Interim Joint Committee on Natural Resources and Environment


Minutes of the<MeetNo1> 3rd Meeting

of the 2011 Interim


<MeetMDY1> August 4, 2011


Call to Order and Roll Call

The<MeetNo2> 3rd meeting of the Interim Joint Committee on Natural Resources and Environment was held on<Day> Thursday,<MeetMDY2> August 4, 2011, at<MeetTime> 1:00 PM, in<Room> Room 149 of the Capitol Annex. Representative Jim Gooch Jr., Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Brandon Smith, Co-Chair; Representative Jim Gooch Jr., Co-Chair; Senators Joe Bowen, Ernie Harris, Ray S. Jones II, Bob Leeper, Dorsey Ridley, Johnny Ray Turner, and Robin L. Webb; Representatives Hubert Collins, Tim Couch, Keith Hall, Stan Lee, Reginald Meeks, Marie Rader, John Short, Kevin Sinnette, Fitz Steele, Jim Stewart III, and Jill York.


Guests: Jeff Derouen, Executive Directive Director, Kentucky Public Service Commission; Stephanie Bell, Deputy Executive Director, Kentucky Public Service Commission; Andrew Melnykovych, Public Information Officer, Kentucky Public Service Commission; Richard Raff, Assistant General Counsel, Kentucky Public Service Commission; and John Lyons, Director, Kentucky Division for Air Quality.

LRC Staff: Tanya Monsanto, Stefan Kasacavage, and Susan Spoonamore, Committee Assistant.


A quorum being present, upon motion by Rep. Steele and second by Rep. Collins, the July 7, 2011 minutes were approved without objection by voice vote.


Update on Air Quality Issues

John Lyons, Director of the Division of Air Quality, discussed three air quality rules that affect the energy supply and price: the National Ambient Air Quality Standards (NAAQS), cross-state air pollution rule, and the proposed utility MACT. All three rules will cause fuel switching, retirements of older units, higher electric prices, additional costs to environmental permitting, and will impact citizens and businesses through higher energy costs.


Mr. Lyons stated that pollutants have decreased, but NAAQS will reset those levels and impose new requirements on states. The federal Clean Air Act authorizes the United States Environmental Protection Agency (USEPA) to revise the NAAQS standards. The Kentucky Division of Air Quality (KYDAQ) has gone on record stating that the new rules will make monitoring difficult, affect the permitting process, and that the desired levels of protection will not be reached. He also said that the time frames for implementation and realizing attainment are too short. Once the new NAAQS rules become effective, Kentucky will have new areas of nonattainment.


The cross-state air pollution rule replaced the clean air transport rule which imposed caps on sulfur dioxide (SO2) and nitrogen dioxide (NO2). The rule allows limited trading among the emitting companies across the states. The only limiting factor is a SO2 budget of 272 thousand tons and utilities will not be able to emit over 236 thousand tons in the 2012-2013 period. Mr. Lyons said that existing sources will get 94 percent of the allocations and the remainder will go to new sources. In response to a question about whether the 272 thousand tons is an inexceedable cap or exceedable with credits, Mr. Lyons stated it cannot be exceeded and that existing sources are already in compliance. They will be able to reduce further and sell credits to other companies. The KYDAQ anticipates some fuel switching and some shutdowns in order to comply.


Mr. Lyons stated that the third major new rule change is the proposed utility Maximum Achievable Control Technology (MACT). The utility MACT proposal has received the most comments because the existing coal and oil fired power plants will have to add additional controls in order to comply. The rules become effective November 2011 and the utilities will have three years to comply. Once again, the compressed time frames are what cause the most concern.


In response to a question about whether the rule is limited to electric utilities, Mr. Lyons stated that the rule is designed to address mercury, acid gases, and sulfur dioxide which are principally emitted by electric utilities.


