Should Kentucky Regulate Merchant Plant Siting?

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. (For the electric
co-op view on merchant plants, see the "From the Editor"
column.)

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 Div-ision of Air Quality will be
conducting an assessment of the cumulative impact of existing
applications on the state’s 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

-Paul Wesslund