Interim Joint Committee on Natural Resources and Environment


Minutes of the<MeetNo1> 1st Meeting

of the 2015 Interim


<MeetMDY1> June 4, 2015


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 4, 2015, 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 C.B. Embry Jr., Chris Girdler, Ernie Harris, Brandon Smith, Johnny Ray Turner, and Robin L. Webb; Representatives Hubert Collins, Tim Couch, Jim DuPlessis, Chris Harris, Cluster Howard, Marie Rader, John Short, Kevin Sinnette, Fitz Steele, and Jill York.


Guests: Dr. Len Peters, Secretary, Energy and Environment Cabinet; Mr. Sean Riley, Chief Deputy Attorney General, Commonwealth of Kentucky; and Mr. Paul Bailey, Senior Vice President, American Coalition for Clean Coal Electricity.


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


Update on Kentucky’s lawsuit challenging U.S. EPA’s greenhouse gas regulations

Sean Riley, Chief Deputy Attorney General (OAG), Commonwealth of Kentucky, updated the committee on the lawsuit against the United States Environmental Protection Agency (U.S. EPA) with regard to U.S. EPA’s authority to regulate greenhouse gases under Section 111(d) of the Clean Air Act (CAA). In June 2014, U.S. EPA issued 111(d) which significantly changes how states regulate greenhouse gases. Subsequently U.S. EPA sought to regulate under Section 112. Kentucky and 12 other state attorney generals think that U.S. EPA cannot regulate under both sections and the authority under 111(d) is precluded.


The timing of the lawsuit is to head off states putting together costly implementation plans before the final rule on greenhouse gases is issued. The suit is in the Washington D.C. Circuit, and a ruling is expected in August 2015. The court was receptive to the OAG’s arguments; however, there is a question of timing because the suit was brought before the final rule was issued.


In response to questions about how states could respond if the court rules against Kentucky, with respect to the timing of the lawsuit and if the lawsuit seeks injunctive relief, Mr. Riley said that the three judge panel voiced skepticism over the timing. If the court rules against Kentucky, then states will preserve their right to sue after the final rule is issued. The effect of the lawsuit is injunctive relief.


In response to questions about “sue and settle” lawsuits and whether courts could overturn past settlements, Mr. Riley said that “sue and settle” is a practice that the OAG sees frequently in environmental law and particularly with respect to the Clean Water Act. Courts likely do not have authority to overturn past settlements. That is why it is important to review those settlements.


Energy and Environment Cabinet’s plans to respond to the U.S. EPA’s greenhouse gas regulation requirements

Secretary Peters contrasted three separate periods of coal production--2000, 2014, and 2020--to illustrate that coal production declines are a function of various factors including low natural gas prices and shifting environmental emissions requirements. Coal production is likely to continue to decline given the aging fleet of Kentucky’s coal-fired electric generation, which is roughly 40 years old. Plants tend to retire at 65-70 years, which means that in 2020, Kentucky will retire approximately 20 units or repower those units to natural gas. Twenty units constituting 17,189 megawatts represent a 24 percent loss of current capacity when the units are retired. An additional 13 units will retire by 2030, however; current plant retirements are due more to age and the federal mercury rule rather than the greenhouse gas requirements that are being issued by U.S. EPA.


In response to a question about whether plants outside of Kentucky show similar patterns of reduced coal production and if those patterns will affect demand for Kentucky coal, Secretary Peters said yes. Evidence clearly shows reduced demand in surrounding states, and that demand softening will affect Kentucky’s production.


Secretary Peters stated that comments were submitted to U.S. EPA on 111(d) on November 26, 2014. In those comments, the cabinet expressed concern over higher electricity costs and stated that emission targets should be revised and made less stringent if any portion of the rule is vacated due to legal action. U.S. EPA should take certain factors into consideration when setting emission compliance goals such as recognizing retirements after the 2012 base year regardless of whether the retirement was due to the federal rule’s requirements or due to some other reason like age of the plant. Also, there could be sizable stranded assets of roughly $4.5 billion dollars caused by 111(d) and U.S. EPA must consider the cost of those stranded assets to the plant and to the state.


Stakeholders to any state implementation plan to control greenhouse gases are telling the cabinet that a state-based approach is better than a federal plan. Stakeholders prefer a mass based approach, meaning that, instead of tons of carbon dioxide per kilowatt hour, plants would rather have a tonnage target by sector. Stakeholders think rates are too difficult to implement. Finally, while Kentucky will continue to act as an observer as multistate discussions, there is no benefit to being in a regional trading regime. However, there are interesting features to how implementation will affect regional trading groups.


Secretary Peters stated that the U.S. power industry must respond quickly or there will be a reduction in U.S. power plants. The Commonwealth’s goals are to protect the Kentucky economy, maintain affordable rates and reliability of the electric grid, maximize the use of existing coal resources, and to remain in charge of the state’s regulatory structure. States must respond to U.S. EPA’s final rule by June 2016. If a plan is not submitted, then U.S. EPA has procedures for instituting a federal implementation plan and the U.S. EPA will directly regulate the electric power sector in this state. Also, even as plans are submitted and rules are issued or rewritten, there will be litigation. This is compliance with environmental law. The electric power sector has been clear that a state plan rather than federal regulation is preferred. If a federal plan is instituted, it would likely have a multistate cap and trade scheme and would have more onerous reduction requirements.


