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Electricity —Duke Energy’s offer of low-cost electricity is questioned

Duke Energy’s announcement last week of a long-term proposal to sell power to San Diego Gas & Electric Co. at a reduced price may have been an opening round in some serious negotiations , or little more than a publicity stunt.

Duke Energy North America, the business unit of Charlotte, N.C.-based Duke Energy, issued a press release Nov. 27 offering to provide SDG & E; all of its electricity needs for the next five years at a fixed priced of 6 cents per kilowatt hour.

But Art Larson, an SDG & E; spokesman, said the only information the utility had on Duke’s proposal came in the press release announcing it. Nothing has been put on the table yet, he said.

Other than some informal talks between Duke and SDG & E;, “we have not received any formal bid, other than the press release outlining Duke’s offer,” Larson said. “If and when we do, we’ll review it carefully and consider it with other offers.”

Larson said Duke’s offer, as described in the press release, presented several problems. As California law now stands, he said, SDG & E; is required to purchase at least half of its power supply from the California Power Exchange (CalPX).

The utility spokesman also said locking in a fixed price over the next five years could be risky. For instance, during the run of the proposed Duke contract, the wholesale price of electricity , hovering at 13.6 cents per kilowatt hour this week , could drop below 6 cents, leaving SDG & E; customers paying higher than market rates.

Energy Market Uncertainty

“The Federal Energy Regulatory Commission next month is about to institute structural changes in the marketplace that could help lower prices,” Larson said. “In another year or two, there’ll be new power plants in place that can also help put on pressure to lower electric prices in the state of California. We also have the governor’s plan, which is coming out this week, which could also have that effect.”

Larson noted the Duke proposal was included in Duke’s Nov. 22 filing with FERC, in which Duke responded to the commission’s order proposing remedies for California wholesale electric markets and the accompanying report on the causes of this summer’s price abnormalities. Larson suspected Duke’s announcement was more for public consumption than a real proposal.

Michael Shames, executive director of the Utility Consumers’ Action Network, also expressed doubts about the press release, and shared Larson’s suspicions.

“My understanding of what’s going on, talking to the SDG & E; people, is that Duke has been trying to sell them the 6 cents (contract). SDG & E; is saying no. Duke decided, for lots of reasons, to go around them and to go public with this thing,” he said.

Shames believes SDG & E; isn’t sold on the fact that Duke’s proposal is a good deal. The way markets are right now, Shames said, it’s hard to tell whether it is.

“The question that everyone needs to ask, and is asking, is, ‘Is this a good deal?’ And the answer is because so many of the transactions in the energy market are conducted in secrecy, few people, if any, can tell whether it’s a good deal.”

Preliminary Discussions

Duke spokesman Tom Williams said Duke had hammered out the proposal in preliminary discussions with SDG & E; as early as Nov. 21.

Williams said the announcement was intended as a departure point, from which more serious discussions could follow. Everything was open for negotiations, including the amount of electricity that would be in the contract, he said.

“You don’t send something over in writing and then they sign it and the deal’s done,” he said. “You need to sit down and talk through those details and the credit requirements, and all the things like that. We’ve sat down with SDG & E; in the past, and talked about much smaller deals than this. They know how it works.”

The offer before SDG & E; is similar to long-term, fixed-price contracts Duke entered into with California’s two other major utilities. Duke signed a similar deal with Pacific Gas & Electric on Oct. 30, and inked another with Southern California Edison on Nov. 15. Terms of those two contracts were not disclosed, Williams said.

That shows the offer to SDG & E; is legitimate, he said.

“We’ve had interest from other utilities for power in that range, since we’ve made that offer,” he said. “There’s been some very good interest in that kind of chunk of power. And we’ve begun to negotiate with them as well.”

Wake-Up Call

Duke went public with its announcement to show SDG & E; and its customers that such a deal is possible, Williams said.

“If SDG & E; decides not to do a deal with us, that’s fine. But we would certainly encourage them to do deals with other traders or other marketing companies,” he said. “It doesn’t have to be us, but they need to do these deals if they want to flatten out their customers’ bills.”

The proposal was also intended as a wake-up call for SDG & E;, Williams said. The local utility had failed to enter into purchasing contracts, relying solely on “spot” power, causing local utility bills to soar, Williams said.

A responsible utility would seek out such contracts, and Duke’s move was designed to give SDG & E; a push, he said.

“People are very upset, wondering why these deals aren’t being done, and our point is saying, ‘They can be done. We are ready to do it, and here’s how far we’re willing to go,” Williams said.

“There’s no excuse for utilities to be ringing up these kinds of debts in the day-ahead market. They can buy these tools that don’t ring up the debt, and keep the customers’ bills low , or certainly more predictable.”

SDG & E;’s Larson said the utility had previously been prevented from entering into long-term forward markets contracts. Since the California Public Utilities Commission granted SDG & E; the authority to do so in September, the utility has proceeded to do so.

“We have entered into direct contracts with power suppliers to lock in prices. But you need a formal contract,” Larson said.

“Our goal has been, and continues to be, to purchase power as cheaply as possible for our customers. But you have to have a formal, written offer, and we have yet to see one,” Larson said.

Duke’s proposal, as stated in the press release, would provide 3,300 megawatts of electricity to SDG & E; , about enough to serve its retail customers’ needs on the hottest summer day, said Williams.

The price, at 6 cents a kilowatt, takes into account SDG & E;’s seasonal and hourly load requirements and has a 3 percent annual adjustment for inflation, he said.

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