Special Subcommittee on Energy


Minutes of the<MeetNo1> 3rd Meeting

of the 2008 Interim


<MeetMDY1> August 15, 2008


The<MeetNo2> 3rd meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> August 15, 2008, at<MeetTime> 10:00 AM, at the Pine Mountain State Park, Pineville, Kentucky. Senator Brandon Smith, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Brandon Smith, Co-Chair; Representative Rick G. Nelson, Co-Chair; Senators Tom Buford, Denise Harper Angel, Ernie Harris, Tom Jensen, Robert Stivers II, and Johnny Ray Turner; Representatives Eddie Ballard, Tim Couch, Will Coursey, Jim Gooch Jr., Lonnie Napier, Fred Nesler, Tanya Pullin, Tom Riner, and Brent Yonts.


Guests:  Speaker Jody Richards; Rep. John Will Stacy; Marty Blake, Principal, The Prime Group, LLC; Sheila Medina, Engineering Program Manager, Center for Applied Energy Research; Kunlei Liu, Associate Director, Center for Applied Energy Research; Stephanie Stumbo, Executive Director, Public Service Commission; David Samford, Deputy Executive Director and General Counsel, Public Service Commission.


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


Minutes of the July 18, 2008 minutes were approved, without objection, by voice vote, upon motion made by Sen. Ernie Harris and seconded by Senator Denise Harper-Angel.


Sheila Medina, Engineering Program Manager, and Kunlei Liu, Associate Director, Center for Applied Energy Research discussed carbon management.


Ms. Medina reviewed the background that led the General Assembly to appropriate $1 million a year to the center for the exploration and development of technology solutions for carbon capture and additional funding for the Kentucky Geological Survey to participate in regional partnerships to explore the suitability for sequestering carbon dioxide in underground formations typical of those found in Kentucky.

Ms. Medina noted that a variety of technology responses can lead to reductions in carbon emissions, including fuel switching to lower-carbon and non-carbon energy sources, improved efficiency of energy use on both the demand and supply sides of the equation, and capturing and sequestering carbon and enhancing natural sinks for carbon.


By far the best option for reducing carbon emissions is through demand-side efficiency improvements in the energy consumption of homes and buildings, vehicles, and industrial use of energy. The second best option lies in increasing the efficiency of supply-side energy production, from coal mining and power generation and delivery, to petroleum production and refining, and natural gas production and storage.


In the case of electricity, reductions in carbon emissions will critically depend on the adoption of new coal- and gas-fired power generation technologies, including supercritical and ultra supercritical pulverized coal plants and components, integrated gasification-combined cycle (IGCC), IGCC with ultra supercritical temperatures and high-temperature gas turbines. Carbon emissions can also be reduced through fuel-switching to natural gas. However, the era of relatively inexpensive gas may be over with the erosion of the supply cushion that existed during the mid-1980s. Since then, spot market prices for natural gas have risen 4-fold, with projections for 2-3% annual growth pushing prices up by as much as 60% through 2020.


Deployment of renewable energy technologies such as wind, hydro, and geothermal systems will not be sufficient to meet future energy demand growth; large-scale use of biomass resources raises transportation, land use, and cost issues; and solar energy poses similar constraints as well as a lack of suitable methods for storing solar energy. The least-developed option for reducing carbon emissions is carbon capture. Sequestration in underground geologic formations or the ocean, and using carbon dioxide for enhanced oil or gas recovery is presently too expensive and poses too many uncertainties to represent a practical solution at the present time. Extensive research and development (R&D) of potential carbon capture processes is needed.


The CAER is currently involved in ongoing R&D of wet scrubbing of carbon dioxide from utility coal-fired flue gas and the use of chilled ammonia as an alternative sorbent. With funding from the Commonwealth of Kentucky and E-ON US Corp., the CAER has constructed a 0.1 megawatt-thermal pilot plant for testing and evaluating carbon capture methods, including solvent-based technologies and new concepts for solid additives and membrane solution separation and a potentially lower-cost, in-situ process for pressurized chemical looping in a combustion combined cycle.


