Wednesday, April 3, 2019

Shale Law in the Spotlight – An Overview of the Pennsylvania Supreme Court Ruling Related to the Impact Fee

Case Summary: Snyder Brothers v. Pennsylvania Public Utility Commission

Written by Chloe Marie – Research Specialist

Background on Act 13 of 2012

On February 14, 2012, the Pennsylvania legislature enacted Act 13 of 2012 which provided broad additions and amendments to existing Pennsylvania law related to oil and gas development in a number of manners. Act 13 repealed and replaced the Oil & Gas Act and updated many of the environmental standards addressing well setback distance requirements, protection of water supplies, well permitting requirements, etc. Act 13 also addressed municipal regulation of oil and gas development and established an unconventional gas well fee – also known as impact fee.

The impact fee was created in order to offset the impact of drilling activities in the state, and all unconventional gas producers are required to pay this fee to the Pennsylvania Public Utility Commission (PUC) based upon the number of wells that they spud, and that are in operation, each calendar year. The impact fee is calculated based on the average annual price of natural gas and the age of the well. Since its enactment, the PUC has collected and appropriated approximately $200,000,000 each year from the impact fee, with $209,557,300.00 being collected from activities in 2017.

Section 2301 of Act 13 requires anyone who produces natural gas from unconventional vertical wells to pay an impact fee provided that natural gas is produced in greater quantities than that of a stripper well. A vertical well would be considered “stripper” if the well cannot reach the natural gas production limit of 90,000 cubic feet per day during any calendar month of the year; however, section 2302 of Act 13 provides that natural gas producers are exempted from the impact fee when production of natural gas from the vertical well falls below the 90,000 cubic feet limit.

PUC Administrative Proceedings & Lower Court Ruling

The PUC Bureau of Investigation and Enforcement (I&E) filed a complaint in 2014 against Snyder Brothers, Inc., claiming that the company failed to properly document 45 unconventional gas wells as vertical wells in its previous annual well production reports and thus failed to pay impact fees to the PUC for them under Act 13. As a result, the I&E Bureau sought to recover $507,586.00 in past due impact and administrative fees, plus penalties and interest for those wells, and an additional penalty in the amount of $50,000.

In response to the complaint, Snyder Brothers, Inc., alleged that those vertical wells did not produce gas in sufficient quantities and should thus be considered stripper wells, and as such, were exempted from the payment of impact fees. Snyder Brothers, Inc., argued before the PUC Office of Administrative Law Judge (OALJ) that the wording of the definition of a stripper well, as contained in section 2301 of Act 13, is “unambiguous” and clearly indicates that a well producing less than 90,000 cubic feet of natural gas per day “for even a single month” of the year must be classified as a stripper well, and therefore is exempt from the impact fee.

According to I&E, the term “any” in the definition of a stripper well is unclear and could either mean “one or another taken at random,” or “every;” however the I&E Bureau emphasized that the main purpose and objective of the impact fee is to benefit municipalities that may be impacted by the development of unconventional gas resources and that this purpose would be frustrated if an impact fee exemption could be granted when production falls below the 90,000 cubic feet limit “for one month out of twelve.”

On February 19, 2015, the OALJ upheld the complaint and held that the general interpretation given by the PUC to the definition of striper well in Section 2301 – which is that no impact fee exemption should be granted based on only one month of reduced production – should be given “great deference” as the PUC is the agency responsible for the administration and enforcement of Act 13. In an order and opinion dated June 11, 2015, the PUC upheld the OALJ decision and, though agreeing on the confusing nature of the term “any,” concluded that the PUC interpretation of a stripper well definition was consistent with multiple interpretative orders issued by the agency over the years and that setting limits in collecting the impact fee when production drops below the 90,000 cubic feet threshold for even one month of the year would potentially create a situation where natural gas producers would purposely reduce production at a well during one month out of the year to escape the payment of annual impact fees pursuant to section 1921(c) of the Statutory Construction Act (SCA).

Snyder Brothers, Inc., appealed the PUC order to the Commonwealth Court of Pennsylvania, which in March 2017 ruled in favor of the company and reversed the PUC order in a split decision. The Commonwealth Court interpreted and concluded that the term “any” in the definition of a stripper well under Act 13 means “one” month out of the calendar year. The PUC petitioned the Pennsylvania Supreme Court for allowance of appeal, which was granted on October 18, 2017. See Snyder Brothers v. PUC, 172 A.3d 1119 (Pa. 2017) (order filed October 18, 2017).

Pennsylvania Supreme Court Ruling

On December 28, 2018, the Pennsylvania Supreme Court overturned the Commonwealth Court decision that unconventional gas wells incapable of producing more than 90,000 cubic feet per day in any one month of the calendar year are exempt from paying annual impact fees, and therefore reinstated the PUC order dated June 11, 2015.

At the beginning of its analysis, the Supreme Court identified that the issue for it to address was whether the 45 unconventional wells at issue in this case were vertical gas wells as defined under Section 2301 and thus were subject to an impact fee assessment. In this respect, the meaning of the word “any” in the definition of stripper well set out in Section 2301 must be defined; however, the court noted that the stripper well definition itself is not “dispositive of the central question in this case.”

The Supreme Court opined that the word “any” has two meanings: one means “all” or “every,” and the second means “one” while recalling that the court itself has given it different meanings depending on the “context in which it is used in the particular statute under review.” In this respect, the court acknowledged that the intent of the Pennsylvania General Assembly in establishing the impact fee is to “provide an adequate and stable source of revenue for counties and municipalities to offset the adverse effects of unconventional gas well production, which … are omnipresent and do not vary with the fluctuations in well production.” As a result, the court found that the meaning of the word “any” in this context must be understood as “each and every” month out of the calendar year, as it seems more in line with the general purpose of the Pennsylvania’s impact fee legislation.

In addition, the Supreme Court noted that such meaning in this context is consistent with the overall statutory language of Act 13. In other words, the term “any” as meaning “each and every” can be interpreted in the same way in other provisions of Act 13 to the way we understand it in the definition of stripper well. Furthermore, the court concluded that such interpretation of the word “any” is consistent with PUC’s prior administrative orders.

Finally, the Supreme Court ruled that the payment of an annual impact fee is required when any gas well produces more than 90,000 cubic feet per day for even just one month of the calendar year.

Reaction to Supreme Court Ruling

This recent decision has generated a lot of discussion among those affected by this ruling. According to PUC spokesperson Nils Hagen-Frederiksen, as quoted in the Inquirer, “We estimate that the recent Pa. Supreme Court decision will involve hundreds of wells with outstanding impact fees totaling millions of dollars.”

In a News Release dated December 31, 2018, the Pennsylvania Independent Oil & Gas Association (PIOGA) General Counsel Kevin Moody declared, “We are extremely disappointed that the majority ignored the unrebutted evidence of the PUC’s consistent interpretation of the word ‘any’ to mean ‘one’ and instead agreed with the PUC that the meaning of the word in this context is ambiguous.” PIOGA’s General Counsel added that “[t]his disappointment extends to the majority’s ignoring other unrebutted evidence that the PUC reversed many of its initial impact fee interpretations in finding that the PUC’s interpretation at issue in this appeal is entitled to deference. The majority also ignored legislative debate showing that the General Assembly intended to exempt stripper wells from the fee even though these wells had impacts intended to be mitigated by the fee.”


This material is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.

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