Special Subcommittee on Energy


Minutes of the<MeetNo1> 2nd Meeting

of the 2011 Interim


<MeetMDY1> July 15, 2011


Call to Order and Roll Call

The<MeetNo2> 2nd meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> July 15, 2011, 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 Ernie Harris, Ray S. Jones II, Bob Leeper, Katie Kratz Stine, Robert Stivers II, Johnny Ray Turner, and Robin L. Webb; Representatives Rocky Adkins, Dwight D. Butler, Leslie Combs, Tim Couch, Will Coursey, Jim Gooch Jr., Wade Hurt, Lonnie Napier, Fred Nesler, Sannie Overly, Tanya Pullin, Tom Riner, Kevin Sinnette, John Will Stacy, Fitz Steele, and Brent Yonts.


Guests: Jeff Derouen, Executive Director, Public Service Commission; Stephanie Bell, Deputy Executive Director, Public Service Commission; John Davies, Deputy Commissioner, Department for Energy Development and Independence; Karen Wilson, Chief of Staff, Office of the Secretary, Energy and Environment Cabinet, and Greg Guess, Director, Division of Energy Efficiency and Conservation, Energy and Environment Cabinet.


LRC Staff: Stefan Kasacavage; Kelly Blevins, Committee Assistant; and Thomas Cothran, Graduate Fellow.


A quorum was present. After a motion and a second, the minutes for the June 22, 2011 meeting were approved.


Report from the Public Service Commission on Natural Gas Retail Competition

Jeff Derouen, Executive Director of the Public Service Commission (PSC), discussed the findings of the PSCís report on retail competition in natural gas distribution, which had been submitted to the Legislative Research Commission in December 2010 pursuant to House Joint Resolution 141 of the 2010 Regular Session. Mr. Derouen explained the reasons for the PSCís finding that natural gas markets should only be opened to broader retail competition if expanded safeguards for residential customers and natural gas distribution companies are also adopted.


Under federal deregulation efforts that occurred in the 1980s and 1990s, the transportation cost of natural gas was separated from the commodity cost, so interstate pipelines were no longer allowed to sell gas; they could only charge for its transportation. Natural gas distribution companies in Kentucky regulated by the PSC must separate the cost of delivery from the commodity cost of the gas, and they may only earn a profit on its delivery. The commodity cost is to be passed on to consumers dollar-for-dollar based on what the distribution company paid for the gas. The separation of the transportation cost from the commodity cost creates an opportunity for the gas itself to be provided by a third-party marketer, other than the distribution company. Industrial and large-volume commercial customers are entitled to purchase their gas through such third-party arrangements, paying the distribution companies only their transportation rates that are set in tariffs that have been approved by the PSC.


Kentucky statutes neither require nor prohibit retail competition in natural gas service. The PSC reviews applications for customer choice programs on a case-by-case basis to ensure that they meet the ďfair, just, and reasonableĒ requirement of KRS 278.030. Columbia Gas of Kentucky has been the only utility to seek to establish a customer choice program, and the PSC has approved the program and its extensions for the last 11 years. Data provided by Columbia Gas to the PSC shows that customers in its customer choice program collectively saved $11.4 million during the first five years of the program, but due to extreme volatility in the natural gas markets, customers paid $28.7 million dollars more in the last five years than they would have if they had purchased the gas from Columbia instead of a marketer.


On this and other evidence collected during a two-day hearing on the subject that involved all five major local gas distribution companies as well as many other stakeholders, the PSC concluded that the benefits of retail competition for residential customers could not be established with certainty. If the General Assembly were to move Kentucky toward expanded retail competition, the PSC recommended placing third-party marketers under the same requirements as local natural gas distribution companies by allowing the PSC to: review a marketerís ability to provide gas service before it may provide gas in Kentucky; revoke a marketerís permission to operate in Kentucky or otherwise penalize a marketer for failure to comply with PSC standards; adjudicate complaints against marketers; and require marketers to file tariffs setting forth their rates, terms, and conditions of service.


Update from the Energy and Environment Cabinet on State Strategies to Foster Alternative Transportation Fuels and Renewable Energy Industries in Kentucky

John Davies, Deputy Director of the Department for Energy Development and Independence (DEDI) discussed the strategies that the Commonwealth was undertaking to promote transportation fuel and synthetic natural gas production from fossil energy and biomass resources, as required by House Bill 299 of the 2006 Regular Session. Mr. Davies also discussed state strategies for promoting renewable energy industries in Kentucky.


