NOTICES
PENNSYLVANIA PUBLIC UTILITY COMMISSION
Act 13 of 2012—Implementation of Unconventional Gas Well Impact Fee Act
[43 Pa.B. 115]
[Saturday, January 5, 2013]Public Meeting held
December 20, 2012Commissioners Present: Robert F. Powelson, Chairperson; John F. Coleman, Jr., Vice Chairperson; Wayne E. Gardner; James H. Cawley; Pamela A. Witmer
Act 13 of 2012—Implementation of Unconventional Gas Well Impact Fee Act; M-2012-2288561
Clarification 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. Following review of submitted comments, we issued an Order on May 10, 2012, addressing those comments and other issues associated with implementation of Chapter 23 of Act 13.
Subsequently, Petitions for Reconsideration were filed to the May 10, 2012 Order. On July 19, 2012, we issued a Reconsideration Order regarding Chapter 23 of Act 13, further detailing our treatment of vertical unconventional gas wells, assessments, caps on distribution amounts received by a municipality, and producer reporting requirements.
On September 28, 2012, Anadarko E&P Company LP (Anadarko) filed a Petition for Amendment and Clarification (Anadarko Petition) of our May 10, 2012 Implementation Order. Comments to this Petition were filed by the Pennsylvania Department of Environmental Protection (DEP), Seneca Resources Corporation (Seneca), the Pennsylvania Independent Oil & Gas Association (PIOGA), Matt Milliron, and Talisman Energy USA Inc. (Talisman).1
Conductor Pipe and Well Fees.
Anadarko raises several issues in its Petition. First, Anadarko requests clarification on whether the setting of conductor pipe constitutes ''spudding,'' thereby triggering the impact fee. Under Act 13, spudding is defined as ''the actual start of drilling of an unconventional gas well.'' 58 Pa.C.S. § 2301. Anadarko argues that setting conductor pipe does not constitute spudding a well. See Anadarko Petition at 3,4.
In support of its argument, Anadarko alleges that ''[c]onductors are metal open-ended cylinders, typically approximately 20 inches in diameter, that are set into the ground at depths of usually not more than 40 to 50 feet simply to create a workspace within which to begin drilling a gas well. Conductors are not cemented in place and are not designed to contain or convey gas.'' Anadarko Petition at 3. Conductor pipe is set using specialized equipment prior to the arrival of the drilling rig. Id. Many operators set conductor pipe for operational convenience and flexibility, prior to the enactment of Act 13. Id. Anadarko alleges that had producers known that they would be subject to fees for setting conductor pipe, many likely would not have set the pipe. Id.
Alternatively, Anadarko argues that even if setting conductor pipe constitutes spudding, a well should be treated as a vertical stripper well2 for impact fee purposes. See Anadarko Petition at 4. 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. Id.
Talisman filed comments supporting Anadarko's Petition on this issue. Talisman comments that setting conductor pipe is part of site preparation and can be accomplished separately from drilling. See Talisman Comments at 2. Talisman alleges that setting conductor pipe can be done months or years before drilling commences, and is a standard practice among many operators, which promotes safety and efficiency, limiting environmental impact by reducing the number of times contractors need to visit the site for site preparation. Id.
Comments opposing Anadarko's Petition on this issue were filed by DEP and Matt Milliron. 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. See DEP Comments at 1. This interpretation predates Act 13 and the industry has been aware of this long standing position. Id.
DEP is the agency primarily responsible for implementing Chapter 32 of Act 13, which sets forth the permitting, financial responsibility, drilling, casing, reporting, plugging, and site restoration requirements for oil and gas wells. See DEP Comments at 1. Section 3211(f) of Act 13, 58 Pa.C.S. § 3211(f), requires operators to provide DEP with notice of the date that drilling will commence. Id. According to their comments, DEP interprets the date of drilling, or ''spud date,'' as the date when ''the drilling bit penetrates the surface of the land or when conductor pipe is begun to be set by being driven into the ground.'' Id. (emphasis added). Setting conductor pipe is one of the first steps in well construction. Id.
DEP further comments that spudding triggers a permit requirement under Act 13. See 58 Pa.C.S. § 3211(a) (''No person shall drill or alter a well . . . . without having first obtained a well permit . . . . ''). DEP Comments at 2. DEP states that ''if setting conductor [pipe] does not constitute drilling a well, this activity would not necessitate a permit. If a permit is not required then the well site may be built and a wellbore commenced all without a permit from [DEP]. This is in direct conflict with Act 13's requirements that a well permit be posted at the well site during site preparation, construction and the drilling, operating, and altering of the well. See 58 Pa.C.S. § 3211(a), (g).'' Id. DEP argues that under Anadarko's interpretation, a surface landowner would be deprived of the opportunity to object to well site location prior to development. See 58 Pa.C.S. §§ 3212, 3251. Id. DEP also alleges that Anadarko's interpretation avoids the requirement to complete drilling with due diligence (58 Pa.C.S. § 3211(i)) or restore the well site if the site is constructed and the well is not drilled within 30 days of permit expiration. 25 Pa. Code § 78.65(2). Id.
