Special Subcommittee on Energy


Minutes of the<MeetNo1> 2nd Meeting

of the 2009 Interim


<MeetMDY1> July 17, 2009


The<MeetNo2> 2nd meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> July 17, 2009, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Brandon Smith, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Brandon Smith, Co-Chair; Senators David E. Boswell, Dorsey Ridley, Katie Kratz Stine, Robert Stivers II, and Gary Tapp; Representatives Royce W. Adams, Eddie Ballard, Dwight D. Butler, Jim Gooch Jr., Harry Moberly Jr., Rick G. Nelson, Fred Nesler, Sannie Overly, Tanya Pullin, Tom Riner, Fitz Steele, and Brent Yonts.


Guests:  Jeff Derouen, Executive Director, Public Service Commission, David Samford, Deputy Director, Public Service Commission, Stephanie Bell, Legislative Liaison, Public Service Commission, Wayne Miller, Director of Financial Affairs, Public Service Commission, Reggie Chaney, Director of Engineering, Public Service Commission, Jenny Smith, Director of Consumer Affairs, Public Service Commission, Helen Helton, Public Service Commission, Andrew Melnykovych, Public Affairs, Public Service Commission, Linda Faulkner, Public Service Commission, and Charlie Borders, Commissioner, Public Service Commission; Dr. Len Peters, Secretary, Energy and Environment Cabinet; Lea Masson from France and Morius Buechi from Switzerland.


LRC Staff:  Taylor Moore; Susan Spoonamore and Kelly Blevins, Committee Assistants.


The June 19, 2009 minutes were approved, without objection, by voice vote upon motion made by Rep. Jim Gooch and seconded by Rep. Royce Adams.


Chairman Smith introduced Jeff Derouen of the Kentucky Public Service Commission. Mr. Derouen gave a status update on the review of utility performance during the catastrophic power outages that occurred following Hurricane Ike last September and the ice storm this past January. He noted that there are 14 electric providers in the hardest-hit areas, but only four of them are under PSC jurisdiction.


Mr. Derouen stated that the ice storm created the most extensive power outage in the history of Kentucky.  Earlier this year, inquiries were sent to utilities, county judges, and mayors.  The PSC has received responses for the majority of the affected utilities, and from 118 elected officials.  He pointed out that the state replaced 10,066 poles carrying 381 miles of line; enough to stretch from one end of Kentucky to the other.  Mr. Derouen said that the PSC is still analyzing data and that a final report will be completed in early fall. 


Mr. Derouen stated that a summary of the base rate cases completed by the PSC since the beginning of last year include:  26 electric cases; 4 gas cases; 25 water cases, and 9 sewer cases.


He said that the PSC has had several inquiries regarding the fuel adjustment clause (FAC) and the purchased gas adjustment (PGA). He explained that the FAC is the mechanism used to adjust rates based on fluctuations in the cost of fuel, primarily coal.  The PGA is the mechanism used by gas utilities to pass through the price swings in wholesale natural gas. The size of the fuel adjustments varies a great deal from one utility to another. He emphasized that if there is a federal mandate to limit carbon emissions from coal-burning power plants, the prices of the past will seem mild.


In conclusion, Mr. Derouen stated that the PSC is sharing staff expertise within state government, and is involved in national policy discussions. PSC Chairman Armstrong was appointed to the National Association of Utility Regulatory Commissioners Board of Directors.


Rep. Gooch asked whether, if all the nation’s renewable power were totaled up, it would only power four states the size of Kentucky.


Mr. Derouen stated that it would be four states comparable to Kentucky.


Rep. Gooch asked if the PSC would be able to tell if the investor-owned utilities were better able to respond to the disasters than distributors for rural cooperatives.


Mr. Derouen said that the PSC does plan to review all of the utilities and those findings will be in the final report. 


Rep. Pullin stated that the Interstate Renewable Energy Compact Commission changed Kentucky’s grade, as a result of the net-metering legislation, from a D to a B. 


Rep. Moberly asked for the status on the federal legislation.


Mr. Derouen stated that it had passed the U.S. House and was now in the U.S. Senate.


Rep. Moberly asked if the predictions made by the PSC, affecting Kentucky, were based on the provisions of the federal House Bill.


Mr. Derouen stated that it is hard to estimate how much the prices of coal and electricity would increase since the information is constantly changing. 


Rep. Moberly asked where the date 2012 came from.