Under Governor Beshearís energy plan, the cabinet has adopted a multi-faceted approach to develop clean, reliable, and affordable energy sources that will help improve our energy security. As part of this strategy, Kentucky has adopted the goal of developing a coal-to-liquids industry that will use 50 million tons of coal to produce four billion gallons of liquid fuel per year by 2025. Another goal under the strategy is to produce the equivalent of 100 percent of the stateís annual natural gas demand by augmenting in-state natural gas production with synthetic natural gas from coal-to-gas processing by 2025. With regard to biofuels and renewable sources of energy, the strategy strives to derive 12 percent of Kentuckyís motor fuel demands from biofuels and seeks to triple Kentuckyís renewable energy generation to 1,000 megawatts by 2025.


Kentucky has many programs to achieve these goals with regard to coal-to-liquid, coal-to-gas, biofuel, and renewable energy development. Since 2006, the Commonwealth and the US Department of Energy has invested $5.7 million in coal-to-liquid and coal-to-gas feasibility research throughout the state. Construction has started on three coal-to-liquid projects within Kentucky: two in Pike County and one in West Paducah. In 2009, the Governorís Executive Task Force on Biomass and Biofuels found that Kentuckyís current production capabilities for biomass are estimated at 12 to 15 million tons per year with minimal land use changes. It is estimated that this burgeoning biomass and biofuels industry could generate over $3.4 billion of net output annually and create almost 14,000 jobs. In 2010, the University of Kentucky Center for Applied Energy Research broke ground on a $19.8 million LEED Gold certified renewable energy laboratory, which will put Kentucky at the forefront of clean energy research. Federal funding accounted for $11.8 million of the project cost, with UK contributing $1 million, the Commonwealth contributing $3.5 million, and an additional $3.5 million coming from stimulus funds.


Representative Pullin commented that the Kentucky Department of Veterans Affairs would be taking part in the Kentucky green bank to retrofit the Thomson-Hood Veteranís Center with energy-saving technologies. She complimented Representative Adkins for his foresight in sponsoring House Bill 2 and understanding the role that energy efficiency would play in the future.


In response to a question from Senator Stivers, Karen Wilson, Chief of Staff for the Energy and Environment Cabinet, said that the Beshear Administration was responding in several different ways to US EPAís attempts at more aggressive environmental regulation of coal mining and coal-fired power plants. The cabinet has sued EPA twice over proposed environmental regulations regarding coal mining, and Secretary Peters has testified before Congress and has written numerous letters stating his displeasure with proposed regulations. The cabinet has also submitted letters opposing proposed greenhouse gas and coal ash regulation and the timeline for which the proposed regulations are to take effect.


In response to a question from Chair Smith, Ms. Wilson said that the Beshear Administrationís position on hollow filling had changed after further consideration of the issue.


Representative Gooch commented that public officials need to do a better job of conveying to the public the impacts of increased coal regulation on the economy of Kentucky, especially the industrial sector.


Representative Adkins commented that US EPA was overreaching with regard to the regulation of coal mining and that Congress has not granted it the authority to hold coal mining permits indefinitely.


In response to a question from Senator Stine, Greg Guess, Director of the Division of Efficiency and Conservation, stated that he was working with the Department of Education and the US Green Schools Caucus to help promote green building practices for schools in Kentucky. Mr. Davies stated that a new LEED Gold certified agribusiness school in Fayette County, Locust Trace, was built after passage of Senate Bill 132 in 2010 without any help from grant money. A list is currently being compiled of which schools have been built or refurbished with and without energy efficient technologies.


In response to a question from Representative Couch, Mr. Davies responded that the cabinet would investigate the negative economic impact of coal-fired power plant closures in Georgia on the export demand for eastern Kentucky coal.


In response to a question from Representative Riner, Ms. Wilson responded that she would provide the members with a list of US EPA regulations that the Beshear Administration opposes.


Representative Combs commented that people from around the country share Kentuckiansí view that Kentucky has already been implementing clean coal technologies, and that the US EPAís overregulation is unwarranted.


There being no further business, the meeting was adjourned.