New Fraud Allegations Emerge at Troubled 'Clean Coal' Project As Southern Co. Records Multi-Billion Loss


Southern Co. is accused of fraudulently misrepresenting the prospects for its troubled “clean coal” project in Kemper County, Mississippi in several legal filings this summer.

Southern announced in late July that it was shuttering the troubled “clean coal” part of Kemper after construction ran years behind schedule and the company spent $7.5 billion on the 582 megawatt power plant — over $5 billion more than it first projected.

In a lawsuit filed today, Brett Wingo, a former Southern Company engineer, alleges he warned the company’s top executives that it would not be possible to meet key construction deadlines. Management responded by retaliating against him, the complaint asserts, and Southern continued to assure investors and the public that Kemper’s schedule and budget targets would be met, then blamed unpredictable factors like the weather when those goals were missed.

Wingo’s claim that Southern misled investors by concealing construction-related problems drew national attention in a front page New York Times investigation last year. In January, the U.S. Occupational Safety and Health Administration (OSHA) concluded that Wingo had suffered a “continuing pattern of retaliatory treatment” and ordered Southern to reinstate Wingo, but the company has refused, according to a statement accompanying the lawsuit. (The case is “Brett Wingo v. The Southern Company, et al.,” Case No. 2:17-cv-01328-MHH in the U.S. District Court for the Northern District of Alabama, Southern Division.)

A second less-noticed legal filing with Mississippi state regulators accuses Southern of misrepresenting Kemper’s prospects right from the outset, before construction even began. Those claims center on Southern’s projections for what it would cost to operate and maintain the plant once it was up and running, which the filing asserts were so low they were “indefensible”.

In an email to DeSmog, Wingo seconds those claims, saying that he believes management knew back in 2012 that its “operation and maintenance” (O&M) projections were off — but kept the accurate numbers under wraps for years.

“By hiding the true O& M costs for so long, apparently since 2012 and likely longer, Fanning basically ensured shareholders would be forced to absorb $6 billion in losses,” Wingo told DeSmog.

“In 2012, sunk costs on Kemper were only around $1 billion and the natural gas part of the plant substantially complete. It would have been a perfect time to stop a runaway train from running off the end of the tracks,” he added. “But history shows, that’s not what Fanning and Southern Company chose to do.”

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Market Swings?

If you ask Tom Fanning, the CEO of Southern Co., what went wrong with his company’s attempt to build a “clean coal” power plant in Kemper County, Mississippi, he’ll tell you Southern actually succeeded in building that plant.

“We committed to build a clean coal facility that would have a carbon footprint equal to or less than natural gas,” Fanning told Bloomberg News last Wednesday, the day that Southern announced it was taking a new $3.012 billion loss on the Kemper project. “We fulfilled that commitment.”

It just turned out the market changed, Fanning argued.

“We built the plant, but in the meantime, natural gas prices fell. At the time we started building the plant, natural gas prices were around $10 per million BTU [British thermal units]. Today they’re around $3 per million BTU,” he explained. “As a result, the project became uneconomic and our regulator in Mississippi issued some guidance that basically said that they would not allow recovery of those costs.”

What Fanning failed to mention was that when Kemper was first on the drawing board, it was supposed to cost $1.8 billion to build — but after years of missed deadlines and budget overruns, the price tag for building Kemper had climbed more than $5 billion, to $7.5 billion, making Kemper the most expensive fossil fuel power plant ever built in the U.S.

Talking to Bloomberg Wednesday, Fanning also never mentioned the word “fraud.”

That omission was notable, in part because company records, recorded conversations, and other materials provided to The New York Times last year by Wingo, a former Kemper engineer turned whistleblower, suggest that Southern’s top management may have deliberately deceived investors about Kemper’s prospects, claiming in public that they could meet targets that the company’s own managers said privately were impossible.

The documents “show that the plant’s owners drastically understated the project’s cost and timetable, and repeatedly tried to conceal problems as they emerged,” The Times reported.

