The SLC Energy & Environment Committee convened on Saturday, July 12, for a program session, on Sunday, July 13, for a business session and on Monday, July 14, for a technical tour during the 62^nd SLC Annual Meeting.  The following is a summary of the speaker presentations and Committee activities during these programs.  An attendance list is attached.

Program Session, July 12, 2008

I.         Energy Efficiency in Southern States

            Craig Johnston, Vice President of Strategy and Marketing, Oklahoma Gas and Electric Company

            Todd Lucas, General Manager of Transmission Maintenance, Georgia Power Company

            Wayne Shirley, Director, The Regulatory Assistance Project, New Mexico

Background

In light of rising fuel costs and increased volatility in energy markets, as well as concerns over environmental impacts of energy production and use, responsible and economical utilization of the region’s energy resources is of profound importance to Southern legislators.  It is vital for state lawmakers to identify current trends and plan for the future energy needs of their citizens.

Mr. Johnston's Presentation

Mr. Johnston began his presentation by describing briefly how Oklahoma Gas and Electric Company (OG&E) works to meet the electricity demands of Oklahomans in a resource-constrained environment.  OG&E currently operates nine power plants for 755,000 customers and maintains a 30,000-square mile distribution system.  Enogex Incorporated, the parent company of OG&E, maintains a total of 8,300 miles of pipeline, six processing plants, and 23 billion cubic feet of natural gas storage.  Electricity demand continues to increase, while resources are constrained worldwide.  Natural gas prices have increased significantly in recent years while the United States is experiencing an aging electrical infrastructure.  Also, greenhouse gas legislation will continue to affect the way energy is produced, transported and used throughout the country.

Regarding increasing electricity demand, Mr. Johnston insisted that since 1985, electricity use has grown at a rate far exceeding the averages for total energy consumption.  When coupled with rising and volatile natural gas prices, this creates a strain on energy producers, as well as consumers and businesses.  From the 1970s through the 1990s, natural gas prices hovered around $1.00 to $2.00 per thousand cubic feet.  Since 2000, prices have spiked to well over $6.00 per thousand cubic feet, reaching more than $10.00 per thousand cubic feet around 2006.  From 1998 to 2008, there was a 323 percent increase in natural gas prices.  In 2008 alone, there has been an additional surge in natural gas prices, peaking at over $13.00 per thousand cubic feet. 

Aging infrastructure, Mr. Johnston continued, is becoming increasingly problematic for the natural gas industry, as well as for other sectors of the energy community.  Crumbling infrastructure leads to rising utility construction costs and, thereby, affects the end price of the product.  Currently, 70 percent of all transmission lines are at least 25 years old; 70 percent of all power transformers are at least 25 years old; and 60 percent of all circuit breakers are at least 30 years old.  The average age of all OG&E generating assets is 32 years. 

Greenhouse gas legislation has and will continue to play a role in energy costs.  According to Mr. Johnston, it is feasible for companies such as OG&E to achieve their CO₂ emissions reduction goals.  However, these adjustments will most certainly affect output potential.  In order to address the stricter emissions standards being passed by the federal government and the other obstacles, Mr. Johnston suggested that a combination of solutions must be sought.  First, it is imperative that states and companies invest in renewable energy sources.  For instance, wind power capacity in the United States is drawing astute attention as energy prices continue to soar and greater attention is given to the environmental hazards of using conventional energy sources.  

OG&E has begun investing in wind power, harnessing the strong winds blowing across the western part of Oklahoma.  An important aspect of making electricity produced from wind farms available for sale is transmission.  Since wind farms must be located in wide-open areas for them to be effective, the need for their proximity to urban areas (which use the most electricity) creates difficulties.  However, advances in transmission lines allow delivery to be an economically feasible option.  For instance, OG&E has built a line from Guymon, Oklahoma, the site of an OG&E wind farm, located in the western panhandle of the state, all the way to Oklahoma City, located in the middle of the state.  The final goal of OG&E's Oklahoma Renewable Energy Program, which includes wind production, is to construct more transmission lines throughout the state, eventually adding up to 600 megawatts of wind-generated electricity to the grid.  Mr. Johnston insisted that while wind power can be a key component in addressing customers' increasing energy needs, it is only a partial answer to the goal of achieving sustainable energy production, and it must be integrated with other supply assets.  Challenges of wind power, such as it being “non-dispatchable” (it blows when it blows), means that it must be supplemented with other sources of power. 

