kemper study

7/30/2019 Kemper Study

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November 26, 2012

M E M O R A N D U M

Re: Mississippi Power Companys Kemper CountyIntegrated Gasification Combined Cycle Project Base Rate Impacts

Brubaker & Associates, Inc. (BAI) has developed an estimate of the retail base rate

impacts associated with the commercial operation of Mississippi Power Companys (MPC)

Kemper County Integrated Gasification Combined Cycle Project (Kemper County IGCC). The

rate impacts are developed from public information obtained primarily from MPCs filings before

the Mississippi Public Service Commission (Commission) and Federal Energy Regulatory

Commission (FERC). Much of the specific Kemper County IGCC operating costs are

classified by MPC as confidential. For example, the detailed cost information that MPC used to

develop its rate impacts in Docket No. 2009-UA-14 was treated as confidential and was not

shared publicly with the retail ratepayers. Basic cost items such as operation and maintenance

(O&M) expense, depreciation rates, fuel cost and cost of parasitic load were classified by MPC

as confidential and are not publicly available. Therefore, the first-year Kemper County IGCC

cost estimates were developed from public information. The data and assumptions used by BAI

to estimate the Kemper County IGCC revenue requirement and associated customer rate

impacts are discussed below.

Summary

The estimated retail rate impacts are summarized on Attachment 1. Attachment 1

shows the total estimated first-year revenue requirement for Kemper County IGCC, Mine and


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MEMORANDUM - 2 - November 26, 2012

CO2 Pipeline. In addition, Attachment 1 shows the percent increase for the residential,

commercial, industrial and other retail classes. Also shown is an estimated average increase in

dollars per year for the average residential, commercial and industrial customer. The analysis

assumes that approximately 71.5% of the total costs are allocated to the retail ratepayers and

approximately 28.5% are allocated to the wholesale customers.

An average-sized residential customer will see an estimated increase of $912 in the

initial year of operation ($76/month), or 61%. According to 2011 FERC Form 1 data, the

average-sized residential customer uses 1,186 kWh per month.

An average-sized commercial customer will see an estimated annual increase of $4,513

($376/month), or 60%. According to 2011 FERC Form 1 data, the average-sized commercial

customer uses 86,496 kWh per year or 7,208 kWh per month.

An average-sized industrial customer will see an estimated annual increase of $282,760

($23,563/month), or 54%. According to the 2011 FERC Form 1 data, the average-sized

industrial customer uses 767,462 kWh/month.

Analysis

A revenue requirement was developed individually for the Kemper County IGCC, Mine

and CO2 Pipeline. The revenue requirement is shown on Attachment 2. The revenue

requirement consists of a return on the rate base and income taxes, O&M expense,

depreciation expense and property tax expense. The assumptions that were utilized to develop

each component of the revenue requirement are discussed below. As previously indicated, all

of the assumptions are developed from publicly available information.


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An average rate base was developed for the first year of operation. The rate base

consisted of the Current View1 cost estimates for the Kemper County IGCC, Mine and CO2

Pipeline, the Projected Allowance for Funds Used During Construction (AFUDC) Non-Mine,

additional AFUDC for 2012 through the in-service date, and reductions for accumulated book

depreciation and deferred taxes. AFUDC was estimated and capitalized until the Kemper

County IGCC is placed in-service.

Specific publicly available O&M expenses were not available for the Kemper County

IGCC, Mine and CO2 Pipeline. Therefore, the estimated O&M expense of $75 million2 was

allocated to these three items.

Fuel cost and any potential fuel savings were not considered in the analysis. These data

were confidential and therefore were unavailable. Because of the unique nature of the plants

primary fuel source (new lignite mine), it was not feasible to estimate the fuel cost. The lignite

fuel will be obtained from a Mississippi mine that is currently being developed.

