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* Utility to refile request for higher rates tied to Kemper
* Settlement calls for future royalty payments to customers
By Eileen O'Grady
Jan 24 (Reuters) - The Mississippi Public Service Commission on Thursday approved a settlement with Southern Co's Mississippi utility that will allow the company to seek higher rates for costs tied to a $3 billion coal-gasification power plant under construction in Kemper County.
Mississippi Power Co is building a 582-megawatt, integrated gasification combined-cycle (IGCC) plant scheduled to begin operating in May 2014.
Thursday's settlement gives Mississippi Power Co another chance to request a rate hike of as much as $172 million this year and calls for the commission to act on the request within 50 days of the utility's request.
Last June, the commission denied the utility's request for $55 million over six months, saying customer rates should not be raised until a legal challenge from an environmental group, the Sierra Club, was resolved. The Mississippi Supreme Court also denied the utility's motion to charge interim rates while the Kemper certificate was under appeal.
Louie Miller, the Sierra Club's state director, said the settlement offers no benefits to Mississippi Power customers and was approved only to help the utility which he said is struggling financially.
"They (Mississippi Power) bit off way more than they can chew" with the costly Kemper project, said Miller.
"Today's reckless actions by the commission have opened the door for Mississippi Power to charge their customer base for the boondoggle Kemper County Coal Plant while it's under construction, with no guarantee that the plant will ever produce a single megawatt of electricity," Miller said.
In the settlement, the commission acknowledged that uncertainty over the rate issue has hurt Mississippi Power's credit rating. It also cited "a high likelihood" that the Kemper County certificate will withstand the ongoing court appeal.
The commission voted 2-to-1 to approve the settlement at a special meeting called a day earlier. No details of the proposed settlement were discussed before the commission held an executive session which was closed to the public.
The pact also sets up a framework to establish cost-recovery for the Kemper plant over the first seven years of its operation, if allowed by the state legislature.
In return, Mississippi Power customers will receive a credit for 10 percent of any royalties Southern derives from future sale to other utilities of the gasification technology being used at Kemper.
"The settlement today further puts into place the protections of the ratepayers by affirming the cost cap for the Kemper Project at $2.4 billion," said PSC Chairman Leonard Bentz in a statement.
Mississippi Power officials did not return calls for comment. The 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 in the state.
Under the Mississippi Baseload Act, the utility planned to begin charging customers for certain costs related to Kemper while the plant was under construction, but its efforts were blocked by the state's highest court.
Thursday's special meeting precedes scheduled oral arguments on Monday at the state supreme court related not only to Mississippi Power's appeal of the rate denial but to the larger question of whether the state law under which Mississippi Power would raise customer rates during construction is constitutional.
Michael Adelman, an attorney representing some of the utility's customers in the appeal, said the oral arguments should go forward.
"I'm going to be at the court at 1:30 Monday, unless told otherwise," he said. "We believe there are serious constitutional problems with that statute."
Adelman said the settlement "kicks the can down the road in an attempt to create some aura that they have reached an agreement, but they have not reached any more of an agreement than in all the months we spent before the hearing last June when they denied any increase."
The settlement keeps intact the commission's $2.4 billion approved cost for the plant plus contingency costs.
Additional costs, including $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, will push the total Kemper price tag above $3 billion.