Special Subcommittee on Energy


Minutes of the<MeetNo1> 5th Meeting

of the 2011 Interim


<MeetMDY1> October 21, 2011


Call to Order and Roll Call

The<MeetNo2> 5th meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> October 21, 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; Representative Keith Hall, Co-Chair; Senators Ernie Harris, Ray S. Jones II, Bob Leeper, Johnny Ray Turner, and Robin L. Webb; Representatives Royce W. Adams, Rocky Adkins, Dwight D. Butler, Leslie Combs, Will Coursey, Jim Gooch Jr., Wade Hurt, Martha Jane King, Fred Nesler, Sannie Overly, Tanya Pullin, Tom Riner, Kevin Sinnette, John Will Stacy, Fitz Steele, and Brent Yonts.


Guests:† Representative Teddy Edmonds, Representative Dennis Horlander; Holland (Hollie) B. Spade, Executive Director, Cabinet for Economic Development; Don Goodwin, Cabinet for Economic Development; Gary Crawford, CEO, ecoPower Generation LLC; Grant Curry, Vice President, Fuel Procurement, ecoPower Generation; John R. Taylor, President, C20 Technologies LLC and Robert J. Walty, Executive Vice President, C20 Technologies LLC; Steve Corbitt, Ashland City Manager and Tony Grubb, Manager and Director of Finance, City of Ashland.


LRC Staff:D. Todd Littlefield, Sarah Kidder, and Susan Spoonamore, Committee Assistant.


The September 16, 2011 minutes were approved without objection by voice vote upon motion made by Representative Adams and seconded by Representative Adkins.


Discussion of 2012 BR 197

Representative Kevin Sinnette explained 12 RS BR 197: AN ACT relating to Utility Franchises: Amend KRS 96.010 to prohibit bidders for city utilities franchises from recovering the franchise fee from ratepayers through fees or surcharges on their bills. He said that the existing case law on the subject matter should be put into a statute. Representative Sinnette said that under constitutional provisions, municipalities and legislative governments have to have a franchise with utilities such as gas and electric companies. The utility companies have failed to follow the case law, claiming that the Public Service Commission (PSC) has allowed the utility companies to pass on the franchise fee to ratepayers. The PSC has no authority to circumvent the Constitution of Kentucky by telling the companies that they can pass the franchise on to the consumer. Representative Sinnette stated that the jurisdiction of the PSC is to set rates.


In response to Representative Pullin, Representative Sinnette said that a lawsuit was filed. He said that municipalities have the right to require that the franchise fee cannot be a line item on the customerís bill. If the utility company believes that it needs a higher rate, it must file for an increase with the PSC. He said that the PSC has no right to allow utilities to recover the franchise fee and put it on a customerís bill.


In response to Representative Gooch, Representative Sinnette explained that a municipality can say to a utility company that it cannot put the franchise fee on a bill as a line-item. If the utility company wishes to pass the franchise fee on to the customer, then the utility company needs to go to the PSC for a rate increase. The citizens cannot be charged for using their own right-of-way.


In response to Representative Gooch, Representative Sinnette said that a franchise was a contract that had to be passed pursuant to ordinance. He said that if a franchisee wanted to recoup the fee paid to the city, then it can go to the PSC. For customers who do not live in that city, then that would be between them and the PSC. The issue is that cities have to get a franchise with the utilities, and it has to be a reasonable and non-capricious franchise.


In response to Representative Yonts, Representative Sinnette stated that the franchise rates for cable-vision are federally mandated. He agreed that BR 197 should include language that the costs of a franchise not be a factor in setting rates rather than saying that the utility company must go to the PSC to get it done.


In response to Representative Adkins, Representative Sinnette stated that the service area of Columbia Gas stretches beyond the City of Ashland. The issue of whether customers outside Ashland would have to pay for a rate increase because of what a city commission has done under a franchise fee is a question that would have to be answered.


Incentives for Energy Independence Act (HB 1)

Ms. Holland Spade, Executive Director, Office of Legal Services, Cabinet for Economic Development and Mr. Don Goodin, Economic Development Cabinet discussed the Incentives for Energy Independence Act (IEIA). Ms. Spade said that reducing energy dependence and achieving traditional economic development goals of investment and job creation addressed in House Bill 1. When talking to companies, one of the primary considerations is Kentuckyís low electricity rates, and it is important to keep them low. National desperation for new energy sources equals opportunities for economic development in Kentucky.


