Below is the Q&A session. Please note that The Meridian Star’s interview with Holland is not included in its entirety.
QUESTION 1: A hot issue right now is the Supreme Court decision. How is it going to impact you and the future of the plant?
ANSWER: At the end of the day, we and a lot of other people — our customers, the Mississippi Economic Council, the Mississippi Development Authority, and several of the casinos, have filed amicus curiae briefs asking the Supreme Court to rehear the case and to reverse the decision that they made. We were told twice by the Public Service Commission to build the Kemper plant. They made the decision after comparing it (the lignite plant) to about 18 other possibilities, mostly gas plants, and some greenfield plants that would have to be constructed. They looked at all those on two different occasions in extensive hearings and made the decision that Kemper was the best alternative to meet the demands of our customers in south Mississippi and the 23 counties that we serve. We started construction of the plant. We built the plant. We’ve got well over $3.5 billion dollars already invested in the plant. The plant is going to be built. That’s important for everyone to realize. Based on the decision of the commission, for those things that the commission said we ought to recover the cost from the customer, then we ought to be entitled to recover those costs. The Supreme Court case it really is about trying to mitigate, or reduce, the rate impact on the customer to the maximum extent possible. That’s what we are all about, that’s what the commission was all about, when it agreed that we ought to begin to collect the 18 percent that we began to collect in 2013. That’s the $257 million dollars that you read about in the case that we’ve collected thus far. If we are able to keep those dollars then we can keep the rates at a level that today is 18 percent and would go to somewhere in the 24 (percent) to 26 percent range, once the plant comes online. If we are not able to keep those dollars then we estimate the rate impact when the plant comes online to be somewhere in the 35 (percent) to 40 percent range.
QUESTION 2: Will that amount be determined by the PSC?
ANSWER: Yes it will be. That’s what we will ask for. That doesn’t mean that’s what we will get, but based on what we have actually expended to build the plant and for those other items I have talked about. That rate increase is somewhere in the 35 percent to 40 percent range.
QUESTION 3: The cap (on how much ratepayers will pay for plant construction) is still in place at $2.88 billion, right?
ANSWER: The cap is in place and we have honored that cap, but the thing that has been very difficult for people to get and understand … is what the commission did. We said we’ll build it for $2.4 billion but that’s the plant itself — the lignite dryer, the gasifier, the gas clean-up, and the combined cycle, and the total cost of those that we said we would build it for was $2.4 billion, plus a 20 percent contingency and that gets you to the $2.88 billion and that’s where we’ve capped. Everything over that for those facilities, and we have gone over, that’s the $2.1 billion to 2.2 billion that the shareholders of Southern Company have taken on and we have written that off. The total cost is $6.2 billion and if you add $2.8 billion and $2.2 billion, you are at $5 billion. You might ask where is the remaining $1 billion … You’ve got to have a lignite mine to produce the lignite. That was not included in the cap. So those costs are to be recovered from the customer. You’ve got to have a CO2 pipeline that takes the CO2 and gets it to Tellus (Operating Group) or Denbury (Resources Inc.) who are paying us for the CO2 and the revenues are going to go back to the customers to offset the rate impact. That was not included in the capped amount and then you’ve got the financing cost, which is the bigger part of it, and that was not included in the capped amount. When you add those three things up that totals to a little over $1 billion. So the total that the customer is, has, and always has been, responsible for is not $2.8 billion. It’s closer to $4 billion.
QUESTION 4: The estimated total rate increase prior to the Supreme Court ruling was 24 percent. Does the 24 percent rate increase just cover the capped amount?
ANSWER: No, that’s everything. And that’s the point because the costs matter to us. The costs matter to our customers, but what ultimately matters to our customers is how much of a rate increase are they going to see. When we had the plant certified in the beginning and then had it certified again the second time, we estimated that the rate increase when that plant came online would be in the 35 percent range. We told all our customers we are looking at a 35 percent rate increase when the plant comes online and then after that everything that we did was focused on trying to get those rates below 35 percent and make them as low as we possibly could and mitigate the impact on the customers. We were able to do that working with the commission and the Legislature … The accumulation of all those things put us in position to put together a plan that would in fact keep the rates at the 24 percent rather than at 35 percent or what could be upwards to 40 percent.