Second, Mr. Johnston continued, it is imperative to utilize the Smart Grid, which uses a robust two-way communication system, advanced sensors and distributed computers to improve electricity transmission and distribution efficiency, reliability and safety.  Third, energy conservation must become a priority for companies and businesses, as well as individuals.  Fourth, advancing technologies for carbon capture and storage will allow for more, cleaner electricity production.  Also, advances in nuclear waste storage and clean coal technology can yield similar results.  Finally, Mr. Johnston added, advances like the development of plug-in hybrid electric vehicles will produce environmental as well as fiscal changes for industries.  Mr. Johnston concluded his presentation by challenging industry and government to work together to achieve these goals and thus meet the energy needs of their customers and constituents. 

Mr. Lucas' Presentation

Mr. Lucas began his presentation by noting various strategies that Southern Company, the parent company of Georgia Power, has developed in order to effectively and efficiently deliver electricity to its consumers.  Utilization of the Smart Grid is one of these.  Smart Grid activities work to produce constructive regulation and healthy capital spending, which yields high reliability, lower prices, and higher overall customer satisfaction.  Currently, there is a growing societal demand for energy efficiency due in part to the rising energy costs and growing expectations of lower prices and higher reliability.  In order to address these needs and concerns, Southern Company has begun taking steps to explore emerging technologies and pilot programs, as well as to develop long-term strategic direction for comprehensive utilization of existing and emerging technologies. 

Mr. Lucas continued by defining the Smart Grid as a seamless, telecommunication-enabled power delivery system utilizing electronic data and other technologies to optimize system performance, reliability and the customer's experience.  The Smart Grid is self-healing, meaning it uses real-time information from embedded sensors and automated controls to anticipate, detect, and respond to system problems.  It can automatically avoid or mitigate power outages, power quality problems, and service disruptions.

Second, the Smart Grid involves customer interaction in that it incorporates consumer equipment and behavior in grid design, operation, and communication.  This enables consumers to better control and adjust appliances and equipment in their homes and businesses, reducing energy consumption.  It also allows the interconnectedness of buildings with energy management systems installed.  All of this allows consumers to better manage energy use and therefore reduce energy costs. 

Third, the Smart Grid prioritizes security in its operations.  New technologies allow operators to better identify and respond to disruptions.  For instance, real-time information enables these operators to quickly isolate affected areas and redirect power flows around damaged facilities.  Fourth, integrated applications allow for better communication and the ability to identify and address disruptions faster and more efficiently.  Fifth, overall power quality is improved by Smart Grid applications.  Sixth, the Smart Grid allows for more diversity in generation, important for avoiding blackouts and other major disturbances that could easily affect a few large power stations.  Since deregulation has given rise to an environment in which electricity supply depends on a large number of smaller producers, the ability to accommodate the variety of electricity sources is of vital importance.  Finally, the Smart Grid provides overall asset optimization. 

Next, Mr. Lucas examined some emerging applications for accomplishing efficiency and reliability.  For example, automatic fault location improves situational awareness of the transmission network by providing accurate, real-time information to system operators and thereby allowing them to make informed decisions that ensure quick restoration of system integrity.  Other applications include automatic fault isolation and restoration; condition-based maintenance; integrated applications; interaction with “smart appliances,” which offer flexibility in usage in order to minimize it; and advances in energy storage, such as those used to fuel plug-in hybrid vehicles.  

In closing, Mr. Lucas suggested some strategies for prolonged energy efficiency and responsibility.  First, a long-term strategy is imperative.  Given the volatility in the energy markets, extensive and informed planning will bring about more stability and sustainability for energy companies and their customers.  Second, technology will play a major role in developing more reliable energy production and delivery.  Finally, the Smart Grid strategy will continue to improve with innovation, diligence and cooperation between industry and government. 