Considering the extremely high cost of Kemper County IGCC, the potential for significant

savings from fuel is questionable and has not been established by MPC based on current gas

prices. Further, MPCs documents reveal that Kemper County IGCCs Break Even Fuel

Pricing would require natural gas prices to be in the $11/MMBTU range in 2014 and increasing

substantially thereafter. Currently, the price of natural gas is only in the $4/MMBTU range,

which is much lower than the Kemper County IGCC Break Even presented by MPC. In

addition, the plant will also use natural gas as a fuel source. The split between energy

produced by lignite and natural gas was unavailable, so any estimate of the fuel costs and/or

potential benefit would have been arbitrary. Also, to develop the fuel cost it would be necessary

1Monthly Status Report filed by MPC through May 2012, Docket No. 2009-UA-14.2See Assumption 3.


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to consider the fuel cost associated with serving the parasitic load. Information about the plant

indicates that the plant will have a gross capacity of approximately 800 MW, however, the net

summer capacity of the plant is reported to be 582 MW. Some portion of the difference

between the gross capacity of 800 MW and the net summer capacity of 582 MW will be used in

the operation of Kemper County IGCC. The cost of the fuel associated with serving the

parasitic load should be part of the plants fuel cost.

The analysis also does not reflect any revenues derived from the sale of the plants

byproducts. The plant will produce CO2, ammonia and sulphuric acid, which will be for sale.

MPC has not provided any publicly available data that estimate or confirm these future revenue

streams. In fact, the Commission stated in its Order in Docket No. 2009-UA-14, dated

April 24, 2012, that MPC offered estimates of the revenues that it hoped to obtain from the sale

of the byproducts, but indicated that those estimates were not supported by any contracts. The

Commission indicated that the revenue stream from byproduct sales contained in MPCs

economics was uncertain.3

Attachment 1 shows the revenue requirements associated with Kemper County IGCC,

Mine and CO2 Pipeline that were allocated to the various rate classes. We understand that

MPC intends to allocate the Mine costs on an energy basis. Therefore, these costs were

allocated based on energy to the various retail rate classes. The Kemper County IGCC and

CO2 Pipeline costs were allocated using MPCs proposed allocation in

Docket No. 2011-UN-135.

Separate retail base rate impacts were developed for residential, commercial, industrial

and other rate classes. The base rate impact analysis assumes that approximately 28.5% of

3Order Docket No. 2009-UA-14, April 24, 2012, pages 85 and 86.


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the plant will be allocated to the wholesale customers and approximately 71.5% will be allocated

to the retail customers.

The primary reason for the substantial increase in base rates for the Kemper County

IGCC is because of the type of generation. Integrated Gasification Combined Cycle Projects

have very high construction costs and, thus, very high base rate revenue requirements. The

IGCC plant, Mine and CO2 Pipeline could have a total cost of approximately $3.680 billion or

$4,600 per kW. In comparison, KGEN Power sold its combined cycle natural gas unit located in

Jackson, Mississippi to Entergy Mississippi, Inc. Entergy Mississippi will invest in various plant

upgrades and expects the total cost of the acquisition to be $246 million. The unit, which is

450 MW, will have a cost of approximately $550/kW.

In contrast to the $602 million revenue requirement associated with the Kemper County

IGCC, Mine and CO2 Pipeline, as estimated in this memorandum, a combined cycle natural gas

plant could have a first-year revenue requirement as low as approximately $70.4 million

(800 MW x $550/kW x .16). The U.S. Energy Information Administration estimates the

overnight capital cost of a new natural gas-fired combined cycle to be approximately $1,000/kW.

For an 800 MW unit this would produce a first-year revenue requirement of approximately

$128 million.

The combined cycle natural gas plants first-year revenue requirement assumes that a

plant rated at 550 MW would be needed to provide the approximate same summer rating as the

Kemper County IGCC and the cost of that plant would be $550 per kW. The fixed charge rate

associated with the Kemper County IGCC is approximately 16% ($602 million/$3,680 million)

and this same fixed charge rate was applied to the combined cycle natural gas plant cost.


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Key Assumptions

The following assumptions were utilized to calculate the Kemper County IGCC first-year

revenue requirement and the allocation of those costs to the various retail customer classes.