Mr. Derouen stated the 2012 date is based on the Markey-Waxman bill regarding carbon constraints.


Rep. Moberly asked if current utilities would be grandfathered in and whether Kentucky would receive a certain number of credits.


Mr. Samford stated that there are a couple of variables under consideration and it is still being debated.


Rep. Moberly stated that he was under the impression that there would be several credits given to existing utilities.


Mr. Derouen stated that the Market-Waxman bill does not give enough free credits in the beginning phase, and there will be some impact.


Rep. Moberly asked if the constraints would be phased in over a period of time.


Mr. Derouen stated that would be correct and the free credits are phased out.


Rep. Moberly stated that other uses for carbon such as phototropic algae must be found.  He asked if that was being considered. 


Mr. Derouen stated that they are working on that. The commercial scale-viability is important.


Sen. Stivers asked if 2012 was the current target date in the Markey-Waxman bill.


Mr. Derouen stated that changes will not be seen before 2012. It will not all come at once and there is still discussion between utilities in what it would mean in real dollars.


Sen. Stivers asked about the increase in utility rates for the average family when this takes effect.


Mr. Samford stated that the highest would probably be 60% and the lowest is 15%.  It will probably be in the 20% to 35% range, but will vary significantly from utility to utility.


Sen. Stivers asked what type of impact the Markey-Waxman bill would have on the AK Steel’s of the world; to the Ford plant in Louisville; the Toyota plant in Georgetown and the GM plant in Bowling Green, and whether there has been any type of study as to what impact that will have on those groups of consumers and the potential for job loss if the rates go up.


Mr. Samson stated that the utilities are doing analysis on a continuing basis to see what the total revenue impact will be to them and how that will play out in the rate design.  There is no doubt that it will erode Kentucky’s competitive advantage when it comes to electric rates.  Any state that has coal will see their rates increase. Kentucky has a strong reliance upon coal for power generation so the impact on Kentucky will be disproportionate.  Rates will go up.


Mr. Derouen stated that Kentucky ranks 48th out of 51 in average utility rates.  In emissions from utility plants Kentucky is ranked 7th.  If all emissions are included, then Kentucky is 13th


Sen. Stivers stated that he would like to know what the impact would be, under the Markey-Waxman bill, to large employers who rely on cheap energy.  He asked if the PSC had the capability to do that or could they work with the industries or staff to find out. 


Mr. Derouen stated that they would need industry input to provide that information, and will address the issue with them.


Sen. Smith asked that the PSC work with committee staff in order to get that information to each member.


Sen. Stine stated that the Economic Development Cabinet should be able to provide a list of who those entities are.


Rep. Gooch asked if the 15% to 60% figures, discussed earlier, were for Kentucky, and if so, how they will affect Kentucky.


Mr. Derouen stated that those quotes were the national average. He said that Kentucky will have a much higher percentage.


Chairman Smith stated that Kentucky will be hit the hardest.  The rate distribution is a large concern.


Rep. Moberly stated that Kentucky is aware of the changes coming and has invested heavily in working on carbon management.  This crisis presents an opportunity for Kentucky to be the leader in carbon management and finding uses for carbon.


Sen. Stine stated that the Kentucky Department of Agriculture should also be involved in this.


A Resolution urging all entities across the state and the country to interact with each other on carbon management and uses for carbon was approved, without objection, by voice vote, upon motion made by Sen. Boswell and seconded by Sen. Ridley. Sen. Boswell asked that this Resolution be presented to the General Assembly upon convening in January, 2010.


            Sen. Ridley announced that the University of Kentucky’s Center for Applied Energy Research would have a carbon symposium on Aug. 12 and 13 in regards to a pilot algae research program that is being done in conjunction with the City of Henderson and their Station 2 power plant. 


            Chairman Smith introduced Dr. Len Peters, Secretary of the Energy and Environment Cabinet.  Dr. Peters explained the reorganization of the Cabinet under Executive Order No. 2009-0538.  He said that the bill to approve the reorganization made it through both chambers during the 2009 Session, but time ran out on getting final approval.   He described some of the changes included in the Executive Order.


Dr. Peters stated that it was important to distinguish the regulatory functions from the non-regulatory side of the Cabinet; namely, the Department for Energy Development and Independence. The reorganization to Energy and Environment Cabinet enables new focus on the mission of improving the quality of life.


