Special Subcommittee on Energy


Minutes of the<MeetNo1> 5th Meeting

of the 2007 Interim


<MeetMDY1> October 19, 2007


The<MeetNo2> 5th meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> October 19, 2007, at<MeetTime> 10:30 AM, in<Room> the Multi-Purpose Room, Robert F. Stephens Circuit Courthouse, Lexington, Kentucky. Senator Robert Stivers II, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Robert Stivers II, Co-Chair; Representative Rick G. Nelson, Co-Chair; Senators Walter Blevins Jr, Charlie Borders, Denise Harper Angel, Vernie McGaha, and Johnny Ray Turner; Representatives Eddie Ballard, Dwight D. Butler, Leslie Combs, Tim Couch, Jim Gooch Jr, J. R. Gray, Thomas Kerr,  Fred Nesler, Tanya Pullin, Tom Riner, Brandon Smith, and Brent Yonts.


Guests:  Representative Robin Webb, John Talbot, Big Rivers Electric Corporation; Van Needham, Duke Energy of Kentucky; Eric Gregory and Barry Mayfield, East Kentucky Power Cooperative; Dan Yates, Kentucky Association of Electric Co-ops; Tim Moser and Jimmy Keeton, Kentucky Power;  David Freibert and George Siemens, Kentucky Utilities, and Louisville Gas and Electric, and E.ON US


LRC Staff:  D. Todd Littlefield, Committee Staff Administrator; Taylor Moore; and Susan Spoonamore, Committee Assistant.


Minutes of the September 21, 2007 meeting were approved, without objection, upon motion made by Rep J. R. Gray and seconded by Rep. Leslie Combs.


Chairman Stivers introduced representatives of  Kentucky’s regulated electric utility industry:  John Talbot, Big Rivers Electric Corporation; Van Needham, Duke Energy of Kentucky; Eric Gregory and Barry Mayfield, East Kentucky Power Cooperative; Dan Yates, Kentucky Association of Electric Co-ops; Tim Moser and Jimmy Keeton, Kentucky Power; David Freibert and George Siemens, Kentucky Utilities, and Louisville Gas and Electric, and E.ON US.


David Freibert stated that the information being presented was a collaborative effort of Kentucky’s regulated electric utilities and was intended to give a snapshot of the state of the electric utility industry in Kentucky.


Mr. Freibert stated that Kentucky’s regulated electric utilities generate more than 11,000 megawatts of electricity through 79 generating locations, with 123,623 miles of power lines serving approximately three million Kentuckians. In addition, the utility companies represent more than $13 billion in assets while investing $6 billion in Kentucky from 2003-2008,  employing 5,326 people.  He said that a large portion of the $6 billion investment had gone towards environmental controls and compliance with federal regulations. He noted that the $6 billion investment did not include costs that would be associated with federal regulations regarding carbon capture and storage.


  Mr. Freibert stated that utility companies are facing significant challenges and increased costs due to the growing demand for electricity; new environmental regulations; advanced technologies; and climate changes. He said that in order to meet the growing demand for electricity, which is estimated to grow at an average rate of 1.7% annually, ten major generating stations would need to be built before 2025.


He said that utility companies would have to comply with federal regulations regarding the Clean Air Interstate Rule and the Clean Air Mercury Rule, which is estimated to cost customers across the United States approximately $47.9 billion. Mr. Freibert again noted that this did not reflect the additional costs that will be incurred when the federal government establishes regulations for carbon dioxide emissions.


He said that Kentucky generates 95% of its electricity from coal, so when carbon restraints do come, Kentucky will feel a sharper impact that most states. He said that many of Kentucky’s electric generation plants have been in operation for at least 35 years, meaning that the generating stations must be upgraded in order to comply with present regulations and to plan for future regulations regarding federal CO2  legislation. The cost of compliance will be reflected in the electric bills of Kentucky’s families and businesses.


Mr. Freibert stated that a recent survey involving CEOs of both public power and investor-owned utilities found that 93% of the CEOs believe that climate change legislation will be enacted and enforced by 2014. That same study concluded that 59% of the CEOs believe that carbon capture and storage will be required by 2018.


Mr. Freibert said that Kentucky’s historically low cost of electricity is no longer guaranteed. He said that, on average, Kentucky was rated fourth in the nation for overall electric costs. He explained that the costs would increase due to rising fuel costs, increased environmental compliance costs, and the construction of new base-load units to meet the growing demand.


Mr. Freibert stated that Kentucky must develop new technologies to comply with carbon legislation and develop new and enhanced customer energy efficiency programs. He stated that Kentucky must be prepared to create legislative tools to help utilities and their customers manage or mitigate the upward cost pressures.


In conclusion, Mr. Freibert stated that the utility companies have an obligation to provide electricity to Kentucky’s growing economy.  Coal will remain the fuel of choice.  In order to achieve the lowest-cost compliance with coming federal legislation, the utilities will have to develop new technology to comply with COemission limits and develop new, stronger energy efficiency programs as a bridge until the new carbon control technologies come on line. When necessary, the utilities will purchase CO2 credits to remain in compliance.


Mr. Freibert said that the utility companies need the continued partnership and leadership of the General Assembly to address the challenges in the near future.


Sen. Borders asked why Kentucky no longer had the lead as the nation’s lowest-cost state for electricity.


Mr. Freibert stated that economic development growth and growth in electricity demand would be one reason. Another key reason is the investment by utility companies for environmental compliance.


Sen. Borders asked if other states were having to spend millions of dollars toward environmental compliance.


Mr. Freibert stated that other states were also investing, but their compliance may be less strenuous and costly.


Sen. Borders asked if  the investment dollars were being spent for  federal or state regulations.


Mr. Freibert stated that the investments were being made pursuant to federal environmental standards.


