Southern Co unit requests higher rates for Kemper coal plant

Fri Jan 25, 2013 6:46pm EST

* Settlement opens door for recovery above earlier cost cap

* Rate request puts focus on Supreme Court hearing

Jan 25 (Reuters) - Southern Co's Mississippi Power unit filed a request late Friday to increase its rates by $172 million to begin collecting costs related to a $3 billion coal-gasification power plant under construction in Kemper County, Southern officials said.

The rate filing with state regulators comes one day after the Mississippi Public Service Commission approved a settlement that opens the door for the utility to recover all rising costs associated with the advanced coal plant, including costs above a $2.4 billion price cap previously set by the commission.

The 582-megawatt Kemper County plant is one of only two integrated gasification combined-cycle (IGCC) plants being built in the country. It is designed to burn lignite from a nearby mine using a technology developed by another unit of Southern Co over the past decade.

The Kemper plant, which will capture a portion of its carbon dioxide emissions for use in enhanced oil and gas operations, is scheduled to begin operation in May 2014.

If approved by regulators, a rate request would represent a 21 percent rate increase that could show up on customer bills as early as April, Southern Co Chief Executive Officer Art Beattie told analysts on a call Friday.

Mississippi Power is the smallest unit of Atlanta-based Southern Co, with just 185,000 customers, so the rate impact of the costly Kemper facility is of concern to regulators and consumer groups in the state. Opponents argue the plant is no longer economical with natural gas prices falling.

Thursday's settlement agreement overturned the commission's previous order to deny any rate increase related to Kemper until a legal challenge from an environmental group, the Sierra Club, was resolved.

Now the commission will allow Mississippi Power to seek recovery of early Kemper financing costs with the understanding that the "construction work in progress," or CWIP, funds will help reduce the overall interest that customers pay for the plant over time.

The settlement also gives the utility a new way to recover escalating construction costs through securitization.

The commission had previously "capped" the amount that Mississippi Power could recover from its customers through base rates at $2.4 billion, plus some contingency funds, for a total of $2.88 billion. Customers would also pay for the adjacent lignite mine and a CO2 pipeline, now pegged at $377 million.

Cost overruns have already pushed Kemper's price tag to the $2.8 billion level, according to PSC reports.

Under the settlement, Mississippi Power is now seeking a new state law that will mandate the use of securitized bonds to cover any additional costs of the plant "not addressed in base rates," officials told analysts.

"While there is much work to be done, this agreement defines a much-needed process for rate recovery to be considered," said Southern Chief Executive Officer Tom Fanning.

With securitization, a utility sells bonds which are repaid over a long period of time through a charge on customers' bills. The process benefits the utility because it recovers its money quickly. Customers benefit because current interest rates are generally much lower than the interest earned by the utility.

"Securitization looks like a creative way of dealing with the potential rate impact of the cost of the plant," said Paul Patterson, an energy analyst with Glenrock Associates.

Commissioner Brandon Presley, who has consistently opposed the Kemper project for its high price tag and untried technology, voted against Thursday's settlement.

"I have consistently said that I oppose the general concept of customers paying for a project before they get any benefit from it," Presley said. "Nothing in the settlement changes that scenario."

Friday's CWIP rate request will likely increase interest in a Mississippi Supreme Court hearing set for Monday on a constitutional challenge to the Baseload Act, a 2008 law which first allowed utilities the option to seek higher rates during power-plant construction.

"With this new development, I'm optimistic that the court will render a decision that will clarify these issues within a reasonable period of time," said Michael Adelman, an attorney representing a utility customer in the cross appeal.

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