Kentucky Public Service Commission Chairman David Armstrong speaks at Eighth Annual Conference on Carbon Capture & Sequestration

Kentucky Public Service Commission Chairman David Armstrong appeared as a panelist along with utility regulatory commissioners from Indiana and Minnesota at the Eighth Annual Conference on Carbon Capture & Sequestration in Pittsburg, Pennsylvania on May 7, 2009. The 2009 Conference focused on carbon capture, separation and sequestration technologies that are being or could be deployed in the U.S. and North America. The conference included featured speakers representing international organizations, federal and state government, utility and financial companies, the scientific community and interest groups. 

Commissioner Armstrong acknowledged the recent decision by the US Environmental Protection Agency to add carbon dioxide to its list of regulated pollutants and noted that it is now clear that constraints will be imposed either by legislation, regulation, or both. He also noted that Kentucky will be disproportionately affected by any constraints on carbon emissions given that ninety five percent of the state’s electricity is generated from coal. 

Commissioner Armstrong described two projects underway in Kentucky to gauge the potential for carbon sequestration in saline aquifers found within sandstone formations underneath the state. The first is Duke Energy’s project at its East Bend Generating Station in Boone County in northern Kentucky. The East Bend project is being conducted in cooperation with the Midwest Regional Carbon Sequestration Partnership, which is one of three National Energy Technology Laboratory partnerships in which the Kentucky Geologic Survey is a participant. 

The East Bend project involves the injection of about 2,000 tons of supercritical C02 — about two or three tanker truck loads of liquid carbon dioxide — to a depth of 3,000 to 3,500 feet. The CO2 is going into the Mount Simon sandstone saline stratum, one of the major potential carbon storage aquifers in the Midwest. EPA granted the experimental well permit for the East Bend project in April of this year. Duke Energy is expected to begin drilling in late May or early June and to start injection shortly after the well is completed. The permit requires tracking the process at every stage. 

The other project is being conducted by the Kentucky Geological Survey, in partnership with several utilities and other private entities. The Kentucky Geologic Survey test is near the Ohio River in Hancock County in western Kentucky. It calls for injecting between 1,500 and 3,000 tons of CO2. This well will be deeper — between 4,000 and 8,300 feet. Its target is the Knox dolomite saline stratum, which was chosen because the Mount Simon sandstone is both thinner and deeper in western Kentucky, making it a less attractive sequestration option. The Hancock County project also received its EPA permit in April, and drilling is currently underway. Injection is expected to begin this summer.  

The Commissioner noted that these are test projects, with relatively modest costs. The Kentucky Public Service Commission has granted the participating utilities separate accounting treatment for their costs related to the projects, with the expectation of future recovery through rates. 

The Commissioner also discussed the regulatory challenges faced by Kentucky as it moves towards a carbon constrained future. He identified two looming regulatory questions: who owns the carbon and who pays the bills?  The Commissioner noted that the first of these questions poses a real challenge for Kentucky as long-term sequestration of carbon dioxide poses unprecedented issues with respect to monitoring, mitigation and liability, all of which may extend well beyond the lifespan of the plant that produced the carbon dioxide. Kentucky law currently has no framework for addressing those issues. 

The Commissioner made reference to the Interstate Oil and Gas Compact Commission’s recommendation that states should take ultimate ownership of sequestered carbon after the originating operation has been closed. However, the Commissioner suggested that Kentucky could not take ownership of the carbon, or indemnify the original operator, without changes to the state constitution. Amending the constitution in Kentucky requires a two-thirds majority in a voter referendum. 

The Commissioner noted that the cost recovery issue is far less complicated, as Kentucky has regulatory framework already in place to address this issue. In response to the Clean Air Act Amendments of 1990, and recognizing the need to both streamline the ratemaking process as it applied to environmental compliance costs, and to bring a measure of regulatory certainty to it, the Kentucky General Assembly in 1992 enacted an environmental surcharge mechanism, codified at KRS 278.183. The statute provides that costs imposed on utilities as a result of the Clean Air Act, or federal, state or local measures to control coal combustion by-products, are recoverable through a surcharge on electric rates. This surcharge applies to both capital and operating costs, including the purchase of emission allowances. 

The Commissioner believes that the environmental surcharge mechanism would apply to costs associated with CCS, whether they come through the addition of controls to existing plants, the inclusion of CCS technology in new facilities or the purchase of carbon credits or other offsets under a cap-and-trade regime. However, the Commissioner acknowledged that the applicability of the environmental surcharge mechanism to CCS is an untried legal concept, and could be subject to challenge. 

This article was co-authored by Kevin McGuire and Mary Beth Naumann, Jackson Kelly PLLC. For more information on the authors see (McGuire) here and (Naumann) here.