Call to Order and Roll Call
The 6th meeting of the Interim Joint Committee on Natural Resources and Energy was held on Thursday, November 2, 2017, at 1:00 PM, in Room 129 of the Capitol Annex. Senator Jared Carpenter, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Jared Carpenter, Co-Chair; Representative Jim Gooch Jr., Co-Chair; Senators C.B. Embry Jr., Ernie Harris, John Schickel, Brandon Smith, Johnny Ray Turner, Robin L. Webb, and Whitney Westerfield; Representatives John Blanton, Larry Brown, McKenzie Cantrell, Tim Couch, Jeffery Donohue, Jim DuPlessis, Daniel Elliott, Kelly Flood, Chris Fugate, Dennis Keene, Reginald Meeks, Suzanne Miles, Marie Rader, and Jim Stewart III.
Guests: Brydon Ross, Vice President of State Affairs, Consumer Energy Alliance (CEA); Allen Luttrell, Commissioner of the Department for Natural Resources; Secretary Charles Snavely, Energy and Environment Cabinet, Chairman of the Reclamation Guaranty Fund Commission; David Carroll, General Manager, Paducah Power System (PPS), General Manager, Kentucky Municipal Power Agency (KMPA); Josh Callihan, Vice-Chair of Kentucky Municipal Energy Agency (KyMEA), President, Kentucky Municipal Utilities Association and General Manager, Barbourville Utility Commission; Annette DuPont-Ewing, Executive Director, Kentucky Municipal Utilities Association; and David Samford, Attorney at Law, Goss Samford, PLLC.
LRC Staff: Stefan Kasacavage, Janine Coy-Geeslin, Tanya Monsanto, and Rachel Hartley.
Overview of Solar Policy and Infrastructure Challenges in the States
Brydon Ross stated CEA is a consumer advocacy organization that brings together households and small businesses that use energy along with other industrial users to engage in a meaningful dialogue regarding America’s energy future. The mission of CEA is to improve consumer understanding of energy security, including the need to reduce reliance on imported oil and natural gas, maintain reasonable energy prices, and continue to diversify energy resources.
CEA was founded in 2006 and has over 250 member companies and over 400,000 individual consumer members. Kentucky has close to 5,500 individuals and partner organizations. CEA strongly advocates for and supports solar expansion. Mr. Ross testified that the United States is in the early stages of an energy revolution that can reshape the nation’s economic landscape with proper regulatory and public policy decisions. Mr. Ross testified that solar is vital to the country’s energy future and a significant part of our diverse energy sources. Solar will provide long-term health, environmental, and cost-saving benefits for families and businesses.
Mr. Ross testified that solar energy continues to set records every year due to the 70 percent cost decrease since 2010 and the incentive programs provided by the government and electric utilities. Many of the incentive programs were designed when there were not many users, so policymakers created options to encourage the use of solar. These programs grew in popularity. Over time, the structure used to incentivize consumers has resulted in losses due to covering the costs associated with providing electricity 24 hours a day, seven days a week. These costs are shifted to those who do not participate in the incentive programs.
In 2016, 47 states and the District of Columbia made legislative or regulatory updates to solar policy regarding net metering, rate design, and solar ownership. Net metering is a billing mechanism that compensates qualifying businesses and customers for any excess private electricity they generate. It creates private credits for participants that are valued at the full retail rate for electricity. This includes not just the value of the generated power, but also the grid infrastructure. Private solar customers would not have the ability to net meter without the public grid.
Mr. Ross testified that net metering allows private solar customers to avoid paying infrastructure costs. These costs are factored into a monthly power bill. When the costs are avoided, it creates a lapse in grid maintenance funding, or it requires that the loss of funds be collected elsewhere.
In 2015, CEA launched its Solar Energy Future Campaign to help expand and improve education on the importance of growing solar responsibly. The focus of the campaign is to raise awareness on the value solar provides and to ensure policies are pro-consumer.
In 2016, CEA conducted a comprehensive analysis to evaluate solar nationally. The conclusions were that existing incentives for residential and third party solar were significant; private solar credit incentives shifted costs onto less affluent consumers; and incentives for privately owned solar varied widely among states.
In Kentucky, the typical private solar customer with a 30 kilowatt system receives over $1,660 per year in excess credit generation. If the one percent cap were met by private solar program participants, the fiscal impact to consumers without private solar could reach $5 million per year to help pay the fixed costs of maintaining the grid.