In response to a question about whether an implementation plan with different rates would increase the retail rate and create winners and losers in the electric power sector, Secretary Peters stated the plan might have a fixed cap and then participants could trade and sell. It is unclear whether U.S. EPA would take into account differences in state regulations. It is not known whether a federal plan would protect the economy, rate affordability, maximization of coal resources, or reliability.


In response to a question about what the cabinet will do when the court decision is announced and how the Northeast managed to remain powered during the Nor’easter, Secretary Peters stated that the cabinet can come back to the committee with an update when the court announces their decision. Also, the Northeast dispatched all coal-fired power plants to maintain power. Northeastern states also paid exorbitant prices for natural gas.


In response to another question about whether the cabinet agrees to the standards proposed in Section 111(d) and Section 112 of the Clean Air Act (CAA), Secretary Peters said that the proposed 111(d) has the least stringent standards. But, with respect to other areas of the CAA, the courts have said the rules are appropriate for regulating greenhouse gases. One legislator stated that the Maysville power plant is very clean and that Kentucky used to be third in the nation for coal production. The rules that are ruining the coal industry were developed behind closed doors of regulatory offices rather than in Congress.


In response to a question about who the “stakeholders” are in the cabinet’s plan for regulating greenhouse gases are in regards to 111(d), Secretary Peters said that the stakeholders are the utilities, the Kentucky Chamber of Commerce, Kentucky Association of Manufacturers, and the Kentucky Coal Association, among others. There are 10 to 25 people who are in discussions. The cabinet is most concerned with talking to the target community, which is the utility industry.


One legislator, in reaction to Secretary Peter’s remarks, commented that utilities are concerned about federal implementation plans, but unlike other parties, utilities have a guaranteed rate of return and will be less harmed than other groups. U.S. EPA’s response to inquiry regarding how the science is developed behind its rulemakings lends itself to developing mistrust. For example, U.S. EPA misused the study identified, and US EPA is recalcitrant when questioned about the foundations or science behind its policies. It appears the federal government does not care about the cost or impact of those policies on Kentucky or other states. U.S. EPA tends to overestimate the benefits and diminish the impact of the cost.


One legislator described traveling to meet with officials at U.S. EPA. Those officials were hostile and intimidating and treated the legislative delegation badly. Another legislator commented that as an elected official the system is a mockery. In response, Secretary Peters stated that executive branch offices in the Capitol have a protocol for meeting with the public, and the experience was not simply reflective of meetings with U.S. EPA. Other offices would greet people the same way; however, U.S. EPA has done a good job with developing 111(d).


In response to a question about whether Mercury and Air Toxics Standards (MATS) will only affect power plants or other types of boilers, John Lyons, Assistant Secretary for Climate Policy, stated only steam electric generating units, regardless of whether those units have scrubbers, will be affected. The legislator further asked why the mercury rule is a problem for existing power plants because most have wet stack scrubbers and mercury is easy to remove. Mr. Lyons responded that some power plants can already comply with the mercury emissions but others need new technology. There is a Maximum Achievable Control Technology (MACT) rule that could impact other boilers. Overall compliance is a $4.5 billion dollar cost for the state. The legislator said that technology is already available for compliance, and it appears the policies are truly against coal.


One legislator commented that after U.S. EPA finishes with coal, the agency may go after natural gas too, because it is a fossil fuel. In response to a question as to who represents the normal consumer at the stakeholder meetings, Secretary Peters said there are individual ratepayers and nongovernmental organizations on the stakeholder group. He noted the focus has been to get a broad representation without getting so large that the group cannot come to a consensus.


Projections for the economic impact of U.S. EPA’s greenhouse gas regulations

Paul Bailey, Senior Vice President, American Coalition for Clean Coal Electricity gave a profile of Kentucky’s coal production and usage in 2014 and compared it to current trends to demonstrate that U.S. EPA’s policies have had a detrimental impact on the state. The main point is that while U.S. EPA lacks authority to implement the current rules, the result will be higher electricity and natural gas prices without significant climate change benefits. In fact for the $560 billion spent to thwart climate change, the only result will be a reduction in sea levels that is three sheets of paper in thickness. However, energy prices will be 11 percent higher and there will be stranded assets along with a reduction in system reliability. There will be lost tax revenues in addition to a $2 billion loss in Kentucky gross domestic product (GDP). There will be job losses and no time to put together implantation plans.


National Economic Research Associates (NERA), however, finds energy prices will be 14 percent higher from 2020 to 2030. In the wholesale markets, electricity prices will increase from 40 percent in the PJM market to 52 percent and 55 percent in the South and Midwest Independent System Operator (MISO) respectively. According to the Energy Information Administration, retail electricity prices will be around four percent higher in 2020 and 8.2 percent in 2030. Overall all analyses show an increase in energy prices without real positive results. There will be almost one million Kentucky families that spend roughly 17 percent of their home pay on energy. These families are vulnerable. Coal usage will be reduced by 320 million tons per year.


Officials from 32 states have opposed the rule, and grid operators are equally concerned about negative impacts to reliability. There will be other legal challenges.


In response to a question about the dollar impact on tax revenues, Mr. Bailey said he did not know but would look at the data and get back to the committee. One legislator commented that the lack of coal severance would make budget discussions next year even more complicated. Another legislator echoed the speaker’s concerns about the impact of higher energy prices on the low income families in the state.


The meeting adjourned at 2:35 PM.