Mr. Shirley's Presentation

Mr. Shirley began by addressing utility business models and clean energy incentives and why incentives for utilities are important.  First, all forms of regulation are incentive regulations, meaning there should always be a benefit to regulating profitability.  Also, incentives are important because utilities can be expected to respond out of a natural desire to help themselves.  Finally, Mr. Shirley warned, if incentives are poorly designed, poor results can be expected. 

Mr. Shirley discussed how utility financial structures can enhance the power of incentives.  First, non-production costs do not vary with sales.  Therefore, increased sales increase profits; conversely, decreased sales decrease profits.  Second, utility profits represent a relatively small share of the total cost of capital.  This means that profits are highly sensitive to changes in revenues.  These considerations must be made when lawmakers and other officials are evaluating incentives and regulations for utilities.

The problem with incentives, Mr. Shirley continued, is revenue erosion, or the decoupling of utility profits from sales volume.  When this mathematical link is broken, utilities become deeply concerned.  The objective is to make profit levels immune to changes in sales volume.  Mr. Shirley insisted that this is a revenue issue, but not a pricing issue, and therefore volumetric pricing approaches need to be changed.  The decoupling calculation should involve fixing a utility target revenue requirement determined with traditional rate cases.  Since target revenues may grow over time with customer growth or with inflation, each future period will have different actual unit sales.  The difference, positive or negative, is passed down to customers by adjusting the price for that period.  In order to address that, Mr. Shirley asserted, there should be positive incentives for meeting efficiency goals, such as cost bonuses, shared savings, and cost capitalizations.  There should also be performance goals. 

There are various risks that are eliminated by decoupling.  One of these is weather risk.  Weather risk is the risk that revenues change due to changes in weather.  If a utility receives more or less revenues, then the utility faces a weather risk.  The result is a wealth transfer between utility and customers.  Because decoupling holds revenues steady, it eliminates weather risk for the utility and its customers.  A second risk assuaged by decoupling is economic risk.  Like weather, changes in economic conditions can change sale volume.  The effect on the customer is delayed until the next rate case, but a wealth transfer, as in weather risk, does not actually occur.  What does occur is a simple lack of revenue.  Decoupling has the effect of eliminating this risk as well because price adjustments are driven by actual sales.  A third risk is financial and business risk.  Because revenues are stabilized with decoupling, the risk profile of the utility is reduced, so cost of capital is decreased.  Meaning, in the short run, the utility can be more highly leveraged.  In the long run, total return requirements will decrease. 

Currently, there are two states—California and Connecticut—where all electric investor-owned utilities are decoupled.  There currently are four states—Idaho, Maryland, New York and Vermont—where at least one electric investor-owned utility is decoupled.  In addition, there are a handful of states considering decoupling: Colorado, Delaware, Hawaii, Kansas, Massachusetts, Minnesota, New Hampshire, New Mexico, Wisconsin and the District of Columbia. 

Mr. Shirley then explained various methods for employing positive incentives.  The first is the cost bonus method, in which the utility earns bonuses computed as a percent of its energy efficiency budget.  A problem with this method is that it may incentivize over spending.  Also, the budget may operate as a ceiling on energy efficiency.  States that have used this approach have largely moved on to other methods.  A second method is the cost capitalization method, in which expenditures are included as investments—expenditures are rate-based—and amortized over the life of associated energy efficiency investments.  This method is advantageous because it provides a mechanism that is familiar to regulation, but like other rate-based investments, it may encourage overspending.  A third method is the shared savings method, in which the utility earns incentives based on a share of the economic savings generated by energy efficiency.  This method provides greater incentives for programs with higher cost benefit ratios.  Finally, a simple bonus is the final type of positive incentive, in which a bonus fund is pre-defined.  When performance goals are met, the utility earns the bonus. 

Mr. Shirley concluded by emphasizing that, in setting performance goals, incentives always should be conditioned on meeting these goals.  Goals should be achievable for the utility, but they should also encourage energy efficiency as aggressively as possible. 

II.        Applied Energy Solutions: CO₂ Collection Project

             Lundy Kiger, Director of Government and Community Relations, Applied Energy Solutions, Oklahoma

Background

Applied Energy Solutions (AES) Shady Point is a 320 megawatt co-generation power plant that annually processes approximately 800,000 tons of coal.  The project collects CO₂ generated from the production of coal and converts it for use in food processing and beverage production.  It is one of the largest coal-fired, non-utility co-generators in the United States, and also one of the cleanest solid-fueled power plants in the world. 

