The2nd meeting of the Special Subcommittee on Energy was held on Friday, June 15, 2007, at<MeetTime> 10:30 AM, in Drakesboro, Kentucky. Representative Rick G. Nelson, Chair, called the meeting to order, and the secretary called the roll.
Members:Senator Robert Stivers II, Co-Chair; Representative Rick G. Nelson, Co-Chair; Senators Tom Buford, Denise Harper Angel, Ernie Harris, Vernie McGaha, Jerry P. Rhoads, and Johnny Ray Turner; Representatives Rocky Adkins, Eddie Ballard, Jim Gooch Jr, J. R. Gray, Fred Nesler, Tanya Pullin, Tom Riner, Brandon Smith, and Brandon Spencer.
Guests: Senators Dan Seum and David Boswell; Nancy Shelton, Valley Relations Kentucky District Manager, Tennessee Valley Authority (TVA); Greg Nunley, TVA Paradise Plant Manager; Rick Newman, Muhlenberg County Judge Executive, and Dale Todd, Superintendent, Muhlenberg County School system; Greg Harkenrider, Office of the State Budget Director; Talina Mathews for the Governor’s Office of Energy Policy; and Jacky Preslar, TVA General Manager, Fossil Fuel Supply .
LRC Staff: D. Todd Littlefield, Committee Staff Administrator; Taylor Moore; Tanya Monsanto, CSA; and Susan Spoonamore, Committee Assistant.
Minutes of the May 30, 2007 meeting were approved, without objection, by voice vote, upon motion made by Rep. Nesler and seconded by Rep. Pullin.
Nancy Shelton, Valley Relations Kentucky District Manager, Tennessee Valley Authority (TVA), welcomed members to the TVA Paradise Plant. She introduced Greg Nunley, Plant Manager.
Mr. Nunley provided an overview of the facilities. He stated that the Paradise Plant was one of eleven coal powered plants operated by TVA. He said that the plant generates roughly 14 billion kilowatt-hours of electricity a year, which is enough to service 930,000 homes and businesses. The plant can generate approximately 2,273 megawatts of power using 22,000 tons of Kentucky coal. He explained that with the installation of the new scrubbers, TVA is now able to remove 90% of the S02 from the combustion process and 90% of the NOx.
Mr. Nunley stated that the plant is the third largest employer in Muhlenberg County, and pays approximately $33 million a year in tax equivalent payments to the Commonwealth of Kentucky. Of that amount, approximately $6.5 million dollars has been brought back into the Muhlenberg County School System.
Mr. Nunley said that TVA’s vision is to generate prosperity in the Tennessee Valley region and listed four priorities to support that mission. The first priority is to provide a safe work place for employees and safe operations to citizens in the area; second, to meet or exceed the environmental commitments; third, to protect the assets of the plant; and last, to generate low cost power for the region that will help attract new businesses.
Ms. Shelton recognized Rick Newman, Muhlenberg County Judge Executive, and Dale Todd, Superintendent, Muhlenberg County School system. Judge Newman stressed the importance of having the TVA Paradise Plant in their county contributing to the economic development and community involvement.
Chairman Nelson welcomed members and guests to the meeting. Rep. Yonts, who was out of the country, had asked that a warm welcome be extended on his behalf.
Chairman Nelson stated that discussion regarding the proposed Energy Initiative would be limited in order to accommodate the video presentations and tours being provided by TVA officials. He said that more in-depth discussions surrounding the Energy Initiative would be held in Pikeville and Covington.
Co-chairman Stivers recognized Greg Harkenrider, Office of the State Budget Director and Talina Mathews, Executive Director, Governor’s Office of Energy Policy.
Co-chairman Stivers stated that there would be additional discussions on the Energy Initiative in the following days. He explained that the initiative is primarily focused on alternative fuels. The goal is to create an engine-grade fuel that would be cheaper, cleaner and provide a more stable supply for personal use, reduce dependence from Middle East oil, and strengthen homeland security. He said that the passage of such an energy initiative would make Kentucky a national leader, potentially an international leader, in alternative fuels.
Sen. Rhoads stated that the proposed bill was needed in order to attract large companies and investment groups that could launch large-scale projects in Kentucky. He stated that Illinois and Indiana had already made public announcements regarding incentives and grants for coal-to-synthetic natural gas projects. He said it was important to note that this would not involve an expenditure of tax payer funds; the projects would be self-generating by producing new sales, new tax revenues, and new jobs. He stated that Kentucky has all the components in place and that the proposed bill would offer tremendous economic benefits for eastern and western Kentucky. Sen. Rhoads also stated that coal-to-liquids and coal-to-gas plants would involve an investment of $2.5 billion each, with approximately 2,000 high paying construction jobs for 4 years. These types of plants would each consume approximately 6 million tons of coal per year, generating 500 new mining jobs, and would likely provide permanent employment for 150 to 200 employees. He said that more importantly such plants would help decrease dependence on foreign sources of oil.
