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MC  Kathleen KaneAttorney General Kathleen Kane has issued administrative subpoenas throughout the shale industry in Pennsylvania, broadening her review of natural gas royalty payment practices beyond Chesapeake Energy Corporation.
Sources confirmed administrative subpoenas have been issued throughout the energy industry for information about royalty calculations and payments in what is seen as an industry-wide survey to look at practices of such companies operating in Pennsylvania.

The Office of Attorney General’s Bureau of Consumer Protection Antitrust Section issued the subpoenas. Kane spokesman J.J. Abbott and a spokesman for the Marcellus Shale Coalition declined to comment on the matter.

Landowners have complained to legislators that Chesapeake, the largest drilling company operating in Pennsylvania, was deducting “excessive” post-production costs from royalty payments, causing those payments to drop below the mandated one-eighth minimum guaranteed royalty.

Responding to constituent complaints, Gov. Tom Corbett and Sen. Gene Yaw, R-Lycoming, asked Kane earlier this year to review Chesapeake’s royalty payment practices.

The 1979 Guaranteed Minimum Royalty Act says royalty payments must be 12.5 percent, or one-eighth, of the production value. However, the law says companies are allowed to tax leaseholders for post-production costs, which include things like adding compression, dehydration, gathering, and transportation.

Legislative efforts to address the issue and clarify the minimum royalty payments stalled a few months ago. The industry pushed back hard against legislation they said amounted to lawmakers trying to tamper with private leases. The industry believes companies are responsible for the costs of bringing the gas to the surface, but companies and leaseholders share the cost of preparing and delivering the gas to market, pursuant to terms of a lease.

Rep. Garth Everett, R-Lycoming, who sponsored one of the bills, has said rural Pennsylvanians signed “company leases” with little legal knowledge, unaware of the specifics of the agreement they signed. He called the leases “one-sided” in favor of industry.

“The legislation needs to provide relief, not only to those with one-eighth leases, but to those with higher percentage agreements. This must include not just rules on how royalties are calculated but also remedies for land owners who feel that their royalties are not being calculated correctly,” said Everett.

Everett’s bill, House Bill 1684, was passed by the Environmental Resources and Energy Committee with bipartisan support. It seeks not only to remedy the lease payments, but to ensure that drilling companies do not deduct excessive and unwarranted post-production costs from the payments as well. The Pennsylvania Supreme Court in 2010 issued a ruling suggesting that the General Assembly further clarify the 1979 law on how royalty payments are calculated, and the legislation would do that.

The Oklahoma City-based Chesapeake last August settled a federal class-action lawsuit filed in Scranton brought by more than 1,000 leaseholders for no less than $7.5 million to cover the cost of post-production deductions.
In broadening her office’s investigation, Kane issued administrative subpoenas, which differ from traditional subpoenas and are considered controversial because judicial oversight is not required.

Pennsylvania’s Administrative Code gives state departments, as well as independent and departmental commissions subpoena power to require “the attendance of witnesses and the production of books and papers pertinent to any hearing before such department, board, commission, or officer, and to examine such witnesses, books, and papers.”

Refusal to comply with the administrative subpoena could result in a contempt of court charge, according to the administrative code.

Kane, a Democrat elected to office in 2012, campaigned on aggressively monitoring the natural gas industry in Pennsylvania.

Kane’s office in January filed charges in criminal court against XTO Energy, an Exxon-Mobil subsidiary, for alleged violations of state environmental laws. In June, she filed numerous criminal charges including fraud and conspiracy against a Marcellus Shale waste hauling business in Northumberland County.