QUESTION 5: The last time you were here one of the things that you brought up was the volatility of natural gas prices. If you look at just the capped figure of $2.88 billion, you could probably build a natural gas plant for the $.88 billion ($880 million), so your looking at roughly an additional $2 billion (for the lignite plant). You can buy a lot of natural gas for $2 billion dollars can’t you?
ANSWER: Hindsight is a wonderful thing. At the time in 2009/2010 every study out there was showing gas prices going up to $10, $12, $14 bucks (per MMBtu) over a period of time. If anybody at the time had known that they were going to fall to below $3 and stay that way for a period of time, we might have looked at this differently. I still think at the end of the day we probably would have decided to build Kemper and the commission would have decided to have us build Kemper. If you go back and look at our rates from, and this is very important, from 2004 to 2009 our rates went up 55 percent at Mississippi Power Company. You didn’t hear anything about that 55 percent. Since 2009 the gas prices have come back down and we’ve had the Kemper increase, the 18 percent, but between 2009 and 2014 our rates went up 3 percent. Now the 18 percent was offset by lower gas prices and so we made up for that increase. Our rates today are not much higher than they were in 2009, about 3 percent higher than they were in 2009.
QUESTION 6: Just to make sure I have this clear, was the 55 percent rate increase from 2004 to 2009 directly attributed to an increase in natural gas prices?
ANSWER: Of the 55 percent increase, 43 percent was gas prices; 7 percent was Katrina related expenses where we had to totally rebuild our system. And then the other 5 percent was environmental restrictions that were mandated and put on us by the federal government.
QUESTION 7: If you are looking forward 10 to 15 years, or even 20 years, what do your rates look like for Meridian, Lauderdale County and East Mississippi.
ANSWER: It’s hard to project what those might be. The beauty of Kemper is we know what the fuel price out of Kemper will be for the next 40 years and it will be low. It will be lower than gas. Gas, I’ve been proven wrong before, but gas prices would never get as low as the price of lignite out of the Kemper plant. We know what that lignite is going to cost us for 40 years. The thing that the commission was trying to do and that we were trying to do, if we had built another gas plant we could have been as much as 70 (percent) to 80 percent reliant upon natural gas as our source of fuel to produce electricity … Every day we read in the paper where there are more and more restrictions on fracking and the technology that has brought about the revolution in gas. If those prices go from $2 to $4 and then $6 to $8, then our rates are going to just go through the roof. You won’t have that with Kemper. You are going to know what your rates are going to be over a sustained period of time.
QUESTION 8: There are only two major carbon capture plants under construction, one in Canada and the one in Kemper County, because of the excessive cost. People say it’s just too expensive. I read somewhere that you said carbon capture would not work universally, that it works in Mississippi because of the lignite. Is that true?
ANSWER: I did not say that. Our company has said that. The reason we continue to build this plant and that we have put $2.2 billion dollars of shareholder money into this plant that they are not going to get one dime of return on, ever, is because we believe so strongly in this technology. Yes, it is expensive but we think it’s the right thing not only for our customers at Mississippi Power Company but for the state of Mississippi, for this country and ultimately for the world. Coal has to have a place in the energy mix again in this country and in the world. What you have heard is that in order for carbon capture plants to work you need to be in an area where the CO2 can be sold for enhanced oil recovery. Others have acted as though that is only in the state of Mississippi. We’ve got 4 billion tons of lignite in the state of Mississippi. We’ve got lots of it so we could have a lot of Kempers here if we could get the cost to a point where it made sense. We could sell every ton of CO2 that we can produce to Tellus or Denbury or any other number of entities that would like to buy it. There are huge lignite reserves in Texas. There are lignite reserves in New Mexico and Arizona. There are huge lignite reserves in North and South Dakota. There are a lot of places in the United States where there are huge deposits of lignite that you could capture the carbon and put it on the pipeline and sell it for enhanced oil recovery.