Mr. Kiger’s Presentation

Mr. Kiger began his presentation by stating that the Shady Point electric contract falls under the Public Utility Regulatory Policy Act (PURPA) of 1978.  Commercial operations began in January of 1991, and currently net plant capacity is 320 megawatts.  The plant utilizes 65 percent of all coal produced in the state, which is used to produce electricity that is sold to Oklahoma Gas and Electric.  The plant also employs clean coal technology to refine and sell CO₂ emissions.  Until 2002, it was the largest single private investment in Oklahoma at $480 million. 

Mr. Kiger explained the energy and economic impacts of the plant, stating that the project has created 1,500 to 2,000 direct and indirect rural jobs in the area.  The plant payroll and benefits exceed $15 million annually, and the overall financial impact of the plant is approximately $48 million annually, which has immediate impacts on the surrounding area—from local coal purchases to buying equipment and supplies locally.  Approximately 275 trucks per day haul coal, limestone and ash to the plant.  The plant processes about 3,000 tons of coal and 1,000 tons of limestone per day. 

Mr. Kiger described the clean coal technology used by the plant to process the minerals and collect and refine the CO₂ emissions.  The plant utilizes Circulating Fluidized Bed (CFB) combustion technology, which results in lower sulfur dioxide and nitrogen oxide emissions by firing at lower temperatures than a conventional pulverized coal plan (approximately 1,500 degrees Fahrenheit).  Emissions are controlled within the four boilers, and no add-on flue gas treatment is required.  Also, fabric filter bags allow for an extremely high degree of particulate removal.  The plant has four bag houses with 12,000 bags each.  This results in no visible emission from the stacks, which in total release less than 75 percent of its NO_X limit, less that 20 percent of its opacity limits, and less that 80 percent of its SO₂ limits. 

The CO₂ recovery process involves taking the gas and turning it into a liquid that is of food-grade quality, safe for shipping food for human consumption.  Approximately 5 percent of the flue gas is diverted from the power plant for the CO₂ process.  The flue gas is then compressed with centrifugal blowers for transport to the CO₂ plant.  From there, the first step involves passing the flue gas through a quencher to reduce gas temperatures from 325 degrees to approximately 106 degrees Fahrenheit.  Then, cooled gas travels through the scrubber to remove sulfur oxides.  The cooled and cleaned flue gas then enters the absorber tower where CO₂ is removed by a counter-current flow of monoethanolamine (MEA) solution.  The gas and liquid are separated at this point.  The CO₂-rich MEA solution is then pumped to a CO₂ stripper and boiled at 75 pounds per square inch to strip out all CO₂.  The stripped MEA is cooled and pumped back to the absorber tower as lean MEA with no CO₂ particles present.  The CO₂ gas is compressed, liquefied and purified, where all sulfur compounds, amine, oil, ammonia, and nitrogen oxides are removed.  Last, the gas is liquefied by cooling it to -12 degrees Fahrenheit and 300 pounds per square inch, and stored in three insulated containers prior to shipment at 200 tons per day of production. 

The liquid CO₂ is then sent to a certified laboratory for testing and verification of 99.9 percent pure food-grade CO₂, safe for packing food for human consumption.  Approximately 40 tons of liquid food-grade CO₂ is passed over to a liquid flash tank to be pelletized.  Liquid pressure is dropped to 60 psi and temperatures are reduced to -109 degrees Fahrenheit, producing solid food-grade CO₂ or dry ice. 

AES Shady Point became the first plant in the United States to produce successfully a food-grade product from utilizing fossil fuel.  In conclusion, Mr. Kiger stated that the innovative technologies employed by the plant have won it a number of awards, including Power Magazine’s power plant award. 

Business Session, July 13, 2008

I.          Oklahoma Bioenergy Center

             Bobby Wegener, Deputy Secretary of Energy, Oklahoma

Background

A joint project of Oklahoma State University, the University of Oklahoma and the Sam Roberts Noble Foundation, this program was created in 2007 to focus on research, development and education regarding the use of renewable sources of energy in the state.

