Ian Urbina /The New York Times – 2016-07-08 00:40:54
Kemper III: Southern Company’s “clean-coal” plant. Mississippi Business Journal
Piles of Dirty Secrets Behind a Model ‘Clean Coal’ Project
Ian Urbina /The New York Times
DE KALB, Miss. (July 5, 2016) — The fortress of steel and concrete towering above the pine forest here is a first-of-its-kind power plant that was supposed to prove that “clean coal” was not an oxymoron — that it was possible to produce electricity from coal in a way that emits far less pollution, and to turn a profit while doing so.
The plant was not only a central piece of the Obama administration’s climate plan, it was also supposed to be a model for future power plants to help slow the dangerous effects of global warming. The project was hailed as a way to bring thousands of jobs to Mississippi, the nation’s poorest state, and to extend a lifeline to the dying coal industry.
The sense of hope is fading fast, however. The Kemper coal plant is more than two years behind schedule and more than $4 billion over its initial budget, $2.4 billion, and it is still not operational.
The plant and its owner, Southern Company, are the focus of a Securities and Exchange Commission investigation, and ratepayers, alleging fraud, are suing the company. Members of Congress have described the project as more boondoggle than boon. The mismanagement is particularly egregious, they say, given the urgent need to rein in the largest source of dangerous emissions around the world: coal plants.
The plant’s backers, including federal energy officials, have defended their work in recent years by saying that delays and cost overruns are inevitable with innovative projects of this scale. In this case, they say, the difficulties stem largely from unforeseen factors — or “unknown unknowns,” as Tom Fanning, the chief executive of Southern Company, has often called them — like bad weather, labor shortages and design uncertainties.
Many problems plaguing the project were broadly known and had been occurring for years. But a review by The New York Times of thousands of pages of public records, previously undisclosed internal documents and emails, and 200 hours of secretly though legally recorded conversations among more than a dozen colleagues at the plant offers a detailed look at what went wrong and why.
Those documents and recordings, provided to The Times by a whistle-blower, an engineer named Brett Wingo, and interviews with more than 30 current or former regulators, contractors, consultants or engineers who worked on the project, show that the plant’s owners drastically understated the project’s cost and timetable, and repeatedly tried to conceal problems as they emerged.
The system of checks and balances that are supposed to keep such projects on track was outweighed by a shared and powerful incentive: The company and regulators were eager to qualify for hundreds of millions of dollars in federal subsidies for the plant, which was also aggressively promoted by Haley Barbour, who was Southern’s chief lobbyist before becoming the governor of Mississippi.
Once in office, Mr. Barbour signed a law in 2008 that allowed much of the cost of building any new power plants to be passed on to ratepayers before they are built.
Seeing so many of the problems from the inside, at least one employee felt the need to speak up.
“I’ve reached a personal tipping point and feel a duty to act,” Mr. Wingo wrote in a 2014 email, which was among several that he sent to officials of Southern Company and Mississippi Power, the state utility that runs the plant, alleging that the company had broken federal law and engaged in corporate fraud. “Hope is not a strategy,” he added. “This is a high-profile project with many misguided enemies, so why give them free ammo?”
In their recorded conversations with Mr. Wingo, at least six senior engineers from the plant said that they believed that the delays and cost overruns, as well as safety violations and shoddy work, were partly the result of mismanagement or fraud.
“It has nothing to do with the design, it has nothing to do with the technology, it just has to do with poor project management,” Landon Lunsford, an engineer at the plant, said during one recorded call with Mr. Wingo last December, when they discussed an email from Southern’s legal department telling senior employees to retain all emails because of a continuing S.E.C. investigation.
The company will never admit the project-management problems because they will attract more scrutiny from regulators, Mr. Lunsford said. “As long as they can talk away the results as attributable to something else other than just poor performance, the other public service commissions can’t hold them over the fire as much,” he added.
Officials from Southern Company and Mississippi Power, which is a Southern subsidiary, said that they could not comment on Mr. Wingo’s allegations but that all decisions about cost and budget projections were made by consensus.
They also said that Mr. Wingo’s accusations had previously been investigated by the company and could not be substantiated. Mr. Wingo was fired in February, a move that the Occupational Safety and Health Administration later ruled illegal.
Ed Holland, the former chief executive of Mississippi Power, added that one of the project’s biggest mistakes was to start construction with little of the plant designed. “We still believe that from our investors’ standpoint, this was a wise investment to prove the technology,” he said in an interview.
