Program Review and Investigations Committee




<MeetMDY1> August 14, 2012


Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee met on<Day> Tuesday,<MeetMDY2> August 14, 2012, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Fitz Steele, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Jimmy Higdon, Co-Chair; Representative Fitz Steele, Co-Chair; Senators Tom Buford, Perry B. Clark, Joey Pendleton, Dan "Malano" Seum, Brandon Smith, and Katie Stine; Representatives Leslie Combs, Jim DeCesare, Terry Mills, Ruth Ann Palumbo, Rick Rand, and Arnold Simpson.


Legislative Guest: Representative John Will Stacy.


Guests: Secretary Leonard K. Peters, Kentucky Energy and Environment Cabinet. Commissioner R. Bruce Scott, Kentucky Department for Environmental Protection. Commissioner Steve Hohmann, Kentucky Department for Natural Resources. Bill Bissett, President, Kentucky Coal Association. David Gooch, President, Coal Operators & Associates, Inc. Kim L. Nelson, Executive Director, Western Kentucky Coal Association.


LRC Staff: Greg Hager, Committee Staff Administrator; Colleen Kennedy; Katie Kirkland; Van Knowles; Lora Littleton; Jean Ann Myatt; William Spears; Joel Thomas; Leonard Evans, Graduate Fellow; Jenna Skop, Graduate Fellow; Stella Mountain, Committee Assistant; Program Review and Investigations Committee Staff. Mike Clark, Jonathan Roenker, LRC Staff Economists Office.


Approve Minutes for July 12, 2012

Upon motion made by Representative Simpson and seconded by Representative Mills, the minutes of the July 12, 2012 meeting were approved by voice vote, without objection.


Importance of the Kentucky Coal Industry

Representative Steele said that he is generally calm but that the targeting of the Eastern Kentucky and West Virginia coal industry angers him.


Staff Report: Economic Contribution of the Kentucky Coal Industry

Jonathan Roenker and Jean Ann Myatt presented the staff report The Economic Contribution of the Kentucky Coal Industry. Mr. Roenker said that coal production in the US has been steadily increasing since 1960 but the amount of coal mined in Kentucky has been declining since 1990. As of 2010, Kentucky was still the third largest coal-producing state; however, producing approximately 105 million tons. This represents almost 10 percent of the total volume of coal produced in the US that year. Historically, the majority of coal severed in the state comes from mines in the eastern Kentucky coal fields. This gap has narrowed in recent years as production from western Kentucky mines has increased, and production in eastern Kentucky has declined.


In 2010, Kentucky coal was shipped to 24 other states and to other countries. The majority of Kentucky coal is shipped to other states, primarily southeastern states. In 2010, of the over 42 million tons of coal shipped to end users located in Kentucky, more than 65 percent came from mines within the state.


In 2010, employment in the Kentucky coal industry was just over 19,000 employees, over a 60 percent drop since 1979. Coal mining’s share of total employment in Kentucky was approximately 1 percent of all nonfarm jobs in the state in 2010. For the top 10 counties based on the number of coal mining employees, coal wages and employment often account for a large portion of total wages and employment—up to 45 percent of wages and up to 24 percent of employment. Over the past 10 years, in 7 of the 10 counties, coal employment as a percentage of total county employment and coal wages as a percentage of total county wages grew.


In inflation-adjusted dollars, mine prices for US and Kentucky bituminous coal doubled in the decade ending in 2010. However, coal prices for central Appalachian coal have steadily declined since early 2011 to nearly $50 per ton in early 2012. The increasing availability of low-cost natural gas has contributed to the declines in coal prices.


In nominal terms, Kentucky coal severance tax revenues peaked in 2012 at more than $298 million. When comparing revenues in constant (2012) dollars, coal severance tax revenues were considerably higher in the late 1980s and early 1990s than now.


