Kemper County Plant Runs Into Legal Setbacks, Cost Overruns and Budget Constraints

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Researched by Industrial Info Resources (Sugar Land, Texas--The Southern Company's (NYSE:SO) (Atlanta, Georgia) Mississippi Power utility was dealt another setback this month in the development of its new integrated gasification combined-cycle (IGCC) plant, which is scheduled to begin operation in May 2014. In June, the Public Service Commission (PSC) denied Southern the right to any cost recovery for the plant until the resolution of a legal challenge filed by environmental group Sierra Club. Southern Company decided to appeal the PSC decision, and the PSC's denial was followed by a credit rating downgrade and a negative outlook for Southern Company.

The Mississippi Supreme Court voted 8-0 this month to deny the appeal filed by Southern Company's Mississippi Power, closing the door on any possibility of charging interim rates (subject to refund) for cost recovery. The state Supreme Court's affirmation of the PSC decision means that plant costs will go up, according to the utility, because of increased interest costs on loans used to finance the construction. -Over the life of the plant, this could amount to millions of dollars.

The Sierra Club's legal challenge and these recent interim rate decisions are the latest in a series of complications for the Kemper County Power Plant. In June, it was announced that the project had already seen $485 million in cost overruns, which amounts to about 20% of the overall estimated costs of the project. These costs do not include an additional $360 million required to develop a nearby mine to supply lignite to the plant and a pipeline to transport CO2 emissions from the plant.

One of the main consequences of these cost overruns is tighter budgets. The constraints have led to engineering, procurement and construction company KBR Incorporated (NYSE:KBR) (Houston, Texas) no longer playing a consulting role on the project. That role is now going to be filled by Southern Company.

There may be a silver lining on this very dark cloud. Southern Company's Chief Executive Tom Fanning said lower financing costs will help offset rising construction costs, keeping Kemper's final price tag below the $2.8 billion approved by the state.

"Our current analysis indicates that the overall cost to customers will be less than projected," Fanning said on a call with analysts July 25, 2012.

Dozens of similar planned IGCC plants have been scrapped across North America because of rising costs, falling natural gas prices and legal challenges. Southern Company and Duke Energy Corporation (NYSE:DUK) (Charlotte, North Carolina) are the only utilities still trying to complete builds of IGCC plants.

For more information, view July 10, 2012, article - Coal's Share of Power Generation Falls, Natural Gas Rises to Take its Place.

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