Leadership Changes at Mississippi Power as Kemper IGCC Cost Overruns Soar

Cost overruns of nearly $1 billion to build the 582-MW Kemper integrated gasification combined cycle (IGCC) plant in Kemper County, Miss., were underscored on May 20 as Mississippi Power’s Board of Directors took the dramatic step of replacing the Southern Co. subsidiary’s leadership.

The board elected G. Edison (Ed) Holland as president and CEO of Mississippi Power to replace Ed Day, “effective immediately.” The sudden change was announced just weeks after Mississippi Power in April revised cost estimates for the Kemper County facility to about $3.42 billion, up from the prior estimate of $2.88 billion—a number that nets $245 million in Department of Energy (DOE) grants, costs of an associated lignite mine and equipment, and costs of carbon dioxide pipeline facilities.

The utility has told the Mississippi Public Service Commission (MPSC) it “will not seek to recover the increase from customers.” Former Mississippi Power CEO and President Ed Day, who is expected to retire after a 30-year career with Southern Co., in April expressed disappointment at the increased costs, saying, “we believe we have done the right thing by remaining accountable to our customers.”

A settlement reached with state regulators in January allows the Southern Co. subsidiary to seek higher customer rates for rising costs to build the plant. That agreement, however, also sets a cost cap of $2.88 billion. On February 8, however, the Mississippi House of Representatives passed legislation that would allow Mississippi Power to issue bonds of up to $1 billion to cover costs for the Kemper plant.

In April, Southern Co. withdrew plans to seek a $1.5 billion federal loan guarantee for the plant, reportedly saying that Mississippi Power could borrow money elsewhere at a lower rate. The measure was not related to the utility’s actions to raise rates for the plant, it said.

But in a May 10, 2013, filing with the Securities and Exchange Commission, Southern Co. estimated a $530 million loss on the Kemper IGCC project that was related to the revision of estimated costs expected to be incurred above the $2.88 billion cost cap established by the MPSC.

“Management believes Mississippi Power’s failure to maintain sufficient evidence supporting certain estimated amounts included in the Kemper IGCC cost estimate and to fully communicate the related effects in the development of the Kemper IGCC cost estimate would constitute a material weakness in internal control over financial reporting under standards adopted by the Public Company Accounting Oversight Board and concluded Mississippi Power’s internal control over financial reporting was not effective as of December 31, 2012,” the filing says.

The filing also discloses that Southern Co. management initiated actions to “remediate the material weakness” in internal control over financial reporting, including those to establish a “new governance team” that will focus on accounting, legal, and regulatory affairs, and which will meet periodically with the Kemper IGCC project and construction teams and oversee the cost estimation process.

The sudden change in leadership was pegged to allegations that “the information on the cost overruns was not released to the Public Service Commission until after the Commission had approved a rate increase allowing Mississippi Power to collect from customers even before the plant began generating electricity for ratepayers. In recent weeks the Southern Company, parent company of Mississippi Power, also reported that Mississippi Power’s internal accounting controls were flawed,” alleged the Sierra Club in a statement on Monday.

The group, which has appealed regulatory decisions approving key permits and rate recovery measures, called on the MPSC to immediately reverse the rate increase given to Mississippi Power in January. It also called on the MPSC to convene a prudency hearing on the project so that the public could examine the project’s “true” costs and viability.

Environmental and citizen groups that are opposed to the lignite-fired plant have fiercely decried the project’s mounting cost overruns, which have increased from the original price tag of $2.4 billion to $2.88 billion and now to $3.4 billion. Some groups contend project costs could rise to as much as $4.3 billion.

The Kemper County project is a lignite-fueled 2 x 1 IGCC facility that uses the air-blown TRansport Integrated Gasification (TRIG) technology jointly developed by Southern Co., KBR, and the DOE at the Power Systems Development Facility (PSDF) in Wilsonville, Ala. The plant in Kemper County is adjacent to a viable lignite reserve developed and mined by Liberty Fuels, a subsidiary of North American Coal Corp., which will provide feedstock for the IGCC plant.

Mississippi Power’s latest update shows that the final component of the gasifier has been lifted into place, while the water treatment facility and the combined cycle cooling tower have been completed. The plant is tentatively slated to come online by May 2014.

See COAL POWER’s in-depth technical profile of the project in its March/April issue.

Sonal Patel is POWER’s senior writer. This story was originally published May 23 in POWERnews.