Energy Policy

No Doubt About it: PA has a Severance Tax

tax

What do Christmas festivities, a new office building, and a Ford Explorer have in common? They were all paid for with impact fees on natural gas, raising doubts about the necessity of imposing higher taxes on the industry.

A recent audit of local government spending revealed some officials aren't prioritizing the costs related to natural gas drilling or, worse, the expenses associated with drilling were exaggerated from the beginning.

Back in 2012, when the impact fee was being implemented, we questioned the need for more revenue to offset the local costs of natural gas drilling:

Much of the revenue generated through Act 13 isn't used to address drilling impact—Marcellus Shale isn't responsible for deteriorating bridges and parks in midstate counties where drilling doesn't even occur. Act 13 sustains unrelated programs such as Growing Greener and is littered with corporate welfare like subsidizing rail freight assistance and natural gas vehicles.

The Auditor General's report is proof that such questions were well warranted. It's now clearer than ever that the impact fee is addressing far more than drilling impacts. It is clearly a tax.

Instead of debating the wisdom of the current impact fee (tax), Governor Wolf and others continue to push for an additional natural gas tax. Yet, the IFO estimates the current impact fee is equivalent to a 6.9% severance taxhigher than severance taxes in Louisiana, Wyoming, and West Virginia.

With natural gas prices still climbing from record lows and the industry shedding a third of its jobs in 2016, this audit should put a final nail in the severance tax coffin. Any further effort to raise energy taxes would be a transparent attempt to balance the budget on the backs of working people.

As we've seen, raising niche taxes to fill budget holes is a losing strategy. Only six months ago lawmakers passed new taxes on digital downloads, vape shops, and cigarettes. The result? A estimated $524 million budget shortfall.

Let's avoid repeating our mistake and acknowledge the truth: imposing an additional tax on one industry will do nothing to help solve the state's budget problems. 

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posted by Elizabeth Stelle | 02:45 PM

PA's Conflicted Relationship with Natural Gas

The government giveth, and the government taketh away. Nowhere is this more apparent than in Pennsylvania’s relationship with the natural gas industry.

On the one hand, Gov. Wolf offers a Pipeline Investment Program that would provide $24 million in matching grants to businesses, schools and hospitals for connections to gas pipelines.

On the other, the Pennsylvania Department of Environmental Protection (DEP) proposes new rules on already highly regulated production activities. The gas industry filed a legal challenge to some of the rules. They claim the regulations will cost $2 billion a year “without providing meaningful environmental benefits.” Excluding initial start-up costs, DEP estimates the maximum annual cost of the regulations to be $31 million, or about $24,000 a well.

Meanwhile, Braskem America, a plastics manufacturer, chooses Texas over Marcus Hook, Pa., for the location of a $500 million plant because of Pennsylvania’s lack of pipeline capacity to deliver feedstock.

At the same time, pipeline projects are missing in-service targets due to regulatory delays.

Delayed by about 18 months is the start-up of Sunoco Logistics’ $2.5 billion Mariner East 2 project, which will transport natural gas liquids from western Pennsylvania to Marcus Hook. The company is responding to requests from the DEP for additional information on permit applications.

In New York, the Constitution Pipeline, has languished since April when New York regulators denied the project a water-quality permit. The denial came four months after New York Gov. Cuomo had approved $2 billion in economic-development grants that included an extension from the pipeline to a manufacturing plant.

Pennsylvania should learn from these missed opportunities and stop efforts to finance pipeline extensions to private businesses with tax dollars. After all, Governor Wolf just lamented policies that put well-connected businesses before taxpayers:

" . . . too often, special interests and the well-connected are put before Pennsylvania families and the middle class."

So why not return to citizens the $24 million being transferred from an “underutilized” fund for alternative energy projects? Instead of doling out politically-selected grants, the Governor should focus on ways to balance safety with enhancing the competitiveness of one of the state’s most promising enterprises.

In general, state government is too focused on doling out taxpayer cash and promulgating regulation than on fostering an environment for good-paying jobs and economic growth.

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posted by Gordon Tomb | 03:17 PM

Energy Mandates a Double Whammy

Alternative energy mandates raise the cost of living and make it harder for people to find work. These are the findings of a new paper on the government's futile efforts to manage the energy sector.

According to the paper's author, Dr. Timothy J. Considine, the mandates will adversely affect Pennsylvania, raising energy costs by $700 million and eliminating 11,400 jobs by 2025.

In 2004, Pennsylvania enacted the Alternative Energy Portfolio Standards (AEPS). These mandates require 18 percent of all electricity to be generated from renewable sources by 2021.

