Special Subcommittee on Energy


Minutes of the<MeetNo1> 2nd Meeting

of the 2004 Interim


<MeetMDY1> July 16, 2004


The<MeetNo2> 2nd meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> July 16, 2004, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Robert Stivers, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Robert Stivers, Co-Chair; Representative Tanya Pullin, Co-Chair; Senators Charlie Borders, Ernie Harris, Alice Kerr, Vernie McGaha, and Joey Pendleton; Representatives Rocky Adkins, Eddie Ballard, Carolyn Belcher, Buddy Buckingham, Dwight Butler, J. R. Gray, Thomas Kerr, Lonnie Napier, Rick Nelson, Fred Nesler, Tom Riner, and Charles Walton.


Guests:  Chris Edmonds, ICAP; Dr. Richard Schmidt, the Energy Consortium; Eric Gregory, East Kentucky Power Cooperative; Dr. Ari Geertsema, University of Kentucky Center for Applied Energy Research; and Rich Gates, University of Kentucky; and Secretary Jim Host, Commerce Cabinet.


LRC Staff:  D.Todd Littlefield, Tanya Monsanto, and Sheri Mahan.


Representative Kerr moved that the minutes from the previous meeting be approved as written.  Second by Representative Belcher.  Motion carried by voice vote.

Representative Pullin pointed out the resolution honoring the late Senator Paul Herron included in the members packets.


Dr. Richard Schmidt, director of the Energy Consortium, discussed developing trends in energy markets and their implications for Kentucky.  He introduced himself and discussed the mission statement of the consortium.  He briefly outlined Kentucky's energy demands, stating that coal and petroleum were dominant, with natural gas a distant third.  He then contrasted this with the state's energy supply, stating that coal resources are abundant, but that Kentucky can only meet 1/3 of its natural gas demand and less than 1% of its petroleum demands.


Dr. Schmidt gave a brief history of U.S petroleum production, supply and importation, stating that by  the year 2025 more than 80% of the U.S. petroleum supply will be imported.  He discussed historic crude oil prices and future forecasts, stating that the actual 2004 price is about $40 per barrel, which is more than predicted. He discussed the importance of currency values in pricing crude oil.


Senator Stivers asked how much the import price per barrel affects the price of refined gasoline, and what is the current price of gasoline minus imposed taxes.  Dr. Schmidt stated he did not have the figures with him to give an accurate answer, but would forward that information to staff. 


Senator Borders asked if there are enough reserves to impact the 80% imports currently used by the U.S.  Dr. Schmidt stated he feels it would be a small contribution.  He stated that supplementing the petroleum supply with a petroleum substitute, such as the one derived from coal, would provide a greater impact. 


Dr. Schmidt then discussed Kentucky's historic coal output.  The all time peak in coal production occurred in 1990.  He stated the US Department of Energy forecasts a dramatic recovery in the industry, but this requires prompt action in support of in-state coal projects.  He then discussed the decline in coal production,  existing coal reserves in Kentucky, and the state of production and distribution at the present time.


Next, Dr. Schmidt discussed various strategies, including new clean coal technology projects, to support and encourage new in-state coal use, thus bolstering the coal industry. 


Representative Adkins asked what has been done by Kentucky to try to secure the federal coal project.  Is there any process that needs to be completed to indicate to the federal government that Kentucky is interested in procuring the project?  Dr. Schmidt stated that there is a detailed plan in progress to be presented to the Department of Energy.  Representative Adkins stressed the importance of this project and that Kentucky should put forth every effort to attract this and other projects.  Secretary of Commerce Jim Host addressed the committee assuring the members that he is the point person on this project and stated how important this project could be to Kentucky.


Dr. Schmidt then discussed the challenges for Kentucky coal.  It is important to maintain existing markets for export to other states and to expand in-state coal utilization to capture added value and create new jobs.  He also stated it is important to develop coalbed methane and natural gas recovery and to develop renewable energy resources.


Representative Buckingham asked Dr. Schmidt to comment on the generation capacity in the state and any potential problems it might have.  Dr. Schmidt discussed the aluminum industry and its need for reliable and low cost electricity.  He stated that Kentucky's electric generation capacity is barely sufficient to support its native load. 


Representative Pullin discussed the interdependency of the coal industry and other related industries, such as the railroad industry.


Representative Adkins discussed the importance of natural gas to industry in the state and the negative effects natural gas prices have had on industrial users.  He also discussed the importance of low cost, reliable energy to industry in the state.


Representative Butler asked why domestic petroleum production is expected to decrease.  Dr. Schmidt stated that petroleum reserves are depleting, and this is affecting production. 


Senator Stivers asked if oil shale is still being investigated.  Dr. Schmidt stated that Colorado has a large supply of oil shale, but the process is very laborious and expensive and that the environmental impact is great.


Next, Mr. Chris Edmonds, Senior Vice President for Development, from ICAP discussed the broker's role in the wholesale energy market.   Mr. Edmonds provided the committee with a company profile, discussing what the company does and where they are located.  He stated that they are the largest energy broker in the world but that they do not own any resource assets.  They match buyers with sellers of natural resource commodities in real time.  The average sale cycle is about 30 seconds.  They allow industrial access to wholesale energy markets.  Currently production capacity across all commodities is less than demand, and the recovering economy is adding additional pressure to this balance.


Mr. Edmonds then discussed the status of the coal industry, stating the price of eastern coal has doubled in the past 12 months. Utilities are maximizing their power generation using coal.  At present coal inventories are 20% below normal.  Coal transportation is constrained at present, with rail cars operating at maximum utilization.  Investment dollars are flowing into the coal production and coal transportation sector.


Mr. Edmonds then gave an overview of the current prices of various energy commodities, discussing natural gas prices and supply, coal prices, and crude oil prices.


Representative Adkins stated he would like to visit ICAP's trading facilities.  Then he asked if ICAP provides brokerage services for states and governmental entity.  Mr. Edmonds stated yes.  Representative Adkins then asked if ICAP handles NOx credit trading and what is the current price for one NOx credit.  Mr. Edmonds stated that they do handle emission credit trading and currently SOx credits are trading for $200 to $400 per ton range and that NOx credits are trading in the $3,000 to $4,000 per ton range.  Mr. Edmonds then stated that a number of states are selling their NOx credits instead of giving them directly to the utilities.


Being no further business, the meeting was adjourned at 11:40 a.m.


A tape of this meeting and all meeting materials can be found in the Legislative Research Commission library.