Special Subcommittee on Energy


Minutes of the<MeetNo1> 3rd Meeting

of the 2005 Interim


<MeetMDY1> August 12, 2005


The<MeetNo2> 3rd meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> August 12, 2005, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Tanya G Pullin, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Robert Stivers II, Co-Chair; Representative Tanya G Pullin, Co-Chair; Senators Denise Harper Angel, Jerry P Rhoads, Katie Stine, and Johnny Ray Turner; Representatives Royce W Adams, Rocky Adkins, Eddie Ballard, Dwight D Butler, Bob M DeWeese, Thomas Kerr, Lonnie Napier, Rick G Nelson, Fred Nesler, Tom Riner, Brandon D Smith, and Brent Yonts.


Legislative Guests:   Representatives Jim Gooch and Don Pasley.


Guests:  John Davies, Director, Division of Renewable Energy and Energy Efficiency, Kentucky Office of Energy Policy; Melissa Howell, Executive Director, Kentucky Clean Fuels Coalition; Mick Henderson, General Manager, Commonwealth Agri-Energy, LLC, Hopkinsville; Dr. Czarena Crofcheck, Assistant Professor, Bioprocess and Food Engineering, University of Kentucky; Rick Geise, Director of Marketing, Griffin Industries, Inc.; Rick Bender, Director, Division of Oil and Gas Conservation, Department for Natural Resources, Environmental and Public Protection Cabinet; Rodney Kirtley, Muhlenburg County Judge Executive; Eleanor Self, SIERRA Club; Greg Copley, KBEAP, University of Kentucky; Gerry Haydon, KCFC and Kentucky Soybean Association; Marion Howard, Kentucky Soybean Association; Ashley Osborne, UK - CES; Mandy Abnee, UK - CES; Jacquetta Wilson UK - CES; Lanie Gardner, Muhlenburg Chamber of Commerce; Hank List, EKPC; Meredith Boyd, EKPC; Hart Moore, Griffin Industries; Jaime Morgan, Kentucky Soybean Association; Rebecca Hicks, Kentucky Soybean Association; Pam Proctor, Kentucky NEED Project; Rich Gates, UK; Mike Montross, UK; James Bush, Kentucky Office of Energy Policy; Michelle Stites, Louisville Metro Air Pollution Control District; Mark Crocker, University of Kentucky Center for Applied Energy Research; Bill Doll, Progress Energy; Hugh Sweatt, Mayor of Central City; and John-Mark Hack , Union County Biodiesel.


LRC Staff:  Todd Littlefield, Bill Bowker, and Rhonda Carter.


The subcommittee approved the minutes of the July 22, 2005, meeting.


Chair Pullin introduced the panel to discuss biodiesel and ethanol production and utilization in Kentucky.


Melissa Howell, Executive Director, Kentucky Clean Fuels Coalition updated the subcommittee on progress made since September, 2004, in various clean fuels and technologies.  Ms. Howell described the utilization of hybrid buses in Louisville and the funding in the federal Highway Bill for purchase of 15 additional buses by the Transit Authority of Louisville.  Ms. Howell stated that Toyota has recently announced that it will produce about 50,000 hybrid Camrys at the Georgetown plant.  Ms. Howell stated that Kentucky now has two rest stops equipped with equipment for providing electricity, air conditioning, and other utilities to trucks when stopped overnight, eliminating the use of fuel while idling.


Mick Henderson, General Manager, Commonwealth Agri-Energy LLC, reported on the production of ethanol at the Hopkinsville plant since March, 2004.  Mr. Henderson stated that the plant adds value to corn by producing ethanol, carbon dioxide for dry ice production, distillers’ grains for livestock feed, and corn oil for biodiesel production.  Mr. Henderson reported that the plant utilized 8 million bushels of Kentucky corn to produce 23 million gallons of ethanol with a goal of 30 million gallons per year this Fall.  Mr. Henderson described how the demand for ethanol is growing nationwide for transportation fuel and as an oxygenate to replace MTBE and how the rising price of gasoline is creating demand for blending higher percentages of lower-cost ethanol.  Mr. Henderson and Ms. Howell detailed a number of new applications and retail sites for ethanol in Kentucky.


Ms. Howell stated that the key to getting the price of biodiesel down that the industry and government can control is in getting the fuels to a terminal for blending and distribution to retail sites, thus greatly reducing costs of transporting biodiesel to dispersed blending sites.  Ms. Howell explained that, in Jefferson County, blending at the several bus fill sites added 6.5 cents to each gallon and that central blending at a terminal would have avoided most of this cost. Ms. Howell reported that Marathon-Ashland is developing blending at its terminals in Kentucky.  Ms. Howell also reported on projects for providing information to school systems about use of biodiesel and funding assistance available.  Ms. Howell reported that biodiesel is currently produced in Kentucky at Griffin Industries in Pendleton County and at Union County Biodiesel Company, and planning or feasibility study is underway in Owensboro and in Graves County.     