More than 98 percent of the new renewable energy capacity for Pennsylvania is supplied by wind power. This means electricity production at coal and natural gas plants fluctuates (or cycles) to accommodate times when the wind does not blow. But cycling reduces efficiency and raises costs.

In 2013, coal remained the largest source of Pennsylvania power, followed by nuclear power at 34 percent and natural gas at 22 percent. In comparison, wind power accounts for only 1.5 percent of total generation.

The high cost of renewable energy mandates isn't unique to Pennsylvania. By 2025, the mandates will destroy more than 150,000 jobs and increase electricity costs by $23.1 billion in 12 states.

If lawmakers want to shield Pennsylvanians from this economic damage, repealing the AEPS and/or refusing to extend the program should be a top priority. Rep. Sankey offered the lastest repeal bill back in 2013. 

Costs of Pennsylvania RPS in 2013 dollars (millions)

 

 2016 

 2020 

 2025 

 2030 

 2035 

 2040 

RPS Legacy Costs

 

 

 

 

 

 

Direct

$210

$206

$201

$196

$192

$187

Cycling Costs

$20

$28

$31

$32

$33

$35

less Fuel Costs

$57

$60

$64

$66

$68

$71

Net RPS Legacy Costs

$173

$174

$168

$162

$156

$150

New RPS Costs

 

 

 

 

 

 

Direct

$324

$544

$622

$651

$680

$710

Cycling Costs

$21

$29

$32

$33

$34

$36

less Fuel Costs

$216

$384

$437

$463

$490

$523

less NGCC Costs

$3

$0

$12

$12

$12

$13

Net New RPS Costs

$125

$189

$206

$209

$212

$210

RPS Tax Subsidies

$203

$291

$326

$343

$361

$379

Total RPS Cost

$502

$654

$701

$715

$729

$741

 

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posted by Elizabeth Stelle | 00:18 PM

PA Business Climate Isn't Winning any "Miss Congeniality" Contests

Why would one of Pennsylvania’s largest natural gas producers suddenly switch from selling all non-Pennsylvania assets to purchasing a $3.3 billion Houston company that operates exclusively in Louisiana?

A Dallas Morning News article suggests Pennsylvania’s less than “congenial” business conditions.

Range Resources, which in 2004 drilled the first commercial horizontal well in Pennsylvania’s Marcellus Shale, plans to purchase Memorial Resource Development partly because of regulatory hurdles in Pennsylvania and other Northeastern states.

Energy companies are trying to cope with constant calls for higher taxes, new methane emissions standards, a dramatic overhaul of drilling regulations, and pipeline delays. At the same time, the region is experiencing a severe and prolonged drop in natural gas prices.

The Dallas Morning News reports:

The U.S. gas market is Balkanized," said Subash Chandra, an analyst with Guggenheim Securities. "And the Appalachian Basin is becoming increasingly isolated."

Pipeline projects in Pennsylvania and New England running into regulatory issues over the past year include Northeast Energy Direct, Constitution, Rover and PennEast. In some cases, the delay could be a matter of months; for others, longer.

Keeping the natural gas from getting to market in the Northeast makes retail prices bounce around more and can contribute to shortages in an unusually cold winter. And it pushes some producers to the sidelines for a while.

A couple of the producers with the best cost of production in North America are sitting on their hands for a couple of years," Miller said.

In Pennsylvania, the industry has shed thousands of jobs, and the number of drilling rigs operating in the state is at 2007 (pre-boom) levels. The paper continues:

But in the meantime, the Range purchase of Memorial means Range will have options. It can push development in Louisiana while waiting for more congenial conditions in Pennsylvania.

Reporting on the transaction, Forbes says, “[P]ipeline bottlenecks in the northeast have gotten so bad that Range has been realizing sale prices 66% below market.”

Before punishing the natural gas industry with a severance tax or regulations of questionable value, Pennsylvania politicians should consider congeniality—or common sense.

Unfortunately, a lack of it seems already to have driven one company to invest $3 billion in Louisiana instead of in Pennsylvania.

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posted by Gordon Tomb | 01:14 PM

The $20 Billion Energy Tax

Solar Subsidies Sink State

More than ten years after its passage, Pennsylvania's Alternative Energy Portfolio Standards continue to stunt our economy. The standards cost the state $4 billion annually, according to a study by the Institute of Political Economy at Utah State University.

Researchers reviewed renewable portfolio standards in all states and found the law reduced Pennsylvanians' personal incomes by almost $20 billion from 2004 through 2009.

