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Southern Co. subsidiary absorbs $333M cost overrun on 'clean coal' plant

The price tag keeps rising for Mississippi Power's next-generation fossil plant that will convert lignite coal into a combustible gas, with the latest estimate running to $3.42 billion, 42 percent higher than the plant's original projected cost and 19 percent higher than what is allowed under a cap imposed on the project by the Mississippi Public Service Commission.

The increase in costs, which the company will absorb rather than pass along to ratepayers, is due to several factors, according to Mississippi Power spokesman Jeff Shepard. But the main driver is a large amount of steel pipe that is required to build the plant's complex system of gasifiers, heat exchangers, pollution controls and other internal systems.

"We have increased both the quantity and the quality of the piping, and we have also increased the manpower needed to deal with the increased amounts of pipe," Shepard said in a telephone interview yesterday. He added that the plant's construction is about 80 percent complete and it is still scheduled to come online in May 2014.

The Kemper County Energy Facility, also called Plant Ratcliffe, being built on a 3,000-acre site about 20 miles north of Meridian, Miss., has been touted as one of the nation's most advanced "clean coal" plants, and its construction follows years of research and development by Mississippi Power parent Southern Co., at its Power Systems Development Facility in Alabama.

The Kemper County plant's spiraling costs also took a deep bite out of Southern Co.'s first-quarter 2013 profits, which were down 75 percent from the first quarter of 2012 due to a $333 million after-tax charge related to the increased construction costs, executives with the Atlanta-based company reported yesterday. First-quarter 2013 operating revenues of $3.9 billion were up 8.1 percent for all four of Southern Co.'s rate-based utilities, whose service territories extend across most of Georgia and Alabama as well as portions of south Mississippi and northwest Florida.

Limit on charges to ratepayers

In a statement, Mississippi Power President and CEO Ed Day said that while the company is "disappointed that costs have increased, we believe we have done the right thing by remaining accountable to our customers.

"Equally important," Day added, "is keeping the promise we made in the settlement agreement with the Mississippi Public Service Commission to limit the total rate base for the plant to $2.4 billion, net of Department of Energy grants and cost cap exceptions."

In January, Mississippi Power and state regulators signed an agreement that limited the amount of money the utility could charge customers to help finance the 582-megawatt plant, which is designed to power tens of thousands of homes and businesses while capturing 65 percent of its carbon dioxide emissions. Under the agreement, Mississippi Power is effectively bound to spend no more than $2.4 billion on the portion of the project that will be subject to rate recovery.

Last month, the PSC signed off on an effective 12.3 percent rate increase for Mississippi Power's 186,000 customers in 23 Mississippi counties, to be followed by a 3 percent increase in 2014.

The Kemper County plant is one of only two "integrated gasification combined cycle" (IGCC) plants being built in the United States, and its progress is being carefully monitored by the electric power sector, the coal industry, utility investors and environmental groups, many of which oppose the plant because of its reliance on coal as a fuel source. The project also received a $270 million Energy Department grant and $412 million in investment tax credits under the Energy Policy Act of 2005 and its successor, the Energy Improvement and Extension Act of 2008.

In addition to significant CO2 capture, the plant is expected to produce power using locally sourced lignite coal with much lower emissions of sulfur dioxide, nitrogen oxides and mercury, all of which are regulated air pollutants.

Yet despite its advanced technology and promise of generating electricity from "clean coal," the Kemper project has been mired in controversy since it broke ground in 2010.

'Massive gamble' or needed power plant?

Beyond the clashes over cost recovery with the three-member Mississippi Public Service Commission, the company is defending the plant's construction in a lawsuit filed by the Sierra Club, which has called the project a "massive gamble" that could burden Mississippi Power ratepayers with the cost of a failed experiment.

But such hurdles have not kept the plant from moving forward. In February, the Mississippi Legislature passed measures allowing Mississippi Power to issue up to $1 billion in securitized bonds to cover construction and financing costs that exceed the $2.4 billion agreed to in the legal settlement with the PSC.

The utility subsequently filed a seven-year rate plan beginning in 2014 that will govern the cost recovery of the Kemper plant through 2020. "We realize there is never a good time for a rate increase, and we have worked hard to keep customers' cost for electricity as low as possible while planning for the future," Day said of the cost recovery schedule.

In a filing this week with the Securities and Exchange Commission, Mississippi Power warned that the company "could experience further cost increases and/or schedule delays with respect to the Kemper IGCC. It cited a number of factors including, but not limited to, costs and productivity of labor, adverse weather conditions, shortages and inconsistent quality of equipment, materials, and labor, contractor or supplier delay or non-performance under construction or other agreements, delays associated with start-up activities, and/or unforeseen engineering problems."

Executives said that any additional cost overruns would be absorbed by Mississippi Power and Southern Co., possibly resulting in additional charges to future income.

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