President Patrick Sullivan Comments on Kemper in Clarion Ledger’s Point-Counterpoint Segment

President Patrick Sullivan Comments on Kemper in Clarion Ledger’s Point-Counterpoint Segment

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Published by the Clarion Ledger on August 9, 2015.

The Clarion-Ledger invited Kelley Williams, chairman of the Bigger Pie Forum, and Patrick Sullivan, president of the Mississippi Energy Institute, to provide their thoughts on this week’s Point/Counterpoint question.

Williams

It’s still a good idea. Bad news for Mississippi Power. Good news for its customers. The Mississippi Public Service Commission met recently to implement the Mississippi Supreme Court’s orders issued six months ago to rescind the 18 percent rate increase and refund the $350 million the company illegally collected for its Kemper lignite project. It looks like 156,000 residential customers could get checks for $500-$600 or more in time for Christmas. Prospects for the company’s substitute 40 percent rate increase don’t look good. That’s because prospects for the company’s $5.2 billion experimental Kemper gasifier don’t look good either. But there is the possibility of a smaller rate increase for Kemper’s combined cycle gas turbines already generating electricity on natural gas.

Sullivan

While the cost overruns at Kemper are concerning, the plant generally should be expected to cost far more to build than a plant using natural gas. Economically, coal and nuclear power plants always cost more to construct but are at a long-term advantage to natural gas because fuel costs over the life of a plant’s operation is much cheaper. Cheaper fuel cost should be expected over the operating life of Kemper (40+ years), which is a benefit to ratepayers.

Despite the cost overruns, the overall construction cost to ratepayers remains the same as the company has absorbed the extra costs — more than $2 billion — that have resulted from construction challenges. If the PSC denies rate recovery based on concerns with the overhead component being higher, it would be like a car buyer telling the dealer: Even though the price of the car is the same price you originally quoted me, I don’t want the car because I read where the manufacturing costs have increased. Therefore, I am walking away from the deal, even though the cost to me has not changed.

Williams

We estimated that electricity from the turbines on natural gas would cost 6 cents per kWh. This assumed $800 million for the turbines and $3.76 per mmbtu for natural gas. We estimated electricity from the turbines on synthesis gas from lignite would cost 30 cents per kWh assuming $3.3 billion from the gasifier after write-offs. So the turbines on natural gas vs. synthesis gas would save retail customers more than $2.5 billion over the first 10 years. That savings is even greater now. We continue to think there are substantial operating risks and that the gasifier may never achieve economic commercial operation. It may never operate on a reliable consistent basis at all — regardless of cost.

Sullivan

“Everybody loves progress … nobody wants change.” This old saw sums up the reaction some have had to the new technology that will bring a long-term stable and predictable priced electricity fuel source — lignite coal — which is being mined right at the plant. There was and still is a real need for the plant … and the new technology. Looking at Mississippi as a whole, over 70 percent of current electric generating capacity is through natural gas powered plants. Mississippi will remain mostly dependent on natural gas for electricity into the foreseeable future. While natural gas is a great and versatile fuel, adopting an implied regulatory policy of only allowing construction of natural gas plants due to low construction costs and current low fuel prices would be short-sighted and risky, even foolish. And, while the current price of natural gas is low, power plants are built to operate for decades, and the historic volatility of natural gas prices is an equally risky choice. With Kemper, the result will be lower, stable fuel costs.

Williams

The turbines at $800 million are not a bargain because they are part of the Kemper project which was never intended to be a bargain. And they are not in the optimum location to meet system demand. In fact, they may not even be needed to meet system demand. It appears demand growth, high natural gas prices and a $2 billion low-ball project cost were assumed to justify the politically motivated experiment that has turned into Frankenstein. The turbines are not prudent by objective standards. But they are there. And there is a risk that the upcoming PSC elections will deliver another commissioner who thinks Kemper’s costs have to be recovered when they are “ripe.” Therefore, we suggest again that the turbines be deemed prudent at a cost of $800 million. This probably means a 12 percent rate increase after the 18 percent increase has been rescinded and refunded. It’s still a good idea because it seems to be the least bad idea of what to do about Kemper.

Sullivan

Appreciation of the long-term nature of power plants seems to be an elusive notion. Throughout the U.S. over the past half century, super-expensive coal and nuclear power plants have been constructed and have resulted in rate spikes to cover construction costs. However, the long-term benefits of low and stable fuel costs pay off as these plants operate over many decades. Therefore, with Kemper, time should tell. My prediction is, as the plant is paid off, the benefits of low fuel costs become very apparent 10 years from now. At that point, Kemper will have at least 30 years of life remaining.

Below are the full comments submitted from Kelley Williams and Patrick Sullivan.

