* Rate hike to have reduced interest costs over time
* Kemper project cost now 15 percent over initial budget
* Only two U.S. utilities building IGCC plants; others scrapped
By Eileen O'Grady
June 22 (Reuters) - Mississippi utility regulators on Friday denied a $55 million rate increase request linked to financing costs for Southern Co's $2.88 billion coal-gasification power plant under construction in Kemper County, Mississippi.
In a move that drew applause from dozens of citizens attending the hearing, the Mississippi Public Service Commission (PSC) voted to deny any rate increase related to the Kemper County plant, a 582-megawatt integrated gasification combined-cycle (IGCC) project, until a legal challenge from the Sierra Club is settled, according to a webcast of the commission meeting.
"I believe it to be prudent for this commission to deny any means of cost recovery from ratepayers until the Mississippi Supreme Court makes their ruling," said Leonard Bentz, commission chairman, whose motion to deny the increase was supported by the PSC's two other members.
Under the state's Base Load Act, Southern's smallest utility, Mississippi Power Co, sought a 13-percent rate increase to begin recovering financing costs for the Kemper County IGCC plant, which is under construction and not expected to produce power until 2014.
"We are extremely disappointed in the action taken today" by the commission, Mississippi Power said in a statement. "By enacting the provisions of the Base Load Act, customers would have saved several hundreds of millions in interest over the life of the plant."
Only two U.S. utilities, Southern and Duke Energy, are pursuing expensive IGCC plants. Dozens of other companies have scrapped similar projects after the technology was unable to gain traction due to high capital costs, carbon legislation delay and rising supplies of affordable natural gas.
Earlier this month, Southern disclosed that the Kemper facility is running about $366 million, or 15 percent, above the company's original $2.4 billion estimate.
The commission imposed a "hard price cap" of $2.88 billion on the Kemper project when it voted, by a 2-1 vote, to approve a certificate in mid-2010.
In Friday's hearing commissioner Brandon Presley asked Mississippi Power vice president Tommy Anderson if he was still "confident" the utility could build Kemper for $2.44 billion as he testified before the commission in the earlier case.
Anderson said the company now "expects" to build the plant for $2.76 billion and he is "confident" the plant can be built under the $2.88 billion cap.
Under questioning from Presley, Anderson also said the utility could not guarantee that the IGCC technology developed by a Southern Co affiliate and KBR Inc, known as TRIG, would work at Kemper. He said he was "not in a position" to say whether Southern plans to share any potential future revenue from technology licenses with Mississippi rate payers.
Southern licensed its gasification technology to a Chinese utility in 2009.
The utility said construction would continue at the Kemper site while officials review the commission action.
Bentz said he continues to believe the Kemper County plant is needed to diversify Mississippi Power's fuel mix.
"We don't know what the cost of natural gas will be tomorrow, next year or in 40 years," Bentz said in a release. "Likewise, we do not know what coal will cost in 40 years. The crucial thing is that we do know what Mississippi lignite will cost for the next 40 years."
A dozen citizens at the hearing criticized the project and the proposed rate increase while a number of representatives of business and economic development groups spoke in support of Kemper.
"The commission finally acted in the best interests of Mississippi Power ratepayers," said Louie Miller, director of the Mississippi Sierra Club in a release.
The Sierra Club successfully challenged the commission's 2010 approval of Kemper and has appealed the commission's move to re-issue Kemper's certificate in April. It opposes the Kemper plant because of its high cost and the rate impact on a small customer base.
Southern's stock rose 9 cents Friday to $46.55 per share on the New York Stock Exchange after reaching a one-year high of $48.44 a share earlier this week.