Southern able to cut its environmental compliance cost estimate

The Southern Co. (NYSE: SO) system is continuing to develop its compliance strategy and to assess the potential costs of complying with the Mercury and Air Toxics Standards (MATS) and the EPA’s proposed water and coal combustion byproducts rules.

“As part of the development of its compliance strategy for the MATS rule, the Southern Company system has entered into agreements for the construction of baghouses to control the emissions of mercury and particulates from certain generating units,” said the company’s Nov. 7 quarterly Form 10-Q report. “While the final MATS compliance plan is still being developed and the ultimate costs remain uncertain, the compliance decisions made in 2012 have allowed the Southern Company system to further develop its cost estimates for compliance with the MATS rule. As a result, estimated compliance costs for the MATS rule in the 2012 through 2014 period have been revised from up to $2.7 billion to approximately $1.8 billion.”

In addition, the Southern system has further developed its estimated capital expenditures and associated timing of these expenditures to comply with the proposed water and coal combustion byproducts rules, resulting in a reduction, due primarily to timing, in estimated compliance costs for the 2012-2014 period. Potential incremental environmental compliance investments to comply with the proposed water and coal combustion byproducts rules have been revised from up to $1.5bn to about $500m over the 2012-2014 period based on the assumption that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under a 2010 proposed rule from the U.S. Environmental Protection Agency.

While the Southern system’s ultimate costs of compliance with MATS and the proposed water and coal combustion byproducts rules remain uncertain, Southern estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule) will be at the low end of the $13bn to $18bn range provided in a recent annual Form 10-K report. Included in this amount is about $750m that is also included in the 2012-2014 base level capital investment of the traditional operating companies described in the Form 10-K in anticipation of these rules.

As part of Southern Electric Generating Co.’s (SEGCO) compliance strategy, the Board of Directors of SEGCO earlier this year approved adding natural gas as the primary fuel source in 2015 for its 1,000 MW of generating capacity at the coal-fired Plant Gaston and the construction of the necessary natural gas pipeline. SEGCO is jointly owned by Alabama Power and Georgia Power. The capacity of SEGCO’s Gaston units is sold to Alabama Power and Georgia Power through a Power Purchase Agreement (PPA).

The Southern Co. Services website shows Gaston having a typical yearly need of 4.5 million tons of coal. U.S. Energy Information Administration data shows Gaston in January getting coal from entirely Alabama mines, with suppliers being Taft Coal Sales, Alabama CoalTwin Pines Coal and Walter Energy (NYSE: WLT).

Numerous petitions for administrative reconsideration of the MATS rule, including a petition by Southern and its subsidiaries, have been filed with the EPA. Challenges to the final rule have also been filed in the U.S. District Court for the D.C. Circuit by numerous states, environmental organizations, industry groups, and others. The impact of the MATS rule will depend on the outcome of these and any other legal challenges and, therefore, cannot be determined at this time, Southern noted.

On Aug. 21, a three-judge panel in the D.C. Circuit vacated the Cross-State Air Pollution Rule (CSAPR) in its entirety and directed the EPA to continue to administer the Clean Air Interstate Rule (CAIR) pending the EPA’s development of a valid replacement. The vacatur of CSAPR creates additional uncertainty with respect to whether new controls may be required for the Clean Air Visibility Rule (CAVR) and best available retrofit technology compliance, Southern pointed out. On Oct. 5, the EPA filed for review of the decision by the full D.C. Circuit court.

Looking at clean-air and other impacts at Southern’s utility subsidiaries:

Georgia Power:

On March 20, the Georgia Public Service Commission approved Georgia Power’s request to decertify and retire two coal-fired units at Plant Branch as of Oct. 31, 2013, and Dec. 31, 2013, and an oil-fired unit at Plant Mitchell as of March 26, 2012, which was included in Georgia Power’s 2011 Integrated Resource Plan (IRP) Update. The Georgia PSC also approved three PPAs totaling 998 MW with Southern Power for capacity and energy that will commence in 2015 and end in 2030. The PPAs remain subject to FERC approval.

