Southern Company: Kemper Not Viable as Coal Plant and It's the PSC's Fault

In what is clearly the first salvo in a public relations campaign to shift blame for the Kemper power plant boondoggle away from himself and management, Southern Company chief executive officer Tom Fanning admitted this week that Kemper plant is not economically viable as a coal-burning power plant.  

 The startling reversal came during an earnings call Thursday at a time when Southern faces intense scrutiny from federal and state regulators and the Securities and Exchange Commission, and as its Mississippi Power Company subsidiary, which is actually building the plant, faces a Moody's downgrade over Kemper's skyrocketing costs and its failure to work as designed despite going almost three years past its promised operating date.

 During the call, Fanning acknowledged that Kemper can only be feasible if it runs on natural gas as financial analysts questioned him about a just-released economic viability study by Southern that found that projected low gas prices for the long-term mean the plant can't profitably gasify lignite in the gasifiers Southern spent most of $7.1 billion to build.  

 Fanning called a "reduction in the longterm gas price forecast" an "overwhelming change, the big change.  Obviously, there are others. It is a point in time. When we had this plant certificated, we all thought that gas prices were going to be double digits and there was some spread that were way higher than where we are now."

 The stunning reversal on Kemper comes as the company announced it will soon file a rate case with the Mississippi Public Service Commission seeking to recover its costs for the plant. 

 Although Fanning has often reassured Mississippians that they are protected by a  $2.88 billion cost cap agreement limiting their liability for the plant's runaway budget,   he has carefully avoided mentioning that once the plant is declared operational, the cap won't protect them from additional costs of some $4 billion. That includes $200 million a year in operation and maintenance costs, a disturbingly high figure that keeps going up for the novel "clean coal" plant.

 To investors, Southern often touts its friendly relationships with state regulators in the four states in which its regulated utilities operate, but the fall 2015 Mississippi PSC election quickly became a referendum on Kemper, replacing two commissioners who reliably rubberstamped MPC's agenda with two new faces, Sam Britton and Cecil Brown, both of whom have pledged not to leave ratepayers holding the bag.

 A source close to the Public Service Commission told CIC recently that the PSC staff has run the numbers and that even under the cap, electrical rates could increase by 40 percent or more - a catastrophic burden for MPC's 186,000 disproportionately lower-income customers in 23 counties in southern Mississippi.

 

Critics have noted that a natural gas facility comparable to the 582-megawatt Kemper facility would have cost about $500 million. 

 During the earnings call, Fanning did not draw the obvious conclusion and admit the plant will never actually use its twin gasifiers to produce electricity.

 In fact, while admitting the technology isn't viable, Southern nevertheless claimed in an SEC 8-K filing this week that it plans to have the plant on-line with both gasifiers operating by mid-March. 

 Mississippi Power already faces three lawsuits over allegations that it misrepresented when the plant would be completed and how much it would cost during the project's seven-year history.  Those allegations, aired in a front page New York Times story last summer, are also the subject of a probe by the Securities and Exchange Commission.

 An important prong of Southern's PR strategy seems to be to shift the blame for Kemper onto the PSC itself.  During the earnings call, Fanning also said, as he has frequently of late, that Southern built the Kemper energy facility because the Mississippi PSC requested it.

However, documents obtained in a Freedom of Information Act request from the Department of Energy, which has provided a total of $407 million in grants for Kemper, demonstrate that the impetus for the facility came from senior management at Southern, including then-chief operating officer Fanning, and from Mississippi Governor and longtime Southern Company lobbyist Haley Barbour, who pressured first the Department of Energy, and then enlisted the secretary of energy himself, to pressure Mississippi's three PSC commissioners into approving plans for the construction of Kemper.  

 Barbour was both governor of Mississippi and still actively lobbying for the company in early 2008 when he and Southern officials launched an all-out campaign to convince the Department of Energy to transfer an existing grant to build a 285-megawatt coal-fired power plant in Orlando, Florida to a new site in Kemper County, near the Alabama border.

