Interim Joint Committee on Appropriations and Revenue


Minutes of the<MeetNo1> 1st Meeting

of the 2007 Interim


<MeetMDY1> June 21, 2007


The<MeetNo2> 1st meeting of the Interim Joint Committee on Appropriations and Revenue was held on<Day> Thursday,<MeetMDY2> June 21, 2007, at<MeetTime> 10:00 AM, in<Room> Ballroom B of the Northern Kentucky Convention Center. Senator Charlie Borders, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Charlie Borders, Co-Chair; Representative Harry Moberly, Jr., Co-Chair; Senators David E. Boswell, Tom Buford, Denise Harper Angel, Ernie Harris, Dan Kelly, Bob Leeper, Robert Stivers II, Gary Tapp, Elizabeth Tori, Johnny Ray Turner, and Jack Westwood; Representatives Carolyn Belcher, Scott W. Brinkman, Dwight D. Butler, Larry Clark, James R. Comer, Jr., Jesse Crenshaw, Bob M DeWeese, Jon Draud, Danny Ford, Derrick Graham, Keith Hall, Jimmie Lee, Lonnie Napier, Fred Nesler, Don Pasley, Rick Rand, Charles Siler, Arnold Simpson, John Will Stacy, Tommy Turner, and Robin L. Webb.


Guests:  Governor Ernie Fletcher, Steve Stevens, President, Northern Kentucky Chamber of Commerce; Talina Mathews, Executive Director, Office of Energy Policy; Rodney Andrews, acting Director, Center for Applied Energy Research; Donna Duncan, Commissioner of Financial Incentives, Cabinet for Economic Development; Dennis Griffin, Chairman of the Board Emeritus, Griffin Industries; Greg Harkenrider, Office of the State Budget Director; Tom Caradonio, President and CEO, Northern Kentucky Visitors and Convention Bureau; and Gretchen Landrum, Executive Director, Northern Kentucky Convention Center.


LRC Staff:  Pam Thomas, Charlotte Quarles, John Scott, James Adams, and Sheri Mahan.


Senator Borders thanked the members for traveling to Northern Kentucky for the first meeting of the interim.  He recognized Senator Westwood, and Representatives Draud and Simpson for hosting the committee in their district.


Senator Westwood and Mr. Steve Stevens of the Northern Kentucky Chamber of Commerce welcomed the committee to Northern Kentucky.


Next, Governor Ernie Fletcher addressed the committee regarding the importance of alternative fuel and renewable energy development to Kentucky.  He discussed the importance of acting immediately on an energy development package to entice alternative fuel production facilities to the state.  He stated that this decisive action will allow Kentucky to become a leader in reducing the dependence on foreign energy.  He discussed various alternative energy development incentive programs offered by surrounding states. Governor Fletcher discussed the potential economic impact an alternative fuel facility could have within the state.  He stated that several companies are currently investigating Kentucky as a potential site for a new alternative fuel production facility and that prompt action in implementing the proposed incentive package could bringing those facilities to the Commonwealth.  Finally, he briefly outlined the provisions of the proposed bill.


Senator Borders asked if passage of an incentive package for these alternative fuel processing facilities could be delayed until the January 2008 Regular Session.  The Governor replied that he believes these companies will be making decisions as to site locations well before January 2008, and that this fact creates the urgency warranting the call of a special session.


Talina Mathews, Executive Director of the Office of Energy Policy, discussed alternative fuel and renewable energy development issues and trends.  She also discussed federal and other state incentives.  She provided the general overview for Kentucky, discussing the state's coal production, energy production capabilities, energy consumption and a general economic profile for the state. She discussed the increasing demand for energy and the increasing dependency on imported petroleum. 


Ms. Mathews discussed regional initiatives including the Southern States Energy Board's American Energy Security study and the Appalachian Regional Commission's regional energy blueprint.  Ms. Mathews noted that this blueprint discussed the need for increased energy efficiency and renewable energy usage, especially biomass,  and that the blueprint also calls for the development of conventional fossil recourses and the advancement of clean coal technologies. Ms. Mathews reviewed the biomass resources in the state and discussed currently operating ethanol and biodiesel facilities in Kentucky.  She also and briefly mentioned several proposed projects.