Moreover, DEP comments that it worked with operators, including Anadarko, to ensure the accuracy of the list of spud unconventional wells it is required to develop and maintain. 58 Pa.C.S. § 2304. That list includes wells where only conductor pipe is set. DEP Comments at 2.
The final commentator, Matt Milliron, also opposes Anadarko's interpretation of whether setting conductor pipe constitutes spudding, thus triggering the impact fee. Mr. Milliron comments that the impact fee was established to compensate both state and local governments for impacts created by drilling unconventional gas wells. See Milliron Comments at 1. Mr. Milliron details the steps in the gas well development process, and comments that each of those steps has varying impact to the state and local governments and local residents. Mr. Milliron comments that setting conductor pipe in the ground constitutes spudding since it is the start of the drilling process. Id. Mr. Milliron opines that operators in land lease agreements most assuredly would argue that they satisfy the deadline prescribed in the lease for spudding by setting conductor pipe. Id. at 2.
Having reviewed the Petition and comments, we find that setting conductor pipe into the ground constitutes spudding, thereby triggering the impact fee. 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. Setting conductor pipe penetrates the land surface and constitutes the start of drilling.
We also agree with DEP's comments that Anadarko's interpretation would be inconsistent with the permitting requirements found in Chapter 32 of Act 13 at 58 Pa.C.S. § 3211(a), which prohibits any well drilling absent having first obtained a well permit from DEP. Anadarko's interpretation would also conflict with Act 13's requirement that a well permit be posted at the well site during site preparation, well site construction and the drilling or alteration of the well, 58 Pa.C.S. §§ 3211(a) and (g). Additionally, Mr. Milliron's comments, highlighting the nature of an impact fee, are persuasive from a policy viewpoint. Therefore, we find that the impact fee is triggered upon the start of drilling, which includes setting of conductor pipe.
We also reject Anadarko's alternative argument that a conductor should be treated the same as a non-producing vertical well for impact fee purposes. Each unconventional gas well in Pennsylvania is permitted as either a horizontal or vertical well. That permit dictates the treatment of the well for impact fee purposes. If conductor pipe is set at a well permitted as a vertical unconventional gas well, it will be treated as such for impact fee purposes. Similarly, if conductor pipe is set at a well permitted as a horizontal unconventional gas well, it will be treated as such for impact fee purposes. 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.
Reclassification of Wells from Horizontal to Vertical.
Anadarko next argues that unconventional gas wells that DEP reclassified from horizontal to vertical should be eligible for a redetermination of the applicable impact fee and that the Commission should provide reporting mechanisms to account for reclassification of wells from horizontal to vertical. Anadarko Petition at 5.
We agree with Anadarko that reclassification of wells from horizontal to vertical will affect the calculation of the impact fee. 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. See 58 Pa.C.S. § 2303(b).
Pursuant to Section 2303(b), each producer is required to file a list of wells with the Commission annually. Any disputes regarding classification should be identified in that report. The impact fee a producer submits to the Commission is based on the report that the producer files with the Commission. Moreover, the producer is required to pay only the amount as calculated by the annual report filed by the producer. As such, the producer self-reports its financial liability under Act 13.
To the extent there is a dispute regarding the accuracy of the producer's report, the Commission will address that dispute via the dispute mechanism established at Sections 2307—2313 of Act 13, 58.Pa.C.S. §§ 2307—2313. These provisions will be enforced consistent with our general rules of practice and procedures found at 52 Pa. Code Chapters 1, 3, and 5. We note that we will utilize formal proceedings only after informal efforts reveal that a dispute cannot be resolved. Under these circumstances, we believe that an adequate mechanism is already in place to account for well reclassification.
Finally, there is one issue associated with reclassification that should be addressed involving the appropriate impact fee for a reclassified well. For a horizontal unconventional gas well, the impact fee accrues upon spudding or at the beginning of a calendar year for wells spud previously. For a vertical well, spudding does not trigger the impact fee, but rather satisfaction of required production levels is the relevant inquiry. See July 19, 2012 Reconsideration Order at 3. Recognizing the myriad of scenarios attendant to reclassification, we believe that a fair reading of Act 13 is that a reclassified well should pay the fee for a horizontal well in the reclassification year.3
The legislature recognized the greater impact occasioned by horizontal unconventional gas wells as compared to vertical unconventional gas wells. This variance is reflected by the different dollar amounts imposed by the impact fees associated with each type of well. Given this consideration, we believe that it is a fair result to require payment of the horizontal unconventional gas well impact fee for a well classified as such during any part of the year in which that well is otherwise subject to the fee.
