In the midst of much uncertainty surrounding California’s powersituation, Duke Energy North America Monday reiterated itscommitment to the state’s struggling wholesale electricity market,announcing new bilateral power deals with Pacific Gas and ElectricCo. and progress with redevelopment plans at three coastal powerplant sites it is operating.

“Duke is committed to continue playing a major role to helpCalifornia address its electricity shortfall and the high pricesmany felt this summer,” said Bill Hall, Duke’s vice president forthe western region in North America, noting that brownfieldprojects in California have turned out to be more difficult thannew plants to site, based on Duke’s experience over the last threeyears.

In response to questions, Hall acknowledged that Duke isconstantly reassessing its position in California and a return bythe state energy officials to a cost-based regulated market wouldcause him a lot of concern, but he is confident at this point thatfor the long-term market solutions will be applied. He said in hismeetings with state political and regulatory leaders he isconvinced they know the state can’t turn back to a traditionalcommand-and-control regulatory structure and they recognize that”multiple solutions” are needed, including balancing supply/demandfor power.

“We believe that new generation coming on line throughout theWest in the next few years will lessen the market volatility andmarkets will begin to react based on supply/demand stability,” Hallsaid.

Both Hall’s and Duke’s western trading executive, NancyDeSchane, said they are very anxious to see what the Federal EnergyRegulatory Commission releases Wednesday with its initial draftdecision on what it will do to address California wholesaleelectricity prices, including whether it intends to extend theCalifornia Independent System Operator’s (Cal-ISO’s) authority toimpose price caps.

Hall said Duke has signed a series of “substantial long-termwholesale electricity contracts” with PG&E’s utility that will”help stabilize the price volatility for the distributor’s retailcustomers.” He would not disclose the terms of the deal, includingthe volumes and duration, but said the supplies are slated to bereceived in the state’s northern zone (NP-15). Earlier Duke offeredCalifornia utilities five-year deals at $50/MWh. Duke’s Salt LakeCity-based trading arm is doing the deal, rather than itsCalifornia-based generation plants, meaning the power could comefrom sources inside or outside of the state.

Hall said Duke has begun work with local city officials in theSan Diego suburb of Chula Vista to accelerate the current schedulefor replacing the South Bay Power Plant, which Duke leases with anoption to buy. “We hope within the next year we’ll be able toannounce what we can do to expedite the replacement of thisfacility,” he said.

Following approvals from the state and a local water permit lastweek, Duke will begin its $500 million modernization of MossLanding Power Plant along the north central coast “within the next30 to 60 days,” Hall said. The upgrade will add 1,060 MW to thesite’s current 1,500-MW capacity and will require a 30-40% increasein the plant’s natural gas requirements, which PG&E’s gasutility assures can be handled by the existing pipelineinfrastructure.

“We’ve had discussions with PG&E, and we’re obviouslyconcerned that we have sufficient infrastructure to transport gasthat we purchase into the system,” Hall said. “We’re confident thattheir infrastructure can support Moss,” although, he added, thatstatewide “we certainly have concerns about the gas infrastructure”and Duke is working with state officials to assure there areadequate gas supplies.

“We had some problems this summer in Southern California, andSan Diego Gas and Electric recently announced it is going to beginan intense look at what needs to be done to upgrade its (gaspipeline) infrastructure to support the new generation plantscoming on board.”

Salt Lake City-based DeSchane said Duke has a “balanced”portfolio of supply and storage contracts, noting that she thinksher company has a “very strong physical position in the West forgas,” and the trading unit will be working over the next couple ofyears “to assure that the gas position is sustained and continuesto grow.”

Down the central coast about 80 miles at Morro Bay, Duke hasresubmitted revised plans for totally replacing the 1950s-era powerplant in a renovation that will build a new $600 million 1,200-MWplant. With prompt state approvals, Hall said Duke could bring thenew plant online by the summer of 2003 and demolish the existing(1,000-MW) plant by 2007, adding that PG&E cannot deliveradditional gas supplies so the added output is a product of theanticipated improved efficiency of the new plant.

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