Mr. Wegener’s Presentation

Mr. Wegener stated that the days of cheap, secure, plentiful energy are over.  For example, major U.S. oil field discoveries have continued to diminish since peaking in the 1930s and 1940s.  In the 48 contiguous states, oil production in fields containing more than 100 million barrels has not exceeded one billion barrels in any one field since the 1950s.  Oklahoma saw peak production in 1925, producing approximately 275 million barrels.  In 2005, the state produced 63 million barrels, which was the same level of production as in 1912.  Although discoveries in Alaska have somewhat stabilized U.S. oil production during the last 60 years, overall U.S. production continues to decline.  Since 2000, the United States has consistently produced less than six million barrels per day, including production from Alaska.  That number continues to decline. 

Correspondingly, foreign imports of oil have increased since 1970, in direct proportion to diminished domestic production and in response to ever-increasing consumption.  In 1970, for instance, about three-fourths of the oil used in the United States was produced domestically.  In 2006, slightly more than 35 percent of oil used in the nation was produced domestically, with around 65 percent from foreign imports.  Also, there has been a tightening of the oil supply globally.  Since 1965, there has only been a 2.3 percent average annual growth in oil production.  Current production is at 85 million barrels of oil a day.  The Energy Information Administration of the U.S. Department of Energy estimates that peak production will be somewhere between 102 million and 120 million barrels of oil per day.  Production is limited by access to these resources, infrastructure costs, geological complexity, and talent.  Currently, 70 percent of the oil produced in the world is from fields older than 30 years. 

The economic growth of China and India will continue to affect world energy markets, Mr. Wegener noted.  Currently, China and India make up one-third of the world’s total population.  Expected economic growth through 2025 is projected to be almost 6 percent per year for these two countries.  Also, oil demand in China has tripled since 1980, turning the nation from self-sufficiency to a net importer of oil.  There are 30,000 new automobiles on the road every month in Beijing. 

Also, the politics of global warming will continue to shape energy policy.  Under the federal Energy Independence and Security Act of 2007, production of cellulosic and corn starch ethanol, biodiesel and other advanced renewables will continue to climb, with production projections at over 35 billion gallons by 2022.  According to Mr. Wegener, biofuel production plays to America’s strengths, since the United States is number one in the world for biomass production potential due to total usable acreage (China is number two), whereas the United States is number 10 in the world for oil reserves. 

Mr. Wegener stressed that the United States must reduce dependence on unstable and often hostile governments as fuel sources.  Likewise, the United States must be more careful in inadvertently funding international terrorist organizations through energy purchases.  Also, the United States must focus on revitalizing rural economies.  According to Business Week, if the United States were to reduce oil imports and byproducts by 20 percent and replace them with homegrown biofuels, in the course of one year, farm communities and other biofuel players would reap $50 billion that would have gone to foreign oil producers, assuming an average oil price of $50 per barrel. 

In particular, the production of cellulosic ethanol provides enormous potential for the state and the country.  Cellulosic ethanol production has little to no effect on food costs, which is not the case with traditional, corn starch ethanol production.  In Oklahoma, there are a variety of cellulosic ethanol sources available, such as sorghum, switchgrass, residues and stover, miscanthus, woody crops, and energy cane.  The Oklahoma Bioenergy Center has invested $40 million over four years to cultivate such technologies.  Oklahoma State University, the University of Oklahoma, and the Noble Foundation all have contributed to this endeavor.

The overall purpose of the project is to conduct research and establish outreach programs to foster the development of a biofuels industry in Oklahoma, one that is focused on Oklahoma.  The Center will be involved in every level of production, including crop development (genetics/genomics and breeding), crop production, harvesting, collection, transportation, and conversion.  The focus of the Center will be on developing new crops and crop systems for the state; educating agricultural producers; and establishing an industry in Oklahoma.  The Center also hopes to improve opportunities for federal funding for the state, as well as opportunities for partnering with industry and other research consortiums.  Oklahoma has a heritage of agriculture and energy production so it makes sense to combine the two, Mr. Wegener continued.  The state has an abundance of natural resources as well as existing, world-renowned research programs at the contributing institutions. 

