Interim Joint Committee on Natural Resources and Environment


Minutes of the<MeetNo1> 1st Meeting

of the 2011 Interim


<MeetMDY1> June 2, 2011


Call to Order and Roll Call

The<MeetNo2> 1st meeting of the Interim Joint Committee on Natural Resources and Environment was held on<Day> Thursday,<MeetMDY2> June 2, 2011, at<MeetTime> 1:00 PM, in<Room> Room 149 of the Capitol Annex. Representative Jim Gooch Jr., Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Brandon Smith, Co-Chair; Representative Jim Gooch Jr., Co-Chair; Senators Joe Bowen, Ray S. Jones II, Bob Leeper, Dorsey Ridley, Katie Kratz Stine, Johnny Ray Turner, and Robin L. Webb; Representatives Hubert Collins, Tim Couch, Reginald Meeks, Tim Moore, Marie Rader, John Short, Fitz Steele, Jim Stewart III, and Jill York.


Guests: John Voyles, LG&E/KU; John Talbert, Big Rivers Electric Corporation; Nick Comer, East Kentucky Power Cooperative; Jimmy Keeton, AEP/Kentucky Power; and Dick Brewer, Duke Energy; Jeff Derouen, Stephanie Bell, and Richard Raff, Public Service Commission; Commissioner Jon Gassett, Dr. Karen Waldrop, and Mark Mangeot, Kentucky Department for Fish and Wildlife Resources; and Ms. Nancy Osborne.


LRC Staff: Tanya Monsanto, Stefan Kasacavage, and Kelly Blevins.


Presentation by Electric Utility Representatives on Future Events Likely to Impact Electric Utility Rates

Mr. John Voyles, Vice President of Transmission and Generation, Louisville Gas and Electric/Kentucky Utilities, discussed several re-interpretations of existing federal environmental laws that will impact future electric utility rates including the Clean Air Act (CAA), the Clean Water Act (CWA), and the Resource Recovery and Conservation Act (RCRA). New federal rules issued under the CAA are the most impactive.


Changes to the National Ambient Air Quality Standards will reduce the emissions threshold for criteria pollutants such as sulfur-dioxide (SOx) and nitrogen-dioxide (NOx) from an 8-hour standard to a 1-hour standard. This change will place many areas out of compliance and force new state implementation plants to achieve compliance.


The Clean Air Transport Rule, which replaced the Clean Air Interstate Rule, proposes to lower SOx and NOx by 2012 and 2014 respectively. States upwind, presumed to be the primary emitters, must make collective reductions of 5 percent over 2009 levels for NOx to as much as 50 percent for SOx.


There are new rules that affect mercury emissions. A new rule on Maximum Achievable Technology for Hazardous Air Pollutants (HAPs) is expected in fall of 2011 which will create new thresholds for mercury emissions based on data from the nation’s lowest emitters. There will be three years for each state to comply with the new standard. Finally, a rule regarding Carbon Dioxide (CO2) Best Available Control Technology (BACT) will have new performance standards.


New rules issues under RCRA will change the way utilities can dispose of coal combustion residuals (CCRs) and may result in CCRs being deemed hazardous materials. If this occurs then CCRs cannot be beneficially reused for wall board or highway materials. The rule changes will likely result in utilities managing CCRs in dry form rather than in wet ponds. Kentucky produces a sizable amount of coal ash, so this rule will be a significant factor in future rates.


There are two CWA rules that will deal with cold water withdrawl and with warm water returns. Generators use cold water for cooling and warm water, after treatment is returned to lakes and rivers. The warm water return is called the 316(b) rule and has not mandated use of a cooling tower, but it will require the utility to study the impacts to aquatic resources. A final rule is expected in 2012. There is also a discharge rule which will set effluent guidelines and maximum allowable loads of certain constituents in water. This rule may mandate water treatment systems for power plants.


The new rules are difficult to comply with because there are short and sometimes conflicting implementation timelines. There are various ways to cope with needed cost reductions through fuel switching and fuel blending. A representative from each of the incumbent electric utilities described their forward looking capital and operating costs as a result of costs associated with new the environmental laws.


