Southern Company's 'Big Bet' on Kemper: A Rigged Game?

Kemper Power Plant

From the very beginning, the story of utility giant Southern Company's Kemper clean coal plant is a long trail of broken promises, according to a New York Times investigation - and the project's numerous critics.

These include many of the 186,000 utility customers in 23 largely rural, mostly low-income counties in southeastern Mississippi that are now on the hook for a good part of the plant's estimated $6.6 billion cost - this after Southern promised them and state and federal officials in 2010 that the first-of-its-kind power station wouldn't cost more than $2.4 billion. 

That figure lasted only a few months, followed by a promise of $2.8 billion. 

The plant was supposed to have been completed in four years, but insiders say that Southern and its subsidiary, Mississippi Power, the operator of the plant, knew very well that was impossible for a complex, novel technology that promised to capture 65 percent of the CO2 generated by locally-mined lignite, a moist, low-grade coal one engineer described as "one step up from peat moss." 

According to Brett Wingo, a former engineer and supervisor at the plant, he tried to point out that the projected timeline wasn't feasible as construction fell further and further behind. 

Starting in earnest in 2013, Wingo called, emailed and button-holed senior engineers and managers warning them that the company was violating the law by not being truthful in public statements about when the plant would finally go on line.

After fighting all the way up the chain of the Southern Company officials at Kemper, Wingo called Southern chief executive officer Tom Fanning, and during a 21-minute phone call on March 10, 2014, explained his concerns that as the CEO he was signing off on forward-looking statements to the Securities and Exchange Commission that could be shown to have been deliberately faked.

 Said Wingo, "He was really nice, totally supportive. He told me, 'You did exactly the right thing by calling me.'  But nothing happened. Nothing changed."

Moving the Money

 In order to make the Kemper plant a reality, Southern Company convinced the federal Department of Energy to transfer of a grant for $270 million for a "clean coal" power plant from its original site in Orlando, Florida to the backwoods of Kemper County.  

The story really began with a lobbyist's email that skipped all the usual formalities and went straight to the office of then-Secretary of Energy Samuel Bodman, or "S-1."

The lobbyist who sent it, Eric Burgeson, worked for the BGR Group, which happened to be then-Mississippi Governor Haley Barbour's own firm, according to documents obtained through a Freedom of Information Act Request by the Climate Investigations Center.  In late, January 2008,  Burgeson arranged for a meeting the following month between Barbour, Bodman, and officials of Southern Company and Mississippi Power to discuss moving a federally-funded "clean coal" project from Orlando, Florida to a remote corner of eastern Mississippi.

In the process, the size of the project roughly doubled, and the technological requirements became much more demanding.  The Orlando project was supposed to be a test of an advanced coal technology called TRIG, for Transport Integrated Gasification, that was developed by Southern Company and Kellogg Brown & Root with funding from the Department of Energy.  TRIG was designed to burn coal more cleanly by using extreme heat and pressure to gasify the coal after which more of the sulfur dioxiode and other pollutants could be scrubbed out than was possible in a conventional coal plant.

But to win money from the newly-available federal Clean Coal Power Initiative, Southern now promised to also use TRIG to capture most of the plant's carbon dioxide, which would be compressed and piped out to older underproducing oil fields and injected into the ground to drive more oil to the surface - a process called enhanced oil recovery.  The project was now not only twice as big, but a good deal more complex, with even more first-of-its-kind bells and whistles.

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),  a company on behalf of which Barbour had personally lobbied for more than a decade before he became governor and which he would again represent upon leaving office in 2012,  the meeting with DOE Secretary Bodman took place on February 26, 2008.

By the fall of 2008, a funding package of almost a billion dollars in DOE grants and federal tax credits was in place, all subject to Southern's contractual promise to build the plant by 2014 and for $2.4 billion.

In March 2014, at the time Wingo says he spoke to Fanning,  the company had been promising the plant would be fully operational by the end of 2014. 

Schedule Slips

In fact from the project's outset in mid-2010 until late October 2013, in every monthly report to the Mississippi Public Service Commission, which regulated utilities in the state, and in every quarterly report to the Securities and Exchange Commission, Southern claimed it was on target to begin operating the plant by May 1, 2014. This projection never wavered, despite late equipment delivery, poor labor productivity and other issues that would presumably slow the process.

