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Wyatt Emmerich: A fiasco in the making

 

Wyatt Emmerich

 

While Mississippi Power was building the $4 billion Kemper coal plant, Entergy bought a natural gas plant for $250 million -- one twelfth the cost per kilowatt. 

 

South Mississippi Electric Power Association (SMEPA) last year purchased an 837 megawatt 12-year-old gas plant in Batesville for $286 million. Per kilowatt, the Kemper plant is 19 times more expensive than the Batesville gas plant. 

 

Natural gas plants are proven technology. The Kemper lignite gasification plant uses a new technology that has never been applied on a commercial scale. 

 

Mississippi Power (MP) and its regulatory agency, the Mississippi Public Service Commission (MPC), have made a huge bet that natural gas prices will rise. So far, the opposite has happened. This bad decision could cost 356,000 households in our state an extra $580 a year on their power bill. 

 

 

 

Rosy projections 

 

If Kemper doesn't meet its rosy operating projections, the price tag could easily be a thousand dollars per household per year. 

 

According to its 2011 annual report, Mississippi Power has 3.2 gigawatts of generating capacity without Kemper. The average daily need is 1.7 gigawatts and the all-time peak is 2.9. In addition, Mississippi Power can always buy electricity from other power plants for less than it costs to produce from its own plants. So why was Kemper needed? 

 

Mississippi Power states in its annual report that its old coal plants can be retrofitted with scrubbers for $330 million and be EPA compliant. Why not do that instead? 

 

MP officials are predicting Kemper will only cost $20 million a year to operate because sales of CO2, ammonia and other by-products will offset operating costs. 

 

Two problems here: The rosy forecasts of by-product sales could fail to materialize. And the operating and maintenance costs could well be far in excess of forecasts. 

 

For instance, MP projects $27 million a year in maintenance for a plant that cost $4 billion. That's about half of one percent of the cost of the plant. Not likely for the 40-year life of the plant. 

 

From 1990 through 2004, natural gas prices averaged around three dollars. From 2005 to 2008 gas prices suddenly spiked to eight dollars. At that price, the Kemper lignite plant could possibly be competitive with gas.  

 

In 2009, natural gas prices dropped back down to historical levels and have stayed there. With fracking, cheap natural gas is projected for years to come. 

 

Dozens of coal projects were shelved when the price of natural gas dropped in 2009. The four billion dollar question is why the Kemper plant proceeded with construction -- despite the fact that its authorization was under appeal. 

 

As it turns out, the Mississippi Supreme Court ruled in 2011 against Kemper, throwing Kemper, the PSC and Mississippi Power into disarray. The high court said Kemper's construction was not supported by "substantial evidence" and remanded its approval back to the PSC. 

 

This was a problem. The plant was already under construction. Over a billion had been spent.  

 

What was the rush? 

 

Kemper could have been altered to burn natural gas and the coal gasification could have been added later if gas prices did indeed double. 

 

Or Southern, Mississippi Power's parent, could have paid for the chemical plant and kept the by-product sales, leaving Mississippians to pay for the only thing they want - affordable electricity. Southern had $2.35 billion in profit last year. 

 

Southern will not release its forecasts of natural gas prices. It's a trade secret, they say. 

 

Experts are predicting low gas prices for years to come. Even if gas prices double in 10 years, losses in the meantime will make it hard for Kemper to ever break even. 

 

Entergy customers pay about a third less for electricity than Mississippi Power customers. And that was before the recent 22.69 percent rate hike approved last month by the PSC to fund Kemper. 

 

(Press releases touted the increase as only 12 percent, but my calculations were confirmed by company officials.) 

 

Here's the reality: The bigger the project, the more money Southern makes because they get a guaranteed return on their investment of about 10 percent. 

 

 

 

Huge cost overruns 

 

There are huge cost overruns. Three hundred Mississippi contractors are involved, including Mississippi's Yates Construction as the recently-fired general contractor. Kemper has grown from $1.8 billion to $3.9 billion and rising. The independent auditor for the project concluded in November that Southern "is not utilizing some basic project management and project control tools and techniques that are available and customarily used in the industry for a project of this magnitude." 

 

There is something wrong when millions of Southern Company stockholders can benefit by foisting an experimental technology on the poorest state in the country. 

 

That's why we have a Public Service Commission -- to protect the public against the power company's monopoly. Democrat Brandon Presley voted against Kemper because he didn't think the technology would work. Such a disaster could cost Mississippi $300 million a year. It would be the beef plant times 80. 

 

The other two commissioners, Lynn Posey and Leonard Bentz, Republicans, have supported Kemper lock step. Bentz was appointed by Haley Barbour, whose lobbying firm has received $2.6 million in payments from Southern Company. Getting the picture? 

 

At Southern's annual stockholders meeting, an investment firm raised the issue of political transparency. Southern does not disclose the recipients of its lobbying and political payments. It is in the tens of millions, perhaps more. New U.S. Supreme Court rulings allow companies to contribute an unlimited amount to whomever they please - even a company that depends on public officials for its profitability. For Southern, it has been money well spent. 

 

 

 

It's not too late 

 

There has yet to be a final prudency hearing on Kemper. That means it's not too late for the Mississippi PSC or even the Mississippi Supreme Court to exit this bad deal. Unfortunately, that would require a change of heart of two PSC commissioners. 

 

The defense of Kemper by Bentz and Posey rests on one concept -- diversification of energy. They fear the volatility of natural gas. 

 

There are three problems with this analysis: First, Mississippi Power is already diversified. Forty percent of its power comes from coal already, without Kemper. Second, volatility means natural gas prices can go down, as well as up. Placing a four billion dollar bet either way is extremely risky. Third, Bentz and Posey have bet on the wrong side. Gas prices have dropped like a rock and are forecast to remain low for many years to come. 

 

Posey and Bentz say Kemper will last 40 years and who knows what will happen over that length of time. Indeed, who knows? That's why Kemper was profoundly imprudent. It's time for the PSC to admit it and take remedial action. If not, the Mississippi Supreme Court should do it for them.

 

 

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