An industry's contribution to the state economy is composed of direct, indirect, and induced effects. The direct effect consists of the value of industry output, the jobs created, and the income paid to workers employed directly in the coal industry. The indirect effect includes employment and income in the economic sectors that supply or support the coal mining industry. The induced effect occurs as people employed in the coal mining and support sectors spend their earnings, creating additional employment and income.


In 2010, the coal mined in Kentucky was valued at $6.4 billion. The direct economic contribution was 19,085 direct jobs in the state with total direct earnings of over $1.7 billion. Applying the appropriate multipliers to the direct output, employment, and earnings figures allows for an estimate of the total economic contribution of the coal mining industry in Kentucky in 2010. In 2010, total output in Kentucky attributable to the coal industry was $10 billion ($6.4 billion direct plus $3.6 billion indirect/induced), total employment was 42,078 (19,085 direct plus 22,923 indirect/induced), and total earnings were $2.85 billion ($1.70 direct plus $1.15 billion indirect/induced).


The industry’s activity in the state generates revenue for state and local governments through the sales tax, the individual income tax, and the coal severance tax. It is estimated that the total earnings of $2.85 billion would result in sales tax revenues of approximately $75.24 million. It is estimated that the total earnings of $2.85 billion contributes approximately $122.55 million in individual income tax receipts. Coal severance tax receipts in fiscal year 2010 in Kentucky were approximately $271.9 million. Total annual receipts attributable to the Kentucky coal industry for these three taxes were an estimated $469.7 million.


Ms. Myatt noted that the report did not cover all federal regulations that affect coal.


Clean Water Act Section 402 permits relate to storm or wastewater discharges into US waters and Section 404 permits relate to discharges of fill material into navigable waters at specific locations. Since 2009, these are the primary permits being delayed by federal actions. One change affecting these permits is the US Environmental Protection Agency’s (EPA) use of guidance documents. Guidance documents are meant to be further explanation of regulations and are nonbinding. In practice, EPA objections to Section 402 and 404 permits based on guidance specifications have slowed or stopped the process and backlogged permits. On July 31, 2012 a federal district court in Washington DC, ruled that the EPA had overstepped its authority in effectively denying permits based on new criteria within the guidance documents. Kentucky is a party to the lawsuit. It is unknown whether EPA will appeal the court’s decision. For now, Section 402 and 404 permit applications will not be subject to the more stringent guidance document criteria.


Another change is the restricted use of general permits in favor of individual permits. General permits are more generic in nature; individual permits require more rigorous approval criteria, are site specific, and have a public comment period.


Another permit issue involves reclamation bonding requirements for surface mining permits. Bonding is required from mining companies to insure an area is properly and fully reclaimed after the mining operation ceases. The federal Office of Surface Mining deemed Kentucky’s bond program as deficient. Kentucky has increased bond amounts and is working to establish a statewide mandatory bond pool. The bond pool would be a backup if an individual bond amount is deficient.


The federal Clean Air Act establishes various standards and rules to improve air quality from the effects of pollution. Utilities’ coal-fired electric generating plants are the major contributor of several air pollutants including nitrogen oxides (NOx ), sulfur oxides (SOx), carbon monoxide, and mercury. The greenhouse gas component, carbon dioxide, is also emitted by coal-fired electric generating plants. Clean Air Act regulations have been in place for 30 years, and emissions have decreased both nationally and in Kentucky during this time. National Ambient Air Quality Standards (NAAQS) relate to pollutants that endanger public health. NAAQS controlled pollutants relating to coal are sulfur dioxide (SO2), NOx, ozone, and particulate matter. From 2010-2013, allowable concentration levels of each of these pollutants have or will be lowered. With one exception, Kentucky is in compliance, but will have more non-attainment areas with the new requirements. With the new Mercury and Air Toxics Standards (MATS), fossil-fuel-fired plants—not just coal-fired plants—nationally overall are expected to reduce emissions of mercury by 91 percent, acid gases by 91 percent, and SO2 by 55 percent from existing levels. This rule will most strongly impact plants without emission controls in place. Many Kentucky coal-fired units are not equipped to fully comply with existing controls.


