Act 123 of 2012—Implementation of Unconventional Gas Well Impact Fee Act

PENNSYLVANIA PUBLIC UTILITY COMMISSION

Act 123 of 2012—Implementation of Unconventional Gas Well Impact Fee Act

[42 Pa.B. 4996]
[Saturday, August 4, 2012]

Public Meeting held
July 19, 2012
Commissioners Present: Robert F. Powelson, Chairperson; John F. Coleman, Jr., Vice Chairperson; Wayne E. Gardner, partial dissenting statement follows; James H. Cawley; Pamela A. Witmer

Act 13 of 2012—Implementation of
Unconventional Gas Well Impact Fee Act;
M-2012-2288561

Reconsideration Order Regarding Chapter 23

By the Commission:
Introduction
 On February 14, 2012, Governor Corbett signed into law Act 13 of 2012, the Unconventional Gas Well Impact Fee Act (Act 13), which amends Title 58 (Oil and Gas) of the Pennsylvania Consolidated Statutes. Act 13 provides, inter alia, for an impact fee, Oil and Gas Act amendments and standards for local ordinances. Act 13 allows counties to pass ordinances to impose an impact fee on unconventional gas well producers and, alternatively, allows municipalities, under certain circumstances, to adopt resolutions compelling the imposition of fees if a county elects not to do so.
 The Pennsylvania Public Utility Commission's (Commission) administrative responsibilities for implementing the provisions of Act 13 are contained within Chapters 23 and 33 of the Act. On March 16, 2012, we issued a Tentative Implementation Order addressing those responsibilities and proposing procedures to carry out the administrative responsibilities contained in these two chapters. That Order solicited comments from interested parties. Comments to the Tentative Order were filed by the Pennsylvania State Association of Township Supervisors (Townships), the Pennsylvania State Association of Boroughs (Boroughs), the County Commissioners Association of Pennsylvania (Counties), Carrizo Oil & Gas, Inc., and, jointly, the Pennsylvania Independent Oil & Gas Association, the Marcellus Shale Coalition, and the Associated Petroleum Industries of Pennsylvania (collectively, Producers). On May 10, 2012, we issued an Order addressing these comments and other issues associated with implementation of Chapter 23 of Act 13.
 Following issuance of the May 10 Order, Petitions for Reconsideration were filed by the Producers and the Townships. On June 7, 2012, we issued an Order granting reconsideration pending a review of the merits of the petitions. Additionally, on June 15, 2012, the Producers filed a Petition for Leave to File an Answer and an Answer in Support of the Townships' Petition.¹ This Order is limited to the issues raised in those petitions.
The Producers' Petition.
 The Producers raise two issues in their Petition. First, the Producers comment that the Commission's treatment of vertical gas wells² should be modified. In our May 10 Order, we discussed vertical unconventional gas wells and determined that those wells ''will be treated identically to horizontal unconventional wells including the three year minimum fee, with the exception of the fee amount, which is 20% of the unconventional horizontal gas well impact fee, and the termination of the fee in years 11-15.'' Implementation Order, p. 8. The Producers allege that vertical unconventional gas wells should not be subject to the three year minimum fee established at 58 Pa.C.S. § 2302(b.1), and should only be subject to the fee if they meet designated production levels.
 In support of their argument, the Producers allege that a vertical well, by definition, is limited to wells that produce natural gas in quantities greater than that of a stripper well (a minimum of 90,000 cubic feet of gas per day during any calendar month). A well that does not produce this minimum amount of gas does not qualify as a vertical gas well. 58 Pa.C.S. § 2301. The Producers argue that it is production that is determinative of whether a vertical gas well is subject to the impact fee, not spudding³ as in the case of horizontal unconventional gas wells.
 We agree with the Producers' comment that a vertical gas well is only subject to the impact fee if it produces sufficient quantities of gas to qualify the well, by definition, as a vertical gas well. As we noted earlier, 58 Pa.C.S. § 2301 defines a vertical gas well as an ''unconventional gas well which utilizes hydraulic fracture treatment through a single vertical well bore and produces natural gas in quantities greater than that of a stripper well.'' Further, 58 Pa.C.S. § 2302(f) provides that ''the fee for a vertical unconventional gas well shall be 20% of the fee established in subsections (b) (concerning amount of fee) and (c) (concerning annual adjustment of fee) . . . .''
 Based upon these two provisions, it is apparent that in order to qualify as a vertical gas well, a well must meet certain minimum production levels. If a particular well does not meet those levels, the impact fee is not initially triggered, since the well does not qualify as a vertical well.
