The Pennsylvania Public Utility Commission (PUC) voted unanimously on Thursday to clarify several portions of Act 13, the state’s omnibus Marcellus Shale law, as to how it pertains to levying an unconventional natural gas drilling impact fee.

Against the wishes of Anadarko Petroleum Corp., the PUC ruled that setting conductor pipe triggers the impact fee, a review of wells reclassified from horizontal to vertical is not necessary, and the impact fee will cease one calendar year after a well is plugged.

PUC documents show that Anadarko and Talisman Energy Inc. had argued that setting conductor pipe did not constitute spudding a well.

According to Anadarko, conductor pipes should not qualify for the fee because they are “not cemented in place and are not designed to contain or convey [natural] gas.” Anadarko said many operators had set conductor pipe for operational purposes only, before Act 13 was enacted, and alleged that many of them would not have done so if they knew the pipes would be subject to the impact fee.

“Alternatively, Anadarko argues that even if setting conductor pipe constitutes spudding, a well should be treated as a vertical stripper well for impact fee purposes,” the PUC said. “Vertical wells are subject to the impact fee only if they produce sufficient quantities of gas to qualify as a vertical well under Act 13. Anadarko alleges that if non-producing and low-producing vertical unconventional gas wells are exempt from the fee, it follows that simply placing a conductor at a well pad should also be exempt from the fee.”

Talisman had argued that the setting of conductor pipe could be performed months or years before actual drilling begins, and that operators typically use conductor pipes to promote safety and efficiency and minimize the impact on the environment. Despite that claim, the state Department of Environmental Protection (DEP) said it disagreed with the argument set forth by Anadarko and Talisman.

“DEP states that it has long held that spudding occurs as soon as a drill bit penetrates the ground for the purpose of setting any length of pipe casing or when a conductor pipe is set by being driven into the ground,” the PUC said. “This interpretation predates Act 13 and the industry has been aware of this long-standing position.”

The PUC ultimately sided with the DEP. “We agree with DEP that ‘the actual start of drilling of an unconventional well’ commences as soon as a drill bit penetrates the ground for the purpose of setting any length of casing or when a conductor pipe begins to be set by being driven into the ground,” the PUC said. “We also agree with DEP’s comments that Anadarko’s interpretation would be inconsistent with the permitting requirements found in Chapter 32, which prohibits any well drilling absent having first obtained a well permit from DEP.”

The PUC added that “Act 13 contains no express language to support Anadarko’s position that a permitted horizontal unconventional well should be exempt from the impact fee if only conductor pipe has been set.”

On the issue of the DEP reclassifying unconventional wells from horizontal to vertical, Anadarko had argued that the affected wells should be reviewed by the PUC to determine whether the impact fee still applies.

“We agree with Anadarko that reclassification of wells from horizontal to vertical will affect the calculation of the impact fee,” the PUC said. “However, we do not believe that devising a separate reporting mechanism to account for reclassification is necessary since an adequate mechanism is already in place by virtue of the annual producer report.”

The PUC documents also show that Anadarko had argued that impact fees should cease once a well is plugged, in the year in which the well was plugged. But the PUC disagreed with the company on this issue as well.

“We concluded that the initial impact fee is due and owing upon spudding, even if the well is subsequently plugged,” the PUC said. “This is the case even for a well that is spud and plugged in the same calendar year.

“In the case of a vertical unconventional gas well, the fee is triggered and accrues at the moment the well meets minimum production criteria in a given calendar year…for a horizontal unconventional gas well, no similar minimum production criteria exists. Rather, the impact fee for a horizontal unconventional gas well is based on that well’s status as a permitted horizontal well.”

The PUC also said budget reports from local governments receiving money from the impact fee are due every year by March 1. “Generally, the annual budget report will reflect a municipality’s final approved [budget] for the prior fiscal year,” the PUC said. “However, for the upcoming year’s deadline, March 1, 2013, the municipal budget reports for both 2011 and 2012 must be filed with the commission.

“In subsequent years, only the prior year’s final approved budget report will be due. For example, the municipal budget report for 2013 will be due on or before March 1, 2014.”

Act 13, which was signed into law by Gov. Tom Corbett in February, amended Title 58 (Oil and Gas) of the Pennsylvania Consolidated Statutes and empowered the PUC to collect an impact fee on behalf of local governments (see Shale Daily, Feb. 15).

The PUC is also responsible for implementing two chapters of Act 13, Chapters 23 and 33. The former provides rules on how to impose, collect and distribute the impact fee, while the latter governs local ordinances that impose conditions, rules or limits on oil or natural gas operations.

In response to the PUC finalizing impact fee procedures in May (see Shale Daily, May 11), Anadarko filed a petition for amendment and clarification with the PUC on Sept. 28.