Snyder Bros., Inc. v. Pa. Pub. Util. Comm'n

198 A.3d 1056

SNYDER BROTHERS, INC., Appellee

v.PENNSYLVANIA PUBLIC UTILITY COMMISSION, Appellant

Pennsylvania Independent Oil & Gas Association, Appellee

v.Pennsylvania Public Utility Commission, Appellant

No. 47 WAP 2017

No. 48 WAP 2017

Supreme Court of Pennsylvania.

Argued: April 11, 2018

Decided: December 28, 2018

OPINION

JUSTICE TODD

At issue in this appeal is whether producers of natural gas from certain vertical wells are subject to assessment of the yearly impact fee established by Chapter 23 of the Oil and Gas Act ("Act 13").¹ The vertical wells that are the subject of this proceeding utilize the hydraulic fracturing process, colloquially referred to as "fracking," to extract natural gas through a vertical well bore from the underlying geologic formation known as the Marcellus Shale. At the heart of this dispute is whether an impact fee will be assessed whenever a vertical well's production exceeds an average of 90,000 cubic feet of natural gas per day for even one month of the year, or whether the well must exceed this production threshold in every month of the year, for the fee to be imposed. After careful review, we conclude that, under the relevant provisions of Act 13, the impact fee will be imposed on such wells if their production exceeds 90,000 cubic feet of natural gas per day for even one month of the year, as found by the Public Utility Commission ("PUC"). Therefore, we reverse the Commonwealth Court's order, which had reversed the PUC, and we reinstate the PUC's order.

I. Background

An unconventional natural gas well is defined by Section 2301 of Act 13 as "[a] bore hole drilled or being drilled for the purpose of or to be used for the production of natural gas from an unconventional formation." 58 Pa.C.S. § 2301. Section 2301 describes an unconventional formation as

A geological shale formation existing below the base of the Elk Sandstone or its geologic equivalent stratigraphic interval where natural gas generally cannot be produced at economic flow rates or in economic volumes except by vertical or horizontal well bores stimulated by hydraulic fracture treatments or by using multilateral well bores or other techniques to expose more of the formation to the well bore.

58 Pa.C.S. § 2301. The Marcellus Shale is such an unconventional geologic formation.²

Structurally, a vertical well, the type of well at issue in this case, is one in which a bore hole is drilled vertically downwards from a point on the land surface until it enters the top of a reservoir of natural gas pooled within an unconventional formation. By contrast, the other type of gas well commonly drilled to extract natural gas — a horizontal well — features a main bore hole drilled vertically downwards from a surface point to the depth of the natural gas reservoir in the formation, with one or more horizontal bore holes branching laterally from the main bore hole into the reservoir. Two or more horizontal bore holes extending laterally from a single vertical bore hole are referred to as multilateral bore holes. Joshi, PETROLEUM ENGINEERING — UPSTREAM — Horizontal and Multilateral Well Technolog y at 2, available at www.eolss.net.³ Section 2302 of Act 13 provides for the imposition of an impact fee on every producer of natural gas from an unconventional well "spud"⁴ in the Commonwealth where authorized by the County or municipality in which the well is located, if the County in which the well is located passes an ordinance authorizing the imposition of such a fee, or 50 percent of its municipalities pass resolutions authorizing the imposition of such a fee. Id. § 2302. A producer of natural gas from a vertical well must pay an impact fee if the well meets Act 13's definition of a "vertical gas well" — i.e. –- "[a]n 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." Id. § 2301. A "stripper well," in turn, is defined as "an unconventional gas well incapable of producing more than 90,000 cubic feet of gas per day during any calendar month." Id.⁵ The impact fee on vertical gas wells is 20% of the fee imposed on producers from other unconventional gas wells, and vertical gas wells are exempt from assessment of such fees during their 11th through 15th years of production. Id. § 2301, 2302(f).

The impact fees for all unconventional wells are imposed on an annual flat, per-well basis, and calculated using the average annual price of natural gas during the calendar year in which the fee is assessed. Id. § 2302. Producers from unconventional wells are responsible under Section 2303 of Act 13 for self-reporting the amount of a well's production for each calendar year and are obligated to remit any impact fees they owe to the PUC, along with a $50.00 per-well administrative fee.

