SD30 - Annual Report of the Coal and Energy Commission

Executive Summary:

The Virginia Coal and Energy Commission was established in statute in 1979 to study all aspects of coal as an energy resource and endeavor to stimulate, encourage, promote, and assist in the development of renewable and alternative energy resources other than petroleum. The Commission has 20 members: five members of the Senate, seven members of the House of Delegates, and seven citizen members appointed by the Governor.

In addition to its general powers, the Commission is also directed by its enabling legislation to: (i) act in an advisory capacity to the Governor and executive branch agencies upon energy-related matters; (ii) investigate and consider questions and problems relating to the field of coal and energy utilization and alternative energy sources as may be submitted; (iii) make recommendations to the Governor and General Assembly on its own initiative; (iv) consult with state agencies on all matters regarding energy conservation, including the promotion and implementation of initiatives for encouraging energy conservation by the public; (v) encourage research designed to further new and more extensive use of coal as well as alternative and renewable energy resources of the Commonwealth; (vi) disseminate its recommendations to groups and organizations, both state and local, so as to stimulate initiatives of local governing bodies and private business in the field of energy-related matters; (vii) coordinate its efforts with those of the Virginia Solar Energy Center and the Virginia Center for Coal and Energy Research; (viii) actively seek federal and other funds to be used to carry out its functions; and (ix) seek to establish alternative fuel capability within the Commonwealth (Va. Code § 30-189).

The Commission met four times in the 2001 interim. Members examined a broad range of issues including energy production in Virginia, low-income energy assistance, coalbed methane, Virginia's energy infrastructure, natural gas prices, and workers' compensation insurance premiums for coal miners.


Steve Walz of the Department of Mines, Minerals and Energy (DMME) gave a detailed report to the Commission on production of traditional and alternative energy sources, consumption of energy, and energy-efficiency measures in the Commonwealth. A copy of Walz's presentation is attached as Appendix A. Walz noted that coal production in Virginia increased slightly, totaling more than 33 million tons last year, at a value of $875 million. Several Commission members noted the difficulty in finding and retaining skilled coal miners, and Walz confirmed that information. Since the average miner is more than 50 years old, employment will continue to be a problem in the mining industry. Walz reported that Virginia's natural gas production declined slightly in 1999-2000, with just more than 71 million mcf produced for a value of $284 million, but production should increase this year. Virginia has seen a large increase in the number of wells, and while the price of natural gas is higher than in 1998 and 1999, the price does seem to be dropping. Oil production remains limited in Virginia, but has increased in recent years from 8,804 barrels to 12,418.

Walz presented the Board with data from the federal Energy Information Administration about consumption of energy in Virginia. Overall, 40 percent of energy used in Virginia comes from petroleum, with the remainder of consumption divided almost equally among coal, natural gas, nuclear power, and electricity. However, these numbers vary greatly depending on the sector of consumption. Residential and commercial sectors get most of their energy from electricity, while the industrial sector is more evenly balanced among energy sources, and the transportation sector consumes 99 percent of its energy from petroleum. Virginians consume 324.1 million Btu per person, and the national average is 350.9 million Btu.

Virginia has a number of programs encouraging the use of alternative energy, and Walz outlined many of them in his presentation to the Commission. In the area of business development, there are solar manufacturing grants and wind projects to encourage businesses to domesticate in Virginia and produce equipment that fosters the use of alternative energy sources. Net metering, park power, Virginia Housing Development Authority loans, and solar easements are some of the other programs Virginia supports. Alternative energy programs utilizing biomass technologies include poultry litter projects operated by private companies and the generation of electricity from solid waste at municipal landfills. Finally, Walz outlined the Virginia Energy Plan. The plan has two main goals: to operate state government as a model of energy efficiency, and to ensure the sustainable use of energy in Virginia. Many state agencies have implemented their own programs to use energy more efficiently, and DMME is currently conducting a study of energy conservation in public education.

