Special Subcommittee on Energy


Minutes of the<MeetNo1> 2nd Meeting

of the 2016 Interim


<MeetMDY1> July 15, 2016


Call to Order and Roll Call

The<MeetNo2> 2nd meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> July 15, 2016, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Dean Schamore, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representative Dean Schamore, Co-Chair; Senators Joe Bowen, Ernie Harris, Jimmy Higdon, Ray S. Jones II, Johnny Ray Turner, and Robin L. Webb; Representatives Rocky Adkins, Hubert Collins, Tim Couch, Will Coursey, Jim Gooch Jr., Thomas Kerr, Jerry T. Miller, Sannie Overly, Tom Riner, John Short, Kevin Sinnette, Jeff Taylor, and Brent Yonts.


Guests: Secretary Charles G. Snavely, Energy and Environment Cabinet; and Tom Fitzgerald, Director, Kentucky Resources Council.


LRC Staff: D. Todd Littlefield, Janine Coy-Geeslin, and Susan Spoonamore, Committee Assistant.


The June 17, 2016, minutes were approved by voice vote upon motion of Representative Collins and seconded by Representative Coursey.


Energy Issues, What to look for in the coming months

Secretary Charles G. Snavely, Environment and Energy Cabinet, discussed clean power plan initiatives. He said that the Environmental Protection Agency (EPA) released the Final Rule for Clean Power Plans in August of 2015. Kentucky and 27 other states filed a lawsuit seeking a stay. The U.S. Supreme Court granted the stay. Courts may render decisions later this year or early next year. Secretary Snavely said the stay is providing Kentucky with the opportunity to focus on lowering emissions.


Secretary Snavely noted that Kentucky has one-third of all the coal mines in the country. Kentucky produces approximately 10 percent of all U.S. coal and 20 percent of all coal mined east of the Mississippi River. He said that the abundance of coal has been an economic advantage to Kentucky. Kentucky has the 4th lowest electricity rate per kilowatt hour in the United States and the lowest east of the Mississippi River. The low electricity rates help attract manufacturing companies. In 2015, coal accounted for about 92 percent of the generation of electricity. Coal accounts for 83 percent to 85 percent of the generation. The decline of coal as a source of electricity is due to the fact that natural gas has become the primary fuel for electricity. Other factors are the closing of the Paducah Gaseous Plant and the decrease in operations at Century Aluminum. One of the other things that has caused the decline in the use of coal is that the technology used in natural gas has caused it to become cheaper.


Secretary Snavely explained that the cabinet is actively pursuing energy efficiency. Kentucky remains a manufacturing state because electricity costs have remained low. Kentucky is ahead of meeting federal regulations for clean air emissions. An oil and gas work group has been formed from employees of the oil and gas industry, cabinet employees, and the general public. The work group is crafting common sense and intelligent rules for natural gas production. The cabinet is also working on regulations for coal combustion residuals which is a new rule coming from the Environmental Protection Agency (EPA). Most all new environmental laws are implemented in Kentucky by the cabinet. The cabinet has also created a lead and drinking water work group in the Division of Water. The cabinet is working towards Governor Bevin’s regulatory reform initiative and has performed a preliminary review of all their regulations. Another initiative is the abandoned mine lands pilot project. Federal funding is available to be used in eastern Kentucky to pursue Abandoned Mine Lands (AML) projects. Finally, in order to meet budget cuts, the cabinet is consolidating offices and streamlining the cabinet.


Representative Gooch said that, even though there are private corporations that are willing to pay for the higher cost of renewable energy, eventually the costs will be passed on to consumers. He also expressed concerns that companies outside of United States would have a competitive advantage in manufacturing. Secretary Snavely stated that foreign countries using coal are not going to put climate issues ahead of their more necessary needs and desires to increase their standard of living, and they will continue to burn coal.


In response to Representative Riner, Secretary Snavely said that he was not sure how Kentucky was addressing terrorist attacks through hacking into the electric grid. Secretary Snavely said he would ask the Public Service Commission and get back to Representative Riner.


Chairman Schamore stated that power plants are investing heavily in cybersecurity and IT security.


Senator Webb stated that manual power plants stand a much better chance of not being compromised, which include cooperatives. From an environmental standpoint, shutting down a coal operation and switching to natural gas creates a lot more environmental concerns. In response to Senator Webb, Secretary Snavely stated that hydraulic fracturing is being addressed in the oil and gas work group. At this time, there is no hydraulic fracturing in Kentucky, but there is a potential for the future.


In response to Senator Bowen, Secretary Snavely said that the EPA consists of civil service employees, and senior management are employees who are appointed by the Executive Branch or the President.


Tom Fitzgerald, Director, Kentucky Resources Council, said that the EPA is an executive branch agency. Its budget is approved by Congress, which has riders to control some substantive rule making activity. Mr. Fitzgerald stated that many of the impacts being felt by the coal industry are due to The Clean Air Act and 1990 amendments. The courts are now conducting a judiciary review to determine if the agency has acted arbitrarily and acted in accordance with proper procedures.


Representative Adkins commended the oil and gas work group and the Kentucky Resources Council for staying in front of issues that could affect Kentucky. It is important to maintain low cost energy rates to keep and draw new industrial manufacturing.


