HOUSTON Aug 1 (Reuters) - Southern Co's Mississippi utility was dealt another legal blow late Tuesday in its attempt to begin charging customers for costs tied to a $2.88 billion coal-gasification power plant under construction in Kemper County.
The Mississippi Supreme Court, in an 8-0 vote, denied the utility's motion to charge interim rates while the court hears its appeal of an unfavorable regulatory order denying all rate increases related to the Kemper County plant until an ongoing legal challenge from environmental group Sierra Club is resolved.
Southern's Mississippi Power unit is building a 582-megawatt, integrated gasification combined-cycle (IGCC) plant scheduled to begin operating in May 2014.
The three-member PSC denied the utility's six-month, $55 million rate increase request in late June.
However, Mississippi Power in August planned to begin charging about half the requested amount, subject to refund, to recover some Kemper financing costs while the plant is under construction as allowed under Mississippi statute.
The utility said increasing rates now would save customers millions of dollars in interest costs over the life of the plant.
"We view their decision on our motion to grant interim rates as a loss for our customers that will result in increased costs related to the Kemper plant," Mississippi Power spokesman Jeff Shepard said in a statement.
Lower-than-anticipated financing costs were a bright spot cited by Southern Co Chief Executive Tom Fanning on a call with analysts July 25. Fanning said lower financing costs will help offset rising construction costs, keeping Kemper's final price tag below the amount approved by the state.
"Our current analysis indicates that the overall cost to customers will be less than projected," Fanning told analysts.
Mississippi Power is Southern's smallest utility with just 185,000 customers.
Fanning said the PSC decision to deny recovery of financing costs during construction, called CWIP, was a "surprise" since two of three Mississippi commissioners consistently support the project to help diversify the utility's generation mix. "We think CWIP is warranted for a project of this magnitude," Fanning said.
The Kemper plant is running nearly $485 million, or 20 percent, above the $2.4 billion cost approved by the PSC and is near the $2.88 billion "cap" set by the commission.
Those costs do not include more than $240 million for a nearby mine to supply lignite to the plant and a $140 million pipeline to transport carbon dioxide emissions from the plant.
Mississippi Power's credit rating has been downgraded by one rating agency citing "rising regulatory risks for the company in addition to the construction and operational risks associated with the IGCC project."
The Sierra Club, which opposes the Kemper plant due to its high cost and rate impact, successfully challenged the commission's 2010 approval of Kemper and has appealed the commission's move to re-issue Kemper's certificate in April.
Louie Miller, state director of the Sierra Club in Mississippi, said the ruling was a "victory for ratepayers."
"It's high time to pull the plug on Kemper," Miller said in a release.
Only two U.S. utilities, Southern and Duke Energy, are pursuing expensive IGCC plants. Many other utilities have scrapped more than three dozen such plants after they were delayed by rising capital costs, legislative red tape and increasing supplies of natural gas.