In response to questions regarding the origins of the three various rules and how they work in practice, Mr. Lyons replied that the new rules are a function of action by an executive branch agency rather than Congress. He said that the money received from the purchase of credits is used to fund new technologies, which helps to curb emissions. Over time the caps are tightened and the number of credits are reduced causing the level of pollutants to fall.


In response to a query about the use of federal rules to privilege one fuel type over another, Mr. Lyons replied that it will affect coal-fired power plants and it will drive up the cost of electricity.


In response to a question about whether other countries emit the same pollutants, Mr. Lyons stated yes, and that the transport of pollutants is factored into air modeling. The cross-state rule is a transport rule meaning it takes into account the ultimate fate and transport of the pollutant. In terms of emissions control, Mr. Lyons did not know if Canada’s restrictions were more or less than the United States.


In response to a question about the medical impacts from air pollution that prompted the changes in federal standards, Mr. Lyons stated that respiratory problems, cardiac disease, learning disabilities, and potential harm to the unborn are the main medical issues. He said that the Division of Air has not reviewed Kentucky specific clinical data and does not know where Kentucky ranks among other states.


In response to a question about the comment period for USEPA’s new rules, Mr. Lyons replied that the Division’s comments are on the state website and the Secretary’s office is in contact with the Kentucky Congressional delegation. In Kentucky’s comments the Division supports the continuation of issuing permits and enforcing federal rules.


In response to a question about who the new rules will affect, Mr. Lyons commented that the rules will harm the coal industry. As a result of the new rules, Kentucky will have areas of violations.




Electric Utilities in Kentucky: The Coming Challenges

Jeff Derouen, Director of the Kentucky Public Service Commission, discussed future challenges to the electric utility industry. He said that electricity rates have not kept pace with the rate of inflation so customers are paying less for electricity than for other goods and services. Mr. Derouen stated that the emissions control technologies to reduce pollution is principally falling on fossil fired plants, and since Kentucky’s utility industry is primarily coal-fired, there is a disproportionate burden occurring. However, coal is one reason that electricity rates in Kentucky are some of the lowest in the nation. He said that another reason for the low rates is that Kentucky resisted electric deregulation.


Mr. Derouen stated that two new rules, mercury and cross-state; will put pressure on the coal industry. He also noted that there may be new rules dealing with water withdrawals and discharges along with new solid waste rules dealing with the proper disposal of coal combustion residuals. He said that there has also been discussion about possible carbon control rules which would increase Kentucky’s rates. Mr. Derouen added that Kentucky could expect additional cuts to the Low Income Home Energy Assistance Program (LIHEAP) since those funds were being redirected to promote more efficiency and conservation.


In response to a question about utility franchise and fees passed to customers, Mr. Richard Raff, counsel to the PSC stated that utilities can recover costs of operation and a reasonable return on investment. The fee is a cost of doing business. The PSC allows either the customers in the area with a franchise fee or all of the customers of the utility to recover the franchise fee.


In response to a question about what utilities are doing to reduce costs, Mr. Derouen stated during a rate case, the PSC reviews all the utility’s needs for revenue. Fuel adjustment clauses and environmental surcharges are reviewed for efficiency in costs.


In response to a question about redirecting LIHEAP money to promote more efficiency and conservation, Mr. Derouen commented that the PSC supports that idea. He said that there are more demand side management rules coming from utilities, and low income households can avail themselves of those energy conservation opportunities.


In response to another question about PSC’s role in siting wind farms, Mr. Derouen stated that there was no clear definition about what constitutes a wind farm. Clarification in statute would be helpful.


In response to a question about “test years” for rate cases, Mr. Derouen replied that a twelve month period sets the standard for costs. It does not include exceptional or unusual expenses. The rate of return to the utility is based on comparable utilities in the nation. The regulatory agencies do not specifically take affordability into account but the PSC is sympathetic to the issue. Customarily the PSC will approve rate increases but there have been instances when the utility was required to cut or reimburse customers.


There being no further business the meeting was adjourned at 3:10 p.m.