The first-year revenue requirement would be the basis for the initial rate increase.

1. Kemper County IGCC Plant The cost of Kemper County IGCC was obtained from theMay 2012 Monthly Status Report filed before the Commission inDocket No. 2009-UA-14. The Kemper County IGCC, Mine and CO2 Pipeline capitalcosts are estimated at $2.88 billion, $244.6 million and $140.5 million, respectively.

Also, there is an additional cost for AFUDC of $173.3 million. The Kemper County IGCC

cost estimate of $2.88 billion included a DOE CCPI 2 funding credit of $245.3 million.The AFUDC amount includes the AFUDC for the wholesale customers through thecompletion; however, for the retail customers it only includes AFUDC for 2010 and 2011.Finally, the projected Mine cost includes its associated AFUDC from 2010-2014.

Additional AFUDC was included in the final cost estimate.

2. AFUDC Rate The costs of Kemper County IGCC and the CO2 Pipeline do not includeAFUDC for the retail customers for 2012 through the in-service date in 2014. Anadjustment was made to the plant cost to include the additional AFUDC. A review ofMPCs 2011 FERC Form 1 indicates that the AFUDC rates for 2011, 2010 and 2009were 7.06%, 7.33% and 7.92%, respectively. For purposes of this analysis an AFUDCrate of 7% was utilized.

3. O&M Expense Because of the confidential designation by MPC of Kemper CountyIGCC cost information, there is no public information available regarding the projectedlevel of O&M expense. However, in the testimony in Docket No. 2009-UA-14, MPCwitness F. Sherrell Brazzell provided a cost summary for various base load generationalternatives. That summary contains an estimate for O&M expense of $50-100 millionper year for Kemper County IGCC.4 Based on this data, it was assumed that the O&Mexpense would be at the midpoint of that range, or $75 million per year.

4. Rate of Return In Docket No. 2011-UN-135, MPC provided a rate of return. This rateof return was utilized to calculate the revenue requirement. The return on equityincludes a .781% adjustment included in its most recent Performance Evaluation Plan

filing. This adjustment increases the return on equity from 9.648% to 10.429%.Consistent with MPCs filing in the referenced docket, a 10.429% return on equity wasused.

5. Composite Tax Rate A composite income tax rate of 38.238% was utilized to developthe income tax component of the revenue requirement. This composite rate wasprovided in Docket No. 2011-UN-135.

4Direct Testimony of F. Sherrell Brazzell, page 6 of 14, Table 1.


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6. Depreciation Rate On May 27, 2010, MPS executed a 40-year management feecontract with Liberty Fuel Company, LLC to develop, construct and manage the miningoperations. This 40-year fuel supply agreement served as a basis for determining thelife span of Kemper County IGCC. Because of interim retirement activity that will occurduring that 40-year period, the life span was reduced from 40 years to 38 years todevelop the book depreciation rates. Generally, average service lives and not life spansare used to develop book depreciation rates. In addition, a net salvage ratio of anegative 10% was also assumed. These depreciation parameters produced a bookdepreciation rate of 2.89%. The equity component of the AFUDC that was depreciatedwas grossed up for income taxes.

7. Property Taxes A property tax rate for MPCs current assets was developed from

2011 FERC Form 1 data. This analysis indicated that MPCs current property tax rate,as applied to its gross plant in-service, would be 1.9%. However, inDocket No. 2009-UA-14, MPC witness Frances Turnage indicated that the Companyhad received a reduction in the property taxes at the Kemper County IGCC. Again,because of the confidential nature of much of the cost data, a specific property tax ratewas unavailable. Therefore, to reflect this cost reduction, a property tax rate of 1% wasassumed.

8. Tax Depreciation To develop the first-year rate base, it was necessary to estimate theamount of accumulated deferred taxes that will be available to offset the plant in-service.