In the end, the Kemper project is a story of how a monopoly utility, with political help from the Mississippi governor and from federal energy officials who pressured state regulators in letters to support the project, shifted the burden of one of the most expensive power plants ever built onto the shoulders of unwitting investors and some of the lowest-income ratepayers in the country.
Kemper’s rising price tag and other problems will probably affect the Environmental Protection Agency’s proposed rules on new power plants, and also play into broader discussions about the best way to counter climate change. EPA regulations in effect require new coal plants to have carbon capture technology but are being held up in federal court partly by arguments that the technology is not cost-effective.
The importance of this technology grows, as well, after President Obama said last week that the United States would join Canada and Mexico in pledging to reach a shared goal of generating 50 percent of North America’s electricity from zero-carbon sources by 2025, up from 37 percent today, with a power mix that includes wind, solar, hydropower, nuclear energy and coal or gas power paired with carbon capture technology.
“The big question with clean coal has always been whether it’s a moonshot or a money pit,” said Charles Grayson, the director of the Bigger Pie Forum, which advocates fiscal conservatism in Mississippi and has been critical of the Kemper project for years. “The Obama administration and my state made a really bad wager in trying to use Kemper to make the economic argument for this technology.”
Coal represents a conundrum: It is among the dirtiest sources of fuel, producing roughly 45 percent of the emissions that contribute to climate change. And yet the world still relies on it for power, with more than a quarter of the electricity used globally coming from coal plants.
Southern Company proposed a promising idea with the Kemper project. Providing a cleaner way to use coal, which is cheap and abundant in the United States, the plant also offered the means to preserve many coal-mining jobs that are fast disappearing in this part of the country.
Kemper County, with mostly two-lane roads cutting through clay hills and pine forest, has an average per capita income of $14,837 and an unemployment rate roughly double the national average. To the region, the plant offered more than clean power: It promised hope, at least 12,000 jobs and long-term savings.
As construction ramped up, the county took in over $8 million annually in extra tax money, which went toward repairing roads, bridges and schools, lowering local property taxes, and clearing debt.
In the summer of 2005, as Hurricane Katrina toppled drilling rigs and uprooted pipelines in the Gulf of Mexico, the price of natural gas rose by more than 40 percent. In Mississippi, utility regulators saw the Kemper plant as a way to diversify its energy options in a state that relies on natural gas for nearly 80 percent of its electricity.
The plant, which broke ground in 2010, would run on lignite, a type of coal that is difficult to process but is plentiful in the region. Most of the carbon dioxide produced by the plant would be captured, compressed, sold and piped to oil fields. There, it would be pumped underground in a process known as enhanced oil recovery, to help push up previously unrecoverable oil to levels where it could be reached.
Though carbon capture technology is proven and widely viewed as a potentially important tool to slow global warming, the question has been whether it can be scaled up affordably.
Before becoming governor, Mr. Barbour helped orchestrate the transfer of about $270 million in federal subsidies from a canceled coal plant in Florida to the proposed Mississippi plant.
As governor, Mr. Barbour then signed the Baseload Act, which shifted much of the cost and risk of building power plants from investors to consumers, and allowed utilities such as Mississippi Power to charge ratepayers for projects before they were completed.
Carbon capture has been considered a holy grail for decades. For Ronald Reagan, it was a solution to acid rain; for Bill Clinton, an alternative to nuclear power. George W. Bush billed his FutureGen project as the world’s first zero-emissions coal plant but mothballed it when it became too expensive.
As the emphasis on fighting climate change grew, the Obama administration hung many of its hopes on Kemper. Gina McCarthy, the E.P.A. administrator, cited federal support for the project as proof that her agency was not anti-coal, despite strict new rules on power-plant emissions. The Energy Department repeatedly wrote state regulators emphasizing the importance of the project.
By 2012, though, “Miss Power,” as locals called the state utility, was facing mounting criticism about the plant. In May of that year, after the utility said that the Kemper project was $366 million over budget, it announced a plan to raise its customers’ rates by 13 percent.
Campaigning for a seat on the Mississippi Public Service Commission, Thomas A. Blanton, an opponent of the project, ran television ads featuring an older woman eating dog food and warning of sacrifices that poorer people sometimes make to afford electricity.
In cramped trailers where some of the poorest people in the state live, summer temperatures topped 110 degrees — potentially deadly for older residents who could not pay to keep their air-conditioning running.
“You don’t want to pay to build my home, and I don’t want to pay to build your plant,” John Gooding, a cabinetmaker from Bay St. Louis, who lost his home in Hurricane Katrina, said during a public hearing about the rate hikes. “Some people are still living in trailers, and now you want to build a plant you can’t guarantee.”
