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Powering the Economy
Despite an adversarial EPA and deregulation woes, energy shortages increase demand for Kentucky coal

The electric power industry and its consumers faced some dramatic challenges over the last 12 months. “This past year may have served as a wake-up call and properly focused our attention towards the importance that energy plays in our daily lives, “ offers Roy M. Palk, President and CEO of Winchester-based East Kentucky Power Cooperative. “It is my hope that these events will underscore the need for a balanced energy approach to energy policy in America in 2001 and beyond.”

Over the last year, energy issues have been increasingly grabbing the headlines. Tops on the list were the “rolling blackouts” and power grid “brown-outs” happening on both coasts, along with painful price spikes in nearly every energy-related sector — from gasoline and electricity to natural gas products. Unfortunately, during the election year, most politicians preferred to curse the darkness rather than light a candle.

Energy-wise, the year 2000 began tumultuously in the Northeast, with heating oil prices surging more than 200 percent from 1999, peaking around $1.97 per gallon in late February. Late summer, per-gallon prices for premium-grade unleaded gasoline exceeded $2 in some U.S, cities. Gas prices for the year averaged around $ 1.57 per gallon across the nation. The rise in gasoline prices was the first of a series of costly energy-related price increases.

While electric deregulation sounds good in theory, it has created difficulties for consumers. In California, the first state in the union to deregulate its retail electric markets, people faced repeated electric power shortages last summer and dramatic price swings. California Gov. Gray Davis has even brought up the prospect of using his government’s power of eminent domain to take over some of the state’s more troubled power utilities. Retail energy bills in San Diego doubled within a matter of weeks during last summer’s heat waves, according to the Wall Street Journal. The Journal also reported that no less than five state and federal agencies were investigating whether there had been collusion among California power suppliers to jack up prices and corner the market. Now officials throughout the nation are wondering if the California scenario will be repeated in other states, many of which are just beginning to embrace retail customer choice and deregulation.

Twenty-four states have already passed laws restructuring their electric utilities. With electric rates consistently ranking among the lowest in the nation here in the Commonwealth, the Kentucky General Assembly has decided that further study is needed of the many complicated issues before the state approves retail customer choice and any form of energy deregulation.

Kentucky’s 2000 General Assembly reauthorized the Task Force on Energy Restructuring in Senate Joint Resolution 107 (SJR107) last April for the purposes of monitoring developments in electric power restructuring, maintaining knowledge of the issues, studying the issues within the context of low-income assistance, and making recommendations to the 2002 General Assembly. The task force is to report to the Legislative Research Commission and Gov. Paul Patton no later than Nov. 15.

In a 1999 report, the task force recommended that no action on deregulation be taken in 2000, citing Kentucky’s existing low energy rates, which would no doubt experience greater volatility if restructured.
Energy is the U.S. economy’s single largest commodity, accounting for more than 65 percent of our total expenditures. Low energy prices, therefore, play a large role in keeping inflation in check. When gas and power prices go up, the costs associated with doing business in most goods and services are directly affected. Rising energy prices cause a ripple effect in the economy that passes on those costs to consumers of products and services in nearly every sector.

“These rising costs affect everyone,” says Palk, “but the Center for Energy and Economic Development has shown that higher energy bills hurt those who can least afford to pay them the most.”

The good news is that the price of consumer electrical service in Kentucky has not changed much in the past 10 years. The bad news is there are several pressing reasons that such stability may not last long into the new century.

According to the U.S. Department of Energy’s most recently compiled report on Electric Sales and Revenue for 1999, the figures show that the national average residential price of electricity declined slightly from 8.26 cents a kilowatt-hour in 1998 to 8.l6 cents in 1999. The average residential price in Kentucky declined from 5.61 cents to 5.58 cents. The 10-year trend shows that U.S. residential rates increased slightly, then dipped back down, ending the decade about four percent higher than they started. Kentucky residential rates did about the same thing, closing out the millennium about two percent lower than 1990 rates. A two percent price cut over 10 years is usually considered pretty good news. But the news sounds even better when you account for yearly increases in the cost of living. Statistics of residential electric rates in 1999 dollars shows that when you figure in the cost of inflation, residential electric rates actually declined about 20 percent across the U.S., and nearly 25 percent in Kentucky.

Statistics show that Kentucky’s electrical rates are consistently lower than the U.S. average. In fact, throughout the 1990s Kentucky has been among the three or four least-cost states when it comes to electric rates. This proves to be a great incentive to manufacturers and other out-of-state businesses looking to re-locate operations from other areas with higher energy costs to realize such relative savings over time.

“If you wanted to use a sports analogy, you could call Kentucky’s low electric rates our ‘home court advantage,’” says Don Schaefer, President and CEO of Jackson Energy located in McKee. “Kentucky already has what other states are trying to work towards – low electric rates – and our legislators are correct to continue their cautious approach to deregulation here. If not, we could lose our advantage and Kentucky homeowners and businesses will be the losers in this ballgame.”

Beneath the historical trends and reassuring statistics however, several pressing issues could threaten that continued stability here in the Commonwealth.