The proposed EPA Greenhouse Gas New Source Performance Standards rule would only apply to new sources of fossil-fuel-fired electric generation, not to existing units or modifications or reconstruction at existing units. The limit of CO2 emissions proposed would not be attainable by new coal-fired plants with current technology. EPA references the use carbon capture and storage as a possible technological advancement to assist coal-fired plants with reducing CO2. This technology is still experimental, however. Officials from the Kentucky Division for Air Quality were unaware of any commercial projects using carbon capture and storage.


Mr. Roenker said that the price of natural gas used in the production of electricity has decreased significantly, typically attributed to two factors. One is that the recent mild winter led to an increased inventory of natural gas. More significantly, the supply of natural gas has increased due to relatively new extraction technologies such as hydraulic fracturing or “fracking.” Dry shale gas production in the US has grown from less than 1 trillion cubic feet of production in 2000 to over 7 trillion cubic feet in 2011. This rapid growth in the supply of natural gas has had an impact on the price. The price per thousand cubic feet has declined since its peak in 2008 from $12 to less than $4, which is approximately the same price as in 2002. These lower natural gas prices are impacting how electricity is generated in the US. As of April 2012, generation from natural gas-fired plants in the US was nearly equal to generation from coal-fired plants.


The US Energy Information Administration has projected the total levelized cost of building and operating new electricity generating plants for plants entering service in 2017. Levelized costs represent the per megawatthour cost of both building and operating a generating facility over an assumed life cycle. Natural gas-fired electricity plants are currently projected to be the most cost-effective option.


Kentucky’s coal-fired generator fleet is even older than the US fleet. Nearly 90 percent of the coal-fired generating units in Kentucky are at least 30 years old and nearly 62 percent are at least 40 years old. This is important given that electricity providers operating older coal-fired units will be faced with a decision on replacing this aging capacity.


In response to questions from Representative DeCesare, Ms. Myatt said that current technology would not meet the proposed EPA greenhouse gas rules if a new coal firing plant were to be built. No commercial entities are performing carbon capture. She deferred to the cabinet for further information.


In response to questions from Senator Stine, Mr. Roenker said that the information in a table on the estimated levelized cost of new generating plants entering service in 2017 is a projection by the Energy Information Administration (EIA) and is a total cost measure including construction and operating costs. He said he would find out whether government subsidies are included in those costs.


In response to a question from Senator Higdon, Mr. Roenker said that staff looked at historical trends and did not make any projections regarding future costs of natural gas and electricity, but the Cabinet could possibly address this. The EIA makes such projections and this was not included in the report.


In response to questions from Senator Pendleton, Ms. Myatt said that approximately 2,000 permits, mostly general, have been issued per year in Kentucky. Mr. Scott would be able to furnish more information about the number of permits denied over the past four years. Representative Steele said that no permits have been issued in Eastern Kentucky over the past three years.


Representative Combs said that wind as a source of energy is not feasible for most parts of the US.


In response to questions from Representative Combs, Mr. Roenker said that 2010 data were the most recent available on total employment attributable to the coal mining industry. He said that the Lexington Herald-Leader estimated that, 2000 jobs directly related to the coal industry have been lost to date in 2012.


Senator Seum said that coal production in Kentucky results in low electricity rates that have attracted industry to this state, making a significant economic and fiscal contribution to the Kentucky economy. This should have been covered in the report. People in Jefferson County should be just as concerned about the survival of the coal industry.


Representative Steele said that those 2,000 lost jobs were in his district.


In response to a question from Representative Palumbo, Ms. Myatt said that in the past most permits were the general type. General permits are used for mining activities that are substantially similar in nature and are going to have minimum adverse effects on US waters. Individual permits require more approval criteria and have a public comment period. They are harder to obtain, thus the decrease in permits issued. The EPA favors the individual permits.