Other critics piled on. Environmentalists called the plant the “Solyndra of clean coal,” a reference to the heavily subsidized but failed federal solar project. They asked whether the plant’s climate change benefits were overstated because the carbon it would capture from coal was going to be used to pump more oil.
Why was Kemper being cited as a model worthy of replicating, they asked, given that other plants would not share one of Kemper’s main advantages: a plentiful supply of cheap coal nearby.
Alleging that Southern Company and Mississippi Power had overstated the plant’s cost-effectiveness, the Bigger Pie Forum sued to unseal project records. To help make their case that the Kemper plant would be competitive with natural gas, which is coal’s main competitor, utility executives predicted to investors and regulators that the per-unit price for natural gas would be higher than $11 by 2016. But gas remains less than $2 per unit, undermining the business case for the plant.
The project did create jobs, but Mark Klinedinst, a retired economics professor from the University of Southern Mississippi, said that more were lost in the region as businesses laid people off to pay for the higher electrical bills caused by Mississippi Power rate increases from plant construction. The University of Southern Mississippi also raised annual tuition $236 per student, partly to offset its additional $1 million in higher electrical costs, he said.
Mr. Wingo, 48, had lived paycheck to paycheck for years, working at small, struggling engineering firms. When he was hired in 2007 by a subsidiary of Southern, it was a big step up. He doubled his salary to become a midlevel manager to help oversee scheduling and some design decisions on a project that he believed would make history.
Before long, Southern began flying him around the country to explain the project to others. He received glowing performance reviews and was awarded an annual $2,000 “Southern Excellence” employee award.
By 2012, though, Mr. Wingo had begun his transition to whistle-blower. About two weeks after state regulators renewed the license for the project to continue, Mississippi Power admitted to regulators that it had concealed cost overruns of about $366 million.
In increasingly testy meetings and emails over succeeding months, Mr. Wingo told his supervisors that other scheduling information that Mississippi Power and Southern Company were providing to the public was infeasible and misleading.
Ed Day, Mississippi Power’s chief executive at the time, tried to tighten control over what was shared. “I would like to remind everyone ‘again,’ no numbers, schedules, or information in general should be communicated to external parties until I review it/them first,” Mr. Day wrote in an Aug. 8, 2012, email to senior staff.
Others shared Mr. Wingo’s growing concerns. Tom Theodore, a scheduling consultant who worked on the Kemper project for about eight months in 2012, described the company’s stated schedule as little more than “a pretty picture to show everybody that we’re all doing wonderful as opposed to what reality showed on the ground.”
I would like to remind everyone “again”, no numbers, schedules, or information in general should be communicated to external parties until I review it/them first . . . . . . . no speculation, no estimates, no forecast, etc.
Email by Ed Day, former C.E.O. of Mississippi Power, to top company officials, Aug. 8, 2012
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His predecessors had altered the software so it no longer automatically adjusted the final price and completion date to reflect problems as they emerged, he said.
Greg Zoll, who had been hired by the state to be the project’s independent monitor, also grew skeptical. While engineering expenses and purchases went up, reported construction costs went down and scheduling timelines were shortened.
“These trends are illogical,” he wrote in of one of a series of highly critical reports that he filed with regulators from 2012 to 2014. Documents show that in a rush to qualify for federal subsidies, Mississippi Power started construction with less than 15 percent of the plant designed, Mr. Zoll told regulators.
Mississippi Power rejected Mr. Zoll’s criticism, responding that the delays were caused by glitchy software and shifts in design, and that the company was absorbing most of the additional costs.
But Brandon Presley, now the chairman of the Mississippi Public Service Commission, which regulates utilities, said that the project was troubled from the start and he voted against it. “The train left the station,” he said, when, in a rush to qualify for millions of dollars in federal subsidies, the commission approved the project.
He added that the problem was not the federal subsidies, which are necessary to develop innovative technology, but the failure by all parties to slow down and ask enough questions.
On May 20, 2013, Mr. Day abruptly stepped down as chief executive. His replacement, Ed Holland, told regulators that Mr. Day had directed or allowed employees to withhold from regulators documents about cost overruns.
That sparked public outcry because the information was withheld from the commission while it was deciding whether to reapprove the project. “I will see that it never happens again,” said Mr. Holland, according to news articles at the time.
BREI evaluated MPCo/SCS management decisions after construction began to incur additional costs as they attempted to maintain the original commercial operation date (COD) and compressed schedule in the face of mounting evidence that it was not achievable . . . .
