Mississippi Throws in the Towel on the Kemper Energy Center

Having already alerted Mississippi Power Company that the time had come to pull the plug on the "clean coal" aspect of a major electric generating plant under construction, the Public Service Commission has given the utility and its parent company, The Southern Company, 45 days to craft a settlement resolving all outstanding capital investment questions. The commission stated that after years of delays and billions of dollars in cost overruns, it had become apparent that the integrated gasification combined cycle (IGCC) component of the Kemper County Energy Center was simply not sustainable. The commission therefore ordered Mississippi Power to apply to have the Kemper facility relicensed as a natural gas-only power plant. 

Mississippi Power first proposed the Kemper project back in 2008. It was designed with a nameplate capacity of 582 megawatts and incorporated a technology that would convert coal (specifically lignite) into gas for use in generating electricity. In promoting the IGCC project, the utility had emphasized that lignite is an inexpensive resource widely available in Mississippi. In further support of the Kemper facility, the utility had attested that due to that local availability, using lignite as a fuel source for the Kemper project would be less apt to face the pricing volatility experienced with other supply sources. Commodity transportation expenses would be significantly lower as well, the company said. In its quest for authority to commence the Kemper project, Mississippi Power had conceded that IGCC technology requires a much larger investment than more conventional power plant designs. But, the company argued, the higher cost of construction would be more than offset by both the lower fuel costs of the plant and the environmental attributes of clean coal applications. 

As initially projected, the utility had estimated the cost of construction of the Kemper facility would come to around $2.2 billion, with a completion date of May 2014. Upon approving the project, the commission implemented a cost cap of $2.88 billion, but, as provided in state law, it permitted the utility to begin recovering from ratepayers some of the project's financing costs as they were incurred instead of waiting until the project was completed and actually placed in service. 

To say that construction of the Kemper project did not progress according to plan would be an understatement. It has been plagued by continual revisions in both capital budgets and in-service dates. As those costs mounted and completion dates stretched further and further into the future, Mississippi Power kept returning to the commission for additional rate relief. 

A particularly controversial response by the commission was a 2013 decision in which it approved a proposed settlement that allowed the utility to raise its rates by $350 million, an increase of 18%. Various parties appealed that rate order to the Mississippi Supreme Court, which in February of 2015 reversed and remanded the rate decision. By the time the court entered its ruling, the cost of the Kemper facility had already risen by almost 300%, to more than $6 billion. 

Looking at the record of construction delays and other setbacks, the court deemed it likely that it would be more than a year from that point before the IGCC units would be in service. Consequently, the court mandated that Mississippi Power's rates be reset to what they had been prior to the commission's 2013 rate order and that the utility refund its customers all monies collected thus far that stemmed from the 2013 rate increase. Although several parties, including the commission, petitioned for rehearing of the court's holding, all were denied. With the prior 18% rate increase now gone, the stage was set for the IGCC portion of the project to fall even further behind schedule and incur even greater cost overruns. 

The last straw appeared to be the project's failure to meet its most recently projected in-service date, which was May of this year. Soon thereafter, The Southern Company announced that it could no longer help underwrite the IGCC facility, and it called on Mississippi Power to cease any additional work on the coal gasifiers at Kemper. That was followed by a formal statement from the commission in which it confirmed the propriety of the corporate parent's decision and told the companies to prepare for operating the Kemper plant as a purely natural gas-fired generator. 

In making that pronouncement, the commission indicated that there comes a time when a company has to cut its losses and admit defeat. The commission said it saw no reason to continue to throw good money after bad for Kemper's IGCC technology. It signaled that it now viewed the Kemper project as a costly, ill-advised experiment that should have been stopped much sooner, when it became obvious that ongoing cost increases and delays in construction had already rendered the units noncosteffective. 

Moreover, the commission cited the fact that the natural gas-fueled part of the facility has been fully operational for nearly three years, since August of 2014. Because nat ural gas prices are much lower now than they were in 2008 when the Kemper initiative was first broached, and because natural gas prices seem likely to remain relatively stable into the future, the commission said there was little to be gained by maintaining a commitment to IGCC operations, but much to be gained by switching the focus to natural gas. 

Nevertheless, the commission emphasized that it was not ordering Mississippi Power to abandon the Kemper IGCC project outright. Rather, the commission said, it had merely reached a point where it could no longer countenance ratepayer funding of the work. That is, it clarified, the utility and its parent are still free to continue construction on the coal gasification units if they want, provided that such is financed solely by shareholders and not customers. Such a scenario seems unlikely, however, given the statement from The Southern Company last month. In directing its staff to meet with representatives from both Mississippi Power and The Southern Company to hammer out a settlement over the next 45 days, the commission offered some guidance on specific terms it wants to see in the resulting agreement. For one, it said, customers are to be shielded from all risks associated with the coal gasifiers and related assets. 

The commission stated that that restriction means that Mississippi Power cannot implement any type of rate increase for its customers. Indeed, the commission urged the company to seriously consider a reduction in rates instead, at least for its residential customers. 

A second provision that must be included in the stipulation is a commitment to apply for modification or amendment of the certificate originally awarded for Kemper construction. The commission held that the reissued certificate must reflect the fact that the Kemper facility will henceforth run exclusively on natural gas. 

While the commission's action in suspending further work on Kemper's IGCC facilities clearly has implications for other clean coal projects, it also marks a significant blow to local coal mining operations. The mines had been planning to increase their production in anticipation of supplying the Kemper units. Because their bottom lines are substantially dependent on Kemper, the move to natural gas only at Kemper undoubtedly will cause at least a few nearby coal mines to close. Re Stipulation of Matters in Connection with the Kemper County IGCC Project, Docket No. 2017-AD- 112, July 6, 2017 (Miss.P.S.C.).