Kelley Williams, Chair of Bigger Pie Forum

It’s still a good idea. Bad news for Mississippi Power. Good news for its customers. The Mississippi Public Service Commission met recently to implement the Mississippi Supreme Court’s orders issued six months ago to rescind the 18 percent rate increase and refund the $350 million the company illegally collected for its Kemper lignite project. It looks like 156,000 residential customers could get checks for $500-600 or more in time for Christmas. Prospects for the company’s substitute 40 percent rate increase don’t look good. That’s because prospects for the company’s $5.2 billion experimental Kemper gasifier don’t look good either. But there is the possibility of a smaller rate increase for Kemper’s combined cycle gas turbines already generating electricity on natural gas.

Not a new idea

Putting the turbines in the rate base isn’t a new idea. But it has a new supporter: the lame duck PSC commission. He was appointed by the governor to fill the unexpired term of the former chairman and Kemper champion. At the recent hearing, he said: “How will costs be recovered? We’re about to roll back the 18 percent (increase) and return millions of dollars to ratepayers, yet Kemper is still there, part of it is in operation and part of it will hopefully soon be in operation. The costs have to be recovered in my opinion.” He also said that while a 40 percent rate increase is unlikely, a smaller increase might be possible for the gas turbines plus other costs “…that might be ripe for recovery.” He said if the company asked for an increase on the turbines “…it might reduce the risk of having nothing approved…” So while he thinks Kemper will soon be in operation and its costs have to be recovered, he doesn’t think this is likely. He does have a new standard for cost recovery though: The costs have to be “ripe.” Costs once had to be prudent per a used and useful test. Now it seems they just have to be “ripe.”

Kemper’s turbines began producing electricity routinely on natural gas a year ago. The company sells it in the wholesale market and uses it at the Kemper site. It’s cheap because natural gas is cheap. However, retail customers can’t buy it because it’s not in the rate base. It’s not in the rate base because the company hasn’t filed for permission with the PSC. Why? Probably because cheap electricity from the turbines on natural gas will make it impossible for the company to get the PSC to approve (and customers to stand still for) expensive electricity from the turbines running on synthetic gas from lignite. But the turbines on natural gas are still a good idea. That’s why we suggested this two years ago.

Natural gas cheaper

We estimated that electricity from the turbines on natural gas would cost 6 cents per kWh. This assumed $800 million for the turbines and $3.76 per mmbtu for natural gas. We estimated electricity from the turbines on synthesis gas from lignite would cost 30 cents per kWh assuming $3.3 billion fro the gasifier after write offs. So the turbines on natural gas vs. synthesis gas would save retail customers more than $2.5 billion over the first ten years. That savings is even greater now. Natural gas prices are lower and projected gasifier operating costs are higher due to higher capital costs and lower (maybe no) byproduct revenues. We continue to think there are substantial operating risks and that the gasifier may never achieve economic commercial operation. It may never operate on a reliable consistent basis at all – regardless of cost. There may also be safety issues.

The turbines at $800 million are not a bargain because they are part of the Kemper project which was never intended to be a bargain. And they are not in the optimum location to meet system demand. In fact, they may not even be needed to meet system demand. It appears demand growth, high natural gas prices and a $2 billion low ball project cost were assumed to justify the politically motivated experiment that has turned into Frankenstein. The turbines are not prudent by objective standards. But they are there. And there is a risk that the upcoming PSC elections will deliver another commissioner who thinks Kemper’s costs have to be recovered when they are “ripe.” Therefore, we suggest again that the turbines be deemed prudent at a cost of $800 million. This probably means a 12 percent rate increase after the 18 percent increase has been rescinded and refunded. It’s still a good idea because it seems to be the least bad idea of what to do about Kemper.

Company owns Frankenstein

That leaves the Frankenstein gasifier as the company’s responsibility, not customers. That seems fair. It was the company’s idea, not customers. If the company pulls the plug on it now, it will probably mean $4 billion additional write offs. That’s a lot. But the company’s parent $40 billion Southern Company can handle it. The total could be much higher if the company tries to start up and operate the gasifier. That may be harder than building it. It could end up costing another $3 billion with the company eating it all.

Two heroes in this fiasco had the customer’s interest at heart. One PSC commissioner consistently voted against Kemper. Customers owe him. The real hero, though, is the private citizen customer who intervened before the PSC and appealed to the Supreme Court which rescinded the illegal rate increase and ordered the refund. He made a difference. Customers own him for their upcoming Christmas present. Customers don’t owe the Legislature. It passed the Base Load Act to make them pay construction interest on Frankenstein. Customers don’t owe elected officials either. They stood by while the company and two PSC commissioners conspired to make customers pay for Frankenstein.