 However, the remaining issue is whether once the impact fee is triggered for a vertical gas well, is the well subject to the three year minimum fee established at 58 Pa.C.S. § 2302(b.1). The Producers argue that a vertical well is not subject to a three year minimum. In support of their argument, the Producers allege that Section 2302(f), 58 Pa.C.S. § 2302(f), does not contain a reference to § 2302(b.1), which section serves as the foundation for the minimum three year fee requirement. The Producers argue that absent this reference, as well as the actual definition of vertical gas well requiring production minimums, a vertical gas well that does not meet minimum production levels is not subject to the three year minimum fee requirement.
 We agree with the Producers' argument. A vertical gas well which falls below designated production levels is no longer, by definition, a vertical gas well. The legislature excluded a reference to Section 2302(b.1) at subsection 2302(f), which concerns the ''vertical unconventional gas well fee.'' Absent reference to that specific section which establishes the minimum three year fee requirement, as well as not qualifying, by definition, as a vertical gas well, a vertical gas well is not subject to the three minimum fee requirement established at Section 2302(b.1). Beyond the language of Act 13, this interpretation is consistent with the Conference Committee Report for HB 1950, which specifies that a ''vertical unconventional gas well shall only pay a fee if it is producing in quantities greater than those of a stripper well.'' Based on the foregoing, we will grant the Producers' request for reconsideration on this issue.
 As a final observation on our treatment of vertical gas wells, we note that a vertical gas well derives its status based on production levels. Those production levels are determined per day during any calendar month. If a vertical gas well qualifies as such, via production levels, during any calendar month in a calendar year, that well will be subject to the impact fee. 58 Pa.C.S. §§ 2301, 2302(f).
 In order to administer this provision, producers must supply production information for 2011 to ensure that a particular well qualifies as a vertical gas well and is therefore subject to the fee. All vertical gas wells on the DEP spud list as of December 31, 2011, will be subject to the fee unless the producer verifies to the Commission, on or before August 15, 2012, that a particular vertical well did not produce natural gas in quantities greater than that of a stripper well during any calendar month in 2011.⁴ For years after 2011, producers must verify on the annual ''Producer Well Report'' form filed with the Commission each April 1, production for all vertical gas wells for which a fee is not due.⁵
 The Producers also comment that the assessment established at subsection 2303(c), 58 Pa.C.S. § 2303(c), should be allocated only to those producers' wells that are subject to the impact fee, not all producers' wells.⁶
 Our review of the relevant statutory provision, 58 Pa.C.S. § 2303(c), reveals that the allocation of the Commission assessment is to be made on ''all producers subject to the administrative charge'' (§ 2303(c)(2)), and, conversely, on ''all producers subject to the unconventional gas well fee'' (§ 2303(c)(3)). In our May 10, 2012 Order, we focused on the language of subsection 2303(c)(2) in reaching the result that all producers, not just those subject to the impact fee, must pay the assessment. Upon further review, we believe that subsection 2303(c)(3) establishes the proper methodology, limiting the assessment to ''producers subject to the unconventional gas well fee.'' 58 Pa.C.S. § 2303(c)(3). This limitation also applies to the $50 per spud unconventional gas well fee established at 58 Pa.C.S. § 2303(c)(1).
 Therefore, we will grant reconsideration on this issue, consistent with the foregoing discussion. We emphasize that, at this juncture, this is a moot discussion, since all producers are subject to the fee via the election of all eligible counties to impose an impact fee.
The Townships' Petition.
 The Townships' Petition for Reconsideration is limited to the Commission's treatment of subsection 2314(e), 58 Pa.C.S. § 2314(e), concerning restrictions on allocations of funds to municipalities. By way of background, subsection 2314(e) provides limitations on the funds a particular municipality may receive from the Unconventional Gas Well Fee. In our May 10, 2012 Order, we discussed this provision:

The statutory language at Section 2314(e) specifies ''the total budget for the prior fiscal year beginning with the 2010 budget year'' as the amount to be used in determining the amount to be allocated to a municipality. 58 Pa.C.S. § 2314(e). The language in subsection (e) does not include any provisions for updates to the 2010 budget year to account for subsequent revisions. On the other hand, the statute does provide for subsequent updates to the 2010 budget amount ''to reflect upward changes in the Consumer Price Index (CPI)'' for the region. 58 Pa.C.S. § 2314(e). Accordingly, we view the statutory provision for subsequent upward increases in the CPI as the sole means by which the originally approved 2010 budget amount can be updated.(emphasis added), pp. 17,18.