Steve Young of CONSOL Energy, Inc. (Consol) briefed the Commission on current activity in Congress affecting the coal industry. Young noted that Virginia is fortunate to have Rep. Rick Boucher of the 9th District as the ranking Democrat on the House Commerce Committee. In 1999, the Virginia Coal Association adopted a resolution urging Congress to support research and development for clean coal technologies. A number of bills have been introduced in Congress and have gone through some of the committee process, but none have passed as of yet. A hearing on one major bill was scheduled for September 11, 2001, and had not yet been rescheduled. Senator Wampler asked Young to monitor the activities of Congress on this issue and provide the Commission with an update at a later meeting.


The Commission received its annual update on the Low-Income Home Energy Assistance Program (LIHEAP) from Vickie Johnson-Scott of the Department of Social Services (DSS), a copy of which is attached as Appendix B. Johnson-Scott noted that more than 84,000 families were served by LIHEAP in the 2000-2001 season due to increased federal funding of the program, and between five and 10 percent of funds were used for cooling assistance. The Chairman noted that most crisis funds are used to pay heating costs in winter months, but summer heat is just as much a health risk when low-income persons, particularly the elderly, do not have adequate cooling in their homes. Senator Watkins noted that the Southern States Energy Board (SSEB) looked at LIHEAP funding this year. It was noted that most funding goes to the Northeast to pay for heat in winter, despite the fact that the incidence of fatalities resulting from extreme heat in summer is equal or greater to that in winter. Senator Watkins indicated that the SSEB passed a resolution asking the federal government to reexamine funding allocation methods, taking new census data into account, and suggested that DSS pass a similar measure and communicate it to Congress. Senator Wampler stated that LIHEAP has been underfunded at the state level, and suggested that the Commission recommend allocating Temporary Assistance for Needy Families· dollars in the upcoming budget to supplement LIHEAP funds. He asked Johnson-Scott to update the Commission at a later meeting with additional figures for the year, as well as funding needs for next year.

Floris Weston of the Department of Housing and Community Development gave a brief update on the Weatherization Assistance Program. Her presentation is attached as Appendix C. Weston told the Commission that funding levels increased in FY 2000-2001, but the number of homes served did not increase dramatically because of turnover among skilled weatherization workers. The costs of training are high, and the Department of Energy has increased funding for safety training, but retention of employees is very difficult. The Chairman asked if the Weatherization Assistance Program had any funding challenges, and Weston indicated that the federal funding picture looks good. The funding may not increase, but she does not expect it to decrease this year. Senator Wampler asked her to keep staff apprised of any funding challenges the program may encounter.

Bill Lukhard, Chairman of the Consumer Advisory Board of the Electric Utility Restructuring Act, presented the Commission with an overview of low-income energy assistance and unmet need. A copy of Mr. Lukhard's comments is attached as Appendix D. The Consumer Advisory Board was created to assist the Legislative Transition Task Force in its work, including ensuring that residential and small business electricity customers benefit from competition. The Board is in its third year of studying low-income energy assistance, including LIHEAP, Weatherization, and private-sector programs. One of the Board's recommendations for 2001 was introduced as House Bill 2473. As introduced, the bill created the Home Energy Assistance Fund, provided for funding through income tax refund checkoffs and contributions through the Neighborhood Assistance Act, and provided for the centralization of administration of low-income assistance programs. The proposed centralization of administration could require that DSS collect information regarding the amounts of assistance provided in Virginia and the amount of unmet need. Budget concerns in the 2001 Session led to most funding mechanisms and data collection requirements being removed from the bill, and the Board is examining the possibility of renewing these recommendations for the 2002 Session. Lukhard indicated that the current state of the economy and possible changes in federal funding could have an impact on the need for low-income energy assistance. The Chairman noted that the Commission will continue to monitor any of the Board's recommendations through the Task Force and the General Assembly.


The Coal and Energy Commission dedicated its second meeting to the issue of coal owner consent to stimulating a coal seam for the operation of coalbed methane wells. The Commission also participated in a tour of Consol' s Buchanan 1 Mine in Buchanan County and several coalbed methane wells.