In closing, Mr. Wegener emphasized that there is no “silver bullet” for fixing America’s energy crisis.  It is imperative that lawmakers consider all fuel alternatives; focus on efficiency as a resource rather than a sacrifice; promote research and development; and recognize that we must work together toward achieving these goals.

II.        Southern States Energy Board’s (SSEB) Legislative Digest, 2008, Presentation and Roundtable Discussion

             Representative Rocky Adkins, Kentucky

Background

The Legislative Digest is a compilation of model Energy & Environmental legislation enacted by Southern states, which has been compiled by the SSEB for more than 20 years. 

Representative Adkins’ Presentation

According to Representative Adkins, in the SLC states, a record number of measures relating to energy and the environment passed in 2008.  These pieces of legislation will serve to improve state economies, foster energy security and independence, and protect the environment.  The passage of these measures demonstrates the deep commitment of Southern states to developing effective Energy & Environmental policies, while addressing the concerns of their citizens. 

The energy measures highlighted in the Legislative Digest are divided into the categories of alternative energy development; coal and minerals; emergency management and homeland security; energy efficiency; natural gas and petroleum; reorganization and coordination; and utilities.  According to Representative Adkins, energy related matters accounted for 31 percent of the total legislation summarized in the Legislative Digest.  The largest topic area was utilities, with the passage of 37 bills in Southern states this year. 

The environmental measures highlighted in the Legislative Digest are divided into the categories of air quality and pollution control; coastal zone management; emergency management and homeland security; environmental health services; hazardous waste and substance management; inland water resource management and conservation; radioactive waste; reorganization and coordination; solid waste; and water quality and pollution control.  Approximately 69 percent of the total legislation featured in the Legislative Digest is related to the environment.  The largest two categories were inland water resources management and conservation, and land management and conservation.  These categories combined for 155 pieces of legislation and represented almost half of all environmental measures passed throughout SLC states this year. 

Representative Adkins highlighted various pieces of legislation in a sampling of these categories and then opened the floor to any members who preferred to speak on specific pieces of legislation, or other energy or environmental issues, addressed in their home states.  Topics of discussion included: the development of wind energy; comprehensive energy bills; alternative fuels, particularly the production of cellulosic ethanol and biodiesel; distribution and availability of alternative fuels; funding for technology research; and natural resource preservation.

III.       Consideration of Policy Position

Representative Chuck Martin, Georgia, sponsored one proposed policy position, according to the provisions of the SLC Rules, regarding Renewable Portfolio Standards.  The position asserts that, given the diversity of alternative energy sources throughout the country, states should be allowed to set their own standards regarding requirements for renewable energy production and use.  The proposed policy position was passed unanimously by the Committee.  Subsequently, the position was adopted by the Southern Legislative Conference, Monday, July 14.   

IV.       Election of Officers

Senator Emmett Hanger, Virginia, gave the report of the Nominating Committee.  Representative Rocky Adkins, Kentucky, was nominated for chair of the Committee, and Representative Chuck Martin, Georgia, was nominated for vice chair of the Committee.  The nominations were moved and seconded, and Representative Adkins and Representative Martin were elected by acclamation.

Technical Tour, July 14, 2008

I.          Chesapeake Energy

The Committee toured the campus of Chesapeake Energy Corporation.  The tour included visits to Chesapeake’s 3D Visualization Room and Reservoir Technology Center, as well as other general facilities on the campus.  The tour also included video presentations and lectures on the production of natural gas throughout the country.  Chesapeake Energy Corporation is the second largest independent producer, and third largest overall producer of natural gas in the United States, with operations focused on exploratory and developmental drilling and corporate and property acquisitions.

Southern Legislative Conference 63^rd Annual Meeting

Winston-Salem, North Carolina

The SLC will meet for the 63^rd Annual Meeting in Winston-Salem, North Carolina, August 15-19, 2009.  In keeping with the wishes of the SLC presiding officers, please note that meeting notification does not authorize travel.

SLC Staff Contact

If you have any questions regarding this report or the 2008 SLC Annual Meeting, please contact Jeremy L. Williams in our Atlanta office at (404) 633-1866 or jlwilliams@csg.org.