FRANKFORT — Gov. Paul Patton on Friday said the state perhaps should let the market decide how Kentucky's “emission allowances” — essentially permission slips for air pollution — get parceled out among electric plants.

        That would be a departure from the policy of the Natural Resources Cabinet, which is reserving 95 percent of credits for existing utilities and only 5 percent for future generators.

        The cabinet's Division of Air Quality issues permits and enforces air standards that are required of utilities and smokestack industries. One credit is for one ton of nitrous oxides, which in warm, sunny weather react with other compounds to form the pollutant ozone.

        Mr. Patton floated his idea at a meeting of his own energy advisory council, made up of administration officials, utility executives, oil and gas and coal industry figures and consumer advocates.

        Mr. Patton asked whether it would be better for utility ratepayers if emission credits were allotted to power plants according to who could produce the most electricity at the least cost. “To me, that's something we ought to look into,” he said.

        It's an important issue because federal limits on nitrous oxide emissions — called “NOx” emissions in the industry — will be slashed in 2004.

        That means fewer emission credits to go around, and the Natural Resources Cabinet has decided that existing plants — the state's regulated utilities — should get 95 percent of them.

        At the same time, a host of independent energy companies, not subject to state regulation, have plans to build up to 24 “merchant” plants that would sell electricity on the open market, primarily to customers in other states.

        Some of the plants would burn coal but several would burn natural gas. Kentucky is attractive to merchant plant developers because it is nicely situated within the Midwest power grid and crisscrossed by gas transmission lines.

        The 5 percent limit would be exceeded by combined emissions of just two coal-burning merchant plants already granted permits — a Duke Energy-EnviroPower project in Knott County and a Peabody Energy plant at a coal mine in Muhlenberg County. And after three years, a merchant plant would be deemed an “existing” plant and eligible for the 95 percent pool.

        Currently in Kentucky, generating plants can emit a combined 103,000 tons of NOx during the warm, sunny “ozone season” — May 1 through Oct. 31. That is to be cut by nearly two-thirds, to 36,503 tons, by 2004.

        The state's regulated utilities contend their 95 percent share of credits is fair because, unlike merchant plants, they are obligated to provide electricity within the state.

        In addition, they have spent $200 million on pollution control equipment, and will spend $1 billion more by 2004, to meet the new standards, officials said.

        In other words, their customers have earned the credits. “They're going to foot the bill to the tune of $1 billion so that we can buy our way down to the 36,000-ton cap,” said Caryl Pfeiffer, director of environmental affairs for LG&E Energy, parent company of Louisville Gas & Electric Co. and Kentucky Utilities Co.

        Additional merchant plants would require others to spend even more on pollution controls, Ms. Pfeiffer said.

        “Merchant plants did not earn any NOx allowances in Kentucky,” she said. “Kentucky electric customers should not be required to pay higher electric bills to subsidize out-of-state customers of the merchant plants.”

        Hayden Timmons, who is on Mr. Patton's advisory council and works for the Kentucky Association of Electric Cooperatives, said he did not think Mr. Patton was pondering an outright auction of emission credits.

        “He's got a very legitimate question about this and he really hasn't made his mind up,” Mr. Timmons said.

        “Our only contention all along has been that we don't want our customers to have to pay for something that they've already paid for,” Mr. Timmons said, referring to pollution controls. “We have no problem with merchant plants. We just don't want our customers to have to subsidize anything.”

        A representative of one coal-burning merchant project, Peabody Energy Vice President Jacob Williams, said Kentucky is a “coal blessed” state that should be cultivating more of a coal-fired electric industry.

        “I think Kentucky should consider being a power exporter just like you're a car exporter,” Mr. Williams said.

        Mr. Patton has been a supporter of the Peabody project. He did not show the same feelings Friday toward proposed merchant plants that would burn natural gas.

        “I'll be blunt about it,” Mr. Patton said. “I don't see much advantage to Kentucky to bring in gas we get no revenue from, export electricity we get no revenue from, and they use some of our allowances.”

        Mr. Patton in June imposed a six-month moratorium on further applications for air-quality permits while his energy policy board and the Public Service Commission study how merchant plants would likely affect existing electric systems.

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