QUESTION 9: I know you’ve had officials from China, Afganistan, Pakistan and all over come out and view the plant. Does Southern Company have proprietary ownership over the technology?
ANSWER: Southern Company has a partnership with KBR — Kellogg, Brown and Root. Its a joint venture. We develop the technology at the Wilsonville plant. We’re focused primarily on energy production. They are focused primarily on gas to liquids and gas to chemicals but we jointly own it and we have an agreement depending on what the use is. They will get a little bit more for liquids and we will get a little bit more for electricity production. It is jointly held. It is proprietary to your point. There are huge lignite reserves in China. There are huge lignite reserves in eastern Europe. The eastern Europeans, especially today, who are very interested in this technology because there is nothing that they would like more than to build plants like this and be able to wean themselves off Russian gas and not be so dependent on that and be dependent upon Mr. (Vladimir) Putin for their future.
QUESTION 10: So I’m assuming this is expensive technology and if you sell the expertise involved in the development of these new plants, it is not going to come cheap. Will that roll back into the Southern Company’s stock or how will that work?
ANSWER: It depends on whether you just sell the license and get a licensing fee and then they go build it and they earn the money on it, or whether we joint venture and put some of our own capital in it. All of those possibilities are on the table. But it’s important, I mean this is first of its kind technology and there’s a book out there that I would commend to anybody called “(Industrial) Megaprojects.” And it talks about projects like Kemper and how almost every time the original estimate is far exceeded by the time you get to the end of the project and bring it online. The beauty of where we are today is that we have kept our word to the Public Service Commission and we are not going to charge our customers one dime more than than what we committed we would charge. The rest of that, the $2.2 billion and anything additional that it cost to bring that plant online, is going to be at the expense of the shareholders and that brings it back to the point I made that if Southern Company didn’t believe in this technology and believe strongly in it and that it had a future then we wouldn’t be doing that. Plant number two will be cheaper than plant one. Plant three will be cheaper than plant two. In China, Japan, Europe gas is about $12 to $14 dollars a million even today. And so you could actually cost justify what we’ve got in plant number one, the full cost of $6.2 billion, you can justify that if gas is in the $14, $15 to $16 dollar a million range.
QUESTION 11: I guess where I’m going at, there’s a good chance, especially if it proves to be a viable fuel source, that (through the sale of the technology) Southern Company could recoup the money spent on this project?
ANSWER: It would take a lot of projects to do that but it could.
QUESTION 12: Well its pretty expensive technology …
ANSWER: It is but the licensing fees, and I think in most cases it would just be that, we would license the technology to a utility in let’s say … China or Japan. The Japanese are very interested in the technology. The Indians are very interested in the technology, to your point earlier, just about every country you can think of has been here to take a look at it and we’ve just got to get it up and running and prove that it will work the way that we know it will. The Japanese actually invited one of our folks over there to do a workshop last month on creative technology.
QUESTION 13: So there are quite a bit of partnering energy funds, different things that were invested into this, somewhere between grants and tax credits the plant got somewhere around $700 million dollars. Is that correct?
ANSWER: It’s not that much. No, we got $245 million. That was the actual out right grant, there are other tax benefits associated with production tax credits and investment tax credits that we have taken advantage of and there are some others that are out there that have a possibility of providing additional benefits and enabling us to offset the ultimate cost to the customer and we are doing everything we can to maximize those.
QUESTION 14: There is going to be byproducts created from the plant. Will that help offset the cost?
ANSWER: There’s going to be carbon dioxide, sulfuric acid and ammonia. Those are the three byproducts and we’ve got contracts for all three to take everything that is produced. And the revenues from all three will be used to offset the rate impacts to the customers. We won’t make any money off of it.
QUESTION 15: Do you have any idea how much money the sale of the byproducts will generate?
ANSWER: Between $50 million to $100 million dollars annually. I think that’s right. It depends on what oil prices are.