Kemper and the Fairness Police

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Kelley Williams, Chair Bigger Pie Forum, June 22, 2013

Despite its high cost and experimental design, Mississippi Power’s Kemper County Lignite Plant supporters say it is prudent because it is not dependent on natural gas.  Therefore it is not vulnerable to natural gas price spikes and shortages if they occur in the future.  This is the fuel diversification argument.  Is it a valid argument?  No.  It’s bogus.  Here’s why.

Kemper requires natural gas.

The Kemper plant cannot run without natural gas.  It uses natural gas for startup, turbine optimization, steam generation, byproduct recovery, and other operations.  It is absolutely dependent on natural gas.  It uses about 30% as much natural gas for the same amount of electricity sold as does a cheaper more reliable natural gas fired combined cycle turbine generator.  It does not insure the supply of electricity if there are future natural gas shortages.

OK, Kemper supporters say, forget about shortages and security.   If Kemper uses 70% less natural gas, won’t its electricity be cheaper if gas prices rise?  Answer: it might be if natural gas prices are high enough and if Kemper’s other cost are low enough.

Kemper’s other costs depend on how much of its construction cost customers pay, and if it operates reliably and efficiently, and if it recovers and sells byproducts at a profit.  Let’s look at these other costs to see how high natural gas prices would have to be for Kemper’s electricity to be cheaper.

Diversification argument absurd.

Consider the absurdity of the diversification argument: Pay more now – for certain.  Pay less later – maybe.

Imagine you go to your neighborhood restaurant and see that menu prices are up 20%.  You ask Famous Fann the manager: “ What’s up.” He says: “It’s our new MissPower Special.  It’s a seven year deal. Pay more (not sure how much, we haven’t decided yet) for seven years and less for the next thirty.” You politely say: “No thanks. Your deal is absurd. You must think I’m stupid.”  And you go to a restaurant down the street.

Now imagine you live in a town where the Restaurant Commission permits only one restaurant which has just been remodeled. You see the prices are up 20%.  You ask Toothy Tom the manager: “What’s up.” Same answer: “New MissPower Special.”  Same deal. You say: “How do I know your prices will be lower after seven years?”  He says: “Trust me.”  You say: “What if I’m not around after seven years?”  He says: “Not my problem.” You say: “That’s not fair.  I’m going to the Fairness Police.”  He says: “Be my guest. I’m tight with the Fairness Police. That’s why I spent so much remodeling. They are OK with the MissPower Special deal.”

You think: “We need fair Fairness Police.  I can hope, but probably not gonna’ happen.  Looks like the deck is stacked against me.  Nobody cares. I’m not happy. My neighbors won’t be either.  How do we get even?”

So what’s going to happen?

No one can predict energy costs seven years out – let alone thirty or forty years.  Or future energy technology.  But the long term trends are better technology and cheaper energy.  Probably not smart to bet against them.

Mississippi Power’s betting history is not good.  It missed the disruptive shale gas fracking technology.  Because of it natural gas prices had been falling for two years when Mississippi Power and its Southern Company parent doubled down on lignite and high cost Kemper electricity in 2010.  They made a forty year bet on expensive energy and an experimental technology.  It’s probably why they are still flogging the diversification argument.  It’s all they have.

Just for fun let’s play along with the argument and look at some numbers under the MissPower Special deal.  Keep in mind these are projections that rest on assumptions:  Bigger Pie’s and Mississippi Power’s.  Like most projections they are probably wrong.  But hey, projections are good enough for the Fairness Police.

Projected electricity cost.

Start with construction cost for the Kemper plant.  It has the largest effect on electricity cost.  It was supposed to cost $1.8B when first proposed.  Latest projection is $3.8B excluding $.8B of write offs and grants.  No one knows the final cost because it is not complete and has not started up and run.

Assume the Fairness Police say customers must pay for the $3.8B projected cost of the plant.  This is the best case for Mississippi Power/Southern Company and the worst case for customers under the MissPower Special deal.

The best case for customers assumes customers pay for only $.8B of plant cost.  This is the cost of the natural gas fired combined cycle gas turbine generator that should have been built.  (Incidentally, the Southern Company has built three of these plants elsewhere in its system since committing to Kemper.)

How well the plant starts up and how reliably and efficiently it operates also affect electricity cost.  Mississippi Power has projected a smooth startup and gradual ramp up over seven years to routine reliable operations.  This seems naive given the experimental design and the plant’s complexity.  It also seems optimistic considering startup problems at the similar but simpler Duke Edwardsport, IN, coal gasification plant and erratic operating history of Southern Company’s even simpler Red Hills lignite fired generating plant at Ackerman, MS.

So we have tweaked Mississippi Power’s assumptions and adjusted their numbers to reflect these concerns.

Byproduct Revenues.

Mississippi Power’s projected byproduct revenues are totally speculative. Byproduct sulfuric acid, aqua ammonia, and carbon dioxide revenues are supposed to offset some of the operating costs.  Mississippi Power revised its projections to increase byproduct revenues.  This is puzzling since Mississippi Power has never produced or sold any of them.  Moreover, sulfuric acid and aqua ammonia are basic commodities with low unit value, high transportation costs, and limited markets. So we have also tweaked byproduct revenue assumptions and numbers.

Kemper’s extra cost.

We have projected Kemper’s electricity cost based on these assumptions and have compared it with the projected electricity cost from the natural gas fired combined cycle generating plant that should have been built at the Kemper site.  We assume average natural gas cost of $4 per mmbtu. This difference between cost from this plant and Kemper’s cost is the extra cost to customers under the MissPower Special deal.

The best case for Mississippi Power/Southern Company and worst case for customers is an extra cost of $2.9B over the first seven years.

For customers to recover the extra cost (plus interest at 7%) from cheaper electricity due to savings from lower cost lignite vs higher cost natural gas going forward, natural gas must average more than $22 per mmbtu over the next thirty years. This seems highly unlikely. The average natural gas price over the last ten years was $6 and the highest average yearly price was $9.  The current price is $4.  And the shale gas revolution is just beginning.

Best case for customers devastating.

The best case for customers under the MissPower Special deal is an extra cost of $2.3B over the first seven years.  Natural gas prices must average more than $18 going forward if customers are to recover their extra payments from cheaper lignite.  Also highly unlikely.  Worse, this ignores greater Kemper rate increase after seven years.

Even the best case for customers under the MissPower Special deal punishes customers.  Why should customers pay any extra for electricity for seven years – or even for one year?  Consider the effect on 186,000 retail customers in Mississippi Power’s monopoly service area.  Every year each customer will pay about $1,050 more on average – probably more than half the discretionary income for the average residential customer.  Devastating.

A fair solution.

The fair solution for customers is for the Fairness Police to rule that Mississippi Power can operate the Kemper plant if it wants to.  But it can charge no more than the cost of electricity from the equivalent natural gas fired combined cycle generating plant.  In this case, Kemper’s gasifier would probably shut down and its turbines would be converted to run on 100% natural gas.  The Southern Company would eat the cost of its mistake.   Customers would pay little more than if the right plant had been built in the first place.

No prudence determination in the meantime.

While the Fairness Police (aka Mississippi Public Service Commissioners) ponder what to do, they should not make any prudence determination until they see the Kemper plant operate routinely and know the cost of its electricity.

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