Last May, the Securities and Exchange Commission (SEC) launched an investigation into those concerns. Shareholder lawsuits and litigation from power customers concerned about higher electric bills followed.

Southern Co. and its subsidiary Mississippi Power Co. have previously rejected Wingo’s allegations of wrong-doing and said that the companies’ own investigations and one by “outside counsel” found Wingo’s claims were without merit. A Southern Co. press representative had not responded to a request for comment on Wingo’s new lawsuit, nor to questions about O&M costs, as of press time.

State utilities regulators are currently negotiating with the company over exactly how much money power customers in Mississippi, whose population is roughly 40 percent people of color and had the highest poverty rate in the U.S. last year, will be asked to cough up to pay for Kemper. Southern has absorbed roughly $6 billion of the project’s costs as losses, as of its August 2 earnings call.

The second, new allegation of fraud suggests that Kemper may have been ill-conceived even if gas prices hadn’t dropped — and even if construction costs were kept under control.

“This thing just had so many shortcomings that if the first thing didn’t kill it, the next one would have,” Charles Grayson, an expert witness whose testimony on Kemper is cited in the legal filing, told DeSmog.

Related DeSmog content: ‘Clean Coal’ Officially Dead in Mississippi as Southern Company Battered by Kemper Fallout

Buried Billions

“Southern and Mississippi Power Company misled the Public Service Commission when they predicted that the plant’s annual Operations and Maintenance cost would be $50 million,” alleged a motion filed by Thomas A. Blanton, a long-time opponent of the project, on June 19.

Last fall, Southern Co. revealed that the costs to operate and maintain the plant, known in the industry as O&M costs, would actually be over $200 million a year, the motion points out.

“In fact, the latest O&M numbers show that just staffing the plant with Southern Company personnel will cost well over $50 million per year,” the motion says. “Given that fact alone, the Company knew or should have known that presenting $50 million as a meaningful assessment of how much the plant would cost to run per year was indefensible.”

The same people at Southern Co. who prepared the allegedly fraudulent construction cost estimates also prepared the O&M cost estimates, Wingo told PBS in an @Issue episode that aired Sept. 9, 2016.

“I don’t think the economics for this plant were ever true,” Wingo, who was fired in February 2016 after raising concerns to top Southern management, said. “I don’t think they were real.”

Wingo said that after he realized the O&M projections and the cost projections were prepared by the same individuals, he sat down and checked the O&M numbers himself — and came back with numbers more than six times what Southern was projecting.

“It was an absolute shocker to sit down and run the numbers,” he wrote, describing how power bills would need to climb an average of more than $1,500 a year in one of the country’s lowest-income areas to cover those maintenance costs alone, if Kemper were used as a coal plant, “but it was undeniable.”

Wingo said in an email that he believes company managers were alerted to the problem back in 2012 — four years before the company publicly revised its O&M estimates from an initial $50 million a year to over $200 million a year.

“Just recently, I talked to a high level manager who I know, but whom I promised not to name, who told me that the O&M costs the company finally admitted to on October 3, 2016 had actually been calculated in 2012,” Wingo said. “This person, who I knew to be a good, effective and ethical manager, told me he saw the new O&M numbers in 2012.”

“He told me that he knows these new O&M numbers were communicated up the chain of command to higher management,” Wingo wrote, “but not reported to the public or to regulators.”

Those annual O&M costs will add up over the decades when a power plant is in service, turning tens or hundreds of millions of dollars each year into billions of dollars total. This means that the O&M hikes could be at least as important as the company’s construction cost over-runs, close observers of the project say. But while the billions Southern poured into construction made national headlines, relatively little attention has been paid to the O&M estimates.

Kemper should be considered finished, Fanning said in last week’s earnings call, because Southern had “demonstrated every major facet” of the complex power plant. But the plant has never been able to fully operate commercially on coal and has been burning natural gas instead.

Nonetheless, Kemper’s “clean coal” equipment already needs some major maintenance.

