Earlier, the Mississippi Public Service Commission ruled that the Southern Co (SO.N) unit failed to prove the costly plant would benefit its customers.

However, the commission offered several conditions it said would allow Mississippi Power to proceed with the 582-megawatt integrated gasification combined-cycle (IGCC) plant.

Utility spokeswoman Cindy Duvall said the PSC conditions "seem to make it impossible for Mississippi Power to finance or construct the Kemper County IGCC Project even if the right to construct had been -- or might in the future -- be allowed."

Duvall said the company was disappointed. "We put the best option available to us to meet our customers' needs with reliable and affordable energy," Duvall said in an email.

The Kemper County IGCC was designed to burn Mississippi lignite coal 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.

If the Kemper project is canceled, it would be the second time Southern has dropped an IGCC project.

In 2007, Southern discontinued a 285-MW IGCC project in Florida, citing regulatory uncertainty.

Both Kemper and the Florida facility were designed to use a gasification technology that has been under development for a decade by Southern Co, KBR Inc (KBR.N) and the U.S. Department of Energy at an Alabama facility operated by Southern.

Two Mississippi commissioners voted in favor of Thursday's order while PSC Chairman Brandon Presley voted against it, saying it did not "sufficiently protect the ratepayers of Mississippi Power Co from the great risks associated with the construction of this project."

Kemper's capital cost of $2.4 billion, excluding government subsidies, is almost twice the $1.3 billion value of the utility's existing facilities in Mississippi.

Presley said it would be better to delay the project several years until more is known about the timing and cost of carbon regulation and the direction of natural gas prices.

During PSC hearings, utility officials said they were "confident" Kemper could be built for $2.4 billion. In a later filing, however, the utility proposed a $3.2 billion cap.

The PSC has spent months evaluating the technology risk as well as the potential rate impact for Mississippi Power's relatively small customer base of less than 200,000 customers. They weighed the IGCC plant against the cost of buying power from existing power plants that burn natural gas, a cleaner fuel that has been more volatility in recent years than coal.

Kemper's critics -- owners of merchant power plants in the region and environmental organization the Sierra Club -- said the utility was counting on high natural gas prices to justify the IGCC's economics at a time when the U.S. natural gas supply is climbing with increased production from unconventional resources, such as shale gas.

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.

(Editing by David Gregorio and Richard Chang)

Sourced from www.reuters.com