The Townships first suggest that the Commission erred in determining that ''subsequent upward increases in the CPI [are] the sole means by which the originally approved 2010 budget amount can be updated.'' The Townships argue that this interpretation fails to give full meaning to the language of subsection 2314(e) and is not reflective of legislative intent, citing prior versions of this provision. Further, as a policy argument, the Townships allege that the Commission's interpretation is contrary to one of the purposes of Act 13, which is to ensure that municipalities have sufficient funds to deal with the local impacts of unconventional gas well drilling.
 We have considered the Townships' arguments and find them persuasive. The applicable provision, 58 Pa.C.S. § 2314(e), provides:

 (e) Restriction.—The amount allocated to each municipality under subsection (d) shall not exceed the greater of $500,000 or 50% of the total budget for the prior fiscal year beginning with the 2010 budget year and continuing every year thereafter, adjusted to reflect any upward changes in the Consumer Price Index for all Urban Consumers for the Pennsylvania, New Jersey, Delaware and Maryland area in the preceding 12 months. Any remaining money shall be retained by the commission and deposited in the Housing Affordability and Rehabilitation Enhancement Fund for the uses specified under subsection (f).

This provision is a cap on the distribution amounts a municipality may receive via the impact fee. The formula used to determine a municipality's initial entitlement is provided at 58 Pa.C.S. § 2314(d). Subsection 2314(d) provides that, after initial distributions to various state agencies, 60% of the revenue remaining in the fund from fees collected are appropriated to counties and municipalities for purposes specified at 58 Pa.C.S. § 2314(g). The 60% is distributed to: counties in which spud unconventional gas wells are located (36%); municipalities in which spud unconventional gas wells are located (37%); and municipalities located in a county in which spud unconventional gas wells are located (27%). The distribution amount for each municipality, however, is potentially limited by the provisions of subsection 2314(e).
 The restriction provided at subsection 2314(e) is the greater of $500,000 or ''50% of the total budget for the prior fiscal year beginning with the 2010 budget year and continuing every year thereafter, adjusted to reflect any upward changes in the Consumer Price Index. . . .'' (emphasis added).
 Upon further review of this provision, we find that the statutory language envisions an annual submission of the municipal budget for the prior fiscal year. This interpretation is consistent with the legislative history of this provision, which in its prior version did not contain the reference to the continuing submission of municipal budgets. Townships' Petition at 6. Also, this interpretation is consistent with the tenet of statutory construction that ''whenever possible each word in a statutory provision is to be given meaning and not to be treated as surplusage.'' In re Employees of Student Services, 495 Pa. 42, 52, 432 A.2d 189, 195 (1981). In using the words ''prior fiscal year beginning with'' in reference to the 2010 budget year and the phrase ''continuing every year thereafter'', the legislation specifies that budget years other than 2010 are to be used to determine the limits on impact fee distributions in subsequent years. To rule otherwise would fail to give meaning to the words in the text of the statute. Accordingly, we grant the Townships' Petition on this issue.⁷
 Additionally, the CPI adjustments contained at subsection 2314(e) apply to both the $500,000 figure as well as the submitted budget figure.⁸ We agree with the Townships and Producers that the CPI adjustment language in subsection 2314(e) refers to both preceding phrases. This interpretation is consistent with both the grammar of this subsection, given that the qualifying phrase regarding the CPI adjustment is preceded by a comma, as well as the intent of Act 13, ensuring that affected municipalities will have sufficient funds to deal with local impacts. Further, we note that this interpretation will not adversely affect any municipality receiving funds under 58 Pa.C.S. § 2314(d), since distribution amounts are separately calculated and this provision only serves as a cap on those amounts. Therefore, we will grant reconsideration on this issue.
 The Townships also request that the Commission should clarify whether municipalities should submit ''originally approved budgets'' or ''final approved budgets'' pursuant to Section 2314(e). The Townships comment that the proper terminology is the ''final approved budget.''
 We agree with the Townships on this issue. It is the final budget for 2010 that is the relevant inquiry, that is, the budget amount that has received final approval by the municipality's governing body. This interpretation allows municipalities to accurately report budget amounts.⁹ Therefore, we will grant reconsideration on this issue. Municipalities are to submit the final approved budget from 2010, pursuant to subsection 2314(e), 58 Pa.C.S. § 2314(e).
Additional Matters.
 Pursuant to 58 Pa.C.S. § 2304, producers subject to the impact fee must notify the Commission of the following within 30 days after the calendar month in which the change occurs: (1) the spudding of additional unconventional gas wells; (2) the initiation of production at an unconventional gas well; or (3) the removal of an unconventional gas well from production. We addressed this requirement in our May 10, 2012 Order and the Producer Update Report (Attachment B thereto). However, upon further review, we believe clarification is required. The report is only to be filed if a designated event occurs. The report is to be filed electronically with the Commission. The due date for the report is 30 days after the end of the calendar month in which the event occurred. For example, if the event occurred on September 3, 2012, the report would be due October 30, 2012. We hope this clarifies our treatment of this issue. Therefore,
 It Is Ordered That:
 1. The Producers' Petition for Leave to File an Answer is granted.
 2. The Petitions for Reconsideration filed by the Producers and the Townships are hereby granted, consistent with this Order.
 3. Our May 10, 2012 Order is modified consistent with this Order.
 4. On or before August 15, 2012, Producers must supply production information for 2011 for vertical gas wells, as provided herein.
 5. A copy of this Order shall be published in the Pennsylvania Bulletin and posted on the Commission's website at www.puc.state.pa.us click on Natural Gas/Act 13 (Impact Fee).
 6. A copy of this Order shall be served on all commentators.