Greg Zoll, independent monitor for the Mississippi Public Service Commission, April 15, 2014
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An Internal Battle
In February 2014, an argument erupted at the plant. Engineers told upper-level managers that the company should not promise to regulators and investors that the project would be done before the end of the year, emails and recorded calls show. Weeks later, the company did so anyway.
The next day, the owner of the project’s scheduling firm sent an email saying that he could not in good conscience continue to work on a project that did not “fairly and accurately represent the work that still remains.”
Mr. Wingo wrote in a subsequent email to an official at PricewaterhouseCoopers, an auditing firm that was helping to manage the project, “This has really put the entire project at a crossroads.” The other engineers in his division were in “utter disbelief” that the company had published a false schedule, he added.
On March 10, Mr. Wingo called Mr. Fanning, the chief executive of Southern Company, to ensure the message reached him. “I’m glad you brought this to me,” Mr. Wingo said Mr. Fanning told him. “I plan to get to the bottom of this.”
Kemper’s estimated cost has increased by $2.1 billion, or 70 percent, since the Commission issued a Certificate in 2010. Increases in the cost of building Kemper were inevitable, foreseeable and, in fact, were foreseen. However, the Company failed to heed, and, indeed, affirmatively rejected the warning signs . . . .
Sierra Club testimony to the Mississippi Public Service Commission, March 14, 2014
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Instead, Southern Company and Mississippi Power focused in subsequent months at least as much on damage control as they did on rooting out wrongdoing.
In meetings, Mr. Wingo and other engineers said that they were told by plant managers that they needed to present an optimistic timetable for the project or the utility risked “financial Armageddon” of lost tax subsidies, spooked investors, possible bankruptcy, and harsh criticism from the news media, regulators and lawmakers.
After Mr. Wingo provided company officials with a binder of documents corroborating his allegations, he said he was ordered to stop sending emails on the matter because they could become public through litigation.
After he told his manager in an email that most project engineers agreed that the plant could not be completed by 2014, the manager continued telling executives that “to a man” all of the plant’s engineers thought that finishing by 2014 was feasible, Mr. Wingo said, and Mr. Lunsford, the engineer at the plant, reiterated in a recorded call that the manager’s comment was false.
Mr. Wingo, who began speaking to reporters, refused an offer of roughly $975,000 from the company to keep quiet, according to interviews and court records related to his whistle-blower claims. Southern was then granted a restraining order, later dropped, forbidding him from speaking publicly about the plant, court records show.
Mr. Wingo said that he began recording his phone conversations in August 2014, hoping to protect himself. During those calls, at least two of Mr. Wingo’s colleagues said that they strongly disagreed with what one of them called “his grand conspiracy.” A half-dozen other engineers told Mr. Wingo that they shared his views.
The Times contacted each of the engineers whose conversations were recorded and shared by Mr. Wingo. All declined to comment.
The recordings include commiseration among colleagues, and ambivalence from engineers who vacillated between criticizing and defending the project. They include typical workplace grousing about bosses who workers say are in need of “Viagra for the brain” and are incapable of running even a Popsicle stand.
They also reveal an internal struggle that Mr. Wingo faced: While still a believer in the possibility of clean coal, he was uneasy to find himself on the same side as environmental groups that oppose fossil fuels.
“My enemy’s enemy is not necessarily my friend,” he said in one recorded conversation in February 2015.
You seem to know enough people to break down the silos. I’m asking for your help to fix a pervasive cultural problem in our organization before it can cause real harm to Kemper and our company. I challenged this culture to prevent breaking federal laws and our name from becoming synonymous with cheating and lying to customers and investors.
Email by Brett Wingo to the Southern official Helen R. Nalley on June 10, 2014
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What troubled the engineers most was the poor quality of work: leaking gaskets, cracked ductwork, and pipes missing inspection records, valves and supports. Ryan Brown, a plant engineer, said during a phone call that he was having to “go back and do some sort of repair or rebuild” for every piece of work handed to him by the plant’s construction teams, which were under intense deadline pressure.
In a call on Aug. 22, 2014, Mr. Wingo confronted one of his superiors, Brett Wingard, about photographs covertly taken by an inspector who was concerned about defective pipes at the plant. Mr. Wingard dismissed the threat, saying that the pipes were only in a section of the plant not yet in operation (part of the project is running on natural gas already). GPS information in the images indicates otherwise.