Ms. Mathews discussed current federal renewable energy initiatives, which include money available for research and development of biomass-based products, biofuels, bioenergy, and related processes.  She discussed the President's Farm Bill which has money available for bioenergy and biobased product research, energy efficiency improvement grants, and loan guarantees for cellulosic ethanol projects in rural areas.  She discussed the energy bills currently being considered in the United State House and Senate, and the status of those bills.


Ms. Mathews outlined current federal coal to liquid (CTL) incentives which include EPAct 2005, which authorizes money for coal gasification research and development.  She stated that CTL technology can provide a long term viability for coal because it is a clean coal process.  She noted that this technology also lends itself to the capture of carbon, enhanced oil recovery, and enhanced coal bed methane recovery.  She discussed regional carbon sequestration partnerships and studies being done regarding enhanced oil recovery.  This technology requires a steady stream of CO2 which would be provided by the CTL process.  She stated that the coal industry and forestry industry would benefit from providing incentives for these technologies.


Ms. Mathews discussed the incentives provided by other states for energy initiatives.  She then compared the proposed incentives with those offered in surrounding states.


Senator Westwood asked if there are any markets for CO2 beyond oil recovery.  Ms. Mathews replied that the food industry utilizes dry ice made from CO2.  Also the chicken rendering industry uses CO2.


Representative Pasley asked if a CTL plant can be built anywhere without federal incentives.  Ms. Mathews replied that federal incentives are very important, but that state incentives will determine when the plants will be built.


Representative Belcher asked if Kentucky's incentive package should include provisions for carbon capture.  Ms. Mathews answered that she believes those issues should be addressed at a federal level.


Representative Moberly stated that escrow and claw back provisions should be included in any incentive package offered by the state.  Representative Moberly also stated that any incentives should include provisions to make any plant build carbon capture ready.


Representative Draud asked if there is a timeline as to when federal incentives would be in place.  Ms. Mathews replied that they are currently working on legislation and that a realistic projection would be early fall 2007.


Next, Mr. Rodney Andrews, Acting Director of the Center for Applied Energy Research, discussed CTL technology.  Mr. Andrews briefly discussed the U.S. supply, consumption and import of liquid fuels and other petroleum products.  He stated that there is currently a market for CTL fuels in military and commercial aviation and in the blending of ultra-low sulfur diesel.


Mr. Andrews discussed the two methods of coal liquefaction, which are direct and indirect.  The direct method cooks low ash coal with a catalyst at high pressure and temperature which produces liquid hydrocarbons.  In the indirect (Fischer-Tropsch) method, coal is gasified with steam and oxygen which results in CO and H2 (syngas).  This syngas is then converted to liquid hydrocarbons.  Mr. Andrews then discussed all the products that can be created using the indirect process, which include power, gasoline, kerosene, diesel, and wax.  Mr. Andrews gave an overview of three CTL case studies, outlining their coal input and production, feed size, and air emissions.


Mr. Andrews discussed the quality of fuel produced by CTL technology.  He stated that CTL produced diesel that is lower in all regulated emissions than standard diesel fuel.  He discussed the sources of emissions in the CTL process.  CO2 is produced in power generation, during the Fischer-Tropsch process, and in the shifting of the coal to a liquid form.  Mr. Andrews then listed various ways that CO2 emissions can be reduced during this process.


Mr. Andrews discussed the economic impact of CTL in Kentucky.  Utilizing his three case studies, he discussed the total equipment cost, total capital cost, and economic data for a CTL plant in the state.  He discussed potential investment and job creation within the state.  Mr. Andrews also discussed barriers to commercialization which include reluctance in use of this new product and large capital requirements for building a CTL plant.  Mr. Andrews discussed the need for a well educated workforce to both build and staff CTL plants, and the role of the universities in providing energy scientists and engineers to staff these facilities.


