Co-op looks to buy stake in Southern Co IGCC plant

* South Mississippi Electric mulling 17.5 percent stake

* Co-op board to vote next week on $450 million investment

HOUSTON, June 22 (Reuters) - The board of the South Mississippi Electric Power Association will vote June 30 on a proposal to buy a stake in the $2.88 billion advanced coal plant under development by a Southern Co SO.N utility in Kemper County, Mississippi, a spokesman for the association said on Tuesday.

The electric association, known as SME, has negotiated an agreement to purchase a 17.5-percent interest in the 582-megawatt integrated gasification combined-cycle (IGCC) power plant for about $450 million, said SMEPA spokesman Kurt Brautigam.

Late last month, Southern’s smallest utility, Mississippi Power Co, said it will move forward to build the costly Kemper County IGCC plant after state regulators loosened restrictions that the utility said earlier would kill the project.

“We think it’s an excellent project,” said Brautigam.

Mississippi Power already supplies power to SME under an all-requirements contract covering from 750 to 950 megawatts.

The purchase of 103 MW of Kemper output would serve to lower the impact of Kemper’s cost on the existing SME contract, Brautigam said.

SME began studying a purchase of as much as 20 percent of the Kemper project last year before the Mississippi Public Service Commission launched hearings to determine how much additional generation the utility needs and the economics of the Kemper facility compared to natural gas-fired generation.

The Sierra Club last week filed an appeal of the PSC’s most recent ruling on Kemper, saying the commission arbitrarily reversed its earlier action by raising the price cap for the project and agreeing to let the utility begin to charge customers for some costs while the plant is under construction.

The Kemper project is popular for the jobs it will create, but the Sierra Club is worried about the rate impact for the utility’s customer base of fewer than 200,000.

SME owns some generation and purchases wholesale electricity to supply its 11 member coops which together have more than 405,000 customers, according to its website.

Mississippi Power has said it expects customer rates to increase by one-third over the next decade -- with or without Kemper -- as it meets future power needs and complies with environmental regulation. It said fuel savings from Kemper would eventually allow rates to stabilize although testimony at the regulatory hearings showed the plant might never provide savings for customers, depending on future gas prices.

Several IGCC projects -- including a proposal in Florida by another Southern Co unit -- have been canceled due to high cost and regulatory uncertainty. IGCC projects are moving forward in Indiana and Illinois.

IGCC technology heats coal to convert it into a synthesis gas that is processed to remove sulfur, mercury and other pollutants before being sent to a traditional combined cycle power plant to produce electricity.

Mississippi Power plans to use a technology called Transport Integrated Gasification, or TRIG, that has been under development by Southern Co, KBR Inc KBR.N, the U.S. Department of Energy and others. (Editing by Marguerita Choy)