November 26, 2012

MEMORANDUM
Re: Mississippi Power Companys Kemper County Integrated 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

MEMORANDUM
CO2 Pipeline.

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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. 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 AFUDC was estimated and capitalized until the Kemper

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. addition, the plant will also use natural gas as a fuel source. In

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
1 2

Monthly Status Report filed by MPC through May 2012, Docket No. 2009-UA-14. See 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

Order 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.

MEMORANDUM Key Assumptions

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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 the May 2012 Monthly Status Report filed before the Commission in Docket No. 2009-UA-14. The Kemper County IGCC, Mine and CO2 Pipeline capital costs 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 the completion; 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 include AFUDC for the retail customers for 2012 through the in-service date in 2014. An adjustment was made to the plant cost to include the additional AFUDC. A review of MPCs 2011 FERC Form 1 indicates that the AFUDC rates for 2011, 2010 and 2009 were 7.06%, 7.33% and 7.92%, respectively. For purposes of this analysis an AFUDC rate of 7% was utilized. 3. O&M Expense Because of the confidential designation by MPC of Kemper County IGCC cost information, there is no public information available regarding the projected level of O&M expense. However, in the testimony in Docket No. 2009-UA-14, MPC witness F. Sherrell Brazzell provided a cost summary for various base load generation alternatives. That summary contains an estimate for O&M expense of $50-100 million per year for Kemper County IGCC.4 Based on this data, it was assumed that the O&M expense 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 rate of return was utilized to calculate the revenue requirement. The return on equity includes 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 was used. 5. Composite Tax Rate A composite income tax rate of 38.238% was utilized to develop the income tax component of the revenue requirement. This composite rate was provided in Docket No. 2011-UN-135.
4

Direct 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 fee contract with Liberty Fuel Company, LLC to develop, construct and manage the mining operations. This 40-year fuel supply agreement served as a basis for determining the life span of Kemper County IGCC. Because of interim retirement activity that will occur during that 40-year period, the life span was reduced from 40 years to 38 years to develop the book depreciation rates. Generally, average service lives and not life spans are used to develop book depreciation rates. In addition, a net salvage ratio of a negative 10% was also assumed. These depreciation parameters produced a book depreciation rate of 2.89%. The equity component of the AFUDC that was depreciated was 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, in Docket No. 2009-UA-14, MPC witness Frances Turnage indicated that the Company had 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 rate was unavailable. Therefore, to reflect this cost reduction, a property tax rate of 1% was assumed. 8. Tax Depreciation To develop the first-year rate base, it was necessary to estimate the amount 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 being paid 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 the Kemper County IGCC, Mine and CO2 Pipeline will be depreciated utilizing a 15-year tax life with an in-service date of May 2014. The half-year convention was employed for 2014. 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 were allocated to the MPC retail customers. The remaining approximate 28.5% of the costs were allocated to the wholesale customers. This allocation was provided in Docket 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 the Kemper County IGCC and CO2 Pipeline was allocated to the various customer classes utilizing the proposed allocation provided by MPC in Docket No. 2011-UN-135. In that proceeding, MPC was proposing to allocate the CWIP cost associated with the Kemper County IGCC to the various rate classes. For purposes of my analysis, the same allocation was utilized to develop the rate increase associated with the Kemper County IGCC and CO2 pipeline. However, it is my understanding that the Mine cost will be allocated on an energy basis. The energy sales for the rate classes that are contained in the 2011 FERC Form 1 were utilized to allocate these costs. BRUBAKER & ASSOCIATES, INC.

James T. Selecky
James T. Selecky Attachments
9697/228448

Attachment 1

Mississippi Power Company Retail Ratepayer Impacts

Projected 2012 Revenues (000,000)

Total Rev Req Retail Allocation Retail Rev Req Residential Commercial Industrial Other Total

IGCC Plant (000,000) $536.8 71.52% $383.9 $125.5 $135.8 $122.3 $0.3 $383.9

Mine (000,000) $40.1 71.52% $28.7 $6.4 $8.5 $13.6 $0.1 $28.7

CO2 Pipeline (000,000) $25.3 71.52% $18.1 $5.9 $6.4 $5.8 $0.0 $18.1

Total (000,000) $602.2 71.52% $430.7 $137.9 $150.7 $141.7 $0.5 $430.7

Percent Increase

$227.3 $249.5 $262.3 $6.7 $745.8

61% 60% 54% 7% 58%

Residential Commercial Industrial

Projected Annual Average Customers 151,175 33,391 501

Projected 2012 Revenue (000) $227,342 $249,461 $262,260

Projected 2012 Revenue Per Customer $1,504 $7,471 $523,473

Annual
Percent Increase 61% 60% 54% Cost Increase Per Customer $912 $4,513 $282,760

Monthly
Cost Increase Per Customer $76 $376 $23,563

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

Attachment 2

Mississippi Power Company Kemper County IGCC First Year Revenue Requirement
IGCC Plant (000,000) $2,888.0 $0.0 $168.1 $224.7 $3,280.8 $47.5 $35.0 $3,198.3 10.56% $337.7 $66.6 $99.7 $32.8 $536.8 Mine (000,000) $225.6 $19.0 $0.0 $0.0 $244.6 $3.5 $2.7 $238.4 10.56% $25.2 $5.2 $7.3 $2.4 $40.1 CO2 Pipeline (000,000) $140.5 $0.0 $5.2 $8.8 $154.5 $2.2 $1.7 $150.6 10.56% $15.9 $3.2 $4.6 $1.5 $25.3 Total (000,000) $3,254.1 $19.0 $173.3 $233.5 $3,679.9 $53.3 $39.3 $3,587.3 10.56% $378.8 $75.0 $111.7 $36.8 $602.2

Description Plant in Service AFUDC - Mine AFUDC - $173.3 M Additional AFUDC Total Less: Accum Dep Accum Def Tax Rate Base Pre-Tax ROR Return & IncomeTaxes O&M Expense Dep Exp - Rev Req Property Tax Rev Req