By Eileen O'Grady
HOUSTON, Aug 13 (Reuters) - Southern Co's Mississippi utility has consolidated contractors building a $2.88 billion coal-gasification power plant in Kemper County as it struggles to manage the project's rising cost.
The Kemper County plant, a 582-megawatt, integrated gasification combined-cycle (IGCC) plant, has run into legal and regulatory difficulty, highlighting the industry's difficulty in pursuing a long-term strategy to produce power from a variety of fuel sources in an era of low-cost natural gas.
Only Southern and Duke Energy are building IGCC plants while more than three dozen other projects have been scrapped due to rising capital costs, carbon legislation delay and plentiful supplies of natural gas.
The price tag to complete Kemper County has risen in recent months and is very close to a $2.88 billion cap set by state regulators as the maximum amount Mississippi Power will be allowed to recover from 188,000 customers.
The plant is about one-third complete. Construction activity is nearing its peak and the project's contingency fund has fallen to about $62 million. The plant is scheduled to begin operating in May 2014.
Last week, Mississippi Power said it redefined the scope of work for Kemper's three contractors: KBR Inc, Yates Construction and Performance Contractors Inc.
"To make sure we bring in this project by May 2014 and to make sure that we bring it in at the lowest cost possible, we are looking at those contractors and how we are utilizing their strengths," said Mississippi spokeswoman Cindy Duvall.
"For us, it is day-to-day management of a construction project," Duvall said.
Mississippi Power said the three companies will remain active at Kemper, but several hundred construction workers who had been working for a KBR construction joint venture were demobilized Aug. 9 and had to interview for jobs with the other companies.
KBR, a co-owner with Southern Co of the gasification technology being used at Kemper, will continue its role in engineering and plant start-up, a spokeswoman said.
"The only impact on KBR is the construction engagement piece," said KBR's Marianne Gooch. "We still have great relations with Southern."
The utility's inability to begin charging customers for early plant costs while a legal challenge over its state certificate is resolved led Moody's Investors Service to downgrade its senior unsecured debt last week.
"Although the plant construction remains on schedule, IGCC technology is complex, specialized and not widely utilized," Moody's said. "The next 12 to 18 months will be critical in resolving these uncertainties and determining if the plant achieves commercial operation within its considerable time and budgetary constraints."
The Kemper plant has support of two of three state commissioners who want to diversify the utility's generation mix, but the commission denied a $55 million rate increase request due to legal challenges from the Sierra Club.
Earlier this month, the Mississippi Supreme Court also denied the utility's motion to begin charging interim rates.
The utility said increasing rates now would save customers millions of dollars in interest cost over the life of the plant.
Southern Co Chief Executive Tom Fanning told Reuters last month that the Kemper plant technology - to burn coal while emitting fewer pollutants and greenhouse gas than existing coal plants - is "important to the United States."
"The U.S., through a variety of largely environmental regulations, has taken an energy-policy position ... that is really diminishing the ability of the U.S. to use one of its most valuable natural energy resources," Fanning said.
If not burned by U.S. utilities, coal will be burned in other countries, Fanning said, "to our disadvantage from a global, economic, competitiveness standpoint. This is poor policy."