Note:  See the last paragraph on power plant plans.  Lorna

Duke Stands By California Market

In the midst of much uncertainty surrounding California's power situation, 
Duke Energy North America Monday reiterated its commitment to the state's 
struggling wholesale electricity market, announcing new bilateral power deals 
with Pacific Gas and Electric Co. and progress with redevelopment plans at 
three coastal power plant sites it is operating. 

"Duke is committed to continue playing a major role to help California 
address its electricity shortfall and the high prices many felt this summer," 
said Bill Hall, Duke's vice president for the western region in North 
America, noting that brownfield projects in California have turned out to be 
more difficult than new plants to site, based on Duke's experience over the 
last three years. 

In response to questions, Hall acknowledged that Duke is constantly 
reassessing its position in California and a return by the state energy 
officials to a cost-based regulated market would cause him a lot of concern, 
but he is confident at this point that for the long-term market solutions 
will be applied. He said in his meetings with state political and regulatory 
leaders he is convinced they know the state can't turn back to a traditional 
command-and-control regulatory structure and they recognize that "multiple 
solutions" are needed, including balancing supply/demand for power. 

"We believe that new generation coming on line throughout the West in the 
next few years will lessen the market volatility and markets will begin to 
react based on supply/demand stability," Hall said. 

Both Hall's and Duke's western trading executive, Nancy DeSchane, said they 
are very anxious to see what the Federal Energy Regulatory Commission 
releases Wednesday with its initial draft decision on what it will do to 
address California wholesale electricity prices, including whether it intends 
to extend the California Independent System Operator's (Cal-ISO's) authority 
to impose price caps. 

Hall said Duke has signed a series of "substantial long-term wholesale 
electricity contracts" with PG&E's utility that will "help stabilize the 
price volatility for the distributor's retail customers." He would not 
disclose the terms of the deal, including the volumes and duration, but said 
the supplies are slated to be received in the state's northern zone (NP-15). 
Earlier Duke offered California utilities five-year deals at $50/MWh. Duke's 
Salt Lake City-based trading arm is doing the deal, rather than its 
California-based generation plants, meaning the power could come from sources 
inside or outside of the state. 

Hall said Duke has begun work with local city officials in the San Diego 
suburb of Chula Vista to accelerate the current schedule for replacing the 
South Bay Power Plant, which Duke leases with an option to buy. "We hope 
within the next year we'll be able to announce what we can do to expedite the 
replacement of this facility," he said. 

Following approvals from the state and a local water permit last week, Duke 
will begin its $500 million modernization of Moss Landing Power Plant along 
the north central coast "within the next 30 to 60 days," Hall said. The 
upgrade will add 1,060 MW to the site's current 1,500-MW capacity and will 
require a 30-40% increase in the plant's natural gas requirements, which 
PG&E's gas utility assures can be handled by the existing pipeline 
infrastructure. 

"We've had discussions with PG&E, and we're obviously concerned that we have 
sufficient infrastructure to transport gas that we purchase into the system," 
Hall said. "We're confident that their infrastructure can support Moss," 
although, he added, that statewide "we certainly have concerns about the gas 
infrastructure" and Duke is working with state officials to assure there are 
adequate gas supplies. 

"We had some problems this summer in Southern California, and San Diego Gas 
and Electric recently announced it is going to begin an intense look at what 
needs to be done to upgrade its (gas pipeline) infrastructure to support the 
new generation plants coming on board." 

Salt Lake City-based DeSchane said Duke has a "balanced" portfolio of supply 
and storage contracts, noting that she thinks her company has a "very strong 
physical position in the West for gas," and the trading unit will be working 
over the next couple of years "to assure that the gas position is sustained 
and continues to grow." 

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