 Taking advantage of the availability of hundreds of millions of dollars from DOE's Clean Coal Power Initiative, Southern doubled the size of the plant, added carbon capture and sequestration technology to the existing design for the Orlando facility, which used a first-of-its-kind technology developed by Southern Company and Kellogg Brown & Root (KBR) called transport integrated gasification (TRIG) to heat coal under high pressure in a reactor and turn it into a syngas similar to natural gas to drive a turbine to generate electricity.

 The plant, designed to burn locally-mined lignite coal, a plentiful but low-ranked energy source, is really a petrochemical plant, not a traditional coal-fired electric plant.  TRIG uses KBR's catalytic cracking technology that, according to DOE,  has been used successfully for over 50 years in the petroleum refining industry. Notably, however, it had never been used to generate electricity.

 To the untested TRIG system, Southern now added further complexity and uncertainty in the form of carbon capture equipment,  plus a process to produce sulfuric acid from waste gases. The plan was to strip out the CO2 and connect the plant to an existing network of CO2 pipelines, then injected the gas into older, underproducing Mississippi oil fields to push up more oil - a process known as enhanced oil recovery.

 On February 6, 2008, Eric Burgeson of BGR, Haley Barbour's lobbying firm, requested that then-Secretary of Energy Samuel Bodman meet with himself, Barbour, then Southern CEO-David Ratcliffe,  and several other officials of Southern Company and Mississippi Power to discuss moving and expanding the DOE's commitment from the Orlando project to Kemper.  The initial cost projection was $1.2 billion.  DOE would put up $270 million on top of $23 million already spent in Orlando - where the project was already substantially overbudget.

  "Front-end Engineering and Design (FEED) is underway to support operation in Kemper County in June 2013," Burgeson wrote.

 Barbour had personally lobbied for Southern Company for more than a decade before he became governor and began representing it again upon leaving office in 2012.  Despite the questionable ethics of a sitting governor working hand-in-glove with his own lobbying firm to reel in more than a quarter of a billion dollars in DOE money for Southern Company (Barbour defends himself by noting he put his 50,000 shares of BGR in "blind trust" when he became governor),  the meeting with DOE Secretary Bodman took place on February 26th.

By the fall of 2008, a funding package of almost a billion dollars in DOE grants and federal tax credits was in place.  By then the cost had already gone up to $2.4 billion and the schedule pushed back to spring 2014.  DOE also waived repayment obligations for what was supposed to have been a loan.

To get the project rolling, however, Southern needed a "certificate of convenience and necessity" from the Mississippi Public Service Commission to allow construction to begin. The PSC voted against the project in April 2010, then reversed its decision just weeks later.  In between, Barbour personally sent a letter to each commissioner, as did Secretary of Energy Steven Chu. James Markowsky, head of the department's Office of Fossil Energy, responsible for developing new coal technologies, wrote several letters to the PSC urging approval of Kemper.

During the recent conference call, Fanning leaned heavily on the argument that low gas prices had suddenly made the coal plant idea economically unsound.  In fact, gas prices were trending far lower than Southern's forecasts when the project was approved by the PSC in 2010,  and opponents in Mississippi have long argued that a natural gas plant would be much cheaper.  

When the PSC held hearings in October 2009 to determine if the state actually needed additional electrical power, the Sierra Club pointed out that Mississippi already had 12 natural gas plants that sat idle 85 percent of the time and could provide up to 7,995 MW of power.  Many of these were so-called merchant plants that were for sale for $500 million or less. 

Later, in April 2012, when the PSC reauthorized its approval for Kemper, Louie Miller, director of the Mississippi Sierra Club, told the Associated Press that reauthorization made no sense given low gas prices and forecasts.

"There is no way they can justify Kemper under current conditions in the energy market," Miller said. 

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