The 2nd meeting of the Subcommittee to Study Competitiveness of Kentucky Coal of the Interim Joint Committee on Agriculture and Natural Resources was held on Wednesday, November 13, 2002, at 10:00 AM, in Room 125 of the Capitol Annex. Representative James Gooch, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Robert Leeper, Co-Chair; Representative James Gooch, Co-Chair; Senators Paul Herron Jr. and Virgil Moore; Representatives Rocky Adkins, Hubert Collins, James Comer, Tanya Pullin, Johnnie Turner, and Robin L. Webb.
Guests: Aaron Greenwell and Gerald Wuetcher, Public Service Commission; Secretary Hank List, Bob Logan, Mark Mangeot, Jack Bates, NREPC; Diana Andrews and Lorna Brewer, Division of Air Quality; Bill Grable and Don Bowles, Kentucky Coal Council; Michael Murphy, Illinois Coal Office; and Jackie Bird, Ohio Coal Development Office.
LRC Staff: Tanya Monsanto, D.Todd Littlefield, Hank Marks, David Thomas, and Sheri Mahan.
Representative Adkins moved that the minutes from the previous meeting be approved. Second by Representative Collins. Motion carried.
Mr. Aaron Greenwell and Mr. Gerald Wuetcher from the Kentucky Public Service Commission (PSC) addressed the subcommittee regarding the utility ratemaking process and fuel purchasing practices. Mr. Greenwell discussed the statutes and regulations which give the PSC jurisdiction over utility rates: KRS 278.030, KRS 278.040, and 807 KAR 5:056. He next addressed provisions that encourage utilities to use Kentucky coal. These include the preamble to KRS 278.183 and KRS 141.0405, which provides a tax credit for using Kentucky coal. Next, he outlined how utility coal contracts are reviewed and approved by the PSC, and discussed recent approval for new coal fired generation in the state.
Mr. Greenwell then discussed the Polish coal case. He detailed the basis for the case and how the review is proceeding. At this time, there is testimony on file with the PSC, briefs are being reviewed, and data requests are being processed.
Representative Pullin stated that the purchase of the Polish coal motivated the filing of HCR 244 which created the study subcommittee. She then asked for a time frame for the disposition of this case. Mr. Greenwell replied that an order is expected sometime in December.
Secretary Hank List of the Natural Resources and Environmental Protection Cabinet, and Ms. Diana Andrews and Ms. Lona Brewer from the Division of Air Quality provided testimony regarding the states implementation plan to reduce nitrogen oxide (NOx-SIP). Ms. Brewer described the history of NOx-SIP and the reasons for the EPA requiring reduction in NOx. The EPA developed their model rule, which is not mandated, but it was thought an appropriate basis for reductions. She described the timetable for submitting and implementing plans, and stated that Kentucky’s regulations were finalized and approved in August of 2001.
Next, Secretary List and Ms. Andrews described the NOx caps and trading program. Each state within the SIP Call area is allotted a certain amount of emission allowances during a control period. Emission reduction limits can be exceeded through the purchase of additional allowances. At the end of the control period, there must be enough allowances to cover emissions. Only emitters with monitoring systems can participate in the trading program, that is why mobile and small sources are not included in the program. Ms. Brewer also discussed the allocation methodology and potential new regulations.
Chairman Gooch stated that giving 95% of the allowances to utilities who invested in the state 20 to 30 years ago discourages future investment in Kentucky by new and diverse companies. Ms. Andrews stated that existing utilities are under PSC and are required to invest in control technologies. This will be a large expense to ratepayers. It is a savings to ratepayers if the utilities are not required to purchase allowances. Secretary List stated that the cabinet wants utilities to burn Kentucky coal if possible, and that providing existing utilities with allowances works towards this goal.
Chairman Gooch then asked if the allocation of the allowances was the result of a lawsuit and whether the EPA took ratepayers into consideration when designing the program. Secretary List stated that the EPA came up with this program on their own. The lawsuit followed the EPA’s proposal. The sulfur dioxide program has been successful and provided the model for this program. The lawsuit didn’t create the allocations. The program was a concession.
Representative Adkins asked how other states implement their allowance programs and if Kentucky has contracted with a broker to sell the remaining 5% of the credits. Ms. Andrews replied that the auction idea is unique to Kentucky, and that not all other SIP-call states have followed the 95/5 model. The contract to broker the remaining credits is being handled through the Finance and Administration Cabinet, and a review committee has awarded the contract to a vendor.
Chairman Gooch stated there had been no mention earlier of selling credits, and when the legislature tried to become involved, then the 5% was offered for sale. That action seemed retaliatory. Secretary List stated that the sale of the credits became part of the budget discussions and was not a retaliatory action.
Next, Ms. Jackie Bird from the Ohio Coal Development Office outlined Ohio’s statutory program to promote the use of Ohio coal within their state. Ms. Bird discussed the coal’s importance on a national level, national electricity consumption, coal production by state, and coal-based electricity generation in coal producing states. She then discussed coal and natural gas prices and the importance of coal use in supplying reliable and affordable electricity. She provided basic information regarding Ohio’s coal promotion program, and discussed the importance of research and development within the program.
Senator Moore asked what is the expected future of coal use. Ms. Bird replied that coal use is expected to decline as the EPA introduces additional regulations to ratchet down SO2 and NOx emissions. However, Ms. Bird further stated that the reality that coal is the backbone of electricity generation nationwide cannot be ignored.
Ms. Bird stated that the office is funded by the Ohio public debt commission through bond issues. These bonds are retired in 10 year intervals. The office also gets supplemental funds through paybacks as technology developed through the office becomes commercial.
Next, Mr. Mike Murphy from the Illinois Coal Office discussed that state’s coal industry and his office’s efforts to develop the market for Illinois coal. Mr. Murphy discussed Illinois coal exports into other states. He stated that for years Illinois coal was looked upon as secondary in funding and incentive legislation. He outlined the Illinois Resource Development Act of 2001, which was prompted by reliability problems in the state. Its purpose was to provide homegrown energy for Illinois’ future.
Representative Adkins mentioned that the act had a $500 million incentive package to encourage baseload coal use and to create coal mining jobs in the state. Mr. Murphy provided further details regarding the incentives provided in the act. Among them were grants for developers of new generation plants based on new tax revenues, and various tax breaks. Currently there are five projects under consideration in Illinois. He discussed state matching grants to coal and coal related facilities. Then, he talked about the impact of Powder River basin coal on the Illinois coal industry, stating that it will become increasingly difficult for Illinois to sell its coal to other states.
Chairman Gooch asked if the bonding authority required a constitutional amendment and if impediments to siting new power plants have been eased. Mr. Murphy replied no, it did not require a constitutional amendment. He stated that his office provides guidance during the siting process, and acts as a consultant to those developers who will be using Illinois coal.
Mr. Bill Grable briefly discussed how the Kentucky Coal Council monies are raised, and about the possible creation of a regional coal council to curtail the inroads being made by Powder River basin coal within the region.
Chairman Gooch said that a comprehensive education package should be included in any coal incentive program. Representative Adkins agreed. Mr. Murphy stated that Illinois does have a coal education component in his office.
Chairman Gooch then announced that Mr. Bill Grable and Mr. Don Bowles would address the full committee later in the day.
Being no further business, the meeting was adjourned at 12:30 p.m.