Special Subcommittee on Energy


Minutes of the<MeetNo1> 4th Meeting

of the 2007 Interim


<MeetMDY1> September 21, 2007


The<MeetNo2> 4th meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> September 21, 2007, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Rick G. Nelson, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representative Rick G. Nelson, Co-Chair; Senators Walter Blevins Jr, Tom Buford, Ernie Harris, Vernie McGaha, Katie Stine, and Johnny Ray Turner; Representatives  Rocky Adkins, Eddie Ballard, Dwight D. Butler, Tim Couch, Jim Gooch Jr, J. R. Gray, Fred Nesler, and Tom Riner.


Guests:  Jim Fugitte, CEO, Wind Energy Corporation; Sarah Bolton, Director of Communications, Wind Energy Corporation; Andy McDonald, Kentucky Solar Partnership; Bob Hazelrigg, Delta Natural Gas, and Cynthia Marple, Director of Rates and Regulatory Affairs, American Gas Association.


LRC Staff:  D. Todd Littlefield, CSA; Taylor Moore, and Susan Spoonamore, Committee Assistant.


Co-Chairman Nelson informed members that the October 19th meeting of the Special Subcommittee on Energy would be at the Robert F. Stephens Circuit Courthouse, Lexington, Kentucky; and the November 16th meeting would be held at the Capital Plaza Hotel in conjunction with the Second Annual Kentucky Energy Efficiency Conference. 


Rep. Nelson introduced Jim Fugitte, CEO of the Wind Energy Corporation and Sarah Bolton, Director of Communications, Wind Energy Corporation, Elizabethtown, Kentucky.


Mr. Fugitte stated that Wind Energy Corporation (WEC) is a $2 billion a year revenue company with offices in Elizabethtown, Morgantown, and laboratories at the Western Kentucky University Research and Development Center. The corporation currently employs 18 people and expects to expand to 1,800 employees by 2012.  The mission of Wind Energy Corporation is to provide commercial wind harvesting solutions that are affordable without subsidy. Currently the company is are engaged in conversations with  several large entities such as Wal-Mart, Travis Air Force Base, and Cleveland Clinic’s Hurron Hospital regarding possible installations of WEC’s wind machines.


Mr. Fugitte stated his most important point  was to clarify the difference between in front of the meter and behind the meter solutions. Wind energy and solar power are behind the meter, meaning that there is no involvement of transmission and interconnectivity unless an installment was net metered with a local utility.


Several legislators asked how the wind turbines worked.


Mr. Fugitte stated that WEC’s machines can catch winds from any direction. An array of 6 wind turbines located in a category 3 wind area, which is about 16 miles a hour, would generate a million kilowatt-hours in one year, or enough electricity to power 90 average American homes.


Rep. Adkins asked what was the cost of a wind generator, and could it be installed in an enclosed area.  


Mr. Fugitte stated that the full-scaled product is a 6 meter by 4 meter machine  (19 feet by 12 feet) fabricated from composite material less than half an inch thick. The 50-kilowatt product costs $50,000 each, and the estimated installation in a retro-fit is an additional $50,000 which brings the installed costs to $100,000.  He stated that in order for the wind generator to operate it could not be placed in an enclosed area.   


Rep. Nesler asked what type of jobs would be created with the anticipated growth and demand of wind turbines. 


Mr. Fugitte stated that WEC’s facilities would have to significantly increase production of turbines,  thereby creating more jobs.


Sen. McGaha asked if the turbines had to be elevated, and if so, to what extent.


Mr. Fugitte stated that the turbines are a low-wind urban-type solution, which means that the height of a four or five story building would be sufficient elevation. 


Sen. McGaha asked if Wind Energy had plans to retrofit personal dwellings in the near future.


Mr. Fugitte stated that the corporation is interested in producing a smaller unit to be used for homes. 


Rep. Gooch asked, compared to other sources of energy, what  percent of electric energy could the United States expect from the widespread use of wind and solar power.


Mr. Fugitte stated that distributed power will be the major topic of conversation within about five years. He said that renewable energy will supplement the big complex systems, but nuclear power would be the only resource that could power complex electric grids in the future.  


Chairman Nelson introduced Andy McDonald, Coordinator of the Kentucky Solar Partnership, Appalachia - Science in the Public Interest (ASPI).