Mr. Rick Geise, Director of Marketing, Griffin Industries, reported on the importance of adherence to stringent fuel quality standards in making biodiesel an economically viable product.  Mr. Geise also discussed how Illinois and Minnesota are currently leading in production due largely to incentives offered by the two states’ governments.  Mr. Geise stated that Illinois has eliminated the $.0625/gallon state transportation fuel tax on diesel containing a blend of more than 10 percent biodiesel, and Minnesota has mandated that all diesel fuel must contain two percent biodiesel.


John Davies, Director, Division of Renewable Energy and Energy Efficiency, Kentucky Office of Energy Policy, reported on incentives being offered by Kentucky and the federal government in the last 12 months.  Mr. Davies stated that the Kentucky Comprehensive Energy Strategy contains three specific recommendations for promotion of the production and use of ethanol and biodiesel.  By Executive Order, Governor Fletcher ordered the Transportation Cabinet to increase its use of biodiesel. The Kentucky Tax Modernization Act included a production tax credit for biodiesel totaling $1.5 million annually; the credit equals $1.00 per gallon of biodiesel produced or blended.  Mr. Davies reported that the federal government has extended the $.51 per gallon ethanol tax incentive through 2010, has extended tax credits for production to ethanol cooperatives, and has created a biodiesel excise tax credit ranging from $0.005 to $0.01 per gallon of blended biodiesel.  The 2005 Energy Act includes a 30 percent tax credit for installation of vehicle fueling pumps for various clean fuels including 85 percent ethanol and 20 percent biodiesel fuel blends. The Act extends the biofuels excise tax credit in the 2005 federal Jobs Bill.   The Act also includes a tax credit for small agri-biodiesel producers of $.10 per gallon for up to 15 million gallons per year.  Mr. Davies also reported on the expected economic benefits of the doubling of ethanol production from 3.4 billion gallons to 7.5 billion gallons per year by 2012, as called for in the renewable fuel standard in the Energy Act.


Chair Stivers asked what are the percentages of total fuel use represented in the numbers of gallons of ethanol and biodiesel actually and potentially produced and used in the United States and asked if the U.S. has the capacity to grow enough agricultural products to have an industry that can actually meet American fuel needs.  Mr. Henderson responded that ethanol today meets three percent of U.S. transportation fuel demand, and that level is expected to double in 2012.  This represents 11 percent of the U.S. corn crop today.  Mr. Geise responded that biodiesel production of 38 million gallons is a fraction of a percent of the 65 billion annual use of diesel and added that the real value of ethanol and biodiesel is in extension of a finite resource.


Representative Yonts asked how increased production of ethanol and biodiesel might affect the price of corn and soybeans and if this is helping the farmer.  Mr. Henderson replied that supply and demand will result in a balance between price and increased agricultural output.  Representative Yonts asked if the U.S. Department of Agriculture is pointing farmers in the direction of growing corn and soybeans for these markets instead of the past policy of trying to reduce production of agricultural products and added that, if not, this might be a direction in which to go. 


Dr. Czarena Crofchek, Assistant Professor, Bioprocess and Food Engineering, University of Kentucky discussed projects for developing electronic virtual tours of an ethanol plant and a biodiesel plant showing what the fuels are and how and where they are made and presented the ethanol plant virtual tour.


Representative Adkins stated that America’s energy security and economic well-being depend upon the nation’s being energy independent and that transportation fuels from America’s corn, soybeans, and coal all must be developed.  Representative Adkins stated that the technologies have been in use for years and that a national and state commitment is required for their use in achieving energy independence and the economic benefits that they can provide to the U.S. and to Kentucky.


Senator Stine agreed with Representative Adkins about the importance of all energy resources in America’s energy strategy and about the role of Kentucky in the nation’s energy policy.  Senator Stine asked what are the impediments to growth in production and use of ethanol and biodiesel and what might the General Assembly do to help.  Mr. Geise responded that until now there has not been enough pain from transportation fuel prices; in the past three months, there has been great increase in demand for alternate fuels.   Mr. Geise added that state initiatives have been pulling that demand and cited Illinois’s elimination of the $.0625/gallon state transportation fuel tax on diesel containing a blend of more than 10 percent biodiesel and Minnesota’s mandating that all diesel fuel must contain two percent biodiesel. Mr. Geise stated that the key is a renewable fuel standard that gets the renewable fuel into every gallon of transportation fuel, based on the supply and availability of renewable fuel.  Senator Stine asked for more specifics.  Mr. Geise responded that state initiatives are critical in creating the expectation that renewable fuels will be part of the general fuel supplies within the state.


