(Corrects spelling of last name to Feagin, from Feagan, in paragraphs 13 and 14)
HOUSTON, March 5 (Reuters) - State regulators approved a 15 percent rate increase for customers of Southern Co's Mississippi Power unit on Tuesday to allow the utility to begin recovering costs for a controversial coal-gasification power plant under construction in Kemper County.
The 582-megawatt Kemper County plant is one of only two integrated gasification combined-cycle (IGCC) plants being built in the country. The project was initially expected to cost about $2 billion, but the price tag now is expected to reach $3.5 billion.
Other rate action taken on Tuesday by the Mississippi Public Service Commission (PSC) will temper the jump to about 12 percent to 13 percent, or roughly $16 per month for a customer using 1,000 kilowatt-hours of power, beginning with April bills. Monthly bills will rise another 3 percent next year.
Mississippi Power sought an annual increase of $172 million, or a 21 percent rate increase, but the commission trimmed that amount to $125 million this year.
The vote was 2-1 with Commissioner Brandon Presley voting against the rate increase. Presley has consistently opposed the Kemper project for its high price tag and unproven technology.
The Mississippi utility is Southern Co's smallest with just 186,000 customers, so the rate impact of the costly Kemper facility is of concern to regulators and consumer groups.
PSC Chairman Leonard Bentz chided both Mississippi Power and critics of the plant for the amount of "misinformation" about the rate impact from Kemper.
"It's a shame both sides have not educated people on this," Bentz said.
The exact amount of the rate increase was not available late on Tuesday, a utility spokeswoman said.
After the increase in 2014, Mississippi Power rates will remain stable until 2020, with the exception of fuel-cost adjustments and the cost of Kemper-related bonds to be sold late next year.
A certificate issued by the Mississippi commission to allow the plant's construction remains the subject of a legal appeal as does the state law that commissioners used on Tuesday to allow Mississippi Power to collect $125 million from customers before the plant is completed and operational, which is expected in May 2014.
Last month, the Mississippi Legislature approved a bill to allow the utility to sell up to $1 billion of "securitized" bonds to cover Kemper costs over and above the $2.8 billion the utility can recover through base rates.
The cost of the bonds will add another 3 percent to 5 percent to monthly bills depending on the interest rate at which they are sold, Moses Feagin, Mississippi Power's chief financial officer told the commission.
The utility expects to issue $700 million to $800 million in bonds in the fourth quarter of 2014, Feagin said.
In January, Mississippi Power and the commission announced a settlement overturning the PSC's previous order denying any rate increase related to Kemper until a legal challenge from an environmental group, the Sierra Club, was resolved.
Kemper is designed to showcase gasification technology using low quality lignite coal developed by another unit of Southern Co and KBR Inc. The companies are working to sell the technology around the world. (Reporting by Eileen O'Grady in Houston. Editing by Andre Grenon)