Thursday, February 19, 2015

Coal-Fired Cost Overruns: Who Pays for the Pipe Dream of "Clean Coal"?

By Nick Lawton, Staff Attorney

Mississippi’s ratepayers are off the hook for billions of dollars in cost overruns at the long-delayed Kemper Power Plant, at least for the time being. The state Supreme Court has held that the Mississippi Public Services Commission (PSC) erred in allowing an 18% rate increase because the agency failed to evaluate whether Mississippi Power, the utility developing the power plant, incurred its costs “prudently.” The Court described the Commission’s failure to “balance the ratepayers’ interests with those of the utility” as resulting in a “grave injustice,” ordering the Commission to implement a refund for ratepayers.

I blogged recently about the cost overruns and delays at the Kemper power plant, which is a new type of coal-fired power plant that is supposed to prove the pipe dream of “clean coal” by demonstrating the economic viability of carbon capture and sequestration technology. Although the power plant will likely come online eventually, the demonstration of “clean coal’s” economic benefits has completely failed. The project, originally slated to cost roughly $2 billion, has now reached a total cost of more than three times as much. The total cost, of above $6 billion, is greater than the entire budget of the state of Mississippi, as the Mississippi Supreme Court noted

The essential question now is whether Mississippi’s ratepayers or the utility should pay for the increased costs. The PSC initially allowed the utility to pass those costs on to ratepayers, as I reported. However, the Supreme Court found that the PSC failed to consider whether the cost overruns were “prudent,” as state law requires. (States generally require regulators to consider whether costs are “prudent” before requiring ratepayers to shoulder them.) The upshot is that the utility may have to swallow these billions of dollars in cost overruns, offering ratepayers a refund for what they have already kicked in.

Or maybe not. The Mississippi Supreme Court ruled that the PSC erred by failing to consider prudency. But the court did not itself resolve the question of whether the utility incurred the costs prudently. The PSC could revisit this issue and could conclude later that the utility did in fact act prudently. If that happens, Mississippi’s ratepayers will once more be on the hook. In fact, the utility has already said that it plans to ask the Court to reconsider its ruling. The utility argues that if it can’t recover costs during construction, the rate increases will ultimately cost “significantly more,” roughly doubling the rate increase from 18% to 35%. Mississippi’s ratepayers should watch this issue closely.

Regardless of who pays and when, though, the moral of the story is the same. This coal-fired power plant has turned out to be far more expensive than expected. In fact, as the Mississippi Supreme Court noted, the Kemper power plant’s costs are now higher than the entire budget of the state of Mississippi for fiscal year 2014 or 2015. In short, this power plant—and coal-fired power generally—are a bad investment. In contrast, solar prices are down and solar employment is up. The time has come for all states—including those in the reluctant South—to transition to renewable energy.

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