Section 2302 allows a suspension of the operator's obligation to pay the annual impact fee if, within two years of paying the initial impact fee, the well is capped, or, as is implicated by this appeal, the natural gas produced from the well falls below the statutory limit for stripper wells. If, however, gas production from the well once again rises above the stripper well production limit of 90,000 cubic feet per day during a particular calendar year, then, under Section 2302, the impact fee is re-imposed for that calendar year at the same rate as when payment was suspended. Id. § 2302(b.1). Once a well has ceased production altogether, and has been plugged in accordance with regulations of the Department of Environmental Protection ("DEP"), the producer is no longer required to pay impact fees for the well. Id. § 2302(e).

Because it is relevant to our statutory analysis below, we briefly discuss how the General Assembly has structured the disbursement of the impact fees collected by the PUC. The PUC deposits all impact fee payments from producers into an "Unconventional Gas Well Fund" (the "Fund") in the state treasury. Id. § 2301, 2314. Under Section 2314 of Act 13, 40% of this fund is reserved for annual fixed distributions by the Commission to: county conservation districts for uses consistent with their statutory mission; the Pennsylvania Fish and Boat Commission for review of drilling permits; the DEP for costs associated with administering Act 13; the Pennsylvania Emergency Management Agency to plan, coordinate, and train for accidents or incidents related to unconventional gas well operations; the Office of State Fire Commissioner for the development of training and funding programs for first responders and the acquisition of specialized equipment to deal with emergencies arising out of natural gas production from unconventional wells; and to the Pennsylvania Department of Transportation for "rail freight assistance." Id. at § 2314(c), (c.1), and (c.2).

The remaining 60 percent of the money in the Fund is expressly reserved for counties and municipalities in which such unconventional gas wells are located, and which have authorized the imposition of an impact fee. Id. §§ 2302, 2314(d). Counties and municipalities are required to use the monies they receive from the Fund "for the following purposes associated with natural gas production from unconventional gas wells within the county or municipality":

(1) Construction, reconstruction, maintenance and repair of roadways, bridges and public infrastructure.

(2) Water, storm water and sewer systems, including construction, reconstruction, maintenance and repair.

(3) Emergency preparedness and public safety, including law enforcement and fire services, hazardous material response, 911, equipment acquisition and other services.

(4) Environmental programs, including trails, parks and recreation, open space, flood plain management, conservation districts and agricultural preservation.

(5) Preservation and reclamation of surface and subsurface waters and water supplies.

(6) Tax reductions, including homestead exclusions.

(7) Projects to increase the availability of safe and affordable housing to residents.

(8) Records management, geographic information systems and information technology.

(9) The delivery of social services.

(10) Judicial services.

(11) For deposit into the county or municipality's capital reserve fund if the funds are used solely for a purpose set forth in this subsection.

(12) Career and technical centers for training of workers in the oil and gas industry.

(13) Local or regional planning initiatives under the act of July 31, 1968 (P.L. 805, No. 247 ), known as the Pennsylvania Municipalities Planning Code.

58 Pa.C.S. § 2314 (g) (footnote omitted).

If money remains in the Fund, after these distributions are made, it is mandatorily transferred to a "Marcellus Legacy Fund," from which 40 percent of the money deposited therein is available to counties to use in repairing or replacing their "at-risk" deteriorated bridges, as well as projects which acquire or maintain lands for "recreational or conservation purposes." Id. § 2315.

II. Factual and Procedural History

Appellee, SBI, drilled, and during the relevant time period covered by this appeal — 2011 and 2012 — operated, a number of unconventional vertical wells in Pennsylvania. After reviewing SBI's annual well production reports for calendar years 2011 and 2012, the PUC's Bureau of Investigation and Enforcement ("I & E") determined that SBI had failed to properly identify on those reports 45 wells as "vertical gas wells," and that SBI failed to remit the requisite impact fees to the PUC for them. In 2014, I & E filed a complaint against SBI, seeking $507,586.00 in past due impact and administrative fees, plus penalties and interest for those wells, as well as requesting that SBI be ordered to pay an additional penalty of $50,000. SBI filed an answer to the complaint, denying liability on the basis of its contention that the wells produced insufficient quantities of gas to qualify as vertical gas wells and were, in fact, stripper wells, and...