Georgia Power is developing its compliance strategy and assessing the potential costs of complying with MATS and the EPA’s proposed water and coal combustion byproducts rules. As part of the development of its MATS strategy, Georgia Power has entered into agreements for the construction of baghouses to control the emissions of mercury and particulates from certain units.

While the ultimate costs remain uncertain, compliance decisions made in 2012 have allowed Georgia Power to further develop its cost estimates for MATS compliance. As a result, estimated compliance costs in the 2012-2014 period (in addition to $237m included in base environmental capital disclosed in the Form 10-K) have been revised from up to $320m to about $440m.

Georgia Power estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste) will be at the low end of the $5bn to $7bn range provided in the Form 10-K. Compliance costs may arise from retirement and replacement of existing units, installation of additional environmental controls, upgrades to the transmission system, and changing fuel sources for certain existing units.

Georgia Power’s coal-fired Plant McDonough Unit 1 was retired on Feb. 29. Georgia Power placed the gas-fired Plant McDonough-Atkinson Unit 5 into service on April 26, and the gas-fired Plant McDonough-Atkinson Unit 6 into service on Oct. 28.

Alabama Power:

Alabama Power is continuing to develop its compliance strategy and to assess the potential costs of complying with the MATS rule and the proposed water and coal combustion byproducts rules. As part of its MATS strategy, Alabama Power has entered into agreements for the construction of baghouses on generating units with an aggregate capacity of 1,901 MW and plans to utilize additional compliance strategies at other units with an aggregate capacity of 4,678 MW including utilizing existing or additional natural gas capability and/or using additives or other injection technologies.

The compliance decisions made in 2012 have allowed Alabama Power to further develop its cost estimates for compliance with MATS. As a result, estimated compliance costs for the MATS rule in the 2012-2014 period have been revised from up to $1.2bn to about $585m.

Alabama Power estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste) will be at the low end of the $5bn to $7bn range provided in the Form 10-K. Compliance costs may arise from retirement and replacement of existing units, installation of additional environmental controls, upgrades to the transmission system, and changing fuel sources for certain existing units.

Gulf Power:

Gulf Power is developing its compliance strategy and assessing the potential costs of the MATS rule and the EPA’s proposed water and coal combustion byproducts rules. Compliance decisions made in 2012 have allowed Gulf Power to further develop its cost estimates for compliance with MATS. As a result, estimated compliance costs for the MATS rule in the 2012-2014 period have been revised from up to $375m to up to $205m.

Gulf Power estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste) could be about $1.3bn. Included in this amount is around $400m that is also included in the 2012-2014 base level capital investment of Gulf Power described in the Form 10-K. Compliance costs may arise from retirement and replacement of existing units, installation of additional environmental controls, upgrades to the transmission system, and changing fuel sources for certain existing units.

Mississippi Power:

On April 3, the Mississippi PSC approved Mississippi Power’s request for a Certificate of Public Convenience and Necessity (CPCN) to construct a flue gas desulfurization system (scrubber) on the coal-fired Plant Daniel Units 1 and 2. On May 3, the Sierra Club filed a notice of appeal of the order with the Chancery Court of Harrison County, Miss. These units are jointly owned by Mississippi Power and Gulf Power, with 50% ownership each. The estimated total cost of the project is approximately $660m, excluding allowance for funds used during construction (AFUDC), and it is scheduled for completion in December 2015. Gulf Power’s portion of the cost is expected to be recovered through the environmental cost recovery clause.

Mississippi Power is developing its compliance strategy and assessing the potential costs of complying with MATS and the EPA’s proposed water and coal combustion byproducts rules. Due to compliance decisions made in 2012, estimated compliance costs for MATS in the 2012-2014 period have been revised from up to $430m to about $55m. Mississippi Power estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste) will be at the low end of the $1bn to $2bn range provided in the Form 10-K. Included in this amount is about $354m that is also included in the 2012-2014 base level capital investment of Mississippi Power described in anticipation of these rules. Again, compliance costs may arise from retirement and replacement of existing units, installation of additional environmental controls, upgrades to the transmission system, and changing fuel sources for certain existing units.