Louisville Gas and Electric/KU disclosed $4 billion in new capital costs over 10 years and made a rate filing with the Kentucky Public Service Commission (PSC). John Talbot with Big Rivers Electric Corporation disclosed $758 million in capital costs and a wholesale rate impact of 40 percent. Retail customers would see roughly a 20 percent increase. One problem is that Big Rivers serves industrial customers such as aluminum smelters that are price sensitive. Nick Comer with East Kentucky Power Cooperative disclosed $40 million in capital costs and Jimmy Keaton representing AEP/Kentucky Power stated $40-$60 million in operating expenses. Dick Brewer representing Duke Energy disclosed $1 to $8 million in costs.


In response to a question regarding Big River’s price competitiveness for attracting and keeping industrial customers, Mr. Talbot stated even though Kentucky’s electric power rates are lower than the national average, the company is not the economic price leader internationally. The problems stemming from electric price increases will impact Kentucky’s economy and electric utilities are trying to educate everyone. In response to a question about whether Kentucky would switch to renewable power, Mr. Voyles stated that unit by unit, it is cheaper for LG&E/KU to continue burning coal. The company will add new technology and request a rate increase.


In response to a question about the impact of environmental laws concerning fracking for natural gas, Mr. Voyles said that was a concern with respect to fuel switching to natural gas for electricity. The company is not looking to switch to natural gas for baseload generation. The company has been pushed towards use of noncoal alternatives.


In response to a question about the role of Kentucky’s Department of Environmental Protection, Mr. Voyles stated that the department implements and enforces federal rules. Mr. Brewer added that state officials have been commenting on newly noticed federal rules and are trying to get the standards reduced.


In response to a question about informing the public about rate increases, Mr. Voyles stated that public notification occurs when a request for a rate increase is filed with the Kentucky Public Service Commission. There is a notice in the bill; there are also inserts, open houses, and public forums.


Discussion by the Kentucky Public Service Commission on the Future Regulation of Electric Utilities

Jeff Derouen, executive director of the Kentucky Public Service Commission, identified the requests for rate increases by utility and furthered that more are expected. The two basic recovery mechanisms on rates are the environmental surcharge and the request for a certificate of convenience and necessity, commonly referred to as a CPCN or construction certificate.


In response to a question about self audit of the environmental surcharge to determine whether overcharges occur, Mr. Derouen stated there is a “true up” on the environmental surcharge every 6 months. Actuals are compared to requests. There can be charges added or retired throughout this process depending on the number of environmental mandates that raise the utility’s cost of doing business. Surcharges do not work on a first in-first out (FIFO) basis.


In response to a question about the number of years a debt is amortized, Mr. Richard Raff, attorney with the PSC, replied that it is dependent on depreciation schedules set by the Internal Revenue Service.


In response to a question about which costs are recoverable through the environmental surcharge, Mr. Derouen explained that the costs must be “proven costs” and that companies are entitled to a reasonable rate of return. Mr. Raff added that the utility’s cost of acquiring capital is a “capital cost” and is entitled to recovery through the environmental surcharge.


Rep. Gooch described a report from the United States Chamber of Commerce entitled Progress Denied which would be sent to members of the committee.


Kentucky Department of Fish and Wildlife Discussion of Sandhill Crane Populations in Kentucky

Dr. Jon Gassett, Commissioner of the Department of Fish and Wildlife, described the proposal for a hunting season for sand hill cranes. The proposed season will not jeopardize the crane population. Hunters have been involved in species recovery efforts in Kentucky and then limited hunting of that species occurred. Sandhill cranes are a migratory bird and hunting must be approved by the United States Fish and Wildlife Service. There are two plans, one for the state and one for the population as a whole.


Dr. Karen Waldrop explained that Kentucky falls into the eastern population management plan. There are 60,000 sand hill cranes in Kentucky and the plan is predicated on five year minimum populations to set yearly numbers that can be hunted. Kentucky’s plan is more stringent than what is allowed by the United States Fish and Wildlife Service.


In response to a question about conflicts between bird watchers and hunters, Dr. Gassett stated the state plan does address opportunities for bird watchers. The hunting season will begin only after the popular bird watching season.


In response to a question about how hunting permits are issued, Dr. Gassett replied that permits will be allotted based on a quota hunt application. There will be no charge to apply, but the applicant must possess a valid Kentucky hunting license. In response to second question on whether only Kentucky residents would be allowed to participate, Dr. Gassett explained out-of-state applicants may apply but those applicants must possess a Kentucky license at the time of application. Because the license is required at time of application, it is likely that the largest number of participants will be Kentucky waterfowl hunters.


After a motion and a second the meeting adjourned at 3:25 PM (EDST).