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What About The Merchant Plants?

As demand for electricity increases, utilities face the question: should we build more generating capacity ourselves, or buy electricity from someone else?

In the past, only other utilities could sell their surplus power. But as the electric industry experiments with various forms of deregulation, a new kind of power supplier now offers electricity to meet peak demands.

In the 1990s, non-utility companies began entering the energy marketplace. These companies build what are usually relatively small “merchant plants” that do not serve consumers directly. Instead, they sell electricity on the wholesale market to municipal utilities, investor-owned utilities, and electric cooperatives.

A year ago a rush by non-utility companies to build generating facilities threatened to crowd our state and cause many problems. Heading the list of concerns: unwise use of natural resources, overloading of the transmission grid, and environmental impacts.

A lot has changed during the past year.

In 2001 more than two dozen merchant plant proposals in Kentucky prompted Governor Patton to impose a moratorium to give the state a chance to sort out the situation. A key problem was that since merchant plants are not utilities, they were not subject to many of the regulations that affect traditional utilities.

In 2002, Kentucky legislators responded to this inconsistency with the passage of SB 257 and by creating the Kentucky State Board on Electric Generation and Transmission Siting. This board reviews applications and, when appropriate, grants certificates to build electric generating facilities and transmission lines that are not regulated by the Kentucky Public Service Commission’s usual utility rules.

Annette Dupont-Ewing, chair and executive director of Kentucky’s Energy Policy Advisory Board during the past year, says that when the moratorium on merchant plants was lifted in March, the new legislation made it possible for Kentuckians to exert some control over these previously unregulated businesses.

“The new law looks not just at a single plant but at the cumulative effects of all power plants within the state,” says Dupont-Ewing. “We need to balance the infrastructure of the electric industry, the environmental impact of new construction, and our total energy needs. We have to look at all three parts together.”

Hank List, secretary of the Kentucky Natural Resources and Environmental Protection Cabinet and a member of the Siting Board, says, “Even when the necessary permits are in place concerning air quality, water quality, and waste issues, we must also take into account the physical location of the proposed plant to evaluate its aesthetic impact and the social effects on the local and regional community.”

Before the new legislation took effect, Kentucky already had more than 30 electric generating stations, built and operated by traditional, Public Service Commission-regulated electric utilities. Before the moratorium, only three non-traditional electric generating plants were under construction as merchant plants within Kentucky. Dynergy operates two gas-fired units at its Bluegrass Generation plant in Oldham County, and another gas-fired unit at its Riverside Generation plant in Lawrence County.

So what happened to the plans to construct 29 more merchant plants that were put on hold during the moratorium?

So far, only two merchant power companies have sought permits to build generating plants in Kentucky. Kentucky Mountain Power’s application to build a coal-fired merchant plant in Knott County has obtained the required permits to begin construction. A second company, Pioneer Energy, is just now beginning the application process for a combined cycle/coal gasification plant in Clark County. A third company, Thoroughbred Generating Company (a division of Peabody Energy), has obtained an air permit but has not yet made formal application to the Siting Board to build a merchant plant.

Siting Board requirements are not the only reason for the dramatic decline in merchant plant applications. Nationwide economic conditions, particularly problems in finding the capital to invest in such large construction projects, play a significant role, too.

As demand for electricity continues to rise, applications to site merchant plants may again increase. But Kentucky’s own regulated utilities may want to build new generating facilities, too. What will happen if their needs conflict with plans for merchant plants? That’s one of the reasons the new Siting Board looks at cumulative issues.

To find out how the Siting Board makes its decisions–and how to participate in the process–visit the Public Service Commission’s Web site at

Next month: A Kentucky co-op is building America’s cleanest coal power plant

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