Staff presented an overview of bills from the 2001 Session addressing coalbed methane. House Bill 1941 would have removed coalbed methane wells from the requirement that gas well operators receive consent from coal operators when applying for a permit to stimulate a coal seam. House Bill 2854 provided for arbitration to settle any disputes between a coal operator and well operator regarding the stimulation of a coal seam. House Bill 2868 would have permitted a coal operator to require a proposed coalbed methane well to be moved to an alternate location not farther than 800 feet of the original location, and the well operator would not be required to move the location again without a hearing. The House Committee on Mining and Mineral Resources did not report any of these bills, pending study by the Coal and Energy Commission.

Bob Wilson of DMME gave an overview of coalbed methane production and the permitting process. Wilson showed a diagram of a typical coalbed methane well and explained how the well is constructed. Virginia currently has 3,631 active well permits, with 388 new permits granted last year. Wells remain under permit until they are abandoned or if an operator does not install a well within two years of receiving the permit. All operators are required to be bonded. The application must include the names of all parties who require notification of the proposed well, proof of notification, consent to stimulate the coal seam, the method of stimulation, a map of the entire disturbed area, and a sworn statement indicating the well operator's right to perform these operations. Applicants also need a plan to dispose of the fluid that will be removed from the coal in order to get the gas to move. The number of applications for permits to drill into active mines is small, but any operator of a well that will penetrate an active mine has to have a plan on how to drill while keeping the mine safe. DMME has internal agreements between divisions to cooperate and ensure safety in any coal seam stimulation.

John Heard expressed the Virginia Coal Association's frustration with and opposition to proposed changes to the Gas and Oil Act. The Coal and Energy Commission studied this issue at great length in the 1980s, and the Act that passed represented an agreement among all parties. Heard stated that the oil and gas industries have attempted to modify that agreement every year since the Act's enactment. Steve Young of Consol presented a comparison of coal and coalbed methane resources. Young stressed that the most valuable resource in coal mining is the miners themselves. Since the methane must be removed before the coal can be mined, Consol tries to collect as much of the gas as possible, but its removal has never proven profitable. Consol has invested heavily in research and development to ensure that gas removal occurs safely. Young admonished the Commission that anyone else mining the gas should be equally concerned with safety issues. Young stated that the current law works as it is drafted, and he does not see any need for change. Bob Brendlinger of Jewell Smokeless Coal Company also briefed the Commission. He stressed the importance of maintaining the requirement for coal operator consent to well drilling. Coal operators have to know exactly where the well is going to be; otherwise, a miner might hit a well, which could result in a fatal explosion.

The Commission heard from Sandy Fraley and Jim Kaiser of the Virginia Oil and Gas Association (VOGA). Kaiser stated that safety is the primary concern of VOGA as well. VOGA is not seeking to limit the ability of a coal operator to restrict the stimulation of a coal seam where there is an issue of safety. VOGA is merely seeking a limit on unilateral well rejection where a legitimate safety issue does not exist. Kaiser alleged that in the past year, more than 250 wells were not drilled because of the coal owner veto, resulting in more than $700,000 in lost severance tax revenue. Kaiser claimed that in some cases, the veto has been used by the owner of the coal to veto the installation of wells proposed by the owner's lessee.

The Commission discussed the complexities surrounding stimulation of a coal seam. Members noted that the hydraulic fracturing (or "fraccing") used to move the gas could damage the roof of a mine. However, damage might not be apparent until the coal is actually mined, which could be years later. VOGA asked that a hearing be held to determine whether denial of consent for a well is legitimately based on safety concerns. However, members expressed concerns that without federal or state fraccing standards, the actual safety risk caused by fraccing may be indeterminable, and suggested that the two industries may have to get together to develop standards that protect safety, meet contractual obligations, and protect royalties.

At the Commission's November 18 meeting, Jim Kibler, responding to questions about Mr. Kaiser's statements made at the Commission's previous meeting in Southwest Virginia, indicated that "250 wells" was the "theoretical" number of coalbed methane wells that could not be drilled on a particular sized plat assuming that consent was withheld by the coal operator. Kibler then presented a proposal, on behalf of VOGA, that was a substitute version of Delegate Bryant's House Bill 2868 from the 2001 Session (Appendix E). The proposal would (i) permit a coal operator to require a well operator to move the location of a proposed coalbed methane well to an alternate location within 800 feet of the original location, (ii) create a hearing process before DMME to resolve coalbed methane well location issues, and (iii) provide that consent for wells more than 750 horizontal feet from active areas of a coal mine shall be deemed to be granted if the applicant has obtained consent to stimulate from any coal owner holding at least a 50 percent interest in the acreage for each coal seam. Currently, coal operators must consent to stimulate a coal seam before a permit for a new well can be heard by the Department. This proposal would provide for operators to object during the permitting process, rather than refusing consent before the permitting process may begin.

