MISS. POWER TO ABSORB $540M IN COST INCREASES FROM KEMPER PLANT

Tamar Hallerman
GHG Monitor
4/26/13

Mississippi Power said this week that it plans on absorbing more than half a billion dollars of cost increases stemming from its Kemper County coal gasification facility. The utility revised the cost estimate for its 582 MW integrated gasification combined cycle facility on April 23 from $2.88 billion to approximately $3.42 billion, more than $1 billion above the plant’s initial baseline. But the Southern Company subsidiary said it would absorb the $540 million cost increase instead of passing the expense on to its nearly 200,000 customers. “While we are disappointed that costs have increased, we believe we have done the right thing by remaining accountable to our customers,” Mississippi Power President and CEO Ed Day said in a statement.

In a filing this week to the U.S. Securities and Exchange Commission, Mississippi Power attributed the sudden cost increase to “additional cost pressures, including labor costs, piping and other material costs, engineering and support costs and productivity decreases.” During an earnings call with investors this week, Southern Company officials attributed the bulk of the cost increases to decisions related to piping. “We made the decision to essentially improve the quality of it, improve the thickness, improve the metallurgy. We think that will provide the best long-run answer to the reliability of the plant and serve Mississippi customers for decades to come,” Southern Company Chief Financial Officer Art Beattie said.

Opponents Call for PSC to Pull Project Support

The news provided fuel to the Kemper plant’s opponents, who have long raised concerns about the cost of the IGCC facility, also known as Plant Ratcliffe. The local chapter of the Sierra Club, one of the project’s most vocal opponents, has consistently argued that the gasification project is too expensive to be passed onto ratepayers—especially when compared to the much cheaper price of new natural gas generation. Following the news of the cost increase, the environmental group called on the Mississippi Public Service Commission (PSC) to hold a prudency review on the project. “It’s time to pull the plug on this dirty, expensive and unnecessary boondoggle,” Louie Miller, director of the Mississippi Sierra Club, said in a statement. “Either Mississippi Power managed to spend $600 million over the last few weeks, or the company misled the PSC, its customers, and its shareholders.”

The announcement comes weeks after Southern Company withdrew its $1.5 billion federal loan guarantee application with the Department of Energy. The utility giant said it had secured financing for the plant elsewhere at lower rates than what was available in the federal program. Southern was able to do so thanks to a settlement agreement with the PSC—later blessed by the state’s Republican-controlled legislature and Governor—allowing the company to sell up to $1 billion in bonds to cover construction and financing costs for the plant above the $2.4 billion cleared for rate recovery by the PSC. That agreement also allowed the utility to apply for a rate increase with the state regulatory body. The PSC commissioners quickly approved a cumulative 18 percent rate increase for Mississippi Power’s ratepayers over the next two years to begin paying off construction debt.

As recently as last month, Mississippi Power said capped costs at the facility—excluding the project’s CO2 pipeline and lignite mine—remained steady and on budget at $2.88 billion. But the Sierra Club at the time was quick to raise claims of what it said were “Enron-style accounting” tricks to hide cost increases. “Southern Company has managed an impressive feat: with one foolish project, they’ve harmed their customers, they’ve harmed the environment and they’ve harmed their own shareholders,” Miller said this week. “Now they’re doing their best to hide the true impact of the Kemper project on Mississippians.”

Utility Aims to Meet Initial In-Service Date

Southern Company CEO Tom Fanning said during the earnings call this week that despite the cost estimate increase, Southern is still aiming to bring the facility online by its originally-scheduled in-service date of May 2014, a task he said is “achievable.” “We’ve got our heads down,” he said. “We are focused on this and we’re going to do everything we can to improve performance going forward.” Fanning said Southern has added an overnight shift of construction workers in order to get the work done by the in-service date—another factor he said added to the cost increase. The utility is rushing to bring the plant online in order to receive more than $133 million in federal investment tax credits for advanced coal generation, incentives that expire at the end of May 2014. The project—which has a $270 million Department of Energy grant under the Clean Coal Power Initiative—plans on capturing 65 percent of CO2 emissions for storage via local enhanced oil recovery operations.

In the meantime, Fanning said construction continues on the east Mississippi facility. He said the facility design is “near completion,” with the final component of the plant gasifier lifted into place. He said work on the facility’s water treatment facility and combined-cycle cooling tower are also completed. “We continue to make tremendous progress at the Kemper site. With most of the major components in place—the combined cycles, gasifiers, massive gas absorbers and lignite dome, as well as the 75-acre reservoir—the facility’s appearance reflects our progress with start-up activities, which are now 40 percent complete,” Fanning told investors. He said that final engineering is almost complete and that the utility is now doing activities in the lead up to commercial operation like bringing installed components together through piping, cabling and control equipment.

Fanning said that despite the financial stumbles, he still sees the Kemper plant as a solid investment. “It still is terrific. Now obviously we’re disappointed. Nobody wanted to have this overrun and certainly for our account. We take that very seriously and we’re disappointed with that. That being said, it is so important to serve the long-term interest of our customers to provide a balanced portfolio of generation resources,” Fanning said. “Failing to do Kemper would have put a much bigger bet in natural gas for the account of Mississippi’s customers and that doesn’t make sense.”