Representative Combs pointed out that, in 2010, roughly $136 million from coal severance tax receipts went to Kentucky’s General Fund.


Secretary Peters commended the report.


In response to questions from Representative Steele, Secretary Peters said that the cabinet was not invited to join EPA officials on their private tour to Eastern Kentucky. Mr. Scott said the EPA wanted to meet with members of the public directly.


In response to questions from Representative DeCesare, Secretary Peters said that there has been a decline in direct mining jobs over the past 6 months but he has no exact numbers. He referred to a slide showing coal production. Eastern Kentucky production is expected to continue to decline.


In response to a previous question from Senator Stine and a request from Representative Combs for additional comments, Secretary Peters said that subsidies relevant to wind are included in levelized cost. EIA factors in reasonable permitting requirements and length of permitting time.


In response to a previous question from Representative Palumbo, Mr. Scott said the general permit is intended to cover a broad category of entities that have very similar activities such as individual home units with treated sewage. Individual permits are issued for unique types of activities that need to be addressed individually. In the coal industry, general permits are issued for similar activities, and individual permits are required for unique situations because of where they are located and the water resource they potentially affect.


In response to a previous question from Senator Seum, Secretary Peters said that electricity rates have contributed to the development of a strong manufacturing industry in Kentucky with approximately 200,000 employees. Kentucky has the fourth lowest electricity rate in the nation.


Secretary Peters said the Division for Air Quality is following the Greenhouse Gas New Source Performance Standards closely. Even with supercritical coal combustion, coal burning plants cannot meet the 1,000 pounds limit required for new power plants. It is unknown whether EPA will extend the proposed standards to existing power plants. Should that occur, it would have a major impact.


Senator Stine thanked Secretary Peters for his clarification, which confirms her assertion that the government is picking winners and losers by choosing to subsidize some industries and overly burdening others so that it would appear that one is more cost efficient than another.


Secretary Peters said there are no commercial-scale carbon capture storage projects active in the US.


In response to questions from Senator Higdon, Secretary Peters said that Florida and Georgia are the top two consumers of Kentucky coal. Florida has been shifting from coal to natural gas for electricity generation for several years; Georgia’s shift to natural gas is more recent. It is a most difficult time to make projections on the future of coal in Kentucky. The price of natural gas is at an all-time low and is volatile. The lifetime of natural gas plants is unknown because they burn much hotter. If liquefied natural gas exports increase and the price of natural gas becomes more globalized, the domestic price for natural gas may also increase, which would increase the cost of electricity in Kentucky.


Senator Buford said that solar and wind are not significant sources of energy. Natural gas companies are already designing ways to export natural gas to Europe. This may affect the supply and demand in the US. He is concerned that many power utility facilities will be converted to natural gas and will later need to go back to coal as a source of energy.


In response to questions from Senator Buford, Secretary Peters said that India and China will be the largest energy growth markets over the next several decades. India already is having problems with its electric grid and being able to meet demands. Both countries are building coal burning facilities and are looking for additional sources of coal. They cannot get as much coal from that part of the world as they want, so international exports will grow. China has considerable reserves; India has fewer reserves. Secretary Peters said that 90 percent of base load generation comes from coal, natural gas, and nuclear, yet most time and money is spent addressing the remaining 10 percent such as renewables and hydroelectric. Much can still be done with conventional base load generation sources to make them more efficient, more effective, and have positive effects on electricity use in the US. Until there is a major breakthrough in storage, wind and solar will not be significant contributors to base load generation.


In response to a question from Senator Seum, Mr. Scott said that Kentucky has been in litigation with the federal government only in the past few years. Regulatory initiatives do not recognize regional variance. Secretary Peters said that until there is an effective national energy policy, there will be a de facto energy policy through environmental regulation.


Senator Smith said the lack of an energy policy is hurting Kentucky; national control is frustrating.


