MISSISSIPPI POWER, STATE REGULATORS REACH KEMPER SETTLEMENT

Tamar Hallerman
GHG Monitor
1/25/13

Mississippi Power Company and state regulators reached a settlement agreement Jan. 24 that will allow the utility to seek a rate increase on its customers to help pay for its $2.88 billion Kemper County gasification facility. Two of the Mississippi Public Service Commission’s (PSC) three commissioners voted in favor of the settlement during a last-minute minute meeting held on Thursday. The pact allows the Southern Company subsidiary to file for a $172 million rate increase this year to help pay for its 582 MW integrated gasification combined cycle facility with carbon capture and storage that is currently under construction in the eastern portion of the state and nearly three-quarters complete, according to the utility. The PSC agreed to review that rate increase proposal under expedited consideration within the next several weeks.

Under the terms of the six-page agreement, Mississippi Power also agreed to submit a plan to the Commission outlining when it will seek rate recovery from its nearly 200,000 customers during the plant’s first seven years of operation, which is expected to kick off in May 2014. “The proposed plan should be designed to mitigate and stabilize the up-front rate impacts to customers during the ramp-up period for the Kemper Plant by locking in a series of annual revenue requirements for the first seven years of operation,” according to the settlement.

In exchange, Mississippi Power said it would pass on $2.4 billion in project costs to its ratepayers—plus other expenses not traditionally included in official cost figures such as the project’s CO2 pipeline and nearby lignite coal mine—even though the project is expected to cost $2.88 billion. The utility also agreed to credit its ratepayers 10 percent of any royalties earned from the sale of Southern Company’s Transport Integrated Gasification (TRIG) technology globally. Southern Company CEO Thomas Fanning said in November that the company will market the technology particularly to power companies in countries like India and China that widely utilize low-rank coal. The agreement also stipulates that ratepayers will be credited back their money if the Kemper plant’s certificate is overturned by a court.

Utility ‘Pleased’ with Settlement

Mississippi Power CEO Ed Day said the utility is “pleased” with the settlement agreement. “Now with a formal working agreement and an agreement to jointly withdraw the litigation regarding customer rates relating to the Kemper County energy facility, Mississippi Power is focused on completing the project to provide our customers an affordable energy source and stabilized rates for decades,” he said in a statement.

Mississippi Sierra Club Director Louie Miller, a major opponent of the Kemper project, said the agreement is “reckless.” “This so-called settlement agreement is a coup d’état on the part of Mississippi Power with collusion from two of three public service Commissioners,” he said in an interview. “This is, in effect, just one more in a series of flip-flops.”

Settlement Jumps Ahead of Sierra Club Case

The pact came as a surprise to many given that the Commission voted unanimously in June to deny Mississippi Power’s request to raise rates on its customers by nearly 16 percent to generate about $55 million to help pay for Kemper’s capital costs. The Commissioners at the time said that the PSC would hold off on making a decision until an ongoing legal challenge from the Sierra Club was cleared. “I am still in support of the Kemper County Plant, and believe that [Construction Work in Progress] will ultimately save the ratepayer millions of dollars,” Republican Commissioner Lynn Posey said at the time, referring to state law that allows for utilities to collect money from ratepayers to fund large baseload power projects before they come online. “However, I do not believe it is in the best interest of the ratepayer to increase rates while there is legislation pending before the Mississippi Supreme Court.”

The Sierra Club’s separate case against the Kemper facility currently remains ongoing and is expected to stretch on for several more months. The NGO appealed its legal challenge of Kemper’s certificate to the state Supreme Court after a local judge ruled in favor of Mississippi Power last month. That request is still pending, according to Miller, and likely will not be taken up by the Court for several more months. But the settlement agreement says the lower court’s ruling last month indicates that the project, which will capture 65 percent of CO2 emissions and sell the commodity for enhanced oil recovery operations near the Gulf Coast, has a “high likelihood of success” in the Supreme Court.

Supreme Court Expected to Look at Rate Request on Monday

Miller further questioned the timing of the settlement agreement given that it comes mere days before PSC and Mississippi Power lawyers are set to argue in front of the state Supreme Court regarding the proposed rate increases. After the PSC denied Mississippi Power the ability to collect rate recovery from its customers last summer, the utility appealed the decision to the state’s high court. As of press time, the nine-justice court is still scheduled to review that request Jan. 28 (oral arguments were announced before the settlement agreement), even though Mississippi Power and the PSC said they would ask the court to dismiss the case.

The Supreme Court on Monday will also review the constitutionality of Mississippi’s Construction Work in Progress (CWIP) statute, which authorizes the capital costs for certain baseload power projects facilities to be folded into the rate base for local customers during plant construction. In addition to fielding oral arguments from Mississippi Power and the PSC’s lawyers, the high court will also hear from the attorneys of cross-appellant Thomas Blanton, a local resident who has previously challenged CWIP. It is still unclear how the settlement agreement will affect the case.

Passed in 2008 by the state legislature under the Baseload Act, proponents of the CWIP provision—used in multiple states mainly for large nuclear facilities—say that the mechanism provides a financial incentive for newer, more capital-intensive energy projects to come online when they would not be economic on their own. “The general theory is that CWIP makes it easier to build these large-scale, risky projects by basically shifting the risk burden from investors to ratepayers. Proponents see it as short-term pain for long-term gain,” said Rob Thormeyer, spokesman for the National Association of Regulatory Utility Commissioners, which does not take a position on CWIP. But opponents argue that mechanisms like CWIP unfairly shift the financial burden of risky projects onto the backs of ratepayers without explicitly promising to deliver on investments. This is the Supreme Court’s first crack at CWIP since the passage of the Baseload Act given that Kemper is the first energy project to attempt to use the mechanism.

Stakeholders Dispute Settlement Timing

Miller said this week’s settlement agreement gets in the way of both issues the Mississippi Supreme Court is looking to address early next week. “This settlement agreement to me looks like a preemptive strike to basically inrun the Court … it is highly unusual for there to be some last minute fly-by-night agreement, and I think it’s fair to say the Court will have a lot of questions about how this settlement was arrived at and why Mississippi Power and the Commission they did what they did,” he said.

But a spokeswoman for Commission Chairman Leonard Bentz said Miller’s claim is false. “There’s really no reason for [the settlement] to be done before the Supreme Court arguments on Monday. Jan. 24 just happened to be when we scheduled our meeting,” she said.