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Duke Proposes to Manage San Diego Electricity

Duke Proposes to Manage San Diego Electricity

Duke Energy Monday offered to manage San Diego Gas and Electric's entire power supply in its comments to the Federal Energy Regulatory Commission on proposals for solving California's nagging wholesale electricity problems. There are no negotiations ongoing, and SDG&E initially indicated it has not received any formal offer from Duke.

In essence, the Duke proposal would allow the Sempra Energy utility to get out of the electricity supply business and concentrate on being an energy delivery service company, which Sempra's CEO Steve Baum reiterated earlier this fall is the utility's strategic goal. Retail customers would be shielded from wholesale power price volatility by the proposed five-year deal at a fixed $60/MW price.

"If and when we do (receive a formal offer), we will consider it carefully along with others we have received," said a San Diego-based Sempra spokesperson, who noted that even if the utility received a written offer, it lacks the "legal authority to act" because state regulators have only given SDG&E authority to purchase up to half of its energy requirements outside of the state-chartered wholesale spot power market (Cal-PX).

SDG&E's reaction further reiterated its corporate reluctance to strike any long-term deals (more than a year or two) at this time when the market is in such a flux and before FERC has acted to stabilize wholesale prices. "We suspect Duke would like to make a long-term deal now before regulators institute structural changes in the California marketplace that should help lower prices," the spokesperson said. "The wisdom of locking up electricity at today's high prices for all SDG&E customers has to be questioned."

The Sempra spokesperson confirmed that SDG&E has entered into some longer-term bilateral deals for power supplies, but noted that they have not as yet been formally submitted to the California Public Utilities Commission for approval as have similar deals by the other two major investor-owned utilities in the state. The deals have been discussed with the CPUC staff, however, the spokesperson said.

Duke's California spokesperson noted that its proposal was based on Nov. 17, 2000 electricity and natural gas prices, both of which have bounced dramatically up and down since that date 10 days ago.

The spokesperson confirmed that Duke has now made offers to all three of California's major private sector electric utilities, but the SDG&E proposal would be for greater volumes than what has been put on the table with Pacific Gas and Electric and Southern California Edison.

"The (proposal for) 3,300 MW represents the full electricity load SDG&E needs to serve its retail customer base during the hottest summer day," said Jeff Stokes, executive vice president for the western region of Duke Energy North America, noting that Duke has once again "stepped up with tangible, market-based solutions."

Duke's California spokesperson emphasized that the deals already signed with the other two utilities, and any deal that may be struck with SDG&E, "need to be dealt with pretty quickly" by state regulators since the "prices continue to go up."

In discussing this proposal in its FERC filing, Duke reiterated its long-term commitment to the development of energy markets in California and reminded regulators that if the California utilities had done more deals for fixed-price, hedge contracts last spring and summer, consumers would have been protected more from the wholesale price spikes.

"Obviously, events this past summer were not so favorable to the load-serving utilities," Duke stated in its FERC filing. "Hemmed in by restrictive state rules, and reluctant to manage market risk aggressively, the load-serving utilities took no effective measures to manage billions of dollars in price risks associated with fluctuating supply and demand conditions."

"Moreover, load-serving utilities exacerbated the impact of price volatility by leaving increased portions of their load unscheduled in the day-ahead and one-hour ahead markets, thereby forcing the ISO to rely far more heavily than intended on real-time purchases, from within and outside California."

As part of the federal filing, Duke divulged that on Nov. 15 it signed a five-year, fixed-price wholesale contract with SoCal Edison, noting that it is similar to a deal signed with PG&E's utility Oct. 30, but keeping terms and prices confidential. Both contracts, along with some other bilateral, fixed-price deals, are awaiting approval from the California Public Utilities Commission, which is reluctant to act with the market still wrapped in so much uncertainty and volatility for fear of future second-guessing from state elected officials.

Noting that it intends to do more forward contracts in addition to building new power generation in the state, Duke said in its filing it "foresees opportunities for the market to offer a portfolio of radically new forward contracts," if state regulators change their rules so "competitively bid" forward deals are not second-guessed in prudency review proceedings.

Richard Nemec, Los Angeles

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