Patrick Sullivan, president of Mississippi Energy Institute

While the cost overruns at Kemper are concerning, the plant generally should be expected to cost far more to build than a plant using natural gas. Economically, coal and nuclear power plants always cost more to construct but are at a long-term advantage to natural gas because fuel costs over the life of a plant’s operation is much cheaper. Cheaper fuel cost should be expected over the operating life of Kemper (40+ years) which is a benefit to ratepayers.

Despite the cost overruns, the overall construction cost to ratepayers remains the same as the company has absorbed the extra costs – more than $2 billion – that have resulted from construction challenges. If the PSC denies rate recovery based on concerns with the overhead component being higher, it would be like a car buyer telling the dealer: Even though the price of the car is the same price you originally quoted me, I don’t want the car because I read where the manufacturing costs have increased. Therefore, I am walking away from the deal, even though the cost to me has not changed.

“Everybody loves progress…nobody wants change.” This old saw sums up the reaction some have had to the new technology that will bring a long-term stable and predictable priced electricity fuel source – lignite coal – which is being mined right at the plant. There was and still is a real need for the plant… and the new technology. Looking at Mississippi as a whole, over 70% of current electric generating capacity is through natural gas powered plants. Mississippi will remain mostly dependent on natural gas for electricity into the foreseeable future. While natural gas is a great and versatile fuel, adopting an implied regulatory policy of only allowing construction of natural gas plants due to low construction costs and current low fuel prices would be short-sighted and risky, even foolish. And, while the current price of natural gas is low, power plants are built to operate for decades, and the historic volatility of natural gas prices is an equally risky choice. With Kemper, the result will be lower, stable fuel costs. The cliché is, don’t put all your eggs in one basket.

On the challenge created by the unprecedented Supreme Court decision. This would be like someone getting a construction loan from a bank for $100,000 to construct a house. Further, the bank commits that once construction is finished, the owner will get a 30 year mortgage for $100,000. During the process of construction, which gets way off track due to delays, the price of the house soars to $200,000 and the owner pays the overage out of his personal savings. Just before the owner is ready to move into the house, a bank regulator tells the bank there was an obscure error in process, and the bank must call the loan. Even though the bank was following its regular rules and its reading of the law, the bank must demand immediate repayment. The result may be bankruptcy for the owner, because savings has already been committed, and the original bank loan is gone. If a new loan is provided, the cost to the owner will likely be greater due to accrued interest. Translated, the Supreme Court decision to reject the original agreement to pay for Kemper will likely result in higher rates than the ones previously set by the PSC.

Kemper was planned and presented as a first-of-its-kind coal plant, which I consider to be a great distinction for Mississippi. Being first-of-a-kind does not make Kemper “experimental.” Independent Mississippi regulators at the PSC not only recognized the need for a new generation to serve customers and the economy; they approved the plant, deeming it necessary and the best option to meet need to supply energy needs for many decades to come. In fact, the commission did not rubber stamp the company proposal, rather they opened it up for bidding and multiple different natural gas offers were considered. The commission and company selected the Kemper option for customers.

In the certificate granted by the PSC and Mississippi Power allowing the construction of Kemper, a cost framework was set as is regularly done with regulated utilities. Additionally, the Mississippi legislature passed legislation that would lower the costs of the project to customers. A main principal of growth based energy policy must be a robust but predictable regulatory climate to encourage the required high capital, long-term investment in energy systems to serve our economy. The company has accepted the cost overruns at the facility, and its shareholders have paid the more $2 billion in costs. But they have not been given the cost recovery treatment they were promised when the project was approved in 2010.

Now, action by the PSC is needed to meet their side of the framework to ensure predictability and fairness to both the company and its customers to pay for the plant. The wrong action on this project sends a loud message of instability to businesses considering investing here and employing Mississippians. An industry that might invest millions or even billions of dollars will think twice when they see a regulatory environment and the courts change the rules after agreements have been reached. Some national analysts have already noted these issues as a concern for Mississippi. Stated differently, the state, through the PSC and Supreme Court, has not kept its commitments to Mississippi Power and seems to be “moving the goal posts” when it comes to cost recovery for Kemper.

Appreciation of the long-term nature of power plants seems to be an elusive notion. Throughout the U.S. over the past half century, super expensive coal and nuclear power plants have been constructed and have resulted in rate spikes to cover construction costs. However, the long-term benefits of low and stable fuel costs pay off as these plants operate over many decades. Therefore, with Kemper, time should tell. My prediction is, as the plant is paid off, the benefits of low fuel costs become very apparent 10 years from now. At that point, Kemper will have at least 30 years of life remaining.

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