Data beyond 2009 is still forthcoming, but if the trend continues, alternative energy standards will have cost Pennsylvanians almost $50 billion to date. That's not too far off from the state's pension debt.

So what do these figures mean for each household in Pennsylvania? A loss of $10,000 in purchasing power. That's an enormous cost to bear for such a small benefit. 

A recent Tribune Review article highlighting the study aptly notes this isn't an indictment of renewable energy but a reality check.

As technology advances, renewable energy will become cheaper and markets will shift to renewables as a matter of course. Mandating the shift before the technology is ready simply wastes our resources.

Up until this point, government efforts to transition to a clean energy economy have been costly and unsuccessful. Ultimately, it will be entrepreneurship, not government planning, that will make clean energy affordable and reliable for all. 

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posted by Elizabeth Stelle | 00:24 PM

The Fair Share Fallacy

What is the natural gas industry's "fair share" of taxes? The answer depends on the calendar year.

An analysis from the Independent Fiscal Office (IFO) finds the current "impact fee" is effectively a 5.5 percent severance tax due to a 16-year-low in natural gas prices. In other words, the natural gas industry is already paying a higher tax rate than what the Governor Wolf proposed in 2014.

As a reminder, Governor Wolf called for a 5 percent severance tax during his campaign to replace the impact fee and "put Pennsylvania in line with other natural gas producing states." Of course, many of those states do not have individual income taxes, corporate income taxes or death taxes.

Natural gas prices continued to fall in 2015, so Governor Wolf redefined "fair share" by adding a price floor. Under this policy, natural gas companies pay taxes on gas at $2.97 per Mcf (thousand cubic feet), even though the actual price of natural gas was below that number . . . and still is.

According to testimony by the IFO, Wolf's original plan would establish an effective 17.3 percent severance tax rate in 2016, by far the highest rate in the nation.

Now the Governor is redefining fair share once again by proposing a severance tax of 6.5 percent to collect an estimated $218 million in revenue. For context, that's about four times higher than Ohio's natural gas severance tax and higher than neighboring West Virginia's 5 percent severance tax.

On top of a severance tax proposal, the administration is formulating new natural gas drilling regulations and adding methane emission requirements. The cost of these rules is not yet known.

If the governor and lawmakers want Pennsylvania’s tax rates to reflect other energy producing states, they should cut the impact fee or eliminate other state taxes.

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posted by Elizabeth Stelle | 01:30 PM

Press Pause on Clean Power Plan

Cap and Trade

In a historic move, the US Supreme Court stayed the EPA's Clean Power Plan, otherwise known as Obama's energy tax or stealth cap and trade. The court’s actions halt implementation until legal challenges (brought by 25 states) play out. That means there is no deadline to submit a state plan. In fact it would be foolish for a state to expend the resources to develop and submit a state plan without knowing if the regulation will survive.

But that hasn't stopped the Wolf administration from moving full steam ahead. According to the governor's spokesman, “Pennsylvania will continue planning and engagement with stakeholders on the Clean Power Plan, pending final decision of this issue by the Supreme Court.”

Department of Environmental Protection Secretary John Quigley plans to complete work on Pennsylvania's plan and present it to the legislature by Memorial Day. That's before the Supreme Court will even hear oral arguments.

The EPA's plan to regulate coal out of the economy should be especially concerning to coal-heavy Pennsylvania. The regulations are estimated to increase electricity prices in the state by an average of 14 percent a year, according to the American Coalition for Clean Coal Electricity.

The national cost of the EPA plan has been estimated to be between $29 billion and $39 billion annually — with virtually no effect on global temperatures.

The administration has defended its choice to move forward with planning as a way to give certainty to businesses, but the Supreme Court's actions make that point moot. The only thing certain is states will be waiting months and even years to know the fate of Obama's energy tax.

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posted by Gordon Tomb, Elizabeth Stelle | 01:14 PM

The EPA's Plan Will Hike Your Electricity Bill

Cap and Trade

A new analysis from NERA Economic Consulting projects Pennsylvania electricity bills will increase between 10 and 19 percent from 2022 to 2033a consequence of a U.S. Environmental Protection Agency (EPA) plan to reduce carbon emissions. In fact, all 47 states covered by the EPA's "Clean Power Plan" would experience rate increases, including double-digit hikes in 41 states.

