Call to Order and Roll Call
The5th meeting of the Interim Joint Committee on Natural Resources and Environment was held on Thursday, October 4, 2012, at 10:30 AM, in Room 171 of the Capitol Annex. Representative Jim Gooch Jr., Chair, called the meeting to order, and the secretary called the roll.
Members:Senator Brandon Smith, Co-Chair; Representative Jim Gooch Jr., Co-Chair; Senators Joe Bowen, Ernie Harris, Bob Leeper, Dorsey Ridley, Katie Stine, and Johnny Ray Turner; Representatives Tim Couch, Keith Hall, Stan Lee, Reginald Meeks, Marie Rader, John Short, Kevin Sinnette, Fitz Steele, and Jim Stewart III.
Guests: Mathew Morey, Ph.D., Senior Consultant, Christensen Associates; Laurence Kirsch, Ph.D., Senior Consultant, Christensen Associates; and Pam Schneider, Human Resources Manager, Rio Tinto Alcan (Alcan Primary Products Corporation).
A quorum being present, the September 6, 2012 minutes were approved without objection by voice vote, upon motion made by Representative Steele and second by Representative Hall.
Consultants from Christensen Associates Energy Consulting discuss their report on the impact of utility rates on the aluminum smelting industry in the Commonwealth.
Mr. Mathew Morey, Ph.D., Senior Consultant, and Laurence Kirsch, Ph.D., Senior Consultant, discussed the energy rate impacts on Kentucky industries. Mr. Morey stated that the report examined issues and policies associated with retaining Kentucky businesses in five specific manufacturing industries: aluminum smelting, automobile manufacturing, chemical processing, paper mills, and steel making. Kentucky’s low retail electricity rates have attracted manufacturing industries that are particularly dependent upon electricity. Access to cheap coal-fired electricity generation will likely erode over the coming years with the implementation of federal standards that to regulate the adverse effects of the atmospheric emissions of coal-fired generation sources.
Mr. Morey said that the aluminum smelter plants in Kentucky, Century Aluminum and Alcan, are under financial pressure because of the recent decline of the world price of aluminum. Because electricity is roughly one-third of the cost of producing aluminum, the smelter plants are seeking concessions in the prices that they pay to Big Rivers Corporation, their electricity supplier. The purpose of the report was to examine options open to the Commonwealth for mitigating the adverse impacts of rising electricity costs on heavy industry in Kentucky. The recommendations in the report apply to Kentucky’s industry in general and to the aluminum smelters in particular.
Mr. Kirsch explained that the recommendations were informed by two general principles: Kentucky should spend its scarce economic development dollars in a manner to produce the greatest bang for the buck; and a short-term fix for any industry only makes sense if there are good long-term prospects for that particular industry. The report gave the following policy options with recommendations to address the problems of the aluminum industry:
• Electricity price discounts. Customers receiving discounts should make largest possible contribution to the utilities’ fixed cost recovery.
• Direct access to electricity markets. The utility should have no obligation to resume providing generation services to those customers who choose direct market access.
• Electricity prices pegged to world aluminum prices. This is problematic because it passes aluminum price risk to the utility.
• Forgiveness of Big Rivers’ debt. This is not feasible.
• Big Rivers’ merger or acquisition. This would not address the fundamental aluminum price financial risks, merely shifts risks.
• Economic development support by the Commonwealth. Support should depend on the smelters standing on their own in the long run.
• Mitigating the adverse effects of a smelter closing. Mitigation can include: a) attraction of other industries with better long-term financial prospects; b) job training of former smelter employees; and c) information services regarding job opportunities elsewhere in Kentucky.
The report also contained the following general policy recommendations to help strengthen all large industrial firms:
• Continue to rebalance utility rates to reduce or eliminate any existing cross-subsidies from industrial customers to commercial and residential customers.
• Devote greater resources to Kentucky’s educational systems, including technical training and employee re-training.
• Provide greater assistance and guidance to businesses on the use of Industrial Revenue Bonds to help small-to-medium-sized businesses invest in energy efficiency projects.
• Establish a revolving loan program to support business investment in energy efficiency projects.
In response to questions from Representative Lee, Mr. Kirsch stated that electricity rates for the two smelter plants in Kentucky were higher than the global average rates paid by smelters. He said that the major industries using aluminum included air and ground transportation manufacturing, paper mills, and building material producers. Short-term state support could help Alcan get past a bump in the road, but assistance should only be given if Alcan could survive without continuing subsidizes over time. In the long run, an industry needs to be able to stand on its own without government support. The study shows that Big Rivers has all the incentives that it needs to figure out how discounts might work.
Representative Gooch noted that Big Rivers was a small co-op whose income was derived from the smelter plants.
In response to Senator Bowen, Mr. Kirsch said that defining what constitutes “short-term” assistance is be up to the General Assembly. The Commonwealth would have to figure out how long it would give aid to the smelter industry, and is in the position to define short-term and what the conditions will be. If Big Rivers and the smelters could determine what the short-term assistance will be, Big Rivers would still need to recover the costs of providing service. If rate discounts are given to the smelters, then Big Rivers will have to shift their costs to other customers.
In response to Representative Stewart, Mr. Kirsch said that the research did not look at the advertising costs of Big Rivers to see if money could be saved.
In response to Senator Ridley, Mr. Morey stated that the low retail electricity prices enjoyed by major aluminum smelters abroad are the result of government support from the countries where those smelters are located.
In response to Senator Stine, Mr. Kirsch said that the competitive electric market price projections were not completely accurate because of a recent federal district court decision in EME Homer City Generation vs. EPA. The court vacated EPA’s latest cross-state pollution rule that would have required electric plants to install new pollution controls. As a result of the decision, it is uncertain what new pollution controls, if any, electric plants will be adopting and what costs they will be passing on to ratepayers. Mr. Kirsch expressed no opinion on what the courts would end up doing. Senator Stine stated that the recommendations were pessimistic, and she is hopeful that various levels of government, particularly the federal government, would see the error of their ways and try to work with businesses so that Kentucky can have reasonable energy prices.
In response to questions from Senator Gibson, Mr. Kirsch said that he doubted that onsite electricity generation at Century from natural gas would be less expensive than Midwest Independent Transmission System Operator (MISO) prices once capital expenditures and the cost of pipeline construction are taken into account. Mr. Morey said the report encourages industrial customers to be allowed to go to the market. However, once market prices rebound and rise higher than the regulated rate that the industrial customer has been paying, the industrial customer cannot be allowed to return to that regulated rate. Mr. Kirsch said that any subsidies given to the aluminum industry ultimately are coming from someone else’s pocket. Therefore, the General Assembly must determine how much money in subsidies should be expended per job per year in the aluminum industry to make taking the money from other sources worth it.
Representative Gooch said it was important that Big Rivers and the aluminum smelters work out some agreement. The aluminum industry is important to the state and the committee is committed to finding a way to save the industry. Federal regulations will soon affect other Kentucky companies with higher utility costs, and they too will not be able to compete in the global economy.
Pam Schneider, Human Resources Manager, Rio Tinto Alcan, explained that the Sebree smelter plant is one of the most efficient smelters in the world, but its short-term viability is at risk because of high energy prices. Ms. Schneider said that the aluminum industry is viable for the long-term if electricity prices can be fixed.
In response to Representative Gooch, Ms. Schneider agreed that, if the Century plant were to close and stop purchasing electricity, utility rates would rise, which would put the viability of the Rio Tinto Alcan plant at even higher risk.
The meeting was adjourned.