Representative Adkins asked the cabinet to provide the committee with a comparison of the cost of electricity per kWh with the cost of electricity five years ago, including a breakdown of the cost by region and utility. He questioned whether there will be enough electricity generated for Kentucky and the United States with closing of all the coal fired plants. Representative Adkins said his concern is whether Kentucky can build the infrastructure to provide base-load power with natural gas and maintain a reliable grid.


In response to Representative Adkins, Secretary Snavely stated that he is impressed with the robustness of the grid and the fact that there is a lot of underground storage capacity for natural gas. Kentucky’s actual overall demand for electricity has declined. There are projects being planned to improve transmission capability to help guarantee that there is not a problem with getting electricity.


Chairman Schamore stated that when the Hawesville Century plant is at full operation they have 560 smelter pots. Loss of power for a significant amount of time would cost the plant approximately $200,000 per pot to bring it back into working order. Chairman Schamore asked that the cabinet include, in its report to the committee, any fees that may be added to the rate.


Representative Miller stated that he is more concerned about income redistribution to India and China and their construction and use of coal burning plants. He is concerned about the cost of eastern Kentucky coal versus Powder River Basin coal. Powder River Basin coal is extracted from federal lands. He asked about the lack of a market value lease on coal extracted from federal lands. Secretary Snavely stated that the fees paid by the coal companies are significant. A coal company is first required to make a bonus payment to acquire a lease which is around $1.00 per ton. The royalty rate paid on the coal is approximately $1.00 per ton, which is $2.00 per ton on a product that sells for $10.00. The fee is 20 percent of the price per ton which is greater than the royalty rate on natural gas at approximately 12.5 percent. The fact that coal can be sold for $10.00 off of federal land is what puts Kentucky at a disadvantage.


Mr. Fitzgerald said that one of the issues of mining Kentucky coal is the cost of production per ton along with federal regulations. There have been a number of forces that have combined to displace miners and production in the Appalachia region. Even removing all the regulations would not help the industry rebound. The cost of Powder River Basin coal and the transportation are so much less.


In response to Representative Yonts, Secretary Snavely stated that he did not have any information regarding who might be looking at the reliability factor and the redundancy factor in terms of earthquake potentials, especially in western Kentucky. He will provide that information to the committee.


Tom Fitzgerald testified that no one could have predicted there would be a tremendous upheaval in how electricity is generated and the marriage of hydro-fracking and horizontal drilling and the significant impact it has had on the energy landscape. Kentucky is experiencing a difficult transition as it tries to understand all of the changes being wrought by the changes in energy picture. The cost of coal-fired electricity is rising as certain externalities are now being required to be accounted for which means higher electricity costs for consumers.


Mr. Fitzgerald stated that the stay issued by the U.S. Supreme Court in the Clean Power Plan lawsuit was a very rare occurrence in rulemaking. The central issue in the lawsuit is the lack of notice and opportunity to comment on final rule considering the vast difference between the proposed rule and the final rule. One ray of hope in the Clean Power Plan is the Clean Energy Incentive Program, which is going through the rulemaking process.


Mr. Fitzgerald stated that the purpose of the Kentucky Resources Council is to provide free legal representation in the areas of air, waste, water, and mining cases. There are times that the council will assist communities that are dealing with environmental problems. Mr. Fitzgerald asked the committee to invite the new Director of the Public Service Commission, Dr. Talina Matthews, to discuss what is being done in Kentucky and in the reliability of the grids. The Clean Energy Incentive Program could make a difference as early as 2018 for receiving credits for investments in the low-income energy efficiency sector. He discussed Senator Ray Jones’ 2016 SB 303, which included a program for retraining and hiring displaced miners to work on energy efficiency in Eastern Kentucky.


Mr. Fitzgerald gave an overview of what is being done in the Oil and Gas Workgroup. The workgroup has been successful at developing relationships and communication between different entities for the good of the environment and industries. Laws that have passed through the General Assembly will help to get Kentucky out in front of other issues in the future such as fracking. The workgroup was tasked with looking at the Technology Enhanced Natural Occurring Radioactive Material (TENORM) which is concentrated in parts of the oil and gas process. The group has expanded its membership to the solid waste disposal industry, the Kentucky Geological Survey, the Cabinet for Health and Family Services, the Division of Waste Management, the Division of Air Quality, and the Division of Water. The group is working to develop proposals. Mr. Fitzgerald said that the management of TENORM issues should be guided by science and be risk-informed and dose-based. The government resources should be allocated in the most cost effective manner. Proposals should insure that the public and the workers be protected but also cost-effective. The situation that happened in Estill County was not caused by a Kentucky oil or gas producer. The waste was brought into the state, solidified in Ashland, and dumped in Estill County. Also, it is important to manage the waste streams to see if additional testing and management are needed.


In response to Representative Taylor, Secretary Snavely stated that there is a lot of effort and research being done at the Center for Applied Energy Research (CAER) to find ways to burn coal cleaner and deal with emissions. Mr. Fitzgerald said that most of the research is being federally funded through the Department of Energy.


In response to Representative Coursey, Mr. Fitzgerald stated that he was not aware of businesses currently working on coal purification research.


In response to Representative Gooch, Secretary Snavely said he would provide a comparison on the Department of Energy’s spending on renewables as compared to coal research.


Mr. Fitzgerald recommended that Secretary Snavely, in response to Representative Adkins’ request, also include the breakdown of the cost of electricity by sectors such as residential, commercial, and industrial.


There being no further business, the meeting was adjourned.