Then, after almost four years of construction and only six to nine months remaining before the official completion date in late 2014,  Southern abruptly announced a 100 percent lengthening of its timeline - a six to nine month slip to mid-2015, thereby forfeiting a half billion dollars in bonus depreciation cash flow for 2014 and hundreds of millions in additional cost overruns. 

There was never any satisfactory explanation for such a dramatic and sudden change. 

This was followed by several other course corrections.  In October 2014, the date was changed to May 2016, a 200 percent schedule shift.  On February 3, 2016,  the schedule slid from May to September 2016. 

Through all of this, however, CEO Tom Fanning insisted that things were going very well at Kemper.

"I feel that we're on a real winning streak right now," said Fanning at the Public Utilities Fortnightly conference in November 2015, at about the same time that a series of problems with the gasifier, the ultra-high-pressure reactor that converts coal to gas, were putting the project even further behind. 

"The technical tests have been going great in start-up," Fanning said..  "And yeah we've taken a long time, we spent more money.  We made a commitment to fix the cost to the folks in Mississippi.  We've held our commitment." 

Fanning's Southern Style

There is no bigger cheerleader for Kemper, or for Southern's "all of the above" energy strategy - which emphasizes moving forward simultaneously with gas,"clean coal," nuclear, renewables and energy efficiency - than Tom Fanning.

Southern has its own way of doing things, according to Fanning, who boasts that only Southern is truly looking to advance every part of its energy portfolio. To do that, it's been willing to take on what the company calls "big bets" - the title of the Southern's self-penned corporate history. That means building risky projects like Kemper and the Vogtle nuclear plant in Georgia when other utilities are playing a more conservative game. Fanning believes that building infrastructure like networks of natural gas pipelines and power plants is the path to "energy security" for the country, and that Southern Company's unique combination of technical know-how and experience in building and operating what Fanning calls "mega projects" make it the best candidate to drive a great leap forward in smarter, cleaner energy generation.

Brett Wingo disagrees.    

"All that experience they have building power plants hasn't given them all this expertise. It's just made them more skilled at deceiving people," says Wingo, who was fired by Southern in February after eight years supervising the design and construction of Kemper's gasifier, which is supposed to turn lignite coal into a cleaner-burning synthesis gas to produce electricity, but still doesn't work. The plant has run since August 2014 on conventional natural gas.

The picture Wingo paints is of a company in a frantic scramble to deny the reality of how long the Kemper project would take and how much it would cost. It is a story, he says, of a hand-to-mouth management style where short-term profit was put ahead of both safety and integrity.

Investigated and Sued

Wingo is not alone in raising questions. The federal Securities and Exchange Commission is investigating whether Southern misled investors about when the project could be completed, perhaps to allow it to claim tax credits and other financial benefits that were schedule-dependent, and whether Southern violated the internal financial control provisions of the Sarbanes-Oxley Act, a law passed to reform corporate fiscal practices in the wake of the Enron scandal. The Occupational Safety and Health Administration has already ruled, according to the New York Times, that Southern's firing of Wingo was illegal.

And two lawsuits have been filed, one by commercial customers charging that Southern's mishandling of Kemper cost them thousands of dollars in excessive electricity charges, and another along similar lines by a company that was to pipe carbon dioxide gas from the plant and use it to extract oil.   

These charges make it seem like Southern Company's "big bet" on Kemper may have been made in a rigged game with other people's money, including its Mississippi customers, shareholders, the federal Department of Energy and the Internal Revenue Service.  In addition, the Mississippi legislature backed the sale of $1 billion in bonds by Mississippi Power to build Kemper.

This ugly picture collides squarely with the visionary image cultivated by Southern CEO Fanning,  who is not only far and away the most visible figure in the electric power industry in the United States but a major contributor to the global dialogue about how to handle our energy future in the face of climate change.

The cracks appearing in Southern's image extend potentially not only to Kemper, but also to another massively behind-schedule, over-budget power plant, the twin reactors of Southern's Vogtle nuclear plant, now under construction in Georgia.  The two ventures seem to call into question not only Southern's fitness for tackling such "mega-projects," but the overall wisdom of relying on the traditional utility business model for finding low-carbon solutions to climate change when that model encourages regulated, monopolistic utilities to make "big bets" on infrastructure knowing that they are largely shielded from failure and can build capital costs into the rates they charge customers.

