On October 18, 2012, the PUC issued an opinion after reviewing an ordinance enacted by South Fayette Township relating to natural gas drilling, which found the Township in violation of Act 13. Due to the violations, the Township is presently in jeopardy of missing out on potentially lucrative Marcellus Shale impact fee distributions. Neighboring Washington County is expected to receive $4.4 million in fee distributions in 2012. Because of the PUC’s opinion, South Fayette Township is poised to receive nothing.

In accordance with Section 3305 of Act 13, the PUC reviewed the South Fayette Township zoning ordinance regarding the development of oil and gas wells to determine whether it conformed with Act 13. If the ordinance failed to conform with Act 13’s municipal requirements, then South Fayette Township would be ineligible to receive any share of the impact fee that it would otherwise be entitled to. On October 18, 2012, after reviewing the ordinance, the PUC determined that the South Fayette Township ordinance violated Act 13.

Following an appeal of the PUC’s order, on October 26, 2012, Senior Judge Quigley of the Commonwealth Court issued a cease and desist order directing the PUC to permanently halt Act 13 ordinance reviews. Prior to Judge Quigley’s one-judge ruling, the Commonwealth Court, on July 26, 2012, in a divided 4-3 en banc ruling invalidated as unconstitutional several provisions of the Act. Robinson Twp. v. Commonwealth, 52 A.3d 463 (Pa. Cmwlth. 2012). Notably, the full Court did not invalidate Section 3305 of Act 13. The constitutionality issue is currently being reviewed by the Pennsylvania Supreme Court.

Judge Quigley’s cease and desist order was in response to an application made by several county and municipal governments seeking to enjoin the PUC from engaging in continued ordinance reviews. Section 3305 of the Act authorizes the PUC to review and enforce conformity of local ordinances regulating the production of natural gas.

Judge Quigley’s order followed the PUC’s October 18, 2012 opinion that assessed whether South Fayette Township’s ordinance regulating oil and gas well development complied with Act 13. The PUC’s review of the South Fayette ordinance was in response to a Request for Review initiated by a resident landowner and gas lease holder. Specifically at issue during the review was the propriety of provisions within the ordinance that imposed additional reporting requirements for water withdrawal and hazardous waste disposal, along with additional requirements for the well reclamation process. South Fayette’s ordinance also mandated submission of an environmental impact analysis and attempted to enforce conduct covered by the Air Pollution Control Act.

The PUC found that the provisions of the Township’s ordinance violated Chapter 32 and Sections 3302 and 3303 of the Act. Chapter 32 of Act 13 relates to development and sets forth in specific detail regulations for oil and gas production. Sections 3302 and 3303 collectively preempt a local municipality’s attempt to regulate oil and gas development or to enforce environmental provisions accounted for by other Pennsylvania environmental acts.

Upon issuance of the PUC’s decision, South Fayette Township became immediately ineligible to share in impact fee distributions. Without action by the Commonwealth Court, the Township could reinstate its eligibility only by amending or repealing the offending provisions. The PUC had already begun distribution of the fees and is expected to finish by December 1, 2012.

Although Judge Quigley issued an order directing the PUC to cease and desist from making reviews under Section 3305 of Act 13, it is worthwhile to note that in Robinson Twp., the full Commonwealth Court did not find Section 3305 to violate the Separation of Powers doctrine of the Pennsylvania Constitution. The full Court found that because “58 Pa.C.S. § 3305(b) specifically gives this Court de novo review of a Commission final order so there is no violation of the Separation of Power doctrine.”

While Judge Quigley’s cease and desist order may curb ordinance reviews by the PUC -- at least until the full Commonwealth Court or Pennsylvania Supreme Court weighs in -- the PUC’s South Fayette opinion certainly highlights the financial stakes for noncompliance. The PUC opinion showcases the potentially preemptive nature of state law as it relates to oil and gas, especially concerning municipal attempts to control natural gas production. Shortly after the Commonwealth Court issued the cease and desist order, lawyers representing the aggrieved municipalities called for the PUC to release nearly $1 million in withheld impact fee funds. Whether the PUC will release funds to South Fayette Township and others is yet to be determined.