Next, Donna Duncan, Commissioner of Financial Incentives for the Cabinet for Economic Development, discussed the programs currently available through the cabinet.  The cabinet offers several tax incentive programs, loans, grants and bonds that are used to attract and retain business to the state.  She provided a brief overview of the programs available through the Kentucky Economic Development Finance Authority.  She discussed the Kentucky Industrial Development Act and the Kentucky Rural Development Act, which are the primary tax incentive programs.  She discussed the types of industry which qualify for these types of programs.  She discussed the exclusion of coal and mineral processing as qualifying industries, noting that coal fired electricity generation facilities do qualify.  The Kentucky Jobs Development Act offers incentives for service or technology based companies that locate new facilities or expand new facilities in the state.  The statutory definition of "service or technology based company" excludes the production of petroleum based fuels, ethanol, biodiesel, and coal gasification or liqifaction.  The Kentucky Industrial Revitalization Act program offers tax incentives to manufacturing companies that are in eminent danger of closure.  This program is available to coal mining companies that employ at least 500 persons and mine at least 300 million tons annually or the reopening of a closed mine. The Kentucky  Industrial Opportunity Zone program offers tax incentives to companies to locate within  economic opportunity Zones as defined by statute. The Kentucky Environmental Stewardship Act offers income tax credits to companies that manufacture new or substantially improved products that have reduced adverse effects on human health or the environment.  Energy producing fuels or byproducts of energy production are specifically excluded from participation.  She also discussed the direct loan programs, and bond and grant programs.


Next, Mr. Dennis Griffin, Chairman of the Board Emeritus of Griffin Industries, discussed biodiesel production in Kentucky.  He discussed the biofuels which Griffin Industries produces and the processes by which biofuels can be manufactured.  He discussed Griffin Industries coal consumption for energy generation, and the need for Kentucky to decide which direction it will take in its renewable energy development. He stated that biofuels usage does not effect crude oil prices or traditional fuel production.  He discussed ethanol production in Kentucky and its effect on feed stock prices.  He discussed the various types of feed stock that can be used to produce ethanol.  Mr. Griffin discussed nation-wide fuel consumption and the difficulty in making enough biofuels to effectively substitute biofuels for traditional fuels.  He discussed the process Griffin Industries uses in the production of biodiesel, the various properties of biodiesel.  He also discussed the various positives and negatives to biofuel production and usage.


Senator Borders asked Mr. Griffin if the believes Kentucky should participate in ethanol production.  Mr. Griffin replied that he believes that Kentucky must start producing and utilizing biofuels and that ethanol is the logical starting point.


Representative Brinkman asked what the difference is between building a traditional gasoline refinery and building an alternative fuel production facility with respect to environmental concerns.  Mr. Griffin replied that ethanol plants are less expensive to build.


Senator Harris asked for a progress report regarding lower biodiesel BTU, warranties on engines that use biodiesel, and the higher temperature at which biodiesel freezes.  Mr. Griffin stated that none of these are issues when biodiesel is blended with traditional diesel fuel. He said that engine manufacturers are now providing a warranty on engines which burn up to 20% biodiesel blends.


Next, Senator Boswell, Senator Stivers, and Greg Harkenrider of the Office of the State Budget Director, addressed the committee regarding a proposed Senate state energy plan, BR 115.  Senator Boswell provided a brief overview of synthetic fuel research and development in Kentucky.  Senator Stivers stated that the Senate energy plan does not address carbon capture because it is believed that the federal government will preempt regulation.  The bill does provides money for research in carbon capture and sequestration.  He stated that the senate debated about including various escrow and clawback provisions, but eventually decided not to include these.  He discussed the general philosophy behind the various provisions of BR 115.


Senator Borders commented on the importance of finding alternative uses for Kentucky's coal reserves.  He also stated he appreciates the bipartisan why in which the energy initiative has proceeded.


Mr. Harkenrider provided an overview of BR 115 to the committee.  He briefly discussed the various provisions of the bill which include an incentive package for alternative fuel facilities, demonstration projects, and renewable energy.  The bill includes sales tax incentives for investment in energy efficient machinery and equipment, biodiesel and ethanol credits, encourage energy efficiencies in state buildings, establishes an engineering scholarship program, and provides money for the Kentucky Geological Survey to study carbon sequestration, and CO2 pipeline language.


