Real money and short attention spans
Fun at lunch
I was the speaker at a recent meeting of an old Jackson club. It was like lunch at Animal House. The club was founded in 1923, the year The Hunchback of Notre Dame was released. Lon Chaney was not present. Nor were any original members. However, many members with short attention spans were. But their short attention spans were not due to age. The meeting began with a bizarre melamine dinnerware ritual that whipped members into a trash talking frenzy. I thought this is going to be a tough venue for an amateur. I was right.
I had been warned that members threw rolls at speakers who talked too long. So I was prepared to be brief. I wasn’t brief enough. I didn’t get started before they started throwing comments and questions and playing with the drapes. Reminded me of a debate team prep session where teammates heckled you to see if you could stay focused. I couldn’t.
But it was fun. And it made me think about how to explain a complex subject to short attention span audiences – which is just about everybody today. My subject was Mississippi Power’s Kemper County Lignite Plant. Here’s how I would do it next time.
Kemper in 30 seconds
Mississippi Power is building a very expensive plant to produce very expensive electricity. If the political and business establishment make customers pay for it, the company will make lots of money. Investments and jobs and the economy will tank. And the poor will get poorer. Thank you. Any questions?
What’s wrong with a company making lots of money? Nothing. It’s great if it earns it. Apple makes lots of money making iPhones and other innovative products customers want and willingly pay for. Kemper will make lots of money making electricity that costs twice as much but is the same as electricity from any other source. Customers won’t willingly pay twice as much. But they have no choice since the company has a monopoly.
How expensive is the plant? It’s the biggest boondoggle in the history of the state. It’s over $5 billion and counting. A hundred beef plants. It’s over 10 times the cost of a natural gas plant with Kemper’s same 500 megawatt output.
But Kemper doesn’t have state money like the beef plant, does it? That’s correct. Kemper is a federal boondoggle with Department of Energy funds. So that makes it OK or a source of pride for many. However, Kemper’s harm will be far greater than the beef plant plus Kior plus all the other state boondoggles combined if customers are forced to pay for it.
Why is it so expensive? It’s due to the cost of the complex experimental technology to gasify lignite to make a synthesis gas to drive turbines to make electricity. And to engineering and construction mistakes building the gasifier. A bad decision badly executed.
What difference does it make? The more the plant costs, the more it’s electricity costs, and the more customers have to pay for it. The more they pay, the less they have to spend and invest, and the more it costs businesses to operate.
Why do you say Kemper will make the poor get poorer? There are 155,000 residential customers in Mississippi Power’s service area. The median household income is less than $40,000 per year. A $1,000 increase in power cost takes a big bite out of that.
So why don’t customers move to where electricity is cheaper? Some that can will. New customers won’t move there. Jobs in Mississippi Power’s 23 county monopoly service area will suffer.
Why should I care? I don’t live there. Even if you have no compassion for the people or outrage at the injustice, you should care because of the damage to the local and state economy. It affects you if you live in Mississippi.
How will Kemper hurt the economy? Kemper’s electricity from lignite will cost customers over $400 million more every year than electricity from natural gas. That’s $16 billion more for the 40 year life of the plant that customers won’t have to spend and invest in Mississippi to start or expand businesses and create jobs. That could mean 100,000 fewer jobs. (That’s twice the jobs lost since 2004 and five times the CBO estimate of job lost by 2024 due to Obamacare.)
Where do you get your cost numbers? We use independent third parties and Mississippi Power’s filings. The levelized or time value adjusted cost of Kemper’s gasifier electricity for the life of the plant is over 15 cents per KWH. The same cost from a simpler cheaper natural gas plant is less than half that. The difference is over $400 million per year extra cost.
Where do you get your job numbers? We start with the investment required to create a job. We get this from real life examples. We divide this into Kemper’s $16 billion extra cost which sucks up money that customers could spend or invest in Mississippi. The result is over 100,000 fewer jobs.