In response to Representative Flood, Mr. Ross stated the members who do not participate or cannot participate in solar should not have to shoulder the cost of the infrastructure for solar participants. A compensation rate that reflects market realities is needed. The incentive program should allow people to be grandfathered in who have already invested in solar, but incentive programs going forward should have a compensation rate equal to wholesale power.
Status of the Kentucky Reclamation Guaranty Fund
Allen Luttrell stated the Surface Mining Control and Reclamation Act (SMCRA) was passed in 1977. In 1982, Kentucky received primacy which allows the state to regulate the environmental and public protection aspects of SMCRA. In 2011, the Office of Surface Mining (OSM) declared the performance bond program inadequate, and in 2013, the Kentucky Reclamation Guaranty Fund (KRGF) was formed to partially address bonding inadequacies. Since April 2014, the KRGF balance has increased by approximately $20 million dollars.
In response to the OSM bonding issues, Kentucky increased performance bond protocols in the permitting process, created KRGF, initiated reclamation liability reduction efforts, and revised bond forfeiture reclamation cost estimate procedures.
The revenue sources for KRGF include membership fees, tonnage fees, non-production and dormant fees, late payments, penalties and fines from the Division of Mine Reclamation and Enforcement violations, interest earned, and forfeitures.
The beginning balance of KRGF was $23.5 million, and the current balance is $43.8 million. The fund balance is increasing while the quarterly fee collection is decreasing. Mr. Luttrell explained that this change in balance and fee collection is due to forfeitures. There has been approximately one forfeiture a month since May 2016. Most of the forfeitures are regarding bonds that were calculated utilizing the former protocol of OSM. Mr. Luttrell stated that there have not been any forfeitures under the current protocol.
The Highwall Reduction Initiative was implemented to monitor and track open highwall with a focus on idle operations. Almost 200,000 linear feet of idle highwall in inactive mines has been eliminated since March 2016. Mr. Luttrell stated that bond forfeiture cost estimates have been significantly reduced to reflect a more accurate reclamation expenditure.
In response to Senator Webb, Mr. Luttrell stated Kentucky uses a per-acreage bonding calculation. The previous calculation was $2,500 per acre and has been increased to a minimum of $4,000 per acre with consideration of site factors. The law allowed incremental bonding, so an applicant could bond one or two acres separately from other tracts of land. The program was designed to allow landowners to sell the coal they found during the construction of their residence. Mr. Luttrell explained that this program was abused by coal operators. When a forfeiture occurred, it was difficult for a contractor to do work on such a small scale. One of the new protocols was to add a $75,000 minimum per applicant per increment to cover mobilization and demobilization.
In response to Representative Miles, Mr. Luttrell stated there is a permitting aspect within SMCRA. To obtain a permit you must first describe the land prior to mining and how the land will be utilized post mining. If the applicant wants to have a different post mining land use, then it has to be of an equal or higher use. Some of the land uses included in the regulations are residential, forest, recreation, and fish and wildlife habitat. There is also a public comment component. When the application is complete, it is a requirement to have four weeks of advertising plus a 30 day comment period. There is also public comment if the post mining land usage changes throughout the mining process.
In response to Representative Gooch, Mr. Luttrell said the state program that granted two acre permits was struck down by OSM and the permits are no longer issued. The program was intended for private construction.
In response to Senator Smith, Secretary Snavely stated the reason the two acre permits were struck down was due to abuse of the program, and he hopes there can be a common sense solution.
The Role of Joint Action Agencies in Paducah Power System’s Success
David Carroll stated within the last four years Paducah Power System (PPS) has reduced residential rates by 16 percent and has reduced commercial/industrial rates by 20-25 percent. The reliability rate of PPS is 99.99 percent. There have been zero lost time accidents in the last 5.5 years.
KMPA was formed in 2005 by an inter-local agreement between PPS and Princeton Electric Plant Board to finance ownership in the Prairie State Energy Campus (PSEC). The agency is authorized to coordinate planning, construction, and operation of joint electric power supply projects.
The Prairie State Energy Campus serves 2.5 million families and businesses in 180 midwestern communities. There are nine owners who are all public power entities. Six of the owners are joint action agencies. The campus project cost $5 billion with $1 billion in environmental emission controls.
KyMEA members are seeking joint action legislation. There are 10 members that provide cost effective, reliable and environmentally responsible power. PPS has a 10 year market based contract with KyMEA.
