Mitigating rising costs through proper due diligence and controls – lessons learned for the Kemper County IGCC project
Looking back always gives us the fortune of seeing what we couldn’t have known at the time. Armed with data and analysis, major projects are usually planned and forecasted, ran accordingly and adjusted as time progresses to ensure it completes within budget and on time. Project cost estimates for large capital projects are often mischaracterized during early stages, leading to a continued, almost endless flow of “bad news”, and that bad news does not get better with age.
A recent example is the Southern Company’s subsidiary Mississippi Power’s Kemper County IGCC project to build a new facility to bring coal-gasifying technology online in June 2016. The project has seen continued cost increases, and management’s attempts to reign-in costs have proven ineffective.
In 2010, original testimony to regulators from Mississippi Power (MPC) stated it was confident it could complete the project at a cost to the customer of $2.395 billion. MPC witnesses testified that the risk of cost overruns was “unlikely and comparatively insignificant.” However, reports as early as 2012 raised questions about the project’s viability and whether key metrics summarizing the project’s progress were accurate.
The original bounding cost estimate of $2.88B has more than doubled; the current projection is $6.2B, which exceeds the utility’s ability to recover cost in customer rates by more than $2B. By May 2014, MPC lost a 15 percent ownership stake from Southern Mississippi Electric Power Association. Now MPC must refund more than $350M to its customers, after many failures by the company to recover above the cap, and continued delays and cost increases.
Could this have been avoided with proper due diligence? Were proper controls in place? Did the company underestimate the risks? While hindsight always reveals missteps, mistakes and improvements, in this case there is enough evidence to suggest the magnitude of the situation was avoidable had proper due diligence and assessment of risks been performed.