First and foremost of those issues is deregulation, which according to the Kentucky Association of Electric Cooperatives, has already led to temporary wholesale rate spikes that increased prices as much as 1,000 times during heat spells in the past three summers. So far those incredible price jumps have mainly affected prices that utilities charge each other-a result of the 1992 federal deregulation of wholesale electricity. But as more and more states restructure their electric utility industries, the marketplace’s volatility could reach Kentucky consumers.

The national economy’s future will have a huge influence on the future of electric rates. Low inflation and stable energy prices have had a lot to do with why electric rates haven’t changed much in Kentucky in the 1990s. Recent natural gas price increases could make it hard to hold the line on electric rates since there is an increasing dependency on natural gas as a fuel source for generating electricity. All the emphasis that has been given to development of this environmentally friendly “alternative fuel” for power generation over the past decade has resulted in a classic example of demand exceeding supply of the commodity and prices have been spent spiraling upwards. As a result, the U.S. Department of Energy has predicted this could be the most expensive winter in 15 years for users of propane and natural gas.

Another reason for stable rates this past decade is that there have not been many large power plants built recently. But this high-tech “new economy” runs on electricity, and power plants are incredibly expensive. The more electricity we use, the more it could affect future prices.

Environmental regulation brings still more volatile and emotion-charged questions. Coal generates virtually all the electricity in Kentucky. Will research be allowed to continue to make coal a cleaner source of fuel? Or will shorter-term, extremely expensive, regulations be enacted, eventually affecting electric rates?

“Coal produces almost 60 percent of America’s electricity,” says Palk. “In Kentucky, coal fuels almost 96 percent of the state’s electric power. It is precisely because of coal’s abundance and affordability that Kentucky has one of the lowest average electric rates in the nation.”

“With demand growing for electricity across the board, it will be extremely important for all fuels, especially coal, to play their proper roles,” he adds.

“We need a balanced energy policy that protects the environment, while recognizing that even if the use of other forms of energy increases, coal must play a significant role well into the next century.”

At the University of Kentucky’s Center for Applied Energy Research in Lexington, Dr. B.K. Parekh heads the Center’s clean coal research program. Researchers there have developed an advanced technique that can remove anywhere from 40 to 90 percent of 11 hazardous elements from coal prior to its being burned to produce electricity. The research is the latest in a string of technology advances – from low nitrogen oxide burners to precipitators – that have helped coal-fired electric plants sharply cut emissions.

Unfortunately, Parekh said the Environmental Protection Agency isn’t even considering coal as part of the answer for America’s future energy needs.

“The EPA has looked at coal as dirty energy,” Parekh said. “They are making it harder and harder for coal to be utilized.”

“The industry has made considerable strides in the development of clean coal technology,” adds Palk. “All the science shows that clean coal technology can meet America’s needs for both additional energy and clean air.”

Early last year at EKPC headquarters in Winchester, Gov. Paul Patton unveiled plans for construction of one of the most efficient, environmentally friendly power plants in the U.S. at a site in eastern Clark County. Global Energy Ltd., a company with offices in Scotland and Cincinnati, plans to build a plant at Trapp, Ky. on land leased from EKPC. Called the Kentucky Pioneer Energy plant, it could create hundreds of jobs and put Kentucky at the cutting edge of clean coal technology.

Global would own and operate the Kentucky Pioneer Energy plant, which removes 99.5 percent of sulfur and guarantees some of the lowest emissions in the industry. The process would involve processing coal and municipal solid waste into briquettes at a site located away from Trapp, then converting the briquettes into gas to produce electricity. Not only would the plant provide a low-cost method to dispose of solid waste, it would also capture elemental sulfur to make fertilizer and other products. The plant would also produce a material that can be captured to make road aggregate.

In addition to the Global Energy project, EKPC is also studying the use of fluidized bed boilers that inject limestone into the combustion chamber, which sharply reduces emissions compared with conventional boilers.

With all the advances that have been made, Palk said it doesn’t make sense for the government not to consider coal as a vital answer to America’s growing need for energy.

“If EPA had used the same logic when they dealt with the problem of water pollution as they are now using with coal, the message would have been to quit drinking water,” Palk said. “Clean coal technology has to play a role in meeting America’s future energy needs.”

According to recent statistics from the Kentucky Coal Council, more than $3 billion is brought into Kentucky each year from coal sales to 29 other states and 15 foreign countries.

“George W. Bush understands the energy challenges facing Kentucky families,” said Sen. Mitch McConnell. “Unlike the Clinton-Gore administration, President Bush will focus on our nation’s own energy resources, including coal, which is vital to Kentucky’s economy.”

“It has become evident that President-elect Bush understands the depths of the energy challenges facing our state,” said Mike Templeman of Allilance Coal in Lexington. “He recognizes the need for a national energy strategy and the vital role coal plays in that mix. Clean coal technology research today ensures that we have the ability to meet and exceed federal clean air standards.”

“The Clinton-Gore administration was fixated on renewable energy sources, which while important, comprise less than four percent of U.S. consumption today,” said David Gooch, coalition member and Executive Director of Coal Operators and Associates, based in Pikeville. “We need an energy policy that not only plans for tomorrow but also addresses our country’s needs today. The New Economy runs on electricity, and coal is the backbone of our electric industry.”


Richard Adkins is a staff writer for The Lane Report.
editorial@lanereport.com

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