Interim Joint Committee on Natural Resources and Environment


Minutes of the<MeetNo1> 2nd Meeting

of the 2014 Interim


<MeetMDY1> July 3, 2014


Call to Order and Roll Call

The<MeetNo2> 2nd meeting of the Interim Joint Committee on Natural Resources and Environment was held on<Day> Thursday,<MeetMDY2> July 3, 2014, 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 Jared Carpenter, Co-Chair; Representative Jim Gooch Jr., Co-Chair; Senators Joe Bowen, Chris Girdler, John Schickel, Brandon Smith, Johnny Ray Turner, Robin L. Webb, and Whitney Westerfield; Representatives Hubert Collins, Tim Couch, Stan Lee, Tim Moore, John Short, Kevin Sinnette, John Will Stacy, Fitz Steele, Jim Stewart III, and Jill York.


Guests: John Lyons, Sean Alteri, and Roberta Burnes, Energy and Environment Cabinet; Chad Harpole, Kentucky Chamber of Commerce; Gregory Dutton, Office of the Attorney General; Lloyd Cress, Kentucky Coal Association.


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


A quorum being present, the chair entertained a motion for approval of the minutes from the June 5, 2014 meeting. After a motion and a second, the minutes were approved.


Analysis of the United States Environmental Protection Agency's (US EPA's) newly proposed regulations to limit carbon dioxide emissions from existing power plants

John Lyons, Assistant Secretary for Climate Policy for the Energy and Environment Cabinet, and Sean Alteri, Director of the Division of Air Quality, discussed the features of US EPA's proposed carbon dioxide (CO2) rule for existing sources under the Clean Air Act 111(d). The cabinet is working to formulate and submit its comments on the rule before the public comment deadline of October 16, 2014. The US EPA will take these and the other comments under consideration and issue the final rule for existing sources on June 1, 2015. States will then have until June 30, 2016 to submit their own implementation plans specifying how each state will comply with the emissions reductions required by the rule. State implementation plans will be similar to the plans to reduce criteria pollutants that the state has long been required to submit for National Ambient Air Quality Standards (NAAQS) requirements. States will be given a range of options to craft state implementation plans to meet their emissions rate targets including improving energy efficiency, increasing renewable generation, and fuel switching to natural gas, among other things. Failure to submit an approvable plan will result in US EPA issuing a federal plan for the state.


Emissions rate targets under the proposed rule, which are expressed in pounds of CO2 emitted per megawatt hour (lbs. CO2/MWh), vary from state to state, and depend on the existing resources used to generate electricity in that state, the state's economy, and other factors. Under the rule as currently proposed, Kentucky will be required to meet a statewide fleet average emissions rate of 1,844 lbs. CO2/MWh for 2020-2029 and 1,763 lbs. CO2/MWh for 2030 and thereafter. These are the second highest CO2 emissions rate allowances for any state, behind only Montana. Kentucky's emissions rate requirements were based on the 2012 statewide average emissions rate of 2,166 lbs. CO2/MWh. The cabinet projects that Kentucky is currently in the range of 1,950 lbs. CO2/MWh, given changes that have occurred in statewide generation since 2012. Once the already-issued Mercury and Air Toxics Standards (MATS) are implemented, the cabinet projects that the statewide average emissions rate will further fall to approximately 1,890 lbs. CO2/MWh. The cabinet believes that Kentucky will be able to comply with the proposed emissions rate targets in the new rule without forcing any additional coal-fired or other electric generation shutdowns that have not already been announced due to compliance with MATS.


Although much of the discussion currently focuses on the recently proposed CO2 standards for existing sources, the cabinet believes that the new source standards for CO2 emissions proposed in September 2013 will have a greater impact on the future of coal-fired generation in the state. Under the Clean Air Act, US EPA must have CO2 emissions standards in place for new sources under 111(b) before it can implement standards for existing sources under 111(d). The cabinet has already submitted its highly-critical comments on the new source standards in April. If finalized as currently proposed, the maximum CO2 emissions rate for new natural gas-fired power plants would be 1,000 lbs. CO2/MWh and 1,100 lbs. CO2/MWh for coal-fired plants. New natural gas-fired plants would be able to meet this standard with existing technology, but even the best-performing coal-fired plants have CO2 emissions rates in the 1,700-1,800 lbs. CO2/MWh range. Meeting the 1,100 lbs. CO2/MWh standard would require new coal-fired power plants to be equipped with carbon capture and storage technology that has not yet been proven to be commercially viable. The cabinet feels that through this new source CO2 standard for coal-fired plants, US EPA is inappropriately instituting a major energy policy and is not properly considering costs and economic impacts, especially to coal-dependent states like Kentucky. The cabinet continues to advocate for a new coal-fired plant standard of 1,700 lbs. CO2/MWh or a rate equal to the average of the top six coal-fired performers in the state during an operating year.