Because of House Bill 1, the Cabinet is able to provide tax incentives for alternative fuel facilities, renewable energy facilities and gasification facilities. Also, per an amendment to House Bill 1, the following qualify for tax incentives as well: shale and tar sands as a resource; natural gas as an eligible feedstock; projects producing energy efficient fuels other than transportation fuels; and CO2 pipelines projects. Those projects qualify for tax credits such as corporate income tax credits, sales tax credits, coal severance tax credits, and wage assessments. Ms. Spade stated that House Bill 1 also included funding of $5 million for the Kentucky New Energy Ventures Fund (KNEV). The Kentucky Science and Technology Corporation (KSTC) is responsible for administering the program by providing grants as well as investing in small startup companies. The funds are invested in alternative renewable energy projects that are Kentucky-based, early-stage technology companies. For bigger IEIA projects, a cash option was included in the form of an advance disbursement. This option has not been used but is available if needed.


Ms. Spade said that as of October 1, 2011, there have been 11 projects approved under IEIA. Some of the projects date to 2007. She said it was important to note that, because the projects are not traditional, there is a longer timeline.


Presenting for ecoPower Generation LLC was Gary Crawford, CEO, and Grant Curry, Vice President, Fuel Procurement. Mr. Crawford explained that ecoPower was founded in 2009 to build and operate renewable bioenergy facilities utilizing sawmill residuals and low quality logs as fuels. The project company, ecoPower Generation-Hazard, LLC, was formed to build and operate the first renewable biomass facility in Hazard, Kentucky. The goals of ecoPower are to increase Americaís energy independence, diversify the economic base and create jobs.


Mr. Curry talked about problems that forestry faces in Eastern Kentucky. He said that the forests are declining in productivity due to the lack of transportation and lack of development. There are good markets for high quality saw logs, but there is not a good market for poor quality trees that are beginning to dominate the landscape. EcoPower is hoping to provide a market for poor quality trees and/or low grade logs. There are three major setbacks for the wood industry expansion in Eastern Kentucky: lack of transportation; lack of secondary wood manufacturing; and lack of a local market for wood manufacturing residues.


Mr. Curry said that the major permits have been approved and the project is shovel ready. There are other permits to be obtained but that cannot be done until the project is under construction. ecoPower has been unable to negotiate a power purchase agreement. Assuming that an agreement can be reached, it would take an estimated 27 months to be up and running.


In response to Representative Stacy, Mr. Curry said that the BTU cost for using wood products would be roughly $2.30 per million. EcoPower has considered using other types of biomass, but the primary object is getting the facility built.


In response to Senator Smith, Mr. Crawford said that project was given pre-approval for the amount of $15 million in tax credits. The pre-approval was based on a 2009 preliminary estimate of the cost of the facility. The current estimate is higher than that now and ecoPower has recently reapplied to the cabinet for a readjustment based on the current estimated cost which is approximately 25 percent higher. He said that the $15 million is a promise to offset future tax obligations.


Mr. Crawford stated that approximately 900 jobs, either directly or indirectly, would be created during the construction phase of the project, and 500 jobs would remain during the life of the facility. The direct annual local economic benefit would be around $21 million a year. During the 27 month construction period, the economic benefit would be approximately $82 million.


Mr. Crawford noted that some of the challenges facing the project are financial market changes, regulatory uncertainty and financial access to capital. In addition, there are federal incentives available, specifically Section 1603, but that program is scheduled to lapse if construction on the project is not started in 2011. That would mean a loss of 60 million federal dollars coming into Kentucky.


Mr. Crawford stated that EcoPower is supportive of House Bill 1. The primary problem that the project is facing is obtaining a power purchase agreement. There is a policy mismatch between House Bill 1 and the Governorís Energy Policy. It would be beneficial to look at regulatory reform in the area of cost recovery. Utility incentives are another concern. Mr. Crawford said that another barrier is that incentives only kick in during construction and/or operation. He suggested doing something with incentives that would enhance the companyís profile when it takes its projects to market.


Presenting for C2O Technologies were John Taylor, President, and Robert Walty, Executive Vice President. Mr. Walty explained that the Green River Plant No. 1 is a coal to oil type project. He said that 4 million tons of coal produce approximately 3.2 million barrels of synthetic crude oil per year. Another 2.5 million tons of specialty coal are for steel making. Mr. Taylor explained that lack of funding is hindering construction of the project. C2O Technologies has 3 interested potential investors--one from the United States and 2 from out of the country. Finding $658 million for the project is very difficult in this economy. The main concern of investors is EPAís involvement and changing of regulations. In contrast, a large Chinese company has recently entered into an agreement with C2O to build three coal-to-oil plants in China.


Mr. Taylor stated that, in addition to coal-to-liquids production, C2Oís technology can help reduce CO2 emissions, increase efficiency in coal-to-oil operations and increase the use of biofuels.


In response to Representative Adkins, Mr. Taylor said that the technology is called partial pyrolysis. Eleven thousand tons of coal will yield 75 tons of an upgraded coal and 10,000 barrels of oil. In essence, C2O is distilling the coal.


In response to Representative Adkins, Mr. Taylor said that House Bill 1, with its incentives, enticed C2O Technologies to build a plant in Kentucky.


The meeting adjourned at 11:45 a.m.