Pennsylvania’s Independent Financial Office has released a report summarizing the performance of the impact fee in 2018. The report, which is released annually, discloses revenue figures generated from impact fee collections, as well as explaining the formula used to calculate the fee. Additionally, the IFO discusses its projections for revenues in the next calendar year.
Pennsylvania is the only natural gas producing state in the country that uses an impact fee in lieu of a severance tax. The fee is paid over a 15 year period of a horizontal well’s life, with the bulk of payments made in the first three years. For a complete analysis of the impact fee, please read our explainer here.
Since the implementation of impact fees created by 2012’s Act 13, the state has collected nearly $1.5 billion in revenue from natural gas well operators. As predicted by the IFO, 2018 saw a substantial rise in impact fee revenues from the previous year. Originally estimated to generate approximately $247 million in revenue, 2018 exceeded the forecast, with a total of $251.8 million collected, a record high. This equates to a $42.3 million raise from 2017’s collections.
Additionally, the IFO generates an average effective tax rate (ETR) to more accurately illustrate the total tax burden. Though only used for descriptive purposes, the ETR shows an approximation of the percentage of tax the industry would have paid relative to their post-production revenues. This figure is determined by dividing the total impact fee revenue by the average market value of natural gas in the calendar year. Last year saw the smallest ETR since the impact fee’s beginning, at just 2.2%. What this indicates is that even though impact fee revenues have risen to all-time highs, the market price of natural gas has offset the increase in collections.
The IFO states three key reasons for the record high impact fee revenue:
* First, there has been an increase in freshly spudded wells in 2018. As the impact fee is most costly in the first year of a well’s life, the collections from these new wells negated the decreased collections from older wells.
* Second, a case decided by the Pennsylvania Supreme Court in 2018 changed the threshold for impact fee exemption. Previously, a well that produced less than 90 Mcf of natural gas per day for at least one month received an exemption from impact fee payments. The new ruling did away with the exemption, and mandated that all previously disputed fees must be paid by well operators and,
* Lastly, late payments from previous years.
The report also provides a forecast into 2019’s impact fee collections. According to the IFO, 2019 has the potential to keep with the trend of rising revenue or take a substantial hit. A key factor in this is the price of natural gas in the market. Though the impact fee is not based on the price of natural gas, there are fee schedules that are dictated by the price. If the price of natural gas stays above $3.00 per MMBtu on the New York Mercantile Exchange, then the schedule would not change, and revenues are likely to rise. On the contrary, if the price falls below the $3.00 mark, the scheduling would change, and likely cause a decrease in revenues collected in the tens of millions.