With funding from Kentucky Department of Energy Development and Independence, the CAER is also studying the feasibility of using algal capture of carbon dioxide using flue gas from Kentucky coal power plants. The algae can be converted to a biodiesel fuel. Arizona Public Service is conducting the first field test of carbon dioxide capture for high-intensity, closed conversion of algae at a gas-fired combined cycle power plant. The CAER is working with several utilities in Kentucky to host a demonstration of an algal system for carbon capture at a Kentucky power plant The CAER is also working on the development of a liquid membrane for a solvent-based, post-combustion carbon dioxide scrubber. For IGCC systems, the CAER is evaluating the use of activated carbon for capturing carbon dioxide from coal-derived pitch and polymer blends.


The pilot-scale plant provides a flexible platform for studying a variety of carbon dioxide scrubbing processes and is expected to facilitate the optimization of related power requirements and energy penalties. To build on the E-ON US investment in carbon management and emissions control, the CAER has formed the Carbon Management Research Group, a consortium of the Commonwealth of Kentucky, the University of Kentucky, and the state’s electric power producers. The CMRG is seeking funding commitments from all of Kentucky’s major electricity generators for expanded efforts in solvent and process development and first-hand experience with carbon capture that will enable the early adoption of carbon capture technologies by Kentucky’s electric utilities.


Rep. Pullin noted CAER’s plan to build a portable, pilot-scale coal refinery that incorporates carbon capture, adding “it is rewarding to see the legislative initiatives taking shape concretely.” She commended the center, noting “we aren’t just talking about coal. We are talking about important environmental improvement, reducing economic burdens on consumers and enhancing national security.”


Sen. Smith stated that the subcommittee should schedule a trip to see the mini-refinery in operation. He added that Kentucky needed to use its coal resources in order to progress economically. “We are developing renewable energy resources and much of it is financed by the coal industry,” Smith added. Sen. Stivers asked about the size or output of the refinery; Ms. Medina replied that it would be designed to produce one barrel of refined liquid fuel from coal per day.


Marty Blake, Principal, The Prime Group, LLC, discussed Innovative Rates for Natural Gas. He explained that the U.S. price for natural gas is set by supply and demand in the market.  Unlike electricity, where the price can vary substantially by state, natural gas rates are essentially the same nationwide. He said that approximately 80% of the end user’s bill is the natural gas commodity.


Mr. Blake stated that over the past several years, natural gas consumption per customer in the United States and Canada had been declining due to energy conservation, energy efficiency and higher prices.


Mr. Blake stated that as a result of consumers using less gas, utility companies are not able to recover their fair and reasonable costs of delivering natural gas to consumers. Local distribution companies costs are fixed and do not vary with the amount of natural gas consumed by customers; therefore, the fixed costs are not fully recovered.  He said that over the long term, not being able to recover fixed costs hinders the ability of utility companies to invest in improvements in order to provide better service.


Decoupling the recovery of fixed costs from regulated rates would align the interests of gas distribution utilities with the interests of their customers. This could be accomplished by shifting a larger portion of the fixed costs that are currently collected through the gas commodity charge to customers’ monthly charge and reducing the commodity charge accordingly, or collecting all of a distribution utility’s fixed costs through the customer charge. Other solutions would be either legislative or regulatory rate stabilization and equalization mechanisms.


Sen. Harris asked if the regulatory and legislative solutions cited by Mr. Blake were new. Mr. Blake replied that they have been in place and effective for a long time.


Rep. Stacy asked whether there was a mechanism by which local gas distribution companies are provided an economic incentive to prevent line losses. Mr. Blake replied that LDCs aggressively reduce line losses by upgrading parts of their distribution system.  Rep. Stacy asked whether LDCs hold back or percentage charge to address line losses; Mr. Blake said he was not aware of any.


Sen. Buford asked how much of the natural gas consumed in Kentucky is produced from Kentucky gas wells.  Mr. Blake replied that the majority of gas consumed in Kentucky comes from pipelines that originate in the Gulf of Mexico and that gas reserves in Kentucky are not large enough to support increased exploration and production in Kentucky.


Frank Marquette of Columbia Natural Gas stated that Kentucky’s consumption of natural gas was 60% greater than the in-state production of gas. He added there were no regulatory problems that prevent further exploration for natural gas in Kentucky.


Sen. Buford stated there was a problem with coal companies obtaining access to land for mining. He added that legislation to address that issue may be needed.


