Thursday, July 5, 2012
Question is who pays – ratepayers or the company?
The $2.8 billion lignite gassification plant in Kemper County is in trouble. It’s $366 million over budget but only 22 percent completed.
Public pressure is increasing. Last week the Mississippi Public Service Commission (PSC) denied a request by Mississippi Power Company to raise rates $20 a month on small residential customers and even more on other ratepayers. The raise would have affected 186,000 homes and businesses in 24 southeastern Mississippi counties.
Just over five years ago, it was a $1.8 billion plant, according to the headlines. That’s a big part of the problem. The price tag keeps going up and up and Mississippi Power expects ratepayers to pick up the tab.
This is so screwed up. Why should ratepayers have to pay extra because Mississippi Power underestimated costs by a billion or more?
Lignite gassification is an experimental technology. It may work great eventually, but most pioneers end up with arrows in their back. The company should be accountable for the upside and the downside. Instead, 186,000 families, businesses and industries have been made unwilling venture capitalists.
It’s not too late. The PSC can come to its senses and refuse to go along for the ride. The refusal to approve the most recent rate hike indicates the PSC may be moving in that direction.
The question is who pays – the ratepayers or the company? Ultimately, the Mississippi Supreme Court or perhaps even the U.S. Supreme Court will resolve this.
A similar situation occurred during the construction of Grand Gulf. Ultimately, a compromise was reached and the state Supreme Court was involved.
Grand Gulf had huge cost overruns and raised energy rates for years. Today, Mississippians are enjoying the benefit of Grand Gulf. Now that it’s mostly paid for, nuclear energy is very competitive.
Two of the three PSC members have supported the lignite plant. In theory, there are legitimate reasons for them to do so. They believe the lignite plant will be a great hedge should natural gas prices skyrocket. Historically, natural gas prices have shown great volatility.
The problem is that just as the bill for the lignite plant came due, natural gas prices are experiencing all-time lows. Experts are predicting a surplus of natural gas for years and years to come. The new drilling technique called “fracking” is largely responsible.
The Kemper plant, if it works, will generate 582 megawatts for $2.8 billion, not including the cost of the lignite mine and other required assets. In comparison, the Tennessee Valley Authority (TVA) has just completed a natural gas power plant for $820 million producing 880 megawatts.
The TVA gas plant will cost one-third as much and produce 50 percent more electricity than the Kemper lignite plant. The gas plant is proven technology with unlimited supply. The lignite plant is experimental and faces all kinds of uncertainty and risk.
A story in the Mississippi Business Journal announced a secret Mississippi Power memo that predicted ratepayers would ultimately face a 45 percent increase in electricity costs as a result of the $2.8 billion plant.
Lignite is low-grade coal. It is found in abundance in Kemper County. If the process works right, the Kemper plant will have a low-cost source of fuel right next to the power generating plant. The plant could sell its sequestered carbon dioxide to help lower the cost of extracting the lignite. It would give Mississippi a low-cost alternative to natural gas if it works and if natural gas prices skyrocket. Two big “ifs.”
Mississippi Power has good reasons for pursuing the project. If it works, it will have valuable patents and proprietary knowledge that could be extremely valuable down the road. If it fails, they can pass the cost on to the ratepayers. In fact, the bigger the project, the more money Mississippi Power makes, just like a realtor makes more money selling more expensive houses.
Over the last few years, Mississippi Power forecasts have been wrong. They predicted increases in natural gas. In fact, natural gas prices have declined.
Northsider Ashby Foote, president of Vector Money Management, has been leading the charge against the lignite plant.
“The persons responsible should be relieved of any forecasting duties and perhaps reassigned to writing personal notes of apology to the 186,000 ratepayers in southeast Mississippi who face the prospect of paying an extra $60 a month on their electric bill for the next 30 years,” Foote says.
“Businesses in southeast Mississippi be warned, those higher rates work out to $133 million per year that won't be available to spend on other local goods and services. For fans of good government, that $133 million is the equivalent of two-and-a-half ‘beef plants’ every year for the next 30 years.”
The cost of the lignite plant is up 55 percent over projections. The cost of natural gas is down 67 percent. That spells disaster. So what is to be done?
There is a solution. The Kemper lignite plant has two aspects to it: the power plant and the chemical plant. The power plant can run on natural gas. Construction should proceed on the power plant with a cost limit similar to the TVA plant.
The chemical plant - meaning the experimental part of the project dedicated to the mining and gassification of lignite - should be suspended immediately until the risk for the chemical plant is assumed by Mississippi Power’s parent corporation, the Southern Company, which made $2.2 billion in net income last year.
If lignite gassification turns out to be everything the Southern Company claims it will be, they should be delighted to have 100 percent of the upside. In turn, Mississippi ratepayers will be happy to be rid of the downside.
Mississippi ratepayers want one thing and one thing alone - low monthly utility bills. The PSC needs to refocus its priorities on achieving that goal. Leave the long-range betting on energy technologies where it belongs - with multi-billion-dollar private corporations like the Southern Company.
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