American Municipal Power (AMP) provides generation, transmission, and distribution of power for its 135 members in nine states. It is the largest municipal joint action agency in the country. PPS has a hydropower contract with AMP and has a seat on the AMP board. AMP assisted in securing a two-year capacity contract for PPS with NextEra Energy, which will reduce rates by $3 million.
The benefit of joint action agencies is power supply planning through power contracts with other joint action agencies. Joint action agencies do not require generation to be owned. Another benefit of joint action is the ability to band together with other municipalities to have a voice on all regulatory issues and legislative processes for generation, transmission, and the environment.
In response to Representative Gooch, Mr. Carroll stated there is an opportunity for net metering because of the economies of scale for joint action agencies.
In response to Senator Webb, Mr. Carroll stated there are no current statutes that allow for the formation of a joint action agency. Annette DuPont-Ewing stated the 10 cities that joined together to form KyMEA was organized under four different KRS statutes. The joint action legislation would make a streamlined approach, so all are operating under one set of rules. The Natural Gas Acquisition Act will be used as a model for this legislation. Ms. DuPont-Ewing said the opposition to joint action legislation includes investor owned utilities and electric cooperatives. The opposition has asked that joint action agency legislation include oversight by the Public Service Commission (PSC). Josh Callihan stated that city agencies are subject to open records and meetings and bound by the Model Procurement Code.
Regulated Utility Industry Principles on Municipal Joint Action Legislation
David Samford stated he was speaking on behalf of investor owned utilities and cooperatives that have significant concerns with the proposed joint action legislation. Their main concern is the level of accountability and oversight of joint action agencies. Investor owned utilities are controlled by the shareholders, and electric cooperatives are controlled by their customers. Creating a joint action agency would establish a super board of multiple municipal agencies, and voters would not have the same level of oversight that they would have if it were their sole municipal utility.
Previously proposed legislation was very broad, and municipal customers in Kentucky would potentially be saddled with the obligations of the joint action agency without any recourse. Mr. Samford said he was not opposed to joint action agencies, but he believes there should be a prudent level of oversight.
In response to Representative Gooch, Mr. Samford stated cost overruns for investor owned utilities do occur in other contexts in the industry. If a utility is regulated by the PSC, the decisions are made by the objective regulator. In the context of an investor owned utility or a cooperative, the PSC has the ability to not allow the utility to pass on costs to the rate payers. With a joint action agency, the contracts are guaranteed that the municipal customers will pay full price for the power. Mr. Samford said that he was not suggesting that joint action agencies should be fully regulated. However, they should go through a similar process to what existing utilities go through. A regulated utility must apply for a certificate of public convenience and necessity to build a power plant in Kentucky. The applicant must show there is a need for the power and the new generation will not result in wasteful duplication. Prairie State Energy Campus (PSEC) is the model of why that type of analysis is needed because a utility invested $461 million in a power plant that greatly exceeded the load capacity needed to serve consumers. The problem is what to do with the excess capacity.
In response to Representative Gooch, Mr. Carroll stated the boilers used at PSEC were not initially designed for that project. The boilers were designed for a failed project in Texas. Mr. Carroll stated that the proposed joint action legislation has specific guidelines for PSC to study and prevent capacity issues.
In response to Senator Embry, Mr. Carroll stated that in order to address rate issues in Paducah, a joint action agency needs to have enough participants to hire qualified staff, and PSC should issue an independent report paid for by KyMEA regarding ownership of assets.
In response to Representative Miles, Mr. Samford stated he is not with the PSC. The concern is power contracts should not turn into insurance policies where the only people who are protected are the investors and do not take power from the power plant. The municipal customers would be responsible for those obligations. Ms. DuPont-Ewing stated each municipal utility makes a decision to participate in a project or buy wholesale power from the joint action agency. There are no plans for the next 15 years to build generation or transmission. All of the power contracts have an opportunity for renewal.
Josh Callihan stated joint action is a proven model in states around Kentucky, and there are safeguards in place to protect rate payers. The rate payers are the shareholders who have the opportunity to vote and attend open meetings. Mr. Samford stated municipal customers do not own PSEC and are unable to buy back shares.
The next meeting of the Interim Joint Committee on Natural Resources and Energy will be on December 7, 2017. Documents distributed during the meeting are available in the LRC Library.
There being no further business, the meeting was adjourned.