ROSEMARY CHIAVETTA, 
Secretary

Partial Dissenting Statement of Commissioner
Wayne E. Gardner

Before the Commission today are the Petitions for Reconsideration filed by the Pennsylvania State Association of Township Supervisors and the Pennsylvania Independent Oil & Gas Association, the Marcellus Shale Coalition, the Associated Petroleum Industries of Pennsylvania, and Corrizo Oil & Gas, Inc. (collectively, Producers). I agree with my colleagues on the resolution of most of the issues addressed in the Reconsideration Order. However, there is one issue on which I must respectfully dissent. It is whether or not vertical wells must pay an impact fee for a minimum of three years. I believe the Commission's original interpretation of that provision was correct.
 Section 2302(b.1) of Act 13, 58 Pa.C.S. § 2301(b), directs that once an unconventional gas well is spud, it must begin paying the impact fee and that it must pay the fee for at least three years even if subsequently capped or producing amounts less than that of a stripper well. In our Final Implementation Order, we stated that this provision applies to all unconventional wells including vertical wells.¹⁰
 In the Petition for Reconsideration, the Producers argue that the three-year requirement in Section 2302(b.1) does not apply to those wells which had been classified as vertical wells. The Producers contend that once a vertical well does not produce the minimum amount of gas, it no longer qualifies as a vertical gas well and, therefore, is not subject to the three-year minimum fee. The majority today adopts the argument set forth by the Producers.
 I disagree. Section 2301(b), which delineates the fee schedule, provides that the fee adopted by a county or municipality ''is imposed on every producer and shall apply to unconventional gas wells spud in this Commonwealth regardless of when spudding occurred.'' Section 2301(b.1) then provides an exception/clarification regarding the fee to be collected from nonproducing unconventional gas wells: ''If a spud unconventional gas well begins paying the fee imposed under this section and is subsequently capped or does not produce natural gas in quantities greater than that of a stripper well within two years after paying the initial fee, then the fee shall be suspended.'' As such, all unconventional gas wells are subject to a fee for a minimum of three years.
 According to Section 2301 of the Act, an unconventional gas well is a bore hole drilled for the purpose of the production of gas from an unconventional formation. In Section 2301, an unconventional formation is defined as a specified geological shale formation where natural gas cannot be produced at economic flow rates or volumes except by vertical or horizontal wells stimulated by hydraulic fracturing or other techniques. Finally, a vertical gas well is an unconventional vertical well bore which produces gas in quantities greater than that of a stripper well. Once a vertical well is capped or producing gas in quantities less than that of a stripper well, it then meets the definition of a nonproducing unconventional gas well. As such, it is still an unconventional well because it is a well bored into an unconventional formation. Therefore, it is subject to an impact fee under Section 2302(b).
 Section 2302(f) provides, in pertinent part, that, the ''fee for a vertical unconventional gas well shall be 20% of the fee established in [subsection 2302(b)].'' The Producers argue that because Section 2302(f) does not reference the three-year minimum specifically, vertical wells are not subject to the three-year minimum. This reading of the Act ignores the structure and companion provisions contained in § 2302. Section 2302(b) applies to all unconventional wells—horizontal and vertical. Section 2302(f) then makes an exception to the fee structure contained in part (b). One must still apply part (b) in order to determine the fee to be assessed for vertical wells. Because vertical wells which stop producing below stripper well levels remain, by definition, nonproducing unconventional gas wells, Section 2302(b.1) is applicable and vertical wells must also pay the fee for three years.