The Clean Power Plan is really Cap and Trade in disguise with an enormous price tag. NERA estimates the plan's annual cost to be between $29 billion and $39 billion. The Institute for Energy Research (IER) notes it’s at least,

three times greater than the cost of EPA’s (proposed) Mercury and Air Toxics rule, to which the U.S. Supreme Court stated: ‘It is not rational…to impose billions of dollars in economic cost in return for a few dollars in … benefits'.

What’s the benefit of this costly regulation? IER explains:

Carbon dioxide emissions will decline by less than 1 percent and global temperatures by less than 0.02 degrees Celsius by 2100. Policymakers should know that this costliest of electric power regulations actually achieves meaningless progress towards the goal that EPA uses to justify it.

As we’ve pointed out here, the plan is an extension of the Obama administration’s “War on Coal” that threatens at least 13,000 good-paying jobs in Pennsylvania and thousands more throughout the nation’s energy sector.

In a piece entitled “Obama’s Appalachian Tragedy,” the Wall Street Journal reports,

Since 2009, 332 coal mines in West Virginia have been closed, and 9,733 jobs—roughly 35% of the industry’s total employment in the state—have been lost.

With such a high price tag and thousands of jobs at stake Pennsylvania shouldn’t rush to complete a state plan this spring but rather take the two year extension granted by the EPA.

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posted by Gordon Tomb | 10:36 AM

Could Coal’s Savior be PA’s Legislature?

180 workers in CONSOL Energy’s coal division recently lost their jobs. Now, Pennsylvania’s legislature may be the only thing standing between the Obama administration and complete destruction of the state’s coal industry.

This week, President Obama announced finalized regulations to cut carbon emissions to a level that would practically ban the burning of coal for electricity—spiking utility costs and eliminating the jobs many Pennsylvanians count on.To comply with the regulations, states must submit a Clean Power Plan to the U.S. Environmental Protection Agency. Last year, foreseeing the dangers in a draft version of the regulations, Pennsylvania’s Republican legislature and governor passed a law requiring legislative approval before the state sends any plan to the EPA.

Presumably, this law would prevent Democrat Governor Tom Wolf from unilaterally submitting a plan that would harm Pennsylvanians. To date, Pennsylvania’s leadership has inspired 14 other states to introduce similar legislative oversight proposals.

Unfortunately, Gov. Wolf’s response to Obama’s announcement ignores the dangers of regulations that will jeopardize the jobs of at least 13,000 Pennsylvanians:

Pennsylvania will use this as an opportunity to write a plan that could improve public health, address climate change, and improve our economy and power system.

If Wolf’s plan mirrors the EPA’s proposed rules, it will do none of these things.

In fact, a computer model estimates the regulations would reduce global temperature by a minuscule 0.018 degrees Celsius by 2100 — a reduction that would hardly influence climate and health.

And according to an Energy Ventures Analysis report, the regulations would increase combined annual gas and electricity bills in Pennsylvania by more than $1,000, or 46 percent, by 2020 compared to 2012. Industrial power rates alone would rise by 62 percent.

Nationally, the United Mine Workers of America estimates the regulations will suction $208 billion from coal communities over the next 20 years, while the North American Reliability Corporation predicts a dangerously less reliable power grid with “the potential for wide-scale, uncontrolled outages.”

As a Wall Street Journal op-ed notes, however, the regulations will fail without the cooperation of the states, and six governors have already decided cooperating is not in their citizens’ interests.

If Pennsylvania’s governor does not have the good sense to follow suit, the legislature must act. Sacrificing an industry that supplies 40 percent of the state’s electricity, contributes more than $4 billion to the economy and, most importantly, provides good paying job, is simply too high a price to pay.

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posted by Gordon Tomb, Elizabeth Stelle | 04:45 PM

Has Wolf Dropped His Unpopular Tax Demands?

Throughout this state budget debate, Gov. Wolf has touted his natural gas severance tax to fund education. And some reporters refer to the severance tax as the "cornerstone" or "centerpiece" of his plan. 

Except it isn't. The severance tax makes up a slim portion of Gov. Wolf’s proposed tax increases. In fact, his plan to tax health care and day care would raise more revenue than slapping an additional tax on the natural gas industry.

He never talks about his sales tax proposals—probably because they are so unpopular. His entire tax plan couldn't garner one single vote in the House. It failed 0-193. Yet, he hasn't said whether he is still demanding a $4.6 billion tax increase.

Even if Gov. Wolf has dropped the majority of his massive tax hikes, that’s no reason to accept a new severance tax. As Dawn pointed out yesterday, the severance tax is bad for all energy consumers, no matter your income level.

Wolf Taxes Pie Chart

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posted by Nathan Benefield | 08:16 AM

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