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By Eileen O'Grady

HOUSTON, March 18 (Reuters) - A unit of Southern Co (SO.N) has proposed to cap costs of an advanced coal-fired power plant in Mississippi at $3.2 billion in an effort to satisfy concerns of state utility regulators.

The $3.2 billion cost cap, proposed in filings late last week at the Mississippi Public Service Commission, is 30 percent higher than Mississippi Power Co's current cost estimate of $2.4 billion for the Kemper County integrated gasification combined-cycle (IGCC) power plant.

The cost-cap proposal represents a reversal of strategy by Mississippi Power executives who last month testified that the company could guarantee neither the cost nor performance of the IGCC facility without risking the company's future credit rating and access to capital.

"While Mississippi Power recognizes there are no provisions in the law for cost caps, we also recognize the commission's need and our customers' need for some reasonable assurances against uncontrolled cost increases," the utility said in a statement on Thursday.

The 582-megawatt facility is being designed to burn Mississippi lignite to meet future electricity demand and to give the utility options as it considers shutting or modernizing its aging coal plants to reduce emissions of carbon dioxide, a greenhouse gas blamed for global warming.

State regulators are weighing the risk and rate impact for Mississippi Power's 189,000 customers of building the expensive coal project versus purchasing power under long-term contracts from existing generating plants that burn natural gas, a cleaner fuel but with more price volatility than coal.

A consultant recommended last month that the commission require the utility to assume Kemper's construction cost overruns.

Southern Co's Chief Executive David Ratcliffe told Reuters last week he was hopeful that the commission would look favorably on the cost-cap filing. "We hope we can satisfy them," Ratcliffe said.

Critics of the plan, including independent power generators and the Sierra Club, said the utility is counting on high future natural gas prices to justify the plant's economics at a time when the U.S. natural gas supply is climbing with increased production from unconventional resources, such as shale gas.

"The Kemper project has multiple major risks associated with its construction, operation, and financing and those risks far outweigh the single (and manageable) risk of natural gas price fluctuation," the Sierra Club said in a filing.

The three-member commission is expected to issue a decision in early May.

Given Kemper's high price tag, the facility will not produce savings for customers "for at least 17 years under a high gas scenario" and "never" under a low gas price scenario, said a filing by power producers, Entegra Power Group LLC and Calpine Corp (CPN.N).

Mississippi Power spokeswoman Cindy Duvall said the company's analysis "shows that Kemper is the overall least cost option over a wide spectrum of gas forecasts."

Addressing an energy conference in Houston, Ratcliffe said the nation is moving into a period of rising power prices.

"We must tell customers that the price is going up," Ratcliffe said. "We must strike a balance between reliability, affordability and being cleaner."

IGCC technology heats coal to convert it into a synthesis gas that is processed to remove sulfur, mercury and other pollutants before being sent to a traditional combined cycle power plant to produce electricity.

Mississippi Power has proposed capturing 65 percent of Kemper's CO2 emissions for sale to the oil industry.

Several IGCC projects -- including a proposal in Florida by another Southern Co unit -- have been canceled due to soaring costs and regulatory uncertainty. IGCC projects are moving forward in Indiana and Illinois, however.

Lower gas prices and regulatory pressure prompted Entergy Corp's (ETR.N) Louisiana utility last year to delay a $1.8 billion IGCC project. Dallas-based Luminant suspended a Texas IGCC plan that would have burned lignite, a low-quality coal similar to the fuel the Kemper County IGCC will burn. (Editing by Marguerita Choy)

Sourced from: www.reuters.com