells and the remaining 27% to municipalities having no producing sites but located in counties with producing unconventional wells. An increase in gas prices from the current sub-$4.50/Mcf to above $5.00/Mcf "could drive cumulative fee revenue to nearly $1 billion over the next five years," according to Scarnati.

The proposal would impose fees for calendar year 2010 activity, with the fees to be paid in two installments due Aug. 1 and Oct. 1 of this year. Fees for calendar years 2011 and beyond would be payable on March 1 of the following year. Fees would be collected and distributed by the Pennsylvania Public Utility Commission, which would also publish a 12-month average natural gas price on its website for use in determining applicable price adjustment factors.

"Our industry understands that, while there are tremendous financial opportunities in Marcellus Shale development, there also can be impacts felt by our host communities," according to Marcellus Shale Coalition President Kathryn Klaber, who said fees on Marcellus production must be clear, straightforward, and competitive.

"We are open to discussing with the governor's Marcellus Shale Advisory Commission, and all legislators, proposals that focus on strengthening our partnership with municipal governments, while providing funds to local communities," she said.

Environmental groups were generally supportive of the proposal, though most said it fell short of their expectations.

"It's good to see Sen. Scarnati put a serious proposal on the table, [but] it's a bit disappointing, in that a lot of the negotiations up until now have laid out a formula where the revenues were shared more equally than they are in this proposal," said PennFuture CEO Jan Jarrett. But with a half dozen proposals of one kind or another being discussed in the legislature, Pennsylvania's long-running debate over collecting revenue from Marcellus drilling has entered a new phase, she said.

"I think this signals that we're to the point where we're not talking about whether or not there will be a drilling tax -- or call it an impact fee, or whatever -- but what it's going to look like, how it's going to be structured, how it's going to be able to benefit Pennsylvanians."

A poison pill in the proposal, which would prohibit municipalities that adopt zoning ordinances exceeding the standards included in the bill from receiving local impact fee revenues, may keep municipalities from supporting the legislation, according to PennEnvironment Director David Masur.

"In order for municipalities to receive the funding under this, they essentially have to give up their zoning rights, which the Pennsylvania Supreme Court has upheld as a way for municipalities to control where drilling happens in townships and how it happens."

But the proposal may get the support of Gov. Tom Corbett, who has said he is firmly opposed to a statewide drilling tax, but is willing to discuss impact fees that would compensate local governments for the cost of development (see Shale Daily, March 25, March 9).

Scarnati's proposal follows an announcement by State Rep. Kate Harper, a Republican from suburban Philadelphia, that she will introduce a severance tax bill that would direct revenue to state and local programs (see Shale Daily, April 19).