 I am cognizant that a concern exists that should this interpretation be adopted, it could result in unconventional vertical bore wells, which never produced, paying 100% of the fee described in § 2302(b) with producing vertical wells paying 20% of that fee. Section 2302(b) provides that the impact fee is to apply to all spud unconventional gas wells. No exception is given for a spud well which never produces amounts over that of a stripper well. Therefore, under Section 2302(b.1), all spud unconventional wells must pay the impact fee for at least three years. Concern has been voiced that because there is no mention in part (b.1) that unconventional vertical bore wells only have to pay 20% of the fee rather than 100%, they must be assessed at 100%. This concern is unfounded and would not be allowed under the Rules of Statutory Construction.
 The rules of Statutory Construction dictate that the General Assembly does not intend a result that is absurd or unreasonable, that it intends the entire statute to be effective and certain, 1 Pa.C.S. § 1922(1), and that every statute shall be construed, if possible, to give effect to all its provisions. 1 Pa.C.S. § 1221. Additionally, statutes are in pari materia when they relate to the same thing or class of things and must be construed together. 1 Pa.C.S. § 1932. When the relevant provisions are read together, an absurd result is not reached. Section 2302(b) describes the components of the fee for unconventional wells. Section 2302(b.1) speaks to the minimum amount of time a fee can be collected. Section 2302(f) provides a discounted rate methodology for a particular type of unconventional well. Each section has a specific purpose, and when construed together, provides that unconventional vertical bore wells, producing and non-producing, must pay the fee for at least three years, at 20% of the rate paid by horizontal wells.
 The interpretation of these provisions adopted by the majority today fails to give effect to the definition of an unconventional well which is provided by the plain language of the statute.

WAYNE E. GARDNER, 
Commissioner

[Pa.B. Doc. No. 12-1481. Filed for public inspection August 3, 2012, 9:00 a.m.]

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¹  Given the purpose of this proceeding, to provide instructional guidance relative to Chapter 23 of Act 13, we will grant the Producers' Petition for Leave and consider their Answer in support of the Townships' Petition.
²  ''Vertical gas well'' is defined as ''an unconventional gas well which utilizes hydraulic fracture treatment through a single vertical well bore and produces natural gas in quantities greater than that of a stripper well.'' 58 Pa.C.S. § 2301.
³  Spudding is defined as the actual start of drilling on an unconventional gas well. 58 Pa.C.S. § 2301.
⁴  Producers may provide this information by letter to the Commission's Secretary, together with a verification. 52 Pa. Code § 1.36. The letter should contain relevant information on each vertical well, including well identification, location and monthly production data.
⁵  The Producer Well Report form will be modified to reflect this change.
⁶  The Producers acknowledge that their concern is currently moot since all eligible counties adopted an impact fee, as noted in our May 10, 2012 Order.
⁷  We note that municipalities must timely file budget reports annually. Failure to do so will result in the application of the $500,000 cap.
⁸  We decline to extend this CPI adjustment to the initial distribution, since this serves as the starting point.
⁹  We note that municipalities are required to file an Annual Audit and Financial Report with the Department of Community and Economic Development and that the Auditor General has general audit authority over county and municipal accounts. 72 Pa.C.S. § 403. As such, the final approved budgets and actual expenditures will be subject to government oversight at the state level.
¹⁰  See Implementation Order Regarding Chapter 23, M-2012-2288561 at 8 (May 10, 2012).