Kemper — A Clean Coal Money Pit?

The following post was written by Regulatory Research Associates, a group within S&P Global Market Intelligence. For further information on the full reports, please request a call.

Construction of the 582-MW integrated gasification combined cycle, or IGCC, Kemper facility commenced in June 2010 following the issuance of a certificate of public convenience and necessity, or CPCN, by the Mississippi Public Service Commission.

Kemper, which is being built by Southern Co. subsidiary Mississippi Power Co., or MP, has seen both delays and soaring costs. In 2010, the base cost of the plant was estimated at $2.40 billion, beneath a $2.88 billion cost cap that had been established by the PSC. At that time the plant was expected to achieve commercial operation in May 2014.

In early June 2017, MP had estimated the base cost of the completed plant at $5.94 billion, assuming that the plant would be in-service date by the end of June 2017. The estimate included costs through April 30, 2017, and noted that any further extension to the in-service date would result in additional base costs of about $25 million to $35 million per month. Including the "cost cap exceptions," (i.e. the associated lignite mine and equipment, COpipeline facilities), and allowance for funds used during construction, or AFUDC, the total cost of the plant at completion was estimated at $7.5 billion.

However, on June 28, MP notified the PSC that "it is beginning a process to suspend operations and start-up activities on the gasifier portion of the Kemper IGCC."

Shareholders are to absorb incremental construction costs for Kemper in excess of the $2.88 billion cost cap, net of certain loan grants and exceptions. State statutes permit MP to securitize up to $1 billion of prudently incurred costs up to, and in excess of, the $2.88 billion cap.

Kemper total project costs

Mississippi commissioners at wits' end?

In a special meeting held on June 21, the PSC requested a solution regarding Kemper that "eliminates ratepayer risk for unproven technology and assures no rate increase for MP's customers." The PSC directed commission counsel to prepare an order to "pursue potential solutions" for Kemper and stated that it intends to review such an order at an upcoming meeting scheduled for July 6, 2017.

The PSC indicated that it intends to open a new docket to facilitate settlement discussions among MP, the Public Utilities Staff and other intervening parties addressing various issues associated with the plant.

As instructed by the PSC, any settlement submitted must include provisions that do the following: remove ratepayer risk associated with Kemper's lignite gasifier and other assets related to its IGCC function; keep rates unchanged or reduce rates, particularly for residential customers; and, amend or modify the CPCN in order to permit Kemper to run solely on natural gas.

The commission added that any forthcoming settlement should be filed with PSC no later than 45 days after the new docket is opened, and contemplated that a hearing would be held and a decision regarding rates associated with Kemper would be rendered after an additional 45 days, whether or not the parties are able to reach a settlement agreement.

In a June 28 statement, MP noted that initiating the suspension of operation and startup activities on the gasifier portion of Kemper is necessary to preserve its workforce and "manage costs in light of the current circumstances surrounding the Kemper IGCC, including, but not limited to, (i) the factors affecting the economics of the Kemper IGCC; (ii) the positions articulated by other parties in recent motions filed with the Mississippi PSC; and (iii) the Mississippi PSC's statement of intent and expectations relating to the establishment of the [forthcoming] Kemper IGCC Settlement Docket."

MP states that roughly $3.4 billion of Kemper IGCC- related costs, including AFUDC, were not reflected in the company's retail and wholesale rates, as of May 31, 2017. This $3.4 billion includes about $2.5 billion associated with the IGCC gasifiers and related facilities, $0.4 billion associated with the lignite mine and pipeline, $0.3 billion associated with the combined cycle facilities, and $0.2 billion of miscellaneous costs.

MP added that if the company is not permitted to reflect the $3.4 billion of costs in rates, the unrecovered costs would have to be recognized in a Q2-2017 income charge.

Kemper regulatory developments tracker

About the PSC

The Mississippi PSC is comprised of three-members that are elected in statewide elections from each of the three judicial districts for four-year terms, and the PSC chairman is elected by the commissioners. Current PSC members include: Chairman Brandon Presley, a Democrat, vice chairman Cecil Brown, a Democrat, and Sam Britton, a Republican, all of which are serving terms extending to December 2019.

Presley is serving a third term on the PSC. He is the only current member of the commission that was present when the PSC issued CPCN's for the Kemper plant; however, he opposed authorizing the construction of the facility. Presley first joined the PSC in 2008, following his election to the Northern District position in 2007, and was re-elected in 2011 and 2015. Prior to joining the commission, Presley was the mayor of Nettleton, Miss. He is a graduate of Mississippi State University.

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Cecil Brown was elected to the Central District PSC seat in 2015. Prior to his election onto the Commission, Brown was a state legislator and served as State Fiscal Officer and Executive Director at the Mississippi Department of Finance and Administration. In addition, Brown has worked as an investment adviser and as a CPA specializing in accounting, auditing, tax consulting, and financial management. He holds an undergraduate degree from the University of Mississippi, and a master's degree from the University of Texas.

Britton was elected to the Southern District PSC seat in 2015. Britton, a CPA, previously worked at the Office of the State Auditor and the Mississippi State Tax Commission, and he also owned an accounting firm. He is a graduate of Jones County Junior College and the University of Southern Mississippi.

Jul 21, 2017
Mar 30, 2017