–Kevin Zwick, Capitolwire

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state forests Former Rendell-era conservation officials are set to testify in Commonwealth Court over the Pennsylvania Environmental Defense Foundation’s lawsuit seeking to halt Department of Conservation and Natural Resources-related budget transfers. Gov. Tom Corbett’s fiscal year 2014-15 budget proposal seeks to transfer $75 million from the Oil and Gas Lease Fund to the General Fund by allowing drilling underneath state forest and park land using adjacent private property or existing well pads. Corbett issued the order immediately allowing the additional drilling as long there are “no additional surface disturbance impacts on state forest or park lands.” In light of that order, the foundation is seeking a preliminary injunction and an expedited ruling because of the June 30 budget deadline. and an expedited ruling because of the June 30 budget deadline. The foundation’s lawsuit also seeks to halt two other Corbett budget proposals. One is the proposed transfer of about $118 million from the Oil and Gas Lease Fund to DCNR to pay for administrative expenses — a practice that started in the 2008-09 fiscal year under then-Gov. Ed Rendell. The cumulative transfers approved by Rendell totaled $383 million, and Corbett and the Legislature have continued to make transfers of various amounts. The PEDF says on its website that more than $400 million has been transferred since the 2008-09 fiscal year. The foundation argues that such transfers are unconstitutional as the fund’s monies were meant to be spent exclusively on conservation, recreation, dams and flood control.

The other budget proposal moves $35 million from the Oil and Gas Lease Fund to the Marcellus Legacy Fund, and then transfers that to the Environmental Stewardship Fund. That is a continuation of a transfer that was established by Act 13, the state law regulating Marcellus Shale development. The foundation said it would sue Rendell in 2010 but didn’t because he halted leasing of state forest and park land, said PEDF legal counsel John Childe. Rendell approved the leasing of about 130,000 acres of state forest and park land before he halted the practice shortly before leaving office in 2010. Childe said PEDF eventually filed the lawsuit in March 2012 because Corbett, while he continued Rendell practice of transferring Oil and Gas Lease Fund monies, did so to replace funding for DCNR’s operations. The lawsuit essentially is asking the court to get involved in state budget negotiations, since it is only seeking the stoppage of a proposal, which the courts have generally avoided. In the past, however, the courts have ruled on challenges to an enacted budget. Set to testify in Commonwealth Court is former DCNR secretary John Quigley, who helped write the Rendell moratorium. Michael DiBerardinis, who resigned in 2009 to serve as Philadelphia Deputy Mayor of Environmental and Community Resources, also was set to testify, but will not due to a scheduling conflict, foundation chair Ron Evans said.The foundation also lists two other former DCNR officials: former State Parks Director John Norbeck and former DCNR deputy secretary for conservation and technical service Cynthia Dunn. Both now work for environmental advocacy group PennFuture: Dunn is President and CEO, and Norbeck is Vice President and COO. Rendell’s forestry director James Grace also is listed among testifiers on the foundation’s website. The hearing is set to start at the Pennsylvania Judicial Center at 11 a.m. The injunction request claims Corbett ordered the budgetary transfers “without evaluating the direct and cumulative impacts to the more than 900,000 acres of State Park and State Forest land currently subject to oil and gas extraction, without determining the cost to mitigate these impacts; and without soliciting any public input on the people’s rights to these public natural resources, the proposed impacts to them, or the use of the Oil and Gas Lease Fund.” The foundation’s complaint relies heavily on the Pennsylvania Constitution’s “Environmental Rights Amendment,” which was given sharp teeth by the state Supreme Court’s ruling upended portions of Act 13, the state law regulating Marcellus Shale drilling. The lawsuit says that section of the constitution creates a public trust consisting of natural resources, including state parks and forest land, and the people of the commonwealth are the beneficiary. The foundation says a preliminary injunction is needed to prevent “irreparable harm.” “Without this injunction, the Respondents [Corbett, Commonwealth of Pennsylvania] will direct DCNR to execute leases of additional State Park and State Forest lands, committing these lands to oil and gas extraction for decades. These leases, once executed, cannot be rescinded and the commitment of these public natural resources to development will be irreversible. The natural gas, itself a nonrenewable public natural resource, cannot be replaced after it is extracted,” the injunction request states. Corbett’s DCNR officials have said “no additional surface impacts” means drilling horizontally underneath state forest land from an adjacent pad on private lands or from already leased state forest and park land. They acknowledge that additional drilling will mean more drilling rigs, truck traffic and noise, but they don’t consider those to be additional surface impacts. DCNR deputy secretary Dan Devlin said the proposal means “disturbing a surface that’s already been disturbed.” “This assertion misses the point that the commitment to extraction of the natural gas on these lands itself is an irreparable injury,” the lawsuit claims. “In addition, the contention that the surface impact from the shale gas development will be limited is speculative without identification of the specific tracts to be leased and an analysis of the direct and cumulative impacts to these tracts and the surrounding lands.”