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

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

In return, Duke is urging Gov. Davis to use his existingauthority under the state’s emergency services provisions to”streamline the permitting process to facilitate the rapidconstruction of environmentally friendly generation” as early asnext year. Duke officials sent the request formally via a letter tothe 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 thefundamental problem, but rather it is the insufficient supply ofgenerating capacity to meet peak-load situations that’s to blamethis summer. It has now become a well-known mantra that “nosignificant new power generation facilities have been built inCalifornia over the past 10 years.”

“During that same 10-year period, peak demand has risen morethan 10,000 MW,” said Jim Donnell, CEO of DENA. “This combinationhascaused the state’s reserve margin to fall to less than 2%, whichnecessarily results in higher prices and abnormal volatility.”These reserve levels are the worst in the nation, according toDuke.

Indicative of the state dilemma is what happened last Mondaywhen the California Independent System Operator (Cal-ISO) declaredStage One and Stage Two power alerts, noting that “an intense andlengthy heat wave hitting the entire Western U.S. is shrinkingpower reserves on a day when electricity is in huge demand.” Withelectricity in short supply across the 12-state region, Californiacannot count on imports from out of state to help fulfill theheightened demand. Cal-ISO on Monday was expecting a near-recordpeak (45,629 MW).

To help solve California power crunch, Duke is proposing todeliver 3,000 MW of added electricity through the construction ofnew natural gas-fired power facilities at three existing sitesalong the California coast that it has purchased or leased in thelast three years. This would include an additional 500 MW as earlyas 2001 and a 2,500 MW by 2002, with an expedited state sitingprocess.

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

With the momentum building among consumer and state officials toroll back the state’s four-year-old electric restructuring, Dukeofficials still insist they are willing to hang in the state aslong as there is movement toward deregulation, although it notedthat recent state moves have caused them to pause. Duke’s Donnellin a national conference call assured questioners that Duke has “nocurrent plans to pull out of California,” although he added thatthere are concerns about outstanding proposals.

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

“[We’re] committed to help bring electricity price stability forthe citizens of California through these proposals,” Donnell said.”Essentially we’re shifting the risk management responsibilities toDuke Energy North America from the utilities and ultimately fromthe consumer.”

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

Donnell did add that Duke seeks “regulatory stability,” andparticularly an environment in which rules don’t change in themiddle of a process. He suggested some of that is happening inCalifornia, and if the rule changes and uncertainty continue, thenDuke would reassess its California situation.

Richard Nemec, Los Angeles

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