The TRIG Tour  

There is nothing hand-to-mouth about Tom Fanning's public appearances, which are slick and numerous, ranging from network television to the Aspen Ideas Festival to dozens of keynote addresses he delivers at industry events.  He is often on agendas alongside ministers of foreign governments, leading academics, senators and cabinet officials - in particular Department of Energy Secretary Ernest Moniz.

Moniz and Fanning have an unusually close alliance, jointly touting the benefits of Kemper's proprietary TRIG clean coal technology. With Southern eager to license the technology abroad, the pair have been on a kind of promotional TRIG tour over the past several years that has taken them to Europe and Istanbul, while other Southern officials have pushed TRIG to Serbia, Romania, Poland, China and South Korea. The fact that Kemper isn't fully operational and TRIG hasn't been proven on a commercial scale has not prevented Fanning, Moniz and other Southern officials from claiming precisely the opposite.

Calling TRIG "a proven technology" before a large audience at the Global Energy Forum in Warsaw in June 2014, Southern's then-chief environmental officer Karl Moor said, "We are capturing and we are utilizing 65 percent of the CO2 and sending three and a half million tons of CO2 down a pipeline for enhanced oil recovery."

Yet at the time Moor made that statement, Southern had not even begun testing the gasifier, much less capturing and piping out CO2. 

The further from Mississippi Southern gets, the more its officials tend to exaggerate Kemper's achievements.  Closer to home, at the company's annual meeting on May 25th, Fanning said virtually nothing about Kemper, dodging questions from shareholder's about Wingo's allegations and what one stockholder and environmental activist called its "ideological" fixation on continuing with coal.

A One-Company Man

Fanning is a youthful, ginger-haired wunderkind who has spent virtually his entire adult life in the company, passing through 15 different jobs in his 35-year career at Southern. The company he runs is a perennial big-earner that is the political leader of the pack in Washington, where it far outspends other utilities and enjoys the services of Republican heavyweight Barbour as its personal lobbyist. It's a company that stands out for the sheer scale of its capital projects and corporate acquisitions, as in its recent multi-billion dollar purchase of the natural gas company, AGL Resources.

Fanning is the definitely the utility guy to watch.

"Guy" is a Fanning-ism.  He talks about his "corporate comms guy," or communications director. At the annual meeting on May 25, he invited the "guys from AGL" to stand up and be recognized. "You're part of the family now," he said.  Fanning likes to keep it loose. And he loves to talk. About energy issues, rooftop solar, "event challenges in the Middle East, a lack of transparency in China" - this is all part of his standard stump speech, a kind of Ted Talk that wanders from chaos theory to selling Kemper's carbon capture and sequestration technology to the Serbs and Romanians.

"I'm worried most about Americans losing faith and hope," he said in November at the  utility industry conference. "We need to restart the idea that we can do something important."

Fanning has mastered how to talk like a visionary. Whether he is one is another question. What is certain is that, unlike in earlier public appearances where he went out of his way to give details of the project's progress, he said almost nothing about Kemper at the annual meeting, perhaps aware that anything he says will be scrutinized by the SEC, plaintiff's lawyers, and others.

It was a kind of schizophrenic stockholder meeting. Though they were ultimately voted down, large blocks of stockholders voted for a resolution that would have forced Southern to respond directly to climate change by preparing a study for how the company can help keep global warming below 2 degrees centigrade, and another to study how its business may be affected by the potential stranding of its coal assets.

The shareholders also rewarded Fanning with a hefty pay increase for 2015, a year in which the Securities and Exchange Commission started investigating potential schedule fraud at Kemper, and where the company hiked the price tag for its still-unfinished Vogtle nuclear plant by 56 percent, lost hundreds of millions in federal incentives and tax credits for Kemper, saw a Kemper partner yank its fifteen percent interest in the plant in favor of wind, and saw the construction schedules at both Kemper and Vogtle substantially set back.

Despite this series of debacles, the stockholders awarded $11,845,151 in compensation for CEO Fanning.

 

 

 

 

 

 

 

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