Rep. Stacy asked whether gas transmission companies are adding charges for the costs of line losses. Mr. Blake replied that they do and that at the LDC level, the charge varies. Mr. Bob Hazelrigg of Delta Natural Gas, who appeared before the subcommittee with Mr. Blake, said the pipeline charge for line losses usually was around 2%. Rep. Stacy asked what was the charge used for. Mr. Hazelrigg said LDCs report losses to the PSC and if the PSC determines they are excessive, the regulator can order system upgrades. In reply to a question from Rep. Stacy, Mr. Hazelrigg stated that Delta Natural Gas has reduced its line losses in recent years.

Rep. Napier asked whether there is comprehensive information regarding the location of existing natural gas wells. He cited complaints regarding gas exploration companies in eastern Kentucky where exploratory drilling has destroyed local infrastructure. Rep. Smith noted “there are some bad actors, but there are laws to require restoration after gas drilling activity.”


Stephanie Stumbo, Executive Director, and David Samford, Deputy Executive Director/General Counsel, Kentucky Public Service Commission discussed  key issues before the Public Service Commission ( a copy of the presentation can be found in its entirety in the LRC Library folder).  She said the federal issues include: assessing potential impacts of national carbon constraints; clean coal technology and transmission siting.  The state issues involve: House Bill 1- report to the General Assembly on Electric Utility Regulation and Energy Policy; House Bill 2 – Energy efficiency; Senate Bill 83 – interconnection standards; electric reliability and natural gas.


She said that House Bill 1 contained four key issues for the PSC to examine:


1.      Eliminating impediments to consideration of cost-effective demand-side management (DSM);

2.      Encouraging diversification of energy supply through renewable sources and distributed generation;

3.      Incorporating full-cost accounting into decisions on energy supply; and,

4.      Changing rate structures and cost recovery to better align financial interests of utilities with the goal of increased energy efficiency.


She stated that the PSC supports:


·        Developing better evaluation, implementation and verification standards for demand-side management;

·        Amending KRS 278.285 to permit Commission to initiate consideration of certain demand-side management programs;

·        Uniform net metering and interconnection guidelines (this was mandated by Senate Bill 83 in the 2008 General Assembly, and the PSC has opened an administrative case to consider guidelines for interconnection and net metering);


She stated that the PSC does not agree that state-wide planning for generation infrastructure is either practical or desirable at this time.  She said that requiring full-cost accounting is premature given the uncertainties over future national policy with respect to carbon constraints and more general uncertainty over quantification of costs.


Ms. Stumbo said that PSC believes it will need additional staff resources and training to address issues related to energy policy and regulatory activities.

She also stated the PSC desires an explicit policy statement by the legislature in support of financial incentives to utilities for implementation of DSM programs, enrollment of renewable energy sources, and environmental initiatives.


She said that per House Bill 2, the PSC is providing input to the Executive Branch’s study of renewable or energy-efficiency portfolio standards and funding mechanisms for renewable and energy efficiency incentives.


Ms. Stumbo stated that siting authority for power transmission lines is needed, noting that the U.S. Federal Energy Regulatory Commission’s authority was significantly expanded in 2005 in areas in which states had previously determined where transmission lines should be sited. Sen. Harris stated that the Kentucky General Assembly supports states’ rights for siting transmission lines. He asked whether the legislature should give local gas distribution companies permissive authority to recover fixed costs. PSC deputy executive director and general counsel David Samford answered that permissive authority for gas distribution companies to recover all of their fixed costs is a compelling argument, but is based on a false premise because, under Kentucky law, all regulated utilities can seek a rate adjustment. “They are entitled to obtain rate relief,” said Mr. Samford. “The rate stabilization concern is that risk shifts from the utility to the ratepayer and the ratepayer bears the cost. Also, the PSC would not have discretion to disallow imprudent costs. There is concern that rate stabilization will turn into a rate guarantee.”


Rep. Pullin noted FERC’s recently expanded authority over so-called national interest corridors and electric transmission line siting. “I see the need for greater cooperation with other states as carbon emission constraints emerge. We may want to sell more [electricity] outside Kentucky.”


Rep. Gooch said electric reliability studies suggest that reliability measures are similar across the country, “but it shows that global warming and climate change scares are not as significant in terms of Kentucky’s electric reliability.”


Meeting adjourned at approximately 12:00 p.m.