Mr. McDonald explained that ASPI had been developing and promoting sustainable energy and  living options for the past 30 years. As a partner of the United States Department of Energy’s Million Solar Roofs Initiative and other organizations, ASPI has been working to identify the barriers to advancing solar energy.  The ASPI is placing emphasis on promoting solar water heating by creating a pilot rebate program for solar water heaters that offers $500 rebates to homeowners who install solar water heaters. In addition, ASPI provides public education, technical assistance, installer training, research and advocacy on renewable energy and sustainable energy issues. 


Mr. McDonald explained the different solar initiatives:


He said that there are enormous opportunities for passive solar design if new buildings are built with the intention of using solar technology. He said that studies have shown that daylighting in schools actually improves students’ test performance. Solar photovoltaics use has been growing at the rate of 20% to 25% for the past 20 years, and is it expected to continue its growth.


He said that solar water heating is more cost effective than solar photovoltaics and can produce a substantial amount of energy.  He said that purchasing a solar water heater involves capital investment. If the initial capital costs are pro-rated over the life of the system, 25 years or more, the cost per kilowatt- hour would be around 5 cents to 8 cents.  It would be lower with the federal tax credit or  potential for a state rebate. He explained that if a homeowner purchased a typical solar water heater for $4,000, the homeowner could get a $1,200 tax credit from the federal government. Environmentally, the use of a solar water heater would save 3.6 tons of carbon emission yearly. He stated that besides basic uses for solar water heating, the largest use presently for solar water heating in the United States is for swimming pool heating. In addition, solar energy can be used in commercial applications such as  hotels, schools, laundromats, car washes, restaurants, dormitories at universities and military bases, and industrial facilities.


Mr. McDonald said that China has the largest global market for installing solar water heating.  But despite having the largest solar resources in the world, the United States only has one-half of one percent of the world market for solar water heating.  


Mr. McDonald stated that the International Energy Agency did an analysis of  total installed capacity of solar-thermal worldwide and found it far exceeded the installed capacity of wind and  greatly exceeded the capacity of  photovoltaics. In 2004 it was in the range of 69,000 megawatts of installed capacity. A typical coal power plant is 500 to 1000 megawatts. 


Mr. McDonald explained that if serious investments were made in solar energy it would create economic development by creating thousands of jobs. Professionals would be needed to manufacture solar panels; to install the equipment; and to maintain the equipment, thereby increasing the number of available jobs.   


He explained that the primary barrier to solar technologies in Kentucky is the  fact that the Commonwealth has some of the lowest energy prices in the country. He said other barriers include the lack of awareness, and a shortage of trained professionals. He said it was hoped that community colleges and universities would eventually take over the  responsibility of training  professionals. 


Illinois, Wisconsin, New Jersey, New York, and Minnesota are among states that are putting significant homeowner and business incentives together, including rebates and tax credits, to help homeowners invest in solar energy. 


California has created a $3 billion investment in solar photovoltaics and a $250 million rebate program for solar water heaters.  They are expecting to train 40,000 solar electric installers over the next eight years to meet the demand.  California has set 2016 as a target date for reaching one million solar installations, but they now expect to meet the target in 2012. 


In conclusion, Mr. Donald stated that the General Assembly can help facilitate and move Kentucky forward by creating homeowner and business rebates or tax credits for solar photovoltaics and solar water heating.  He said that Kentucky needs to have uniform standards for net metering and interconnections.  Finally, he said that Kentucky needed to make comprehensive investments in sustainable energy through a public benefits fund which would provide investment resources.


Rep. Couch asked if there was a cost difference between using an on-demand hot water heater with a solar panel versus just using a solar water heater. 


Mr. McDonald stated that an on-demand water heater with a solar water heater can be combined. There is only one manufacturer that makes an on-demand heater that couples with a solar water heater. Such a system would add about $500 to $1000 to the installation price. From an energy standpoint, it is probably the most energy efficient way to go.


Chairman Nelson then introduced Bob Hazelrigg, Delta Natural Gas Company, and Cynthia Marple, Director of Rates and Regulatory Affairs, American Gas Association, Washington, D.C.


Mr. Hazelrigg stated that the issue of natural gas rate re-regulation is an important issue to the natural gas industry in Kentucky. There are five major natural gas distribution companies in Kentucky. Two of those, Duke Energy and E.ON are combination companies that provide electric and gas service. The three remaining companies —  Atmos Energy, Delta Natural Gas, and Columbia Gas — are  pure gas distribution companies. He said that in 2007 all three of the pure gas companies have had rate proceedings before the Public Service Commission. Mr. Hazelrigg said that the cost of those proceedings will be borne by the rate payers and will exceed $1 million dollars.