Members discussed the proposal at length. Several members continued to express concern about safety issues, particularly related to the fraccing used to stimulate a coal seam. If the roof is damaged in the fraccing process, the methane may migrate through the rock into other coal seams. Some members were concerned about taking away the operator's right to consent to fraccing. Steve Walz of DMME confirmed the unpredictability of fraccing and the lack of standards at the federal or state levels. The consensus position of the members was that more information about the science of fraccing was needed, and the Commission did not vote to recommend any legislation.


Howard Spinner of the State Corporation Commission (SCC) presented the Commission with an overview of current and planned energy infrastructure in Virginia. Virginia currently has approximately 20,000 megawatts (mW) of electric generating capacity, plus one 540 mW plant under construction. Plants that have obtained a certificate of convenience and necessity from the SCC comprise between 5,628 and 7,043 mW of generation, and another 7,430 mW of generation have been announced, but applications for certificates for those plants have not been filed. AEP's 90-mile, 765-kV power line has been granted a certificate but is not yet under construction, and Dominion Virginia Power has applied for certificates for two new power lines: one 500-kV line of 101 miles, and one 230kV line of four miles. Dominion also obtained a certificate from the SCC for a natural gas pipeline, and two other companies have filed applications for their pipelines. Other significant natural gas projects include Dominion's Greenbrier and Mid-Atlantic pipeline projects, Duke Energy's Patriot pipeline, the Saltville natural gas storage facility, Columbia Gas's Homestead Expansion project, and Williams Cos. Transco Pipeline Expansion. Senator Wampler noted that the end point of many new gas pipelines is an electric generating plant. He urged the SCC to examine ways of getting some of that gas dropped off to consumers along the pipeline. The Chairman also noted that the Commission looks to the SCC to see whether Virginia has an adequate energy infrastructure, and expects timely decisions from the SCC based on what is best for the Commonwealth.

Senator Watkins, as Chairman of the Commission's Energy Preparedness Subcommittee, expressed concern about the adequacy and reliability of Virginia's energy infrastructure, and worked with the sec to develop the details of what information may be needed to understand the state of Virginia's energy resources and infrastructure. Senator Watkins proposed the collection of data regarding generation capacity and operations, electric transmission, and gas transmission, outlined in a letter to Senator Wampler (Appendix F). Senator Watkins explained the need to collect and organize this information to determine Virginia's energy infrastructure prior to the commencement of deregulation.

At a meeting of the Energy Preparedness Subcommittee to discuss the issue, representatives from Dominion Resources, American Electric Power, Old Dominion Electric Cooperative and the Virginia Energy Providers Association presented a letter to Senator Watkins identifying issues that they believe need to be resolved (Appendix G). The group expressed concern about a long-term obligation to provide information that may be proprietary or competitively sensitive, without a clear idea of the long-term objective of obtaining the information. Other issues included concerns about the geographical reach of the proposed inquiries, fears that some of the inquiries might obligate the electric utility to furnish information about facilities owned by others, which may not be appropriate, and concerns with interstate commerce issues related to the transmission of natural gas.

Members of the subcommittee discussed the collection of this information at length. Advocates of the proposal to collect the data suggested that as the energy industry is being deregulated, an understanding of a state's energy infrastructure. will allay concerns that may arise as state regulators lose their traditional oversight powers. While the Federal Energy Regulatory Commission may have some of this information, it may not be willing to share it with the sec. After much discussion, the subcommittee agreed that legislation should be prepared to establish a baseline of information about Virginia's infrastructure and that the legislation should be presented to both the full Coal and Energy Commission and the Legislative Transition Task Force of the Electric Utility Restructuring Act. The proposal was presented to both groups, and was introduced as Senate Bill 684. A copy is attached as Appendix H.


