Duke Energy Monday offered to manage San Diego Gas andElectric’s entire power supply in its comments to the FederalEnergy Regulatory Commission on proposals for solving California’snagging wholesale electricity problems. There are no negotiationsongoing, and SDG&E initially indicated it has not received anyformal offer from Duke.

In essence, the Duke proposal would allow the Sempra Energyutility to get out of the electricity supply business andconcentrate on being an energy delivery service company, whichSempra’s CEO Steve Baum reiterated earlier this fall is theutility’s strategic goal. Retail customers would be shielded fromwholesale power price volatility by the proposed five-year deal ata fixed $60/MW price.

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

SDG&E’s reaction further reiterated its corporate reluctanceto strike any long-term deals (more than a year or two) at thistime when the market is in such a flux and before FERC has acted tostabilize wholesale prices. “We suspect Duke would like to make along-term deal now before regulators institute structural changesin the California marketplace that should help lower prices,” thespokesperson said. “The wisdom of locking up electricity at today’shigh prices for all SDG&E customers has to be questioned.”

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

Duke’s California spokesperson noted that its proposal was basedon Nov. 17, 2000 electricity and natural gas prices, both of whichhave bounced dramatically up and down since that date 10 days ago.

The spokesperson confirmed that Duke has now made offers to allthree of California’s major private sector electric utilities, butthe SDG&E proposal would be for greater volumes than what hasbeen put on the table with Pacific Gas and Electric and SouthernCalifornia Edison.

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

Duke’s California spokesperson emphasized that the deals alreadysigned with the other two utilities, and any deal that may bestruck with SDG&E, “need to be dealt with pretty quickly” bystate regulators since the “prices continue to go up.”

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

“Obviously, events this past summer were not so favorable to theload-serving utilities,” Duke stated in its FERC filing. “Hemmed inby restrictive state rules, and reluctant to manage market riskaggressively, the load-serving utilities took no effective measuresto manage billions of dollars in price risks associated withfluctuating supply and demand conditions.”

“Moreover, load-serving utilities exacerbated the impact ofprice volatility by leaving increased portions of their loadunscheduled in the day-ahead and one-hour ahead markets, therebyforcing the ISO to rely far more heavily than intended on real-timepurchases, from within and outside California.”

As part of the federal filing, Duke divulged that on Nov. 15 itsigned a five-year, fixed-price wholesale contract with SoCalEdison, noting that it is similar to a deal signed with PG&E’sutility Oct. 30, but keeping terms and prices confidential. Bothcontracts, along with some other bilateral, fixed-price deals, areawaiting approval from the California Public Utilities Commission,which is reluctant to act with the market still wrapped in so muchuncertainty and volatility for fear of future second-guessing fromstate elected officials.

Noting that it intends to do more forward contracts in additionto building new power generation in the state, Duke said in itsfiling it “foresees opportunities for the market to offer aportfolio of radically new forward contracts,” if state regulatorschange their rules so “competitively bid” forward deals are notsecond-guessed in prudency review proceedings.

Richard Nemec, Los Angeles

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