Mr. Hazelrigg stated that during the 2007 Session of the Kentucky General Assembly, HB 261 was introduced using virtually the same language as a bill that passed in the 2005 South Carolina legislature. He said that the language contained in HB 261  was intended to better align gas companies’ interests with those of their customers and to streamline the rate-making process while maintaining necessary regulatory and consumer protection oversight. In order to give the committee additional information, he said that Ms. Marple would explain the national perspective on this issue.


Ms. Marple stated that the American Gas Association (AGA) believes that the economy needs all sources of energy. The AGA supports the use and development of alternative fuels including wind and solar. 


She said that energy efficiency and climate change are the two most widely discussed regulatory and policy issues in the utility industry today. She said that non-volumetric rate design is a regulatory concept that can help achieve natural gas energy efficiency, customer savings and utility financial stability at the same time. Natural gas utilities are in a fixed-cost business, and gas utilities recover their costs on a volumetric basis. She said that gas utilities do not earn a profit on the gas commodity that they deliver, but they do bear suppliers’ risk, bad debt, and other risks associated with serving as the customer’s agent in procuring the commodity.


Ms. Marple explained that the two main costs that the utilities pass on to their customers are commodity and distribution service costs, with commodity costs being the most significant.


Ms. Marple stated that since 1980, more than 15 million new customers have been added to the customer rolls and that natural gas utilities incurred $96 billion in new construction costs to serve them. She said that on an individual customer basis, between 1980 and 2000, the amount of natural gas consumer per customer has decreased.


Ms. Marple stated that the average American home uses 33% less natural gas than it did a quarter of a century ago. For gas utilities, the problems of declining per-customer consumption and increased bad debt and carrying costs from high and volatile commodity prices are compounded by a 100-year-old rate design.


She said that the volumetric rate design being used today encourages high residential electricity consumption, and ties the gas utilities’ recovery of fixed delivery costs to the amount of gas that customers use. She said that Connecticut, Minnesota, Missouri, Nevada, New York and South Carolina have enacted new laws that mandate or allow the implementation of new rate designs, and similar legislation is under consideration in Illinois, New Jersey, and Ohio.


Ms. Marple said that the U.S. Congress is considering two bills that would mandate states to at least investigate the new and more innovative rate designs. The U.S. Department of Energy and the Environmental Protection Agency are in Phase II of a national action plan for energy efficiency which is addressing utility incentives and innovative rate-making.


  She noted the four types of innovative rate mechanisms that would not raise customer’s bills: automatic adjustments and cost trackers; revenue decoupling; rate stabilization tariffs and flat monthly fees and variants.


In summary, Ms. Marple said that natural gas utilities have accommodated 15 million new gas customers and $96 million of new investment with stable distribution service costs, which is  the very definition of energy efficiency. However, volatile energy prices and the effects of climate change have led to changed consumption patterns that have financially hurt utilities. She said that regulators in 29 states have implemented innovative rate designs that revised the 100-year-old rate paradigm by breaking the inefficient link between a utility’s earnings and the energy consumption of its customers.   As customers and the industry transition to an era of conservation, the legislature needs new and supportive legislation.


Rep. Gooch asked if the figures she quoted were for total natural gas consumption at the base load or peak demand time.


Ms. Marple stated statistics on various volumes of gas used in the various sectors of the gas business. The market for natural gas is 22 trillion cubic feet (Tcf) per year market. In round numbers — 5 Tcf are on the residential side, 3 Tcf for commercial, 10 Tcf for industrial, and 4 Tcf for electric generation. The natural gas distribution industry provides and delivers the 5 Tcf to residential; the 3 Tcf to commercial; approximately one-third of the industrial and not very much at all of the electric. For the most part, the gas that flows through its systems does not include the gas that is going to electric generators. So even as the total market might increase from 22 Tcf to 23 Tcf, and if that trillion cubic feet were to come from the electric generation side of the business, it would not flow to the benefit of the natural gas utilities. She stated that gas distribution utilities are in a cost-based business and rates are recovered volumetrically, but despite the addition of up to 15 million new customers, the industry does not accrue any significant additional revenue from the electric generating sector.    


Meeting adjourned.