Accumulated deferred taxes are tax payments made by MPCs customers prior to beingpaid to the taxing authority. The accumulated deferred taxes are treated as a reduction

to rate base for ratemaking purposes. This analysis assumed that for tax purposes theKemper County IGCC, Mine and CO2 Pipeline will be depreciated utilizing a 15-year taxlife with an in-service date of May 2014. The half-year convention was employed for2014. The debt component of the AFUDC was included in the tax basis.

9. Approximately 71.5% of the Kemper County IGCC, Mine and CO2 Pipeline costs wereallocated to the MPC retail customers. The remaining approximate 28.5% of the costswere allocated to the wholesale customers. This allocation was provided inDocket No. 2011-UN-135.


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10. Allocation of Rate Increase A separate revenue requirement was developed for the

Kemper County IGCC, Mine and CO2 Pipeline. The revenue requirement for theKemper County IGCC and CO2 Pipeline was allocated to the various customer classesutilizing the proposed allocation provided by MPC in Docket No. 2011-UN-135. In thatproceeding, MPC was proposing to allocate the CWIP cost associated with the KemperCounty IGCC to the various rate classes. For purposes of my analysis, the sameallocation was utilized to develop the rate increase associated with the Kemper CountyIGCC and CO2 pipeline. However, it is my understanding that the Mine cost will beallocated on an energy basis. The energy sales for the rate classes that are containedin the 2011 FERC Form 1 were utilized to allocate these costs.

BRUBAKER & ASSOCIATES, INC.

James T. Selecky

James T. SeleckyAttachments

9697/228448


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Attachment 1

Projected

IGCC CO2 2012Plant Mine Pipeline Total Revenues Percent

(000,000) (000,000) (000,000) (000,000) (000,000) Increase

Total Rev Req $536.8 $40.1 $25.3 $602.2Retail Allocation 71.52% 71.52% 71.52% 71.52%

Retail Rev Req $383.9 $28.7 $18.1 $430.7

Residential $125.5 $6.4 $5.9 $137.9 $227.3 61%

Commercial $135.8 $8.5 $6.4 $150.7 $249.5 60%Industrial $122.3 $13.6 $5.8 $141.7 $262.3 54%Other $0.3 $0.1 $0.0 $0.5 $6.7 7%

Total $383.9 $28.7 $18.1 $430.7 $745.8 58%

Projected Projected Projected Annual Monthly

Annual 2012 2012 Cost Cost

Average Revenue Revenue Per Percent Increase Per Increase Per

Customers (000) Customer Increase Customer Customer

Residential 151,175 $227,342 $1,504 61% $912 $76

Commercial 33,391 $249,461 $7,471 60% $4,513 $376Industrial 501 $262,260 $523,473 54% $282,760 $23,563

Note: Based on 2011 data the average monthly usage for a residential customer is 1,186 kWh, for a commercialcustomer the average monthly usage is 7,208 kWh and for an industrial customer the average monthly usageis 767,462 kWh.

Mississippi Power Company

Retail Ratepayer Impacts


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Attachment 2

IGCC CO2Plant Mine Pipeline Total

Description (000,000) (000,000) (000,000) (000,000)Plant in Service $2,888.0 $225.6 $140.5 $3,254.1

AFUDC - Mine $0.0 $19.0 $0.0 $19.0AFUDC - $173.3 M $168.1 $0.0 $5.2 $173.3Additional AFUDC $224.7 $0.0 $8.8 $233.5

Total $3,280.8 $244.6 $154.5 $3,679.9Less:

Accum Dep $47.5 $3.5 $2.2 $53.3Accum Def Tax $35.0 $2.7 $1.7 $39.3Rate Base $3,198.3 $238.4 $150.6 $3,587.3Pre-Tax ROR 10.56% 10.56% 10.56% 10.56%

Return & IncomeTaxes $337.7 $25.2 $15.9 $378.8

O&M Expense $66.6 $5.2 $3.2 $75.0Dep Exp - Rev Req $99.7 $7.3 $4.6 $111.7Property Tax $32.8 $2.4 $1.5 $36.8

Rev Req $536.8 $40.1 $25.3 $602.2

Mississippi Power Company

Kemper County IGCC First Year Revenue Requirement

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