At the suggestion of Senator Smith, Representative Steele asked for a moment of silence in memory of Mr. Michael Haydon.


Representative Combs said that there is no legislative review of regulations at the federal level as there is in Kentucky. She gave background information to explain that it was the US Supreme Court that authorized EPA to regulate greenhouse gases.


Secretary Peters said the Kentucky legislature has been very supportive of energy research being done at Kentucky universities and should be proud of it. He described promising research at the universities.


Senator Clark said that Germany is pursuing solar energy. The price of solar panels has decreased by two-thirds since 2006. Germany is looking at 25 percent of its domestic production of energy coming from solar by 2050. Germany has similar weather conditions as Kentucky and solar energy is not impossible.


Mr. Bissett gave an update of the coal industry. He said that organic and man-made factors are contributing to the uncertainty of its future. These factors include the price of coal versus that of natural gas, the previous warm winter and mild summer; the anti-coal administration in Washington, and the lack of a true economic rebound. He suggests a multiplier of three to one for jobs lost in the coal industry. He gave an update on the Kentucky Coal Association litigation with the EPA.


“Friends of Coal” is a volunteer organization that promotes coal. More than 57,000 “Friends of Coal” license plates and more than 1,800 motorcycle license plates have been sold at $10 each. Half of that amount is used for promotion and the other half is used for scholarships.


Mr. Gooch said that membership of the Coal Operators & Associates, Inc. includes “mom and pop” operations with 10 to 15 employees. He said the impact of unemployment happens over time as support industries that provide services to coal employees lose customers. Kentucky’s natural gas industry is also hurting because of competition from cheap natural gas from the Northeast.


In response to a question from Senator Smith, Mr. Bissett said that the 2,000 jobs lost are direct jobs, but there have been layoffs in other areas too.


Senator Smith said that Kentucky has dry gas and the shift has been to wet gas available in Pennsylvania and elsewhere. The coal and natural gas industries are forced to compete, which is bad for both industries.


Senator Seum said that coal is one of Kentucky’s signature industries and a better job could be done in selling the industry.


Mr. Nelson said that the Western Kentucky Coal Association has tried for years to promote coal but it is difficult with a liberal press in the state. The “Friends of Coal” campaign is a success. The Illinois basin coals are similar in quality and mining techniques. The Western Kentucky coal industry has experienced significant growth, with almost 4,000 miners working in seven or eight counties. Kentucky has been able to attract major industry because of low energy costs. Western Kentucky lost market share due to concerns with high sulfur coal causing acid rain. With the strict EPA regulations, many Western Kentucky utilities have installed scrubbers and production has increased.


Electricity is going to become more expensive as the government is pushing natural gas; cheap energy is going to be lost. Western Kentucky is on the verge of losing its aluminum smelters.


Mr. Nelson noted a front page article in the Courier-Journal on the Natural Resources Defense Council quoting a 27 percent increase in toxins in Kentucky in one year but state officials said that the increase was less than half the quoted number. The paper retracted the number to 11 percent.


Mr. Nelson said that not only the EPA but every federal agency is trying to end the use of coal. Moving from coal to natural gas will be an economic disaster for Kentucky.


Representative Combs referred to a presentation she had seen in which scenes of mountaintop mining were interspersed scenes of road building, which made the point that mining is similar to other industries.


Senator Pendleton said that the dairy industry is facing the same issues as the coal industry, with loss of jobs and farmers going out of business because of regulations enforced on the federal level.


Representative Steele said that GE Industrial Park will be lost if electricity rates go up.


In response to questions from Representative Simpson, Mr. Gooch said that there is a tax on natural gas similar to the coal severance tax. Natural gas is coming into Kentucky because wet gas in other states is recovered by fracking, which is a more efficient method of drilling and thus cheaper than the dry gas from Kentucky.


Upon motion by Senator Pendleton and second by Representative Combs, the report was adopted by roll call vote.


The meeting adjourned at 12:00.