On June 5, Southern revealed in an SEC filing that critical equipment for the coal-fired part of the plant had already sprung leaks. Fixing those leaks would also require ripping through a dense labyrinth of steel pipes, so that the malfunctioning equipment could be accessed, adding up to two years of additional work at a cost of $164 million.

Devil in the Details

The Energy Information Administration (EIA) is the federal agency charged with providing accurate and independent information about energy to the public — but that can be especially challenging when dealing with new and emerging technologies.

Jeff Rissman, head of modeling at Energy Innovation, which promotes clean energy, said that compared to the EIA‘s 2008 or 2009 figures on what a generic carbon capture project might cost to operate and maintain, $50 million a year wouldn’t have seemed too badly out of line.

“$50 million is actually quite close to what EIA would have projected at the time the project was under development,” he said.

But Rissman also noted that Kemper used markedly different technology than the EIA‘s theoretical plants. For example, Kemper uses “gassification” technology instead of burning solid chunks of coal, included two gassifiers rather than the EIA‘s one, and captured a different percentage of carbon emissions — all of which could have raised or lowered the expected price tag.

That lack of reliable independent data spurred Grayson, director of the Bigger Pie Forum, which advocates for fiscally conservative policies in Mississippi, to build his own detailed computer model of Kemper so he could check the company’s costs projections back in 2012.

“We had already suspected just from the size of the plant and that sort of thing, we had come to the conclusion that gee, this just wasn’t realistic,” he said. His numbers kept on coming back a far cry from what Southern was telling regulators.

“They just didn’t go together,” Grayson said. “The O&M was one of those things that from very early on, we were looking at it and saying you cannot maintain that kind of plant and that kind of equipment for that price.”

And as Kemper’s overall price tag grew from less than $2 billion to more than $7 billion, the projections for maintenance costs seemed to lag. It wasn’t until last October that Kemper managers first told regulators that the plant’s O&M costs would be over a billion dollars in its first five years online.

If Kemper ever does go into full service, Grayson said, his independent analysis concluded that the O&M costs could prove as high as $400 million or more a year — roughly double Southern’s October projections and eight times as much as Southern Co. originally predicted.

Southern Co.’s spokesperson did not respond to questions from DeSmog about Kemper.

The Securities and Exchange Commission also declined to comment on its Kemper-related investigation.

Decisions Decisions

Back in 2010, Mississippi regulators had to choose between Kemper’s “clean coal” promise or other options, like a regular natural gas power plant.

The new allegations call into question whether they got reliable information as they made that decision.

For example, in 2009, a Southern Co. official testified that Kemper’s O&M costs were expected to run between $50 million and $100 million, while an all-natural gas option, Plant Sweatt, was projected to cost $30 million to $50 million to run, the records show. That means there’s an overlap between the low cost estimate for Kemper — which includes not one but two coal gassifiers, plus carbon capture equipment and a natural gas combined cycle power plant — and the high cost estimate for the stand-alone natural gas combined cycle Plant Sweatt.

“Certainly you have to ask yourself why Plant Sweatt and Kemper had an overlap,” Grayson said.

The next year, Southern Co. chose to use the lower $50 million estimate as it presented Mississippi regulators with the math comparing Kemper against other projects in a January 5, 2010 decision matrix.

A Southern Co. press representative failed to respond when asked by DeSmog about the company’s justification for presenting the low-end $50 million figure.

The company has previously denied that Wingo’s allegations of mismanagement and fraud had any merit. “The investigations into Wingo’s concerns both reached the same conclusion — that his concerns were unsubstantiated and not otherwise supported by the facts,” the company said in a statement after The New York Times piece ran.

Michael Avenatti, a plaintiff’s attorney, who is suing the company on behalf of a group of Mississippi power customers, said that the O&M issue could prove significant.

“There’s no question that operation cost projections provided to the state would have been relevant to the original approval, and to any subsequent rate increase they were pushing for,” Avenatti said. “I think it’s further evidence of the deception that went on here, which I think is criminal, quite honestly.”