The new structure allows the cabinet to more effectively implement legislative mandates. It also allows the cabinet to focus attention on research, development and demonstration of technologies using Kentucky’s natural resources, including coal, in a carbon constrained world. Dr Peters outlined the many ways in which the new structure would facilitate work flow, increase cooperation between agencies, and improve outcomes.


Dr Peters denied that the Department of Natural Resources received increased funding for mine permitting. For the fiscal year 2009, personnel decreased by 19.  These reductions total $1.3 million which resulted in an equal loss of $1.3 million in federal matching dollars.  The General Assembly did provide additional funds for doubling mine inspections and the Cabinet is on schedule to meet that mandate.  The secretary said that the cabinet recognizes that the delays in permitting affect coal production – they take this issue seriously but reduced funding and staffing have hindered efforts. 


Chairman Smith stated that efforts were made during the last session to provide funding to alleviate loss of personnel. 


Rep. Yonts asked for the timeline to process a coal permit.


Secretary Peters stated that it depended on the individual permit.  Many times the permit is submitted and technical problems are found which means it goes back for review.  He said the average is 6 months with a lot of variation.


Rep. Yonts asked how many permits were backlogged and how many reviewers the Department has.


Secretary Peters said that the Department was seeing a reduction in delinquent mine permits.


Carl Campbell, Commissioner of Department of Natural Resources, stated that there are 157 applications backlogged in the Division of Permits.  He said that 47 of those were slurry applications due to the Martin County slurry problem.  Eleven people are being hired in the Division of Permits.  People are being moved from other divisions to the Division of Permits to help get through the backlog.  


Rep. Yonts asked how soon the 157 permits will be processed.


Mr. Campbell stated that most of the reviewers have 30 or 40 permit applications each and continue to get more daily.  More personnel are needed.


Rep. Yonts asked about the length of the backlog.


Mr. Campbell said that the statute is 65 days.


Rep. Yonts stated that after 65 days the division would be delinquent.


Mr. Campbell stated that was correct.


Sen. Boswell asked about the amount of the stimulus funds received by the Cabinet and how they are being applied.


Secretary Peters stated he has a list that he will provide to the committee, but he gave examples. Sen. Stine stated that it is important to get the permits approved.  Maybe the Department needs to work overtime to get these processed.


Secretary Peters stated that the Cabinet does not have the money to pay for overtime.  The budget is a fixed amount.  Individuals out of other units to help with processing the permits.


Sen. Smith stated the number of mining companies has decreased and it is hard to understand why these permits cannot get processed more quickly.


Secretary Peters stated that he fully understands the frustration.  Permits today are much more complex than they were several years ago. 


Rep. Steele stated he has learned that it is important to have all the information regarding the permit before calling to check on the status of a permit.


Secretary Peters stated that they have great employees, but the loss of highly experienced personnel last year, due to retirement, has been a major factor in how the process works.


Sen. Boswell asked what other agencies were involved in finalizing the permits.


Mr. Campbell stated that the Department works closely with the national Office of Surface Mining, U.S. Fish Wildlife, Kentucky Fish and Wildlife, Division of Water, and Division of Environmental Protection. The Corp. of Engineers and Region 4 of the U.S. Environmental Protection Agency are also involved. 


In addressing previous comments, he said that the Department meets every Monday and Friday to look at deficiencies and to find ways to expedite the permitting process.


Sen. Boswell asked if the other agencies involved in the permitting process were expeditiously doing their job.


Mr. Campbell stated that the Department has no control whatsoever on how federal agencies handle their processes.


Chairman Smith stated he heard that Fees in Lieu of (FLO) money was being used to purchase property in two non-coal producing counties. He is familiar with the language in the Bill and does not recall that the money could be spent for purchasing property, nor could it be used out of the watershed area from where the coal is extracted.  He asked that the Cabinet and LRC Energy staff review the language in the Bill and find out more about how the FLO money is being spent.


Secretary Peters stated that they would look into the issue and communicate with staff.


Rep. Gooch asked if the Reorganization Plan discussed today needed to be brought before the Natural Resources Committee.


Sen. Smith stated that it was his understanding that the Cabinet only had to do testimony.


Rep. Steele stated that he would like to have a total for FLO projects that have been done in the past year and for future projects. Rep Steele wants to be prepared for constituent questions about the Section 404 – Clean Water Act money.


Sen. Smith asked staff to obtain information to be shared with all legislators from coal producing counties.


Meeting adjourned.