Jim Kibler, representing the Virginia Oil and Gas Association, briefed the
Commission on what has happened to natural gas prices over the past several years. High prices in the winter of2001 led to the introduction of Senate Joint Resolution 481 in the 2001 Session (Appendix I), asking the Commission to study the rise in natural gas prices. Since February, prices have dropped dramatically. Producers mine the gas at the wellheads, transmission companies operate the pipelines to move the gas, and local distribution companies (LDCs) deliver the gas to customers. Most gas consumption is in the winter months, but production is all year long, so companies typically store a substantial amount of gas and release it when demand increases. LDCs do not earn a profit on their reselling of the gas, and are required to act as a prudent purchaser.

Last year, gas prices at the wellhead and for consumers were historically high. Depressed prices over the several years prior to 2000 led to a decrease in development of new gas wells. The unusually hot summer of 2000 also required more gas to be taken out of storage to fuel electric generation plants, leaving less stored gas available for winter consumption. The cold weather in December, January, and February came at a difficult time last year. Much of the price of natural gas is dependent on activity outside the Commonwealth, since Virginia only produces less than half of one percent of the gas produced nationwide. A record number of wells have been drilled this year nationwide. As a result, prices are now back down to where they were for the seven or eight years prior to last year.


Karl Kendig, an attorney from Abingdon, presented the Commission with information regarding workers' compensation premiums for operators of coal mines. Kendig indicated that premiums for coal mine operations have reached crisis levels. Since 1997, .approved rates have more than doubled from $16.06 per $100 of payroll to $35.49 per $100. While almost all large mining companies are self-insured, operators of approximately 90 mines, approximately one third of Virginia's coal production, must purchase workers' compensation insurance. Small operators tend to have higher payroll costs per ton of coal produced. As a result, these dramatic rate increases disparately affect small operators.

Kendig stated that regulatory authorities should obtain a clear understanding of the economics of providing this coverage by comparing cash premium generation to cash benefit payments over at least 10 years. Mechanisms should be explored for providing insurers with incentives to investigate suspect claims. Health care providers should be required to charge workers' compensation recipients the same rates as privately insured patients. Industry classifications should be analyzed and modified where appropriate, and regulatory barriers to self-insurance pools should be reduced. A copy of Kendig's remarks is attached as Appendix J.

Bob Maxwell of the National Council on Compensation Insurance (NCCI) explained the process for determining workers' compensation rates for operation of coal mines. Coal companies pay premiums to the insurance companies, and the insurance companies pay NCCI to determine the rates. NCCI then forwards information with its recommendation to the SCC for use in the company's annual rate case. NCCI does not examine the loss experience of self-insured coal companies. Rates before the 1990's decade had decreased substantially, but have increased in the last few years due to an increase in loss costs.

Charlie Tinzer of NCCI explained that his company is a rating organization designated by member insurance companies to fulfill their filing obligations with the SCC. Insurance companies may choose any rating organization to fulfill these duties. The cost of switching companies would be high. The data is analyzed extensively over the period of a year. Self-insured companies do not use the rates filed by NCCI, so NCCI would not want to include their data in determining a premium recommendation. Senator Wampler suggested that part of the premiums be used to pay for independent review.


Senator Watkins gave the Commission an overview of the recent activities of the Southern States Energy Board (SSEB). The SSEB just approved the Energy Policy in the South, which was done as a result of the National Energy Policy promulgated by the President earlier this year. The Energy Policy in the South is designed to provide guidance to southern states about energy production and consumption, based on five guiding principles: (i) ensuring the diversity of domestic energy resources; (ii) addressing energy supply for .,stability and reliability; (iii) increasing conservation and energy efficiency; (iv) expanding and strengthening infrastructure capacity; and (v) advancing research and development and use of clean energy. In response to Delegate Stump's inquiry about the level of interest in clean coal technology, Senator Watkins replied that it is of great interest, and added that it is incumbent on Virginia to leverage as much of the federal funding for that technology as possible.


The Commission will continue in the 2002 interim to examine these and other issues as they arise, in accordance with its charge.