Marcellus Shale Update

In the wake of Robinson Township, the landmark Pennsylvania Supreme Court case that struck down certain provisions of Act 13, some questions still remain unanswered. Robinson Township held that section 3304 of Act 13 violated several provisions of Pennsylvania’s Constitution because it mandated that local governments amend their zoning ordinances to allow oil and gas operations in every zoning district as a matter of right. The Supreme Court similarly struck down section 3303, which was the heart of the Act, providing that all oil and gas regulations were a matter of statewide concern, and thus, local zoning could not place specific restrictions on the industry. In essence, Robinson Township left intact the local authority to prescribe where oil and gas operations may take place and where they may not, in accordance with setback requirements detailed in municipalities’ zoning ordinances. Other sections of Act 13, however, required the Public Utility Commission (PUC) to review and approve local zoning ordinances for compliance with the Municipalities Planning Code and Pennsylvania’s Flood Plain Management Act (FPMA) in order for local “host” governments to receive impact fees from drillers in their districts. The Supreme Court remanded review of this issue back to the Commonwealth Court.

The Commonwealth Court is expected to determine whether other sections of Act 13 could be employed independently from those the Supreme Court held unconstitutional ──namely, whether the PUC has the authority to determine whether local zoning ordinances impose conditions or limitations on the oil and gas industry in contravention of the uniform regulations set forth by the Oil and Gas Act, as it existed prior to Act 13. Also under review is the ability of the PUC to review local zoning ordinances for compliance with the Pennsylvania Municipalities Planning Code and other statutes, the condition that municipalities must meet in order to receive impact fees from drillers.

It is well settled that regulations concerning oil and gas activities, such as prescribed drilling methods, safety devices and even setback requirements from sensitive water sources, have always been regulated by state, rather than local legislation, particularly by the Oil and Gas Act. Challengers of the law claim, however, that allowing the PUC to determine the fate of impact fees based on zoning measures that restrict drilling activates in certain areas will be used as a back channel to prohibit municipalities from imposing stricter setback requirements than those prescribed by state statutes. The critics argue that PUC review will virtually force municipalities to relax their setback requirements or forgo impact fees. Again, recall that the Robinson Township opinion held that setback requirements were largely a matter of local concern, and mandatory waivers from setback requirements were unconstitutional.[1] The issue will likely turn on whether the Commonwealth Court reads the challenged section of Act 13 as a de facto prohibition on local governments to follow their constitutional mandate to protect sensitive water sources by prescribing stringent setback requirements for oil and gas operations.

On the legislative front, proponents of a severance tax appear to be gaining support, due in large part to declining state revenues and demands of pension costs on budgets. Governor Corbett has steadfastly opposed any form of severance tax. Currently, Pennsylvania is the only gas producing state that does not have a severance tax. State Senator Vincent Hughes (D-Philadelphia) recently introduced a proposal that would levy a 5% severance tax on natural gas extraction. The revenues from the tax are estimated to raise $720 million in fiscal year 2014-15, which lawmakers stated would be used to fund public education, job creation, and the environment. Currently, Pennsylvania only receives about $217 million from impact fees charged to the gas industry. The measure is gaining bipartisan support. Rep. Gene DiGirolamo (R-Bucks) recently referred to a severance tax as a matter of “common sense,” which 20 to 30 House Republicans would support. The Pennsylvania Budget and Policy Center has predicted that a 4% severance tax could generate $1.2 billion annually by 2019-20.

[1] The plurality held that mandatory setback requirements of Act 13 violated the public trust doctrine of Pennsylvania’s Environmental Rights Amendment of Article I, section 27 of Pennsylvania’s Constitution.