In a series of posts last year (available HERE and HERE), I discussed the Pennsylvania Supreme Court’s revival of the long-dormant Environmental Rights Amendment (“ERA”) to the Pennsylvania Constitution. This summer, the Pennsylvania Commonwealth Court authored another chapter in the ERA saga. Stick with me, because it is about to get technical…
As you may recall, in Pennsylvania Environmental Defense Fund (“PEDF”) v. Commonwealth, 161 A.3d 911 (Pa. 2017), the Pennsylvania Supreme Court found that the ERA created a public trust, the corpus of which was all of Pennsylvania’s public natural resources. In this analogy, the Commonwealth is the trustee and Pennsylvania’s citizens are the named beneficiaries of the trust. When state park land is leased by Pennsylvania’s Department of Conservation and Natural Resources for oil and natural gas extraction, any royalties – monthly payments based on the gross production of oil and gas at each well – are proceeds received in exchange for trust assets. As a result, royalties must be returned to the trust as part of its corpus. In other words, they are earmarked for the conservation and maintenance of Pennsylvania’s natural resources.
Royalties, however, are not the only income the Commonwealth derives from oil and gas leases. It remained unclear how other revenue streams, including “rents” and “bonuses”, should be treated. To answer this question, the Supreme Court remanded the case to the Commonwealth Court for further proceedings.
In its decision on remand, issued on July 29, 2019, the Commonwealth Court carefully analyzed the structure and purpose of each of these types of payments. In oil and gas parlance, a “rental” payment is typically made to a lessor to give the lessee time to explore the land to determine if it is suitable for oil and gas production. Once oil or gas is discovered, rental payments convert to royalties. If oil and gas are not discovered, the lease lapses by its natural terms. A “bonus”, in contrast, is a premium paid to a lessor as a down payment or enticement to execute a lease. Considering these definitions, the Commonwealth Court concluded that bonus and rental payments are not payments for the severance of natural resources and are merely consideration for oil and gas exploration on public land. Accordingly, it was not facially unconstitutional for the legislature to divert some of these monies for General Fund purposes.
If you are looking for the “Cliff’s Notes” version, here it is: not all the money the Commonwealth receives for oil and gas drilling must be used to conserve the environment. If the Commonwealth is permanently selling or divesting itself of a natural resource, the money it receives in exchange for the resource must be reinvested in conservation activities. Other types of revenue, however, will be carefully scrutinized. If that revenue is found to be consideration for anything other than the “permanent severance” of a natural resource, it will not be subject to such strict constraints.
In terms of a take-away, here’s mine: broad as the ERA may be, the Commonwealth Court, thus far, has carefully analyzed and narrowly interpreted its implications. The Court’s narrow interpretation has applied to both the Commonwealth and its instrumentalities, as well as to private landowners (see Jon Andrews’ post on the ERA and zoning regulations, which is available HERE). While I am hesitant to jump to any conclusions, and although ERA jurisprudence is still the source of more questions than answers, I think both developers and municipalities can be pleased with the direction the Commonwealth Court has taken to date.
Please feel free to contact any member of the McNees Wallace & Nurick Land Use Group for assistance with any land use or development issues or if you have questions regarding this post.