Pa. Natural Gas Impact Fees on Pace to Set Record

Pennsylvania is poised to receive a record amount of impact fees this year from unconventional shale gas wells, rebounding from a record low during the COVID-19 pandemic in 2020. The state Independent Fiscal Office released a report that estimates impact fees in 2022 will be $274.8 million, a 17.2 percent increase from last year, and close to double the record low amount of $146.3 million in 2020. Impact fees on gas-producing companies were authorized under Act 13 of 2012, which regulates unconventional gas well drilling, in lieu of a severance tax charged by some other states. The annual fee is determined according to a schedule that takes into account the amount of gas produced, the number of years the well has been operating, and the price of natural gas. The bulk of the money is distributed annually to counties and municipalities with gas drilling activity, while the rest goes to the Marcellus Legacy Fund and state agencies. The IFO report indicates that the rise in impact fees is due to higher prices for natural gas, as well as an increase in the number of new wells being drilled. New wells pay a higher fee than older wells. The price of natural gas has shot up this year due to the post-pandemic economic recovery and the ongoing global energy shortage stemming from the Russian invasion of Ukraine and the loss of Russian gas flowing to Europe. The IFO noted that for the first time, the price of natural gas has risen to $6 or above per MMBtu, triggering the highest level on impact fee schedule of $20,000 per horizontal well. The average annual price of gas on the New York Mercantile Exchange was $6.64 per MMBtu. The higher fees are also partly due to a 7.5 percent inflationary adjustment on new wells. The IFO estimates that 570 new horizontal wells will be drilled this year and that the fee will be levied on a total of 11,164 operating wells. The IFO said the increase in new wells paying higher fees will more than offset the impact of aging wells paying lower fees. The report also indicates that the effective tax rate (ETR) for all wells will decline to 0.7 percent due to the increase in the market value of gas that more than offsets the impact fee collection. The ETR enables comparisons to states that levy a severance tax. In 2021, the ETR was 1.3 percent; during the pandemic, when gas prices cratered, it was 3.3 percent. Impact fee payments for 2022 will be distributed in July 2023, and Southwestern Pennsylvania counties and communities will receive a large part of the $153 million estimated pie. Washington County last year held the top spot for impact fee revenue, followed by Susquehanna County, Bradford County, and Greene County. Most of the money is used by counties and communities for infrastructure projects or held in capital reserve accounts for future projects.