Mr. Henderson stated that, although mandates should not be necessary in a market economy, that is not the case in the real world.  Mr. Henderson explained how fuel suppliers were very slow to react to recent opportunity for increased profit from blending in of lower-cost ethanol with gasoline when the price of gasoline went up by $.40 per gallon.  Mr. Henderson added that from the economic and environmental standpoint and from the standpoint of biofuels as growth engines in agricultural areas, the use of biofuels is a public issue that needs legislative guidance similar to the mandated use of biofuels in Minnesota.  Mr. Henderson stated that Kentucky had been a leader in providing incentives that got the Commonwealth Agri-Energy plant built.  To reach the goal of utilizing 20 percent of Kentucky and U.S. corn for ethanol production, the plant would need to be tripled in size, or three plants would be needed.  For this growth, producer incentives, blender incentives, and mandates for usage throughout the Commonwealth are all needed.


Representative Nesler stated that, when biodiesel legislation was being considered, the trucking industry expressed concerns about the effect of biodiesel use on engine warranties and asked if this concern continues.  Mr. Geise responded that all of the engine manufacturers recognize biodiesel as an acceptable renewable fuel and specify that various inclusion rates, including the B-2 up to 5 percent, and many 10 percent to 20 percent biodiesel blends are acceptable within the engine warranty specifications.  Representative Nesler asked if Kentucky has looked into the use of incentives to increase use of biodiesel by trucking firms and heavy equipment operators.  Mr. Geise responded that any incentives would have positive impact on demand and explained how increased demand is resulting from incentives, such as the federal excise tax incentive for consumers and producer incentives such as the Commodity Credit Corporation program, that decrease the cost of biodiesel relative to petroleum.  Mr. Davies reported that a $40,000 grant program for buying down the cost of biodiesel for school bus fleets in Kentucky had shown great success by making the price comparable to diesel.  Ms. Howell stated that creation of hubs at petroleum product terminals had great success in putting ethanol and biodiesel out into retail sites, especially in Western Kentucky and that production incentives for development of terminal infrastructure to centrally supply retail sites and consequently reduce transportation costs are right on target.


Representative Nesler noted that terminals appear to be mainly in central and northern part of Kentucky.  Ms. Howard stated that infrastructure is also being developed in the eastern and western regions.  Ms. Howard noted that the Marathon-Ashland terminal in Louisville is the first voluntary, not mandated, such biodiesel infrastructure in the U.S.


Representative Nesler noted that a feasibility study of a biodiesel plant in Graves County is underway and asked about the speakers’ views of Kentucky’s encouraging the building of new plants or helping those already established. Ms. Howell stated that Kentucky needs to take a stronger stand relative to incentives for producers and explained that increased supply is needed to meet rapidly growing demand.  Ms. Howell stated that Kentucky needs a renewable fuel standard that requires that a portion of gasoline or diesel fuel be made up of ethanol or biodiesel, respectively. 


Chair Pullin thanked the panel and introduced Mr. Rick Bender, Director, Division of Oil and Gas Conservation, Environmental and Public Protection Cabinet, to report on the Cabinet’s coal bed methane program.  Mr. Bender explained that the coal bed methane program in Kentucky began with HB 577, enacted by the 2004 Regular Session of the General Assembly, following the recommendation of a task force made up of the natural gas and coal industries.  Mr. Bender stated that the program has been codified in KRS Chapter 354 and that regulations governing the program have been promulgated and approved under authority of KRS Chapter 349 for protecting the environment, gas and coal resources, and property.  Mr. Bender described the procedures established in HB 577 (codified in KRS Chapter 349) for resolving conflicts surrounding the development of a coal bed methane project through appeal to a Coal Bed Methane Review Board.  Mr. Bender concluded by stating that, to date, there have been no applications for development of coal bed methane, apparently due to lack of data concerning methane resources in particular mine areas and to coal companies’ hesitancy to branch out into the gas business.  Mr. Bender reported that Department for Natural Resources is looking into Kentucky’s assuming primacy over the underground injection program for Class II wells and is considering injection as a way for disposing of the water removed from coal seams in production of coal bed methane.  Mr. Bender stated that coal bed methane production might be stimulated by forgiving payment of the severance tax on gas until all or part of the cost of drilling a well is recovered by the operator.


Representative Yonts asked if the federal Energy Act, 2005, has tax credits for  coal bed methane production.  Mr. Bender responded that the Act does not. Representative Yonts asked if the cost of extracting methane is the largest impediment to production of coal bed methane.  Mr. Bender responded that a major factor is lack of data concerning methane resources in particular mine areas, but that more data are being collected by industry and the Kentucky Geological Survey.  Other factors are gas companies’ currently making money drilling for $9.00 per mcf. gas and coal companies’ hesitancy to branch out into the gas business.


