* Law gives utility "blank check" for Kemper costs
* Monitor says plant unlikely to meet target operating date
* Monitor sees plant cost rising above $3.1 billion
HOUSTON, Jan 31 (Reuters) - Southern Co's Mississippi utility is supporting legislation that would allow it to recover another $1 billion from ratepayers for the Kemper County coal-gasification power plant, pushing the potential price tag for the controversial project to $3.8 billion.
A bill, written specifically for the Kemper project, would allow Mississippi Power to sell up to $1 billion of "securitized" bonds to cover costs of the plant - over and above the $2.8 billion the utility can recover through base rates.
The bill would also allow Mississippi Power to create a "special purpose entity" to issue the bonds which will not be considered utility debt, according to the legislation, sponsored by Mississippi Sen. Terry Burton.
Southern Co Chief Executive Officer Tom Fanning said that two Kemper-related bills have passed out of committees at the Mississippi Legislature, in a call with analysts on Wednesday.
"We look forward to monitoring their progress over the next few weeks," Fanning told investors.
The Mississippi utility is Southern Co's smallest with just 185,000 customers, so the rate impact of the costly Kemper facility is of concern to regulators and consumer groups.
Fanning said the 582-megawatt facility is 75 percent complete and will be operational in May 2014. Kemper's gas turbines will begin testing in June, Fanning said. Equipment to convert lignite from an adjacent mine into synthesis gas will begin testing in December.
"Reliable syn gas is expected to begin flowing to the (turbines) in February 2014," Fanning said.
However, an independent monitor's report said Kemper won't likely be operational until November or December 2014.
The monitor's report, filed in November of last year, said construction was only 30 percent complete and that the plant's price tag may exceed $3.16 billion, excluding the nearly $400 million cost of the mine and a carbon dioxide pipeline.
The Kemper legislation follows a surprise agreement announced last week between Mississippi Power and the Mississippi Public Service Commission (PSC) to settle a legal dispute over the commission's refusal to grant a Kemper-related rate increase while a legal challenge from the Sierra Club continues over the plant's certificate.
With securitization, a utility sells bonds which are repaid over a long period of time through a non-bypassable charge on all customers' bills.
The process benefits the utility because it recovers its money as soon as the bond are sold. Customers benefit because current interest rates are generally much lower than the interest rate the utility is allowed to charge customers.
If passed, however, the bill eliminates a $2.8 billion "hard cap," or limit on the amount of money the Mississippi PSC said the utility could charge for the plant when it approved Kemper's certificate last April.
While the settlement wording is not clear, it appears to "eviscerate" the rate cap, giving Mississippi Power "a blank check for the Kemper project," said David Cruthirds, a Houston regulatory attorney in a report to clients.
"The securitization is tantamount to guaranteed recovery," Cruthirds said. "That means the cost cap was removed without notice, without the opportunity for interested parties to be heard and without a public hearing," Cruthirds wrote.
Mississippi Power also filed last week for a $172 million rate hike to cover certain financing costs related to Kemper. Fanning said the proposed 21-percent increase could go on customer bills as soon as April.
Kemper is designed to showcase a gasification technology developed over the past decade by another unit of Southern and KBR Inc. The companies are working to sell the technology around the world.
While commending Southern for developing new technology, Cruthirds said "there seems to be no question that (Mississippi Power's) customers are subsidizing commercialization of Southern Co's technology development efforts" which is "a huge benefit for Southern's shareholders."
The Kemper plant is one of only two integrated gasification combined-cycle (IGCC) plants under construction in the country following cancellation of dozens of such projects due to rising costs, lack of carbon legislation and competition from cheaper natural gas-fired generation.
Indiana regulators limited the amount Duke Energy can recover from customers for the Edwardsport IGCC plant, forcing the utility to absorb nearly $900 million in cost overruns. The $3.5 billion plant may begin producing power later this year after numerous delays.