Mr. Harkenrider explained some of the major provisions in the proposed bill. He stated that the proposed bill would provide tax incentives for three demonstration projects in addition to the large alternative fuel facilities. The threshold was raised on the alternative fuel facilities to $750 million in order to attract major investments in the Commonwealth. He said that in order to give meaningful relief to the companies, there is a 50% capital investment threshold, and five years was added to the grant recovery period, from 20 years to 25 years.
Mr. Harkenrider explained that the Tax Incentive Agreement section contained four parts. Two incentives, which are crucial to the package, are for short-term immediate relief. He said that the sales tax refund on the construction of the facilities, and state income tax withholding paid on behalf of construction workers would be eligible for the tax incentive agreement. This would be about 45% of the incentive package.
He stated that the long term incentives would be the income taxes which include corporation, individual, 765 partnership returns, and the Limited Liability Entity (LLE) tax. Companies that qualify could recover up to 80% of that for their operational fees.
Mr. Harkenrider stated that the biggest long term incentive in the package was the coal severance tax. He explained that whomever severs the coal and delivers it to the fuel facility is considered the taxpayer. The language contained in Sections 14 and 15 of the bill provides that 80% of the coal severance tax can go back to the project. That is a major incentive, he said.
Rep. Adkins asked if that incentive would apply only to coal used at the qualifying facility. Mr. Harkenrider stated that was correct.
Mr. Harkenrider explained that the provisions contained in Sections 14 and 15 regarding the coal severance tax would be treated identically to the other off-the-top allocations. He said that this would be the 4th off-the-top allocation of coal severance tax revenue before it filters through the distribution formula.
He said that the length of the grant agreement was changed from 20 years to 25 years. The agreements would have to be approved by an authority that would include the Secretary of Finance; State Budget Director; Cabinet for Economic Development; Chairman of the Kentucky Economic Development Finance Authority; and the Director of the University of Kentucky Center for Applied Energy Research.
He also said that the bill is aimed at making Kentucky a leader in this field and that it could not be done within the existing package of incentives employed by the Cabinet for Economic Development. This proposed bill will help attract such plants.
Sen. Stivers explained that the proposed bill and amendments contained provisions for incentivising carbon capture, possible construction of carbon dioxide pipelines, and also some appropriations for the Kentucky Geological Survey to evaluate potential sites in eastern and western Kentucky for use in carbon sequestration. He said that another provision would upgrade the University of Kentucky and University of Louisville’s Engineering programs by providing additional scholarships. A student receiving such a scholarship would be required to work in Kentucky for a specific period of time.
He concluded by saying that the proposed bill was not carved in stone, but open for discussion.
After a short recess, Jacky Preslar, TVA General Manager, gave a briefing regarding TVA’s coal supply. He stated that TVA ranks third in the United States as a consumer of coal. He said that one-third of the coal used to operate their 11 plants came from Kentucky, and because of the new scrubber, he said that the Paradise Plant now uses 100% Kentucky coal.
Mr. Preslar said he operates and manages coal supply for all eleven TVA Fossil facilities which means he has to have several different types of coal on hand. He said the Paradise plant depends mainly upon rail and barge as a means for transporting coal, and that TVA expends approximately $200 million yearly for transporting coal.
Mr. Preslar stated that in order to determine the amount of coal needed, he has to look at the requirements of each plant, and also takes into consideration the Clean Air Act requirements. Once he determines the amount of coal needed for each plant, then a Request for Proposal is issued to the various coal providers.
Rep. Smith asked if any of the contracts were long-term. Mr. Preslar stated that some of the contracts were long-term. Most of the contracts had a pre-negotiated set of terms built into them.
Mr. Preslar stated that the Paradise plant has consumed an average of 6.8 million tons of coal since 2001. In 2007, Paradise will consume less because they are now able to burn a higher BTU coal.
Sen. Rhoads asked if the plants kept a large inventory of coal on hand. Mr. Preslar stated the plant used a computer model called a Uniform Fuel Inventory, along with the subjective judgment of TVA staff.
Rep. Smith asked if the Paradise Plant used any synfuels. Mr. Preslar stated that they typically have not, but were open to doing that.
Rep. Pullin asked what where some of the main risks of using barges to transport coal. Mr. Preslar stated that rivers can freeze, they can flood, and they can experience low water levels.
Sen. Buford asked if the plant had built up reserves in anticipation of that happening. Mr. Preslar stated that they were in the process of building up reserves.
Sen. Buford asked if it would raise the price per ton if coal could not be delivered by barge. Mr. Preslar stated that the price per ton would increase if not delivered by barge.
Chairman Nelson thanked Mr. Preslar for his briefing. He also stated that he and Sen. Stivers had agreed not to hold a meeting in July because of legislative conferences. He invited those in attendance to tour the new scrubber plant if they so desired.
The meeting was adjourned.