Spending Money to Make Money

Why would a company want to build a power plant that’s too expensive to run? Part of the answer, critics say, is the way that utilities like power companies are regulated.

Because they are essentially regulated monopolies, the laws governing how utilities like power companies make money are different than most industries, as explained in a  2015 Wall Street Journal article titled “Utilities’ Profit Recipe: Spend More.”

“[U]tilities have another incentive for heavy spending; It actually boosts their bottom lines — the result of a regulatory system that turns corporate accounting on its head,” The Journal reported, explaining that as long as state-level regulators sign off on a project, regulated utilities get a fixed percentage of what they spend as a profit.

If that fixed rate is 5 percent, then for every $100 that a utility company spends on approved construction, they can make a nearly guaranteed $5 in profit.

That’s part of the reason that a big expensive project like Kemper would have been so attractive to Southern Co. even as the construction bill grew, according to project opponents.

“Within reason, so they don’t get a disallowance for imprudence, the utilities like spending money,” said David Schlissel, an energy consultant who testified for the Sierra Club against Kemper in 2009. “Spending increases their profit because their profits are percentage-based.”

Clean Coal?

Kemper was supposed to be an engineering feat, able to turn the world’s least efficient but most abundant form of coal, lignite coal, into a climate-friendly fuel. That’s “climate friendly” as compared to the kind of coal-burning power plants upon which the U.S. has historically relied for the bulk of its electricity.

Lignite coal, which tends to be damp, would be turned into a synthetic gas, and then the carbon dioxide from burning that “syn gas” would be captured and sold to oil companies, which use that carbon dioxide (CO2) to help revitalize old oil wells. To save on transportation costs, the lignite at Kemper would come from a strip mine right on site, riding a massive conveyor belt up to the plant.

To transport water, syn gas, natural gas, captured carbon, sulfuric acid, and other ingredients consumed or produced by the plant, the project includes nearly a million linear feet of piping. Sitting on 2,900 acres, Kemp required over 100,000 cubic yards of concrete, plus 40,000 tons of structural steel to build. It was designed with enough advanced technology that engineers describe it as more closely related to a chemical refinery than a standard coal power plant.

On July 6, Mississippi regulators issued an order that effectively put the brakes on Kemper’s coal project, signaling a start to settlement negotiations between the state and company and threatening to revoke Kemper’s permits if necessary.

Days later, Southern Co. announced that Kemper’s “clean coal” experiment would be suspended. The power plant will run on natural gas, the company announced, and observers expect the “clean coal” portion of the plant will be mothballed.

Environmentalists have long objected to calling a coal-fired carbon capture and sequestration project “clean coal,” arguing that the label is misleading because it focuses on carbon dioxide pollution while ignoring other problems like acid rain and airborne contaminants. And carbon capture projects rely on continuing fossil fuel production, because the CO2 that’s captured is sold to oil companies who pump it into aging wells to coax more oil from the ground.

Politicians nevertheless continue to use the term. “My administration is putting an end to the war on coal,” President Donald Trump said this spring. “We’re going to have clean coal, really clean coal.”

Asked about the prospects for new “clean coal” projects in general after Kemper’s shuttering, a top Department of Energy official was dubious. EIA chief Howard Gruenspecht noted the role of natural gas prices, as well as the lower price of oil, which hurts the price of carbon sold to enhance oil recovery.

“In some parts of the world, one could imagine perhaps some efforts there but the cost situation is very, very challenging, certainly in the United States,” Gruenspecht told DeSmog. “One does not have to have an issue with the technology itself, it’s very impressive, but it’s a question of whether things really pencil out or not — there are some significant challenges.”

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Main image:  Southern Co. CEO Tom Fanning. Credit: © 2016 Laura Evangelisto

Sharon Kelly is an attorney and freelance writer based in Philadelphia. She has reported for The New York Times, The Guardian, The Nation, National Wildlife, Earth Island Journal, and a variety of other publications. Prior to beginning freelance writing, she worked as a law clerk for the ACLU of Delaware.

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