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Duke Offers Solutions to California's Power Shortfall

Duke Offers Solutions to California's Power Shortfall

As the western states generally, and California in particular, faced another blast of power-draining summer heat, Duke Energy North America (DENA) last week proposed to California Gov. Gray Davis a combination of long- and short-term new generation and a five-year, fixed-price electricity option to buffer mass consumers from electric price volatility.

With about $ 2 billion already or soon-to-be invested in the state, Duke Energy obviously is looking to protect its investment in the face of growing cries among consumer groups and state officials to roll back California's electric restructuring.

In return, Duke is urging Gov. Davis to use his existing authority under the state's emergency services provisions to "streamline the permitting process to facilitate the rapid construction of environmentally friendly generation" as early as next year. Duke officials sent the request formally via a letter to the governor and then met with the governor's staff in Sacramento, a session Duke characterized as a "good first step."

Duke and other merchant operators contend the market isn't the fundamental problem, but rather it is the insufficient supply of generating capacity to meet peak-load situations that's to blame this summer. It has now become a well-known mantra that "no significant new power generation facilities have been built in California over the past 10 years."

"During that same 10-year period, peak demand has risen more than 10,000 MW," said Jim Donnell, CEO of DENA. "This combination hascaused the state's reserve margin to fall to less than 2%, which necessarily results in higher prices and abnormal volatility." These reserve levels are the worst in the nation, according to Duke.

Indicative of the state dilemma is what happened last Monday when the California Independent System Operator (Cal-ISO) declared Stage One and Stage Two power alerts, noting that "an intense and lengthy heat wave hitting the entire Western U.S. is shrinking power reserves on a day when electricity is in huge demand." With electricity in short supply across the 12-state region, California cannot count on imports from out of state to help fulfill the heightened demand. Cal-ISO on Monday was expecting a near-record peak (45,629 MW).

To help solve California power crunch, Duke is proposing to deliver 3,000 MW of added electricity through the construction of new natural gas-fired power facilities at three existing sites along the California coast that it has purchased or leased in the last three years. This would include an additional 500 MW as early as 2001 and a 2,500 MW by 2002, with an expedited state siting process.

The first 1,000 MW of the 3,000 MW, Duke officials said, should begin construction in the next two to three months at its existing Moss Landing power plant along the central coast.

With the momentum building among consumer and state officials to roll back the state's four-year-old electric restructuring, Duke officials still insist they are willing to hang in the state as long as there is movement toward deregulation, although it noted that recent state moves have caused them to pause. Duke's Donnell in a national conference call assured questioners that Duke has "no current plans to pull out of California," although he added that there are concerns about outstanding proposals.

As a separate offering to the state --- not tied to the expedited power-plant siting --- Duke has offered to provide 2,000 MW to the three investor-owned utilities in state on a fixed-term of five years and fixed price of $50/MW, beginning Sept. 1.

"[We're] committed to help bring electricity price stability for the citizens of California through these proposals," Donnell said. "Essentially we're shifting the risk management responsibilities to Duke Energy North America from the utilities and ultimately from the consumer."

"I cannot imagine the circumstance that would see us take (any) radical an action (pulling out of California). We stand prepared to compete in the marketplace, and we encourage deregulation and we think it is the right answer across the country. We realize there will be some fits and starts, so as long as the market is headed the right direction, we will continue."

Donnell did add that Duke seeks "regulatory stability," and particularly an environment in which rules don't change in the middle of a process. He suggested some of that is happening in California, and if the rule changes and uncertainty continue, then Duke would reassess its California situation.

Richard Nemec, Los Angeles

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