Other workers recounted in phone calls to Mr. Wingo that they had discovered a large section of outdoor exhaust pipe that was glowing cherry red one night in September 2014 because 1,400-degree gases were misdirected through it. “That’s so bad that it made people all over the company stand up and say this is ridiculous,” Mr. Lunsford said in an October call with Mr. Wingo.
Several co-workers warned Mr. Wingo against being “a martyr.” One engineer, Donald Falletta, told him in a phone call that jumping on a grenade “when there ain’t nobody else in the damn room don’t save nobody.” In a call six months later, Mr. Falletta added that he too believed that managers were being “told to lie” about the pace of progress.
In February 2015, Southern sued Mr. Wingo, alleging that he had agreed to a settlement but failed to comply with its terms, which included keeping quiet about the plant. Mr. Wingo said that he never signed or agreed to any settlement.
Tim Leljedal, a spokesman for Southern Company, added that Mr. Wingo’s allegations had been thoroughly investigated by the company and by outside counsel and were found to be unsubstantiated. He added that with any project of this scope, detractors are inevitable.
Shortly after the lawsuit was filed, Mr. Wingo’s colleague, Robert Adams, called him to say that he was leaving the company and to ask whether he would be legally allowed to speak publicly about the plant at that point. “Once we resign, do you think they will try to silence us?” asked Mr. Adams, who left the company shortly thereafter.
In March, the company dropped its case against Mr. Wingo. “Hug that wife,” Donald Falletta said in a phone conversation congratulating Mr. Wingo. “She’s been through a damn roller-coaster ride.”
The utility was on a roller coaster, too. In February 2015, the state Supreme Court ruled that Mississippi Power had to repay ratepayers roughly $377 million for increasing rates by 15 percent in 2013 and 3 percent in 2014 without proper approvals. Utility officials responded that the requirement would bankrupt it, and several months later persuaded regulators to approve a new increase, 15 percent.
Meanwhile, engineers discussed the pressure to hurry construction. One of them, Brent Duncan, recounted in a phone call that he told a scheduling contractor how discouraged he was that managers were being allowed to “screw” with the schedule and “then claim they can meet all these dates, and there’s no way.”
The engineers joked that Mississippi Power, eager to show progress to investors and regulators, overstated certain milestones. For example, it bragged of achieving the “first fire,” which involves the lighting of the gasifier, when what they did fell far short of the actual definition, according to Mr. Wingo.
“We burned natural gas in a pilot” light, Brandon Davis, an engineer, said during one phone conversation. “I accomplish that every day in my garage.”
Some engineers wondered aloud whether accurate information was making it to the top. “By the time the message gets to Tom Fanning,” Mr. Lunsford said in a September 2015 call, “it’s so muddled and messed up that he’s not even hearing the truth.”
In March, the Occupational Safety and Health Administration alerted Southern that it had violated whistle-blower protections. The agency rejected the company’s claim that it was justified in firing Mr. Wingo because he could “not be trusted to support the chain of command.”
Mr. Wingo filed his whistle-blower claim against Southern Company under the Sarbanes-Oxley Act. While that law does not lead to paying a cash bounty to successful whistle-blowers, Mr. Wingo declined to say whether he has also filed a claim with the S.E.C. under the Dodd-Frank Act, which does pay awards for successful cases.
In April of this year, Southern informed the S.E.C. for at least the eighth consecutive month of a new delay and cost overrun, this time for $60 million, bringing the total spent on the Kemper project to about $6.7 billion. In May, the Obama administration said that it planned to cut spending on clean-coal technologies by 3 percent in next year’s budget.
Supporters of carbon capture say that Kemper’s problems are not representative of the entire industry, and that one part of the plant — the gasifier that converts cheap coal into synthetic gas — is primarily causing the delays. But critics say that the principal challenge of carbon capture is cost, and that the gasifier’s ability to use cheap coal has always been advertised as key to making the project affordable.
As Mississippi Power and Southern Company have continued struggling to bring the plant online, Southern has repeatedly promoted in calls to investors its plans to help offset the project’s cost by selling the carbon-capture technology abroad.
For now, Mr. Presley, the chairman of the Mississippi Public Service Commission, says he is taking a wait-and-see approach, hoping that when and if the plant finally comes online, it works as promised.
Mississippi Power has said that every month of delay adds more than $20 million to the overall cost, but it will charge customers for extra costs from the plant only with approval by the commission.
Mr. Presley will eventually have to grapple with what he called the “awful task” of not pushing the utility into bankruptcy while determining how much electricity customers, taxpayers and investors should pay for the billions of dollars in cost overruns.
Susan Beachy contributed research. Follow Ian Urbina on Twitter and Facebook.
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