The impact of the new source standards for coal-fired plants under 111(b) becomes more apparent when the age of Kentucky's current electric generation fleet is considered. The cabinet anticipates that by 2030, around 4,000 megawatts (MW) of new capacity (25 percent of total existing generation) will be installed in Kentucky and by 2040 nearly 10,000 MW (57 percent of total existing generation) will be installed as aging coal units continue to be retired. Under the new source rule as currently formulated, none of the new generation will come from coal-fired plants unless the plants are equipped with carbon capture and storage technology.


In response to questions relating to the appropriateness and cost of the proposed CO2 regulations, Mr. Lyons stated that under the authority granted to it by the Clean Air Act, US EPA believes it is able to issue these rules without congressional action. The cabinet is determining the cost of compliance with the regulations in Kentucky, but US EPA estimated that electric rates would rise by about four to seven percent nationally. In response to an assertion that the rise would be higher in more coal-dependent states like Kentucky, Mr. Lyons agreed that Kentucky's energy profile could result in a greater cost increase.


In response to questions and comments on the validity of climate science and whether the cabinet accepted that anthropogenic climate change is occurring, Mr. Lyons said that both Governor Beshear and Secretary Peters believe that the science is valid and that there is a man-made impact on the climate. However, the cabinet has serious reservations about the approach that US EPA has taken to address the problem and is working diligently to persuade US EPA to take an approach that is less economically impactful to Kentucky, especially with regard to the new source standards under 111(b).


In response to a comment that federal regulation has caused the demise of the coal industry instead of market forces, Mr. Lyons said that environmental rules do play a role, but that current natural gas prices are influencing what choices utilities are making. In some cases, utilities are choosing to shutdown older coal-fired units to comply with environmental regulations like MATS, but utilities are required to use the least-cost option in replacing that generation, which at this time is natural gas. In response to a question on whether Kentucky would be able to switch to natural gas for electric generation given the difficulty that pipeline developers faced, Mr. Lyons said that the infrastructure was a concern, but that utilities would probably not make the choice to switch to natural gas unless ample pipeline availability existed.


In response to a question about whether the cabinet's white paper on greenhouse gas policy implications constituted a capitulation to US EPA's position on the subject, Mr. Lyons said that it was issued in response to a Natural Resources Defense Council proposal to limit CO2 emissions from existing sources that the cabinet feared would influence US EPA's rulemaking and have a very detrimental impact on Kentucky's economy.


Discussion of the economic impact of the proposed carbon dioxide regulations on Kentucky businesses

Chad Harpole, Vice President for Government Affairs for the Kentucky Chamber of Commerce, discussed the reaction of Kentucky's business community to the proposed greenhouse gas rules for both new and existing sources. Over 50 percent of Kentucky businesses of all sizes say that energy prices are of critical importance to their day-to-day operations. Kentucky is home to some of the most energy-intensive industries in the country, including aluminum smelting, auto manufacturing, and chemical production. This is due to our geographic location and low-price electricity that give Kentucky a competitive advantage over other states in recruiting those industries.


The US Chamber of Commerce conducted a study that estimated the impact of US EPA's recently proposed greenhouse gas regulations for existing plants on the nationwide economy to be $50 billion to the US gross domestic product by the year 2030, with a cost to consumers of $289 billion in increased electric bills between now and 2030. The US Chamber further estimates that the total loss of disposable income for American households as result of the proposed regulations to be $586 billion through 2030. By US EPA's own estimation, the compliance cost for the proposed regulations will be $8 billion. These increased costs will mean that everyone in the state will pay more, from poor and elderly individuals to small and large businesses and school systems.


In response to a question about whether the electricity rate increases resulting from compliance with the proposed CO2 regulations would cause businesses to leave the state, Mr. Harpole said that he has not heard any businesses plan to leave; however, as energy prices increase in Kentucky, it will make business retention and recruitment much more difficult.


There being no further business, the meeting was adjourned at 2:35 PM EST.