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Negotiations Under Way for Pennsylvania Shale Gas Fee

Although the dogs are still barking in Pennsylvania, the caravan for imposing a fee on natural gas drillers in the most active shale gas state appears to be moving on.

"The Senate passed a bill. The House passed a bill. Now it's time to work together, and I think that we will get a bill that's acceptable to all parties -- not what everybody wants, but one that's acceptable to all parties," Pennsylvania Gov. Tom Corbett said Monday. There's no safe bet on whether that will happen before the legislators leave for the holidays in mid-December, or in the new year.

While the bills on the two sides of the state legislature aimed at the drilling of unconventional natural gas wells contain similar environmental safeguards and local control provisions, they differ on the amount of the impact fee to be charged and on whether the state or counties collect and disburse the revenue, according to formulas that are still a question mark.

And there still is opposition to imposing any fee at all, with that opposition coming not from the gas industry, but from anti-tax zealots. Just before the House vote, Grover Norquist, president of Americans for Tax Reform, published an open letter to the Pennsylvania General Assembly calling its proposal a tax. "Just look at where the money goes and it is easy to see that it does not pass the laugh test when it comes to trying to claim this as a fee," Norquist wrote.

"I guess we have a difference of opinion," Corbett said Monday, arguing that the fee only covers the impacts of development and doesn't increase state revenues. The governor's position is backed by surveys that show Pennsylvanians overwhelmingly in favor of collecting a fee.

By passing the bills, lawmakers pushed past their concerns about violating Norquist's Taxpayer Protection Pledge, freeing them to negotiate a final bill, according to David Hess, a lobbyist with Crisci Associates and former secretary of the Pennsylvania Department of Environmental Protection (see Shale Daily, May 27).

"I'm hoping there's going to be an outbreak of common sense here," Hess told NGI's Shale Daily, noting that the two houses, both dominated by Republicans, should be able to reach consensus.

A key difference in the competing bills is the amount of the fee. Under Senate Bill 1100 passed on Nov. 15, the state would impose the equivalent of a 3% tax on natural gas production, retroactive to 2010. A sliding fee of $50,000 per well would be assessed on unconventional wells in the first year of production, $40,000 in the second year; $30,000 in the third year; $20,000 in the fourth through 10th years, and $10,000 through the 20th year. An additional fee would be implemented if natural gas prices exceed $5/Mcf.

The fee would be collected by the Pennsylvania Department of Environmental Protection with 55% of the revenue going to county and local governments that host drilling and the remainder going into state coffers (see Shale Daily, Nov. 17).

Under House Bill 1950, the counties would have the ability to impose and collect the equivalent of a 1% tax by charging a $40,000 annual fee on each unconventional gas well in the first year of production, $30,000 for the second year, $20,000 for the third year and $10,000 for the fourth through 10th years of production (see Shale Daily, Nov. 18).

Under the house bill county and local governments would be the prime beneficiaries of 75% of the revenues collected by the impact fee. Of that 75%, 36% would be retained by the counties, 37% distributed to municipalities that host drilling operations and 27% given to all municipalities. The remaining 25% of the fee revenue would go to the state government, which is required to spend most of it (70%) on infrastructure improvements to address the impacts of shale gas drilling.

While there is no time frame to finish, "everybody would like to get it done as soon as we can," said Stephen Miskin, a spokesman for the House Republican leadership. The General Assembly recesses for the year in mid-December, providing a natural goal for wrapping up the issue, but the session continues through next November.

Currently, behind the scenes negotiations are focused on sections of the legislation where there is consensus, Miskin said. The area of greatest overlap between the bills is a long list of similar, but not identical, environmental protection provisions.

The best solution for reconciling those discrepancies is to adopt the more stringent provision in each case, according to Hess, who lobbies on behalf of the Chesapeake Bay Foundation and the Pennsylvania Environmental Council, two groups that have asked the General Assembly to make those protections even stronger, in some cases. He believes there is a "greater than even chance" the bill will become law this year.

The House avoided a time-consuming showdown over local control of drilling rules and restrictions by adopting looser Senate provisions. The Pennsylvania State Association of Township Supervisors and other local government groups grudgingly supported the bills after getting the House to back off more extreme language that would have preempted local control entirely.

"Where we're at today is a little close to the center. To our perspective, it's not perfect but it's workable," said Elam Herr, assistant executive director at the PSATS. There still is opposition, however. An online petition opposing the local control provision recently received more than 10,000 signatures and will be delivered to policymakers soon, according to the Pittsburgh Post-Gazette.

The legislation as written would generally preempt local regulations during the drilling phase of development, but allow boroughs and townships to regulate the production phrase through zoning codes that apply equally to all industries.

The industry believes local zoning codes are fragmenting regulations across Pennsylvania, threatening development by making it hard for companies to plan ahead.

"The goal is to establish consistency across the Commonwealth in the management of land uses associated with natural gas development, making it clear that any use of land associated with these activities is permitted in appropriate areas of any municipality," Marcellus Shale Coalition President Kathryn Klaber wrote in an editorial before the votes. "Such regulatory certainty would go a long way toward ensuring that the state's natural gas reserves can be developed in a safe, orderly and efficient way."

The Pennsylvania legislation restricts local governments for the sake of uniformity, but doesn't completely preempt local authority as is the case in neighboring Ohio. Though moot because of a moratorium in place, New York also preempts local control over oil and gas regulation, but some municipalities believe a loophole in the law allows them to ban the development they can't regulate.

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