Chair Pullin thanked Mr. Bender and called upon guests who had asked to address the subcommittee.  Representative Jim Gooch stated that Kentucky has an opportunity to lead needed efforts to achieve national energy independence and that the General Assembly had passed two bill that he had sponsored, HB 805 and HB 806, to provide incentives for coal production and use and for development of power plants at coal mine sites.  Representative Gooch stated that the unanimous votes in the House and the Senate on HB 806 were a policy statement that the General Assembly supported development of state-of-the-art mine-mouth coal-fired power plants as had other states including Illinois and Ohio.  Representative Gooch stated that, in the past week, a hearing officer had sent approved permits for a coal-fired power plant proposed for Muhlenberg County back to the Cabinet with the requirement that the regulators should require the applicant to consider new types of electricity generating technologies using coal.  Representative Gooch explained that such a requirement would constantly delay approval of any coal-fueled power plant and is counter to the expressed policy of the General Assembly.  Mr. Gooch stated that he hoped that the Secretary of the Environmental and Public Protection Cabinet would not accept the recommendation of the hearing officer and that he would introduce a resolution to that effect at the August 25 meeting of the Committee on Agriculture and Natural Resources. 


Representative Yonts stated that probably 100 percent of Muhlenberg County supports the power plant and that it represents economic salvation for the county and surrounding area.  Representative Yonts stated he agreed with Representative Gooch and that it appears that the Secretary of the Environmental and Public Protection Cabinet has three options, to accept, to remand, or to decide the issue after reviewing the exceptions of each party for 14 days.   Representative Yonts stated that he had encouraged the Secretary on multiple occasions to decide the issue and that he believed that would be the case and that the right decision would be made since the power plant utilizes the cleanest coal utilizing technology available.  Representative Yonts stated that he would publicly urge the Secretary at this meeting to promptly give that decision, as he has done in person and in writing on multiple occasions.


Representative Ballard stated that Hopkins County is 100 percent behind the project and recalled that the area had missed the opportunity of having coal gasification plants that would have created coal demand for many years and does not want to miss the opportunity offered by the proposed power plant.


Senator Rhoads stated that the situation is not a choice between coal and the environment and that this matter has had unprecedented review and scrutiny.   Senator Rhoads agreed with Representative Gooch that we are always chasing the latest technology, and added that, at some point, one has to build a plant, and if one takes the position that the very latest cutting edge technology has not been achieved, it is doubtful that any coal-fired plant would ever be built.  Senator Rhoads explained that the matter is an important regional economic development issue, that the area had once diversified and broadened its economic base away from its coal resource but is now diversifying back to coal, and that the proposed plant is a stimulus to the economy of the region and the Commonwealth.  Senator Rhoads stated that there has been a very conscious effort to see that the environmental concerns have been met and that he believed that the regulators have done their jobs and that Secretary Wilcher would  understand and so rule.  Senator Rhoads stated the persons who had come to address the subcommittee showed the area’s commitment to economic development and support for the Thoroughbred project.  Senator Rhoads urged the subcommittee and other committees to lend their support to the project.


Chair Pullin stated that the statements of the subcommittee members are on the record and that the subcommittee will look to the Agriculture and Natural Resources Committee to take the matter up in more depth at its next meeting.  Chair Pullin called on Muhlenberg County Judge Executive Rodney Kirtley for his remarks.  Accompanying Judge Kirtley were Mr. Hugh Sweatt, Mayor, Central City, and Ms. Lanie Gardner, President, Muhlenberg Chamber of Commerce.  Judge Kirtley asked Mayor Sweatt to comment first. 


Mayor Sweatt traced the development of central electricity generation and the parallel development of environmental regulation.  Mayor Sweatt explained how experts at the federal and state levels developed standards to protect public health and took a common sense approach of phasing in the new technology required for achieving the standards.  Mayor Sweatt stated that, if an entity meets the existing standards, it should not matter what technology may be out there, that the standards have been met.  Mayor Sweatt concluded that to change the rules would be unfair to the company and to the regulators who held the hearings, did the analyses, and issued the permits.


Chair Pullin thanked the speakers and called on Mr. John Mark Hack, Union County Biodiesel Company, who had requested an opportunity to address the subcommittee.  Mr. Hack stated that Kentucky is indeed leading the world in improving the cost, time, and quality of biodiesel production and explained how the Union County Biodiesel commercially utilizes state-of-the-art technology for production, supported by the Kentucky Economic Development Cabinet through the Consortium for Energy and the Environment.  Mr. Hack stated that the technology is the next generation of biodiesel production and is much less capital intensive than conventional production systems and offers environmental and quality advances.  Mr. Hack invited the subcommittee to visit the facility.


The meeting was adjourned at 12:15 p.m.