On Feb. 14, Mississippi Power submitted its 2012 ECO Plan filing with the state PSC, which proposed a 0.3% increase in annual revenues for Mississippi Power. In compliance with the CPCN to construct an FGD on Plant Daniel Units 1 and 2, Mississippi Power revised the 2012 ECO Plan filing to exclude scrubber expenditures from rate base, which resulted in a 0.16% decrease in annual revenues. On June 22, the 2012 ECO Plan filing, including the proposed rate decrease, was approved by the Mississippi PSC, effective on June 29.

Mississippi Power is also involved in a complex series of regulatory actions related to its in-construction Plant Ratcliffe (also known as Kemper County) integrated gasification combined cycle power plant. In one of its more recent actions related to this matter, on Sept. 13 the Mississippi PSC filed the record in the appeal of the PSC’s June 22 decision with the Mississippi Supreme Court. That is in a case brought by the Sierra Club. If the Mississippi Supreme Court does not render a decision within 180 days of the filing of the record, the rates proposed by the utility on June 14 will go into effect, subject to refund by Mississippi Power.

Mississippi Power’s current cost estimate for the Kemper IGCC equals the $2.88bn cost cap, including a $40m to $50m contingency. The Mississippi PSC and the Mississippi Public Utilities Staff have engaged their independent monitors to assess the current cost estimates and schedule projections for the Kemper IGCC. These consultants are issuing reports with their own opinions as to the likelihood that costs for the Kemper IGCC will remain under the $2.88bn cost cap and as to the expected in-service date, the Form 10-Q noted.

“While Mississippi Power continues to believe its cost estimate and schedule projection remain appropriate based on the current status of the project, it is possible that Mississippi Power will experience further cost increases and/or schedule delays with respect to the Kemper IGCC,” the Form 10-Q added. “Certain factors have caused and may continue to cause the costs for the Kemper IGCC to increase and/or schedule delays to occur including, but not limited to, costs and productivity of labor, adverse weather conditions, shortages and inconsistent quality of equipment, materials and labor, contractor or supplier delay or non-performance under construction or other agreements, and unforeseen engineering problems. To the extent that costs beyond any permitted exceptions to the cost cap exceed $2.88 billion or the Mississippi PSC disallows a portion of the costs relating to the Kemper IGCC, including financing costs, charges to expense may occur and these charges could be material.”

The Kemper County IGCC, expected to be in service in May 2014, will use lignite from an adjacent mine. The mine is scheduled to be placed into service in June 2013. In conjunction with the Kemper County IGCC, Mississippi Power will own the lignite mine and equipment and has acquired and will continue to acquire mineral reserves located around the Kemper IGCC site in Kemper County. The estimated capital cost of the mine is about $245m, of which $127m has been incurred through Sept. 30. In May 2010, Mississippi Power executed a 40-year management fee contract with Liberty Fuels Co. LLC, a subsidiary of The North American Coal Corp., which will develop, construct, and manage the mine. The contract with Liberty Fuels is effective through the end of the mine reclamation.

In December 2011, the Mississippi Department of Environmental Quality (MDEQ) approved the surface coal mining and the water pollution control permits for the mining operations operated by Liberty Fuels. On Jan. 12, two individuals each filed a notice of appeal and a request for evidentiary hearing with the MDEQ regarding the surface coal mining and water pollution control permits. On March 8, the MDEQ permit board affirmed its issuance of these permits.

As of Sept. 30, Mississippi Power had spent a total of $2.1bn on the Kemper IGCC including the cost of the lignite mine and equipment, the CO2 pipeline facilities, and regulatory filing costs.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.