Rep. Gray asked what percentage of Kentucky coal was being used to generate electricity.


Mr. Freibert stated that he would provide the committee with that information.


Rep. Gooch stated that he was concerned about the proposed federal CO2 regulations under consideration. He said that it was important to make the public aware of how much the proposed changes would cost. He asked what could be done to make the public aware of what is about to happen when the proposed federal regulations are passed.


Mr. Freibert stated that there is a lot of uncertainty and risk involved in the proposed federal regulations. He said that the utility companies were beginning to communicate with their customers and would certainly provide customers with more information as it became available. 


Rep. Gooch asked if there was any information on what types of costs Kentucky could be dealing with in the future.


Mr. Freibert explained that there were several different proposals pending in Congress and they vary from 10% greater costs to more than 200%. He said that the utilities were very concerned about the cost assessments contained in the  Lieberman-Warner bill.


Rep. Riner asked what were the impediments to more aggressive use of hydro electric generation. He said he was concerned that the waterways in the Commonwealth were being under-utilized.


Mr. Freibert stated that the hydro units generate with the run of rivers. The water levels have to be high, and sometimes that does not coincide with the peak utility periods of June, July, August and some of the winter months.


Sen. Stivers stated that it was extremely difficult to utilize waterways because of federal intervention also known as the 404 permit process. 


Rep. Yonts asked what percentage of the potential increased electrical costs would be  borne by residential customers.


Mr. Freibert stated that he would have to look at Kentucky’s average cost, because the utilities all have different rate structures. Mr. Yates pointed out that this is a national average cost estimate.


Rep. Yonts asked if increased costs would be substantial, and if so, were customers being educated. He asked if the utility companies were notifying their customers as to what could happen when federal regulations are enacted.


Mr. Freibert stated that the cost increases would be substantial and would likely be more than the national average.


Mr. Siemens stated that his companies were sensitive to the CO2 issue. Bills for KU and LG&E customers now show the amount of CO2 used to generate electricity. He stated that customers who want to know the approximate costs can take $10 and multiply it by the number of tons of CO2 produced. He said that under current PSC regulations utilities could not send letters to customers estimating possible increases in cost until legislation is enacted and CO2 emission limits take effect. 


Mr. Yates said that Kentucky Living would be running articles relating to the challenges and costs of the proposed federal CO2 regulations.


Sen. Blevins asked how many countries had signed on to the Kyoto Protocol. 


Mr. Freibert stated that he did not know. 


Rep. Pullin stated that HB 1, passed in the 2007 second Special Session, was intended to remove impediments to energy efficiency programs of the utilities. It gives customers information to use energy more wisely. It might be worthwhile for the Co-chairs to meet with the Public Service Commission to make sure that is included, she added.


Sen. Stivers asked if the demand for electricity would double over the next 20 years both nationally and in the state.


Mr. Freibert stated that demand would certainly increase, but was not sure if it would double.


Sen. Stivers asked how much of the 11,400 megawatts of electric generating capacity, used for power, was exported.


Mr. Freibert stated that he did not know, but would get the information to staff.


Sen. Stivers stated that in his opinion, there would be big problems in the grid trying to serve the additional demand for energy, creating a major expense. He asked about getting up-front rate increases when it comes to building a new generating plant. He said the long-run impact would save consumer’s money versus end-loading the costs and then requiring bigger rate increases to pay for that construction.  How do we decrease those pressures on future increased costs, Sen. Stivers asked.


Mr. Siemens stated that a lot of the existing generating plants are at least 35 to 70 years old.  We are going to need plants to replace the old plants, Mr. Siemens stated.


Sen. Stivers asked how long it would take for a new plant to be up and running, if approval of the plant was granted today.


Mr. Siemens stated that assuming reality did not exist, his utilities could build a new plant in about 4 years. In reality however, it would take closer to 10 or 11 years because of regulations, he added.


In regard to Sen. Stiver’s previous question on how much electricity was sold out of state, Mr. Siemens stated that the only electricity exported was electricity left over and not needed within the Commonwealth. Utilities share the proceeds of the out-of-state sale of electricity with Kentucky customers. Selling the electricity helps to keep rates low. He said it was important to keep customers informed about future increases in rates.


Sen. Stivers asked Mr. Siemens to explain a bill that was presented in the previous legislative session regarding rate increases at the beginning of a new plant construction versus waiting until the new facility is "used and useful."


Mr. Siemens stated that utilities normally have approximately three rate cases during a new construction build. He said that the language contained in the bill was modeled after the environmental cost-recovery clause because it seemed to work reasonably well. It gives the customers more opportunities for hearings.


Rep. Gray asked a question on the hydro electric power generated by the TVA and what part of that was used in Kentucky before it was put on the grid and sold out-of-state.  Rep. Gray said if he correctly recalled the answer to that question it was that none of the TVA’s hydro-generated electricity was used in the State of Kentucky unless and until the fossil powered plants could not meet the in-state load, then in that case TVA would divert some of that hydro electricity to Kentucky.


Mr. Siemens said that E.ON has a hydro facility at McAlpine Dam on the Ohio River, which he called a great little plant. Depending upon the depth of the river it generates between 60-80 megawatts. But, E.ON can only turn it on if the Army Corp of Engineers gives permission. The Ohio River is primarily a navigation river, but any electricity that is generated is a bonus. He added that it was less dependable than a coal-fired plant.   


Rep. Webb stated that regardless of whether one looks at carbon limits as the bottom line, utility rates are going to increase. When one looks at financing — pay now or pay later — pay later costs are hard to quantify. We do have grid issues. If corporate America is using a lot of energy, and has to budget and forecast, it is going to be very difficult to budget an unknown. This is a very serious issue and what we can do today is important.   


Meeting adjourned at approximately 12:00 p.m.