Utilities, their investors and their lenders want to know whether a Mississippi Supreme Court ruling, mandating Mississippi Power Co. to refund roughly $281 million to ratepayers, represents a concerted blow against construction work in progress cost recovery for large generation projects, or whether it is merely political whiplash against cost overruns on a controversial project employing unproven technology. A close read of the Court's opinion points toward the later conclusion, but stakeholders should still be alerted to the fact that, even where CWIP recovery is permitted, courts and regulatory bodies will push for investors and lenders to bear some project risks, particularly with respect to cost overruns.
In a recent 5-4 split decision, the Mississippi Supreme Court vacated a previously approved rate-increase for Mississippi Power Co. and ordered Mississippi Power to refund all revenues collected under the vacated rate order to its ratepayers, amounting to approximately $281,000,000 under the previously approved rate design. The case is Miss. Power Co., Inc. v. Miss. Public Service Comm'n and Thomas Blanton (No. 2012-UR-01108-SCT) (February 12, 2015).
The decision, particularly the refund order, came as a surprise to many in the industry, as Mississippi had previously joined the growing list of jurisdictions allowing electric utilities to recover generation plant construction costs, including financing costs, throughout the plant construction phase, rather than having to wait until a project is placed in service - commonly referred to as construction work in progress recovery. CWIP is a utility rate setting financing mechanism allowed in certain states whereby the company building the project may include debt and carrying costs in its electric rates while the project is under construction.
I. Mississippi Power's Kemper Project – A Troubled Project
Following a 2010 approval order by the Mississippi Public Service Commission, Mississippi Power began construction on the Kemper County Energy Facility, originally budgeted at $2.2 billion and scheduled for completion in 2014. However, Mississippi Power's most recent MPSC status report projected the cost at $6.172 Billion, with completion in 2016. To put the revised project budget in perspective, the Court pointed out that the Kemper Project will now cost more than the $6.073 billion budget for the entire State of Mississippi for the 2015 fiscal year. Given the unproven technologies involved and the significant cost and schedule overruns, there has been a growing public and political blowback against the Kemper project.
Mississippi Power originally requested approval for the Kemper project under a new rate design, based on Mississippi's Base Load Act (Miss. Code Ann. §§ 77-3-101-109 (Rev. 2009)) which became law in 2009 after intense lobbying by the industry. The Base Load Act allows inclusion of CWIP in a utility's base rates, and permits the utility to earn its allowed return on such costs, "whether or not the construction of any generating facility is ever commenced or completed" subject to a prudency finding by the MPSC. Historically, Mississippi's regulatory scheme disallowed CWIP from base rates on the theory that after a plant is placed into service the utility is made whole, including for capitalized financing costs under so-called "allowed funds used during construction" or AFUDC rate making, and that by requiring existing ratepayers to pay costs that would benefit future ratepayers the utility would obtain double recovery.
III. The Court's Opinion
In the Mississippi Power case, the Court vacated the MPSC's rate order primarily on the grounds that the MPSC failed to examine or rule on the prudency of the CWIP costs, as required under the Act. The Court reasoned that, “by not conducting prudency hearings, the Commission ignored dictates of the Act and thus acted arbitrarily”. The opinion also invalidated a 2013 settlement agreement previously entered into between Mississippi Power and the MPSC, that had allowed Mississippi Power to raise its rates 15% in 2013, and another 3% in 2014, based on CWIP recovery and ordered Mississippi Power to refund revenues collected under those rate increases (the aforementioned $281 million). The Court reasoned that the settlement agreement was negotiated without proper public notice or input, thereby violating statutory restrictions against ex parte communications in contested proceedings.
We read the majority opinion as less of an attack on the concept of CWIP recovery, as allowed under the Act, and more of a reaction to public outcry over the Kemper Project's significant cost overruns and delays. Furthermore, in a concurring opinion, several justices specifically pointed out that the primary purpose of the Act (and CWIP recovery) was to allow a utility to collect construction costs as they are incurred, in order to reduce the overall costs of financing a long-term construction project, which would ultimately benefit ratepayers. Given the narrow scope of the majority opinion and the concurring opinion's nod toward the potential benefits of CWIP recovery (not to mention the four dissenting justices who voted to uphold the rate increase), it seems likely that Mississippi Power may prevail, and the Company has already filed a petition for a rehearing before the Mississippi Supreme Court. Regardless, in its filing, Mississippi Power stated that the court's decision will require a rate increase of up to 40% if the ruling stands rather than the 24% increase under the rate proposed by the PSC.
IV. Key Takeaways
- Create and follow a proportional and reasonable construction budget and schedule with careful documentation of process. In regulated states, when a power plant is completed, the utility requests approval from the Public Service Commission to place the cost of construction in its rate base, which means that the utility begins charging its electric customers for the construction costs. State public service commissions analyze the costs to determine if they were spent “prudently.” If the PSC deems the costs to have been prudent, then they can be passed on to ratepayers. This occurs with or without CWIP.
- When CWIP is allowed, public service commissions exercise even greater oversight and cost control. Costs are audited, reviewed and subject to a prudence determination by the PSC, typically on a quarterly or semi-annual basis. The utility must also demonstrate the economic viability of the project before it even begins construction.
- Regardless of whether CWIP recovery is permitted in a jurisdiction, state public utility commissions and courts will continue to favor ratepayers over investors when there are significant cost overruns and delays on projects.
- Comply with all federal and state regulatory requirements to validate that the utilities’ standards are consistent with all regulatory guidelines.
- Conduct a thorough review of costs to ensure conformance to regulatory requirements and company policies before filing for recovery. Maintaining credibility through the identification of potential adjustments before undergoing commission scrutiny is essential for mitigating financial and reputational risks. Implementing detailed and consistent review testing procedures of cost data and documenting results before submission to the commission will provide greater assurance that all expenses are storm and jurisdictional appropriate and will serve as evidence during any regulatory prudency review undertaken.
- It is critical to strictly follow all procedural guidelines including proper notice of the rate increase request to rate payers as well as making information about the requests public and not confidential
Power Finance & Risk