Fees that Cease Upon Plugging.
Anadarko also comments that the impact fee should cease upon a well being plugged for the year in which it was plugged. Anadarko Petition at 6. In support of its argument, Anadarko cites Section 2302(e), 58 Pa.C.S. § 2302(e), which provides:
Cessation. Payments of the fee shall cease upon certification to the department by the producer that the unconventional gas well has ceased production and has been plugged according to the regulations established by the department.Anadarko argues that the most reasonable interpretation of this provision is that fees cease and are not payable for the year in which wells are plugged. Anadarko Petition at 6.
Notwithstanding Anadarko's arguments, we find that the impact fee does not cease for the year in which a well is plugged. We agree with Anadarko that Section 2302(e) of Act 13 is not entirely clear as to the timing of cessation. However, as explained below, we believe that other provisions in Act 13, as well as the purpose of the impact fee itself, supports our interpretation.
Generally, Act 13 provides that an impact fee is triggered by spudding, regardless of when spudding occurred within a calendar year. Indeed, in our May 10, 2012 Implementation Order, we concluded that the initial impact fee is due and owing upon spudding, even if the well is subsequently plugged. Implementation Order at 8. 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. If a vertical well is later plugged during a year in which it had met that minimum production level, the fee is nonetheless payable since it had accrued upon that well meeting the production criteria set forth in Section 2301, 58 Pa.C.S. § 2301. This is consistent with Act 13's requirement that the impact fee is due and owing upon spudding, even if later plugged during the same calendar year.
As 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. Therefore, assuming the horizontal well was spud in a prior calendar year, the impact fee is triggered and accrues for that calendar year. This is the case for a well that is either plugged or not plugged during that calendar year.
Accordingly, when a horizontal well is plugged in a given year, the fee has already accrued for that year and triggers a payment obligation. The fee ceases in the calendar year following the year in which the well was plugged. Again, this interpretation is consistent with Act 13's requirement that the impact fee is due and owing upon spudding, even if later plugged during the same calendar year. To adopt Anadarko's interpretation would effectively make cessation retroactive, a result not envisioned by 58 Pa.C.S. § 2302(e).
Finally, we note that this interpretation is consistent with the purpose of an impact fee, which is to provide compensation to address the impacts created by drilling. For example, a well plugged at the end of a calendar year is similarly situated to a neighboring unplugged well in terms of impact. Responsibility for payment of an impact fee should reflect this comity. Additionally, a well plugged in the beginning of a year will necessarily create impact by virtue of the plugging process and should logically be subject to an impact fee.
For the foregoing reasons, we find that the impact fee ceases for a plugged well for the calendar year following plugging, since the impact fee had already accrued for the year in which the well was plugged.
Disputes and Refunds.
Anadarko also requests that the Commission clarify the dispute process and associated enforcement proceedings for producers disputing well fees. See Anadarko Petition at 6. Anadarko suggests that a ''fee dispute process is necessary and just rather than forcing Producers to pay significant fees for which good faith disputes exist, not knowing whether such fees will ever be refunded if paid, or be subject to mandatory fines if withheld. The process need not be complicated or lengthy, but simply should allow Producers to document and provide information to support their objections to well fees.'' Anadarko Petition at 6. Accordingly, Anadarko requests that the Commission ''clarify the circumstances in which it will follow formal versus informal procedures to reduce the uncertainty surrounding enforcement risks.'' Id.
As noted earlier, a producer is required to file an annual report with the Commission detailing the number of spud unconventional gas wells for the previous calendar year. 58 Pa.C.S. § 2303(b). This report is due by April 1 of the following year. Id. Along with this report, a producer is to submit payment of the impact fee. Id. As discussed supra, the total impact fee amount for each producer is calculated from the report as compiled by each producer. Id. As such, the producer is self-reporting its liability under Act 13. Any disputes should be identified via the report. Accordingly, to the extent that there is a dispute regarding the accuracy of the producer's report, the Commission will address that dispute via the dispute mechanism established at Sections 2307—2313 of Act 13. See 58 Pa.C.S. §§ 2307—2313. Again, as explained supra, these provisions will be enforced consistent with the Commission's general rules of practice and procedures found at 52 Pa. Code Chapters 1, 3, and 5.
