Should
Kentucky Regulate Merchant Plant Sitings? 01/28/02
Proposals to build power plants owned by non-utility companies raise a number of policy questions for the current session of the Kentucky Legislature. The following excerpts from
"Merchant Electricity Generating Plants" provide background on those questions. This report is part of the Legislative Research Commission's Informational Bulletin No. 205, titled Issues Confronting the 2002 General Assembly. The full report addresses a wide range of issues and is available on the Internet at
www.lrc.state.ky.us/lrcpubs/ib205.pdf.
Merchant plants are electric generating plants that sell power competitively on the wholesale market. Because they produce only wholesale power, the price and supply of the power is not regulated by state or local authorities. Therefore, merchant power plants are not utilities because they do not sell any of their power to retail electric customers. Since 1999, merchant power plants have been locating throughout Kentucky, much to the consternation of some residents, local officials, utilities, and regulators.
Power plants, whether merchant or utility, have the potential to negatively impact air, soil, and water quality and to create a visual blight to scenic landscapes. Merchant power plants have no requirement to sell power to any utility serving customers in Kentucky, and this raises concerns for some policymakers who think the location of merchant power plants should be regulated.
The number of merchant plants in the South Central region of the United States has increased dramatically since the wholesale electric power market was deregulated in 1996.
This trend toward increasing generation by non-utilities is more dramatic in Kentucky. In 1998 generation by non-utilities was approximately 5 percent. That rose to 12 percent by 1999. In 1996 and 1997, the Kentucky Division of Air Quality had received no applications to construct electric generating units. The first application to construct was received in 1998, but the number of applications had risen to 12 by the year 2000.
Kentucky is unusual in that there are no laws that regulate where power plants may be sited.
Power plant moratorium
In light of the increase in requests for new power plants, Kentucky has taken some steps to evaluate the impact of new generating capacity. On May 16, 2001, the governor created the Energy Advisory Board to examine the transmission system, power reliability, and the impact of merchant plants. On June 19, 2001, a six-month moratorium was placed on new
applications to construct an electric generating unit. During the moratorium, the Kentucky
Division of Air Quality will be conducting an assessment of the cumulative impact of existing applications on the stateís air quality.
The Kentucky Public Service Commission will gather information on the adequacy of the transmission system and generating capacity in the state. (Since this LRC report, the moratorium was extended and the air quality and transmission reports have been completed.)
Pros and Cons
Proponents of facility siting regulation raise a number of points. First, they indicate that local governments have neither the staff nor the resources to evaluate the suitability of a proposed location or the economic development advantages of attracting a power generator. Second, the fact that many locales do not have planning and zoning laws raises concerns about a power-generating facility locating in an urban or heavily residential area. Third, proponents point out that merchant plants do not have to serve Kentuckians, but they utilize the state's scarce resources.
Opponents make a number of arguments against siting regulation. First, merchants contend that most of the plants coming to Kentucky are gas-fired peaking units, which are smaller, quieter, and less polluting than traditional coal or oil-fired generating units. Only eight of the 24 applications pending at the Division of Air Quality as of June 19, 2001, will burn coal. Second, merchant suppliers utilize relatively efficient technologies for burning coal. They say creating any barrier to siting a merchant plant is akin to creating a barrier to innovation that can increase Kentucky's market for coal and waste coal. Finally, merchants argue that the growth of a wholesale electric power market ultimately benefits Kentuckians. Regulation of siting will translate into a barrier to entry for new power suppliers, and any constraint on new suppliers may lead to higher power prices
