Mississippi Power Company’s Kemper County lignite coal plant is the largest proposed addition to any electric utility rate base in state history. Financing it would require customers to pre-pay some of the company’s costs through Construction Work in Progress (CWIP) in rate base, which would be a first for Mississippi.
The proposed plant would more than double Mississippi Power Company’s assets. The company’s total assets are approximately $2 billion, according to Frances Turnage, MPC’s chief financial officer.
If approved by the state Public Service Commission after the February resource hearings, plant construction would begin later in 2010, and would function commercially by 2014.
In her Phase II testimony, Turnage said customers would see incremental rate increases, up to 8 percent, until 2020. Rate impacts would then incrementally decrease until 2024, after which customers would receive a cost savings for the life of the plant.
MPC rate increases submitted to the Commission are measured in percentages as compared to the natural gas alternative. MPC’s natural gas price forecasts were filed confidentially with the Commission due to proprietary reasons.
CWIP is the balance shown on a utility’s balance sheet for construction work not yet completed but in process and is sometimes included in rate base depending on state laws.
Turnage said MPC must have CWIP in rate base to keep a high credit rating that will provide the company with critical access to reasonably priced capital and provide a lower cost of financing, which is in the best interest of MPC customers, Turnage said. Company will be able to maintain its current credit quality through improved cash flow and increased certainty of ultimate cost recovery through CWIP.
A credit rating is an evaluation of a potential borrower’s ability to repay debt, which is calculated from financial history and current assets and liabilities. In September Moody’s credit rating agency changed its outlook for MPC to “negative,” saying the company’s credit strengths were “offset by risks associated with the planned construction of a currently estimated $2.2 billion integrated gasification combined cycle (IGCC) plant in Kemper County.”
CWIP covers financing costs only, not construction costs. However, as with any new utility addition, “bricks and mortar” construction costs will be recovered through rates once the plant is completed. Prudent construction costs would be capitalized and depreciated over the life of the plant.
MPC argues CWIP would provide essential funds needed during construction and save customers an estimated $163 million money over total life of the plant.
However, rate-payer’s money won’t be refunded if plant construction is not finished and the facility does not become operational.
Through the Baseload Act, passed by the state Legislature in 2008, the Commission can allow in utility’s rate base and rates all expenditures prudently incurred, pre-construction, construction, operating and related cost that the utility incurs in connection with a generation facility – including but not limited to costs contained in CWIP accounts “whether or not the construction of any generating facility is ever commenced or completed, or the generating facility is placed into commercial operation.”
CWIP in rate base is a mechanism to allow utilities to charge ratepayers incrementally for the cost of financing a new power plant during construction. As opposed to traditional method of allowing rate increases to pay for a plant’s financing costs and construction costs only after a plant is completed and producing electricity.
Other states that have allowed CWIP in rate base include Idaho, Indiana, Louisiana, Missouri, West Virginia and Wisconsin. Florida has similar legislation.
Robert Burns, a research specialist at Ohio State University’s Center for Energy, Sustainability and the Environment, said “There are times where you almost want and have to (use CWIP). If you believe it will make the plant cheaper, if you absolutely need baseload… CWIP in rate base is something commissions don’t like to do.” If you don’t have CWIP in rate base, you get a rate shock at the end, Burns said.
A reason people oppose CWIP is intergenerational equity problems, Burns said. Those in a plant’s service area could be paying for a plant for several years for which they might never receive direct benefit if they move, he said.
As explained by Missouri Public Service Commissioner Jeff Davis, CWIP is a pre-pay system, more like lay away as opposed to using a credit card and having to pay interest. Missouri previously used CWIP to finance a nuclear power plant. Citizens protested but later were happy went rates went down, Davis said.
Davis said he would absolutely approve of using CWIP again: “It is the only way that most utilities can afford to build a multi-billion dollar project of this kind.”
Few Wall Street investment banking firms that could finance a multi-billion dollar plant are left, Davis said. “Because there is less competition, they can charge higher rates for services and can be pickier about who they loan money to. In this economic climate, nobody is going to loan a utility money – $4 or $5 billion – and then wait for commission 10 years to determine in a rate case for a rate of return.”
Utilities, like all other investors, should be entitled to a fair rate of return on their investments, said Dr. David Dismukes, associate director of the Center for Energy Studies at Louisiana State University.
However, an important question for public service commissioners to ask when CWIP in rate base is used for a power plant is: “Is the rate of return – say 10 percent — appropriate given the fact that I am insulating this utility from a considerable amount of regulatory and business risk?” Dismukes said.
Both Davis and Dismukes agree that lower rate of return is reasonable in CWIP because the majority of the financial risk of a new project is shifted to the rate payers.
When asked how Mississippi Power felt about taking a lower rate of return, the Mississippi Business Journal was referred to Turnage who did not respond.
Davis and Dismukes also agree that public service commissions must be vigilant in CWIP to establish a review process to mitigate cost overruns.
If Missouri ever builds another major plant, my recommendation will be to hire a construction manager who works full time “camped out” at the site watching what gets done to prevent wasted money and time, Davis said.
Independent Power Producer alternative
The Commission’s independent consultant, Dr. Craig Roach, said in Phase II testimony that the plant’s “capital costs will be three times or more as great as that for the traditional combined cycle plant. The essence of Phase Two is to judge whether that higher capital cost in return for lower, less volatile fuel prices is a good deal for Mississippi ratepayers. The Commission has already put this issue center stage in Phase Two by its requirement to assess the resource options over a range of natural gas forecasts.”
Roach also said the “Commission has invited…innovative proposals to limit the level and volatility of natural gas prices (in Phase II).”
Proposals that could limit the volatility of natural gas prices are contracts from independent power producers (IPPs).
The Calpine Corporation, Entegra Power Group LLC, KGen Power and Magnolia Energy LP have filed proposals with the commission which are confidential. IPPs own combined cycle natural gas plants in Mississippi.
An anti IPP argument, as expressed by Steven Fetter who testified on behalf of MPC, is that dependence upon contracts, or power purchase agreements, from IPPs is not the most reliable method of providing energy to customers. Fetter is president of the utility advisory firm Regulation UnFettered.
The Commission has exclusive jurisdiction over the rates of a regulated utility such as MPC but not over an IPP. The only remedy the Commission has over an IPP breach of contract is litigation with a financial exchange at the conclusion, Fetter said.
IPPs argue that their livelihood is based on honoring contracts. With their contracts IPPs are required to post financial letters of credit for significant amounts of money commensurate with a potential loss of power. A failure to perform means a loss of significant amounts of cash.
IPPs also argue pursuing a legal remedy with a contract is an easier and possibly less expensive process than the alternative with a regulated utility, which is litigation in a Commission rate case.
Turnage said the facility would be financed with conventional mix of debt, preferred stock and common equity, specifically, 50 percent debt financing, 5 percent preferred stock and 45 percent equity.
According to a filing exhibit, MPC has received $332 million in federal and state incentives reducing capital costs and more than $1.3 billion in federal and state incentives reducing operating expenses. Incentives include loan guarantees from the federal Department of Energy and tax credits.
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