At the same time, we note that we will utilize formal proceedings only after informal efforts reveal that a dispute cannot be resolved. The Commission will always seek informal resolution for impact fee disputes prior to initiating formal proceedings. Based upon our experience in the inaugural year, we believe that this is a sound course. We further note that based on the statutory reporting/payment mechanism established by Act 13 that provides for producers to self-report their financial liability subject to subsequent Commission enforcement action if a dispute arises, we do not envision the situation where refunds would be required. Notably, Act 13 does not provide for a refund mechanism.
Additional Matters.
The issue of responsibility for payment of the impact fee has arisen where the producer for a particular well changes. This may occur, for example, where a producer transfers its interest to another producer. Pursuant to 58 Pa.C.S. § 2303(b), the impact fee imposed on a producer is due by April 1 of each year following the initial year (2012). By that date, each producer must submit the fee and a well report to the Commission. Id. The fee is derived from the submitted well report. Id. The well report is for the previous calendar year and includes the number of a producer's spud unconventional gas wells in each municipality within each county that has imposed a fee, as well as the date each of those wells was spud or ceased production. Id.
Our interpretation of this provision is that the producer filing the report is responsible for paying the impact fee. 58 Pa.C.S. § 2303(b) provides that the liability for fee payment attaches to the producer who is responsible for filing the report. To the extent a particular producer, responsible for filing the report, acquired its interest in the well before an annual report is filed that would have included the subject well, that producer is required to include that well in its report and pay the fee for that well. The fee is imposed on the producer via each well the producer includes on its report. Obviously, producers can proportion this fee among themselves in a private agreement involving a particular well. However, the responsibility for payment of the fee to the Commission lies with the producer filing the report with the Commission. Id.
Annual Municipality Approved Budget Report
In our Reconsideration Order issued July 19, 2012, Docket No. M-2012-2288561, we determined that 58 Pa.C.S. § 2314(e) requires a municipality to file a Municipality Approved Budget Report (Budget Report) annually with the Commission. See Reconsideration Order, pp. 6—9. Generally, the Budget Report reflects a municipality's final approved budget for the prior fiscal year. In our Implementation Order entered May 10, 2012, we established July 6, 2012 as the deadline for filing the initial Budget Report for fiscal year 2010. However, we did not establish due dates for future years.
Upon further consideration, we will establish March 1 of each year as the deadline for submission of the prior year's final approved Budget Report, with one notable exception. For the upcoming year's deadline, March 1, 2013, the municipal Budget Reports for both 2011 and 2012 must be filed with the Commission. This double filing is the result of the timing necessitated by Act 13. In subsequent years, only the prior year's final approved Budget Report will be due. For example, the municipal Budget Report for 2013 is due by March 1, 2014. Municipalities that fail to properly file the Budget Report will be limited to a $500,000 CPI adjusted maximum distribution. 58 Pa.C.S. § 2314(e).
Finally, we note that currently the Budget Reports must be filed in hard copy or via e-mail, as provided on the official Commission Budget Report Form. We anticipate that electronic filing will be available next year. We will provide updates on this development through our web site; Therefore,
It Is Ordered That:
1. Anadarko's Petition for Amendment and Clarification is Granted in part and Denied in part, consistent with this Order.
2. Setting conductor pipe constitutes spudding for Act 13 impact fee purposes.
3. The impact fee ceases for a plugged well for the calendar year following plugging pursuant to 58 Pa.C.S. § 2302(e).
4. Well reclassification will be treated consistent with this Order.
5. In the case of transfers, the producer filing the annual report is responsible for paying the impact fee pursuant to 58 Pa.C.S. § 2303.
6. Municipalities must file their Municipality Approved Budget Report for both 2011 and 2012 with the Commission on or before March 1, 2013.
7. Beginning in 2014, municipalities must file the prior year's Municipality Approved Budget Report with the Commission on or before March 1 of each year.
8. A copy of this Order shall be published in the Pennsylvania Bulletin and posted on the Commission's website at www.puc.pa.gov.
A copy of this Order shall be served on Anadarko E&P Company LP, the Pennsylvania Department of Environmental Protection, Seneca Resources Corporation, the Pennsylvania Independent Oil & Gas Association, Matt Milliron, and Talisman Energy USA Inc.
ROSEMARY CHIAVETTA,
Secretary
[Pa.B. Doc. No. 13-32. Filed for public inspection January 4, 2013, 9:00 a.m.] _______
1 PIOGA's and Seneca's comments were generally limited to supporting Anadarko's Petition.
2 ''Vertical gas well'' is defined in Act 13 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.
''Stripper well'' is defined as ''an unconventional gas well incapable of producing more than 90,000 cubic feet of gas per day during any calendar month, including production from all zones and multi-lateral well bores at a single well, without regard to whether the production is separately metered.'' Id.3 If there is an obvious classification or computational error by a producer, we will work to rectify that error.
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