What are your real life examples? General Atomics is investing $11 million at its Shannon, MS, plant to create 80 jobs. This is an investment of $137,500 per job. A successful local investor recently opened 4 restaurants. He invested $1-1.5 million to create 50-70 jobs. His investment was $20,000 per job. If it takes $137,500 to create a job, $16 billion not invested due to extra power cost means 116,363 fewer jobs. At $20,000 per job, it’s 800,000 fewer jobs. The total is probably somewhere between. We use a 100,000 to be conservative.
I thought Kemper was supposed to create jobs. Yes, that was part of the sales pitch. It has provided several thousand temporary construction jobs. Most of these have been filled by out of state workers. It is supposed to create 200 permanent jobs – at $25 million per job.
How does Mississippi Power make money on a more expensive plant? If the Public Service Commission approves the plant cost, the company gets 10% of its investment (equity) in the plant as guaranteed profit. The more expensive the plant, the greater the company’s investment and the greater its profit.
You mean if the company builds a more expensive plant to make more expensive electricity, it makes more money? Yep. That’s how it works in a monopoly where the company gets a guaranteed return. The company gets the gain. The customer gets the pain.
How much more does the company make? About $80 million per year or $3.2 billion over the life of the plant. The plant will cost $3 billion more if the PSC approves the gasifier. That means about $800 million more equity and $2.2 billion additional debt. The extra profit is 10% of the extra $800 million equity or $80 million per year.
Does the additional debt include the billion$bailout? Yes. But the bailout bill makes customers liable for the debt, not the company. The debt is off the company’s books in a special purpose entity (a la Enron). Since customers are taxpayers, the debt impairs the state’s credit.
Why would the political and business establishments make customers pay more? For the same reasons they backed Kemper in the first place. The same reasons the legislature passed the billion$bailout. It’s called crony capitalism. The company and its contractors, vendors, lawyers, consultants, engineers, lobbyists, etc. make money on the project. They make political contributions to public officials who support the project. The music goes round and round and it comes out: the customer pays.
Who decides who pays? The Public Service Commission does. It sets the price of electricity for Mississippi Power’s customers. Its duty is to assure them an affordable reliable supply of electricity. There are three elected members: two republicans and one democrat. One of the republicans was appointed by the governor to fill an unexpired term following the resignation of the former chairman. In previous decisions related to Kemper, the republicans have consistently voted for the company. The democrat has voted for the customers.
When will the PSC make the final decision about who pays? Maybe this fall. Once the PSC determines the “prudent cost” of the plant, it’s final. The customers are stuck with it for the life of the plant. So the company is pushing for an early decision. The company has written off over $1 billion of the extra cost. It wants the PSC to make customers pay for the rest or about $3.8 billion. This is the number we use for the cost of Kemper’s electricity. It will be a lot more if there are startup problems or operating costs are higher than the company’s projections.
So what’s the value or cost of the PSC decision? A favorable decision for the company is worth about $7 billion ($3.2 billion extra profit plus $3.8 billion write off avoided). The extra cost for the customers is $16 billion. The spread is $23 billion! Gets to be real money.
Why would the PSC make a decision before the plant operates and its costs are known? It wouldn’t if it follows the usual “used and useful” precedent. But the plant will start up at 50% rate and take six years to reach its nominal 80% capacity to show that it’s used and useful. Things could go wrong. The company doesn’t want to wait. Hence, the “seven year plan” where customers prepay for a pig (plant) in a poke.
Does the “useful” test consider Kemper’s cost of the electricity vs the cheaper natural gas alternative? It should. How can electricity that costs twice as much be useful? If the cost to customers is considered, the gasifier will not be deemed prudent – and the company will have to write it off. The $800 million cost of Kemper’s turbines running on natural gas will be deemed prudent. And the cost of electricity will go down, not up.
Stay tuned
Kelley Williams, Chair Bigger Pie Forum, March 26, 2014
Original Text for Edited Article that appears in The Northside Sun | April 2014