Mr. Harkenrider discussed in more detail the tax incentives for eligible projects.  He discussed what types of projects would be eligible for the incentives.  Commercial alternative fuel facilities with a minimum capital investment of $750 million, which primarily produce alternative transportation fuels, synthetic natural gas, or chemicals or chemical feedstock would qualify for the incentives.  Also, renewable energy facilities which utilize wind power, biomass, landfill CH2, or hydropower for electricity generation and solar power facilities in excess of 50 kilowatts also qualify for the incentives. 


Representative Webb asked who would be on the board of the Kentucky Energy Development Authority and to whom they would answer.  Mr. Harkenrider listed the membership and stated that the board would have final authority in decisions.  Representative Webb asked if there is any legislative oversight of the board.  Mr. Harkenrider replied that there is no legislative oversight.


Representative Moberly asked who would staff the Kentucky Energy Development Authority.  Mr. Harkenrider stated that once the Office of Energy Policy is offically created that this office will staff the Authority. 


Mr. Harkenrider then discussed in greater detail the short term and long term incentive package.   The short term incentives include up to 100% of the sales tax on purchases of tangible personal property used to construct, retrofit, or upgrade eligible facilities and up to 80% of the Kentucky income taxes withheld or paid during the construction phase. The long term incentives include a 25 year recovery time frame after the activation date, up to 80% of coal severance taxes paid on the purchase of coal specifically used as feedstock for an eligible project, and up to 80% of the Kentucky income taxes or the limited liability entity tax generated on the footprint of an eligible project.  Mr. Harkenrider then provided an example of the incentives for which a 30,000 barrels per day facility could qualify.


Mr. Harkenrider then provided more detail as to how the coal severance portion of the incentive package would work.  He discussed in general how the coal severance tax works in current statute.  He stated that the coal severance incentive would be taken before the split. He discussed the projected coal severance tax distribution for FY 08 under current circumstances.  He then projected a modest alternative fuel facility scenario which could add $1.05 million to the local distribution formula. 


Representative Moberly asked if there are any protections for the state in the short term financing portion of the bill.  Mr. Harkenrider stated that there are no escrow or clawback provisions in the bill.  Representative Moberly then asked if there are any provisions to keep companies from importing coal from other states or countries for use in a plant.  Mr. Harkenrider stated there is not.


Next, Representative Rocky Adkins addressed the committee regarding his  energy initiative.  He discussed the importance of energy independence and finding uses for Kentucky's coal reserves in producing alternative transportation fuels. He discussed the history and basic provisions of HB 299.  He discussed the United States dependence on foreign oil.  Representative Adkins discussed the benefits of  CTL technology and the products and byproducts of the process. He then discussed the history and basic provisions of HB 5, which included coal severance tax incentives, sales tax incentives, economic development incentives, energy efficiency and conservation provisions, and a coal tax credit.  He stated that HB 5 also included provisions to allow the Office of Energy Policy to fund preliminary assessments on potential locations for alternative fuel and renewable energy facilities.  Representative Adkins then discussed carbon capture, stating the importance of having CTL facilities carbon capture ready.


Senator Boswell stated how important a state energy initiative is to Kentucky, and how economically beneficial it could be to the state.  He also encouraged further discussions of a nation-wide energy policy by the federal government.


Finally, Tom Caradonio, President and CEO of the Northern Kentucky Visitors and Convention Bureau, and Gretchen Landrum, Executive Director of the Northern Kentucky Convention Center discussed the expansion needs of the Northern Kentucky Convention Center.  Mr. Caradonio discussed the history of the facility and the projections for events at the facility.  The economic impact of the Convention Center during its first seven years of operation was $632 million, $188 million more than the projected $444 million.  He stated the Center has had a positive income flow since it opened.  Mr. Caradonio stated that since 2005 the Center has had declining bookings due to not having enough meeting space at the Center.  Ms. Landrum stated that the Convention Center needs $51 million to expand its facilities. 


There being no further business, the meeting was adjourned at 2:10 p.m.