Message-ID: <1373043.1075859803506.JavaMail.evans@thyme> Date: Mon, 7 May 2001 04:11:00 -0700 (PDT) From: issuealert@scientech.com Subject: California Update: Duke Energy Proposes Settlement Deal Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "SCIENTECH IssueAlert" X-To: X-cc: X-bcc: X-Folder: \Mark_Haedicke_Jun2001\Notes Folders\All documents X-Origin: Haedicke-M X-FileName: mhaedic.nsf Today's IssueAlert Sponsors: [IMAGE] EXPERIENCE THE PEACE SOFTWARE DIFFERENCE. DISCOVER THE POWER OF SUCCESS. Peace Software customers are experiencing real, measurable results using Peace's advanced customer and commodity suite, EnergyTM. Discover what the world's leading energy providers already know. Leading energy providers prefer Peace Software. Find out why...at CIS, Booth #501. www.usa.peace.com/CIS2001 [IMAGE] Vice President Cheney recently stated that to meet projected energy demands the US requires between 1,300 and 1,900 new power plants. That averages out to more than one new plant per week, every week, for 20 years running. Learn about the pivotal role of natural-gas based generation in solving the US energy crisis, attend Natural Gas and Power Generation Strategies 2001, June 13-15,Tucson, AZ. Miss last week? Catch up on the latest deregulation, competition and restructuring developments in the energy industry with SCIENTECH's IssuesWatch [IMAGE] [IMAGE] May 7, 2001 California Update: Duke Energy Proposes Settlement Deal By Will McNamara Director, Electric Industry Analysis [IMAGE][IMAGE]Duke Energy (NYSE: DUK) approached Calif. Gov. Gray Davis with a secret deal, now made public, that offered monetary concessions if the state drops lawsuits and investigations into the company's alleged price gouging. Duke made the offer in a secret 17-page letter sent in April to Gov. Davis' office, which the governor confirmed on May 2. Davis' spokesman called the letter Duke's "wish list," which included having the state call off investigations of the North Carolina-based generator. Although Gov. Davis has acknowledged receipt of the proposal, he has not officially accepted or rejected the offer. Analysis: Duke's desire to make a settlement with the state of California stems from an ongoing investigation by FERC that began back in March. At that time, FERC put 13 California power sellers, including Duke, on notice that they must either make refunds for certain power sales or provide further justification for their prices. Duke is considered to be one of four companies (along with Dynegy, Reliant and Williams) that faces the biggest potential refunds to the state of California. In fact, Duke reportedly faces potential refunds of up to $20 million for the power that it has sold to California since the start of this year. We can fast forward from FERC's investigation to Duke's "good faith" settlement offer that now sits before Gov. Gray Davis. The plan sets out specific action steps for new generation, conservation programs, electric and gas infrastructure improvements, regional transmission frameworks, and environmental goals. In addition, Duke has offered an undisclosed settlement agreement, for which the California government would agree to cease all ongoing investigations of price manipulation by the company. Duke's "appropriate payment" is based on fair estimate of the company's alleged overcharges for power that it sold to the state. Yet, beyond the spin control surrounding this offer, Duke's proposal amounts to a mutual back-scratching agreement, with Duke clearly obtaining the largest benefit. Duke wants the state to drop all pending lawsuits that allege price gouging and tone down the negative public comments against Duke made by the governor and others. In return, Duke will refund to the state some of the money that it allegedly owes and will further assist in helping the state with its power supply needs. However, under the offer Duke will admit no wrongdoing. Rather, the company's proposal is being presented as an altruistic effort to assist in the resolution of California's flawed market. Neither Duke nor Gov. Davis has disclosed the monetary amount of Duke's settlement offer, but it is fairly safe to assume that it is only a fraction of the $20 million that the state wants. Other specifics within Duke's proposal that are important to note include the company's "commitment to work with the state to get 680 MW of additional peaking capacity ready for summer 2002." In addition, Duke has offered to enter into long-term contracts with the state on "reasonable terms" and also "attempt to secure other reasonably priced electricity for the state." Perhaps eliciting the greatest response within the industry is Duke's pledge to "share the financial pain" of California's troubled market with other market participants. Presently, Duke supplies about 5 percent of California's power needs, the majority of which is based on long-term contracts. This is a significant point because Duke has argued that its participation in the California market is not as entrenched in the volatile spot market, in contrast to many of the other power suppliers under FERC's investigation. The company also owns the Moss Landing plant, located south of San Jose, Calif., which it is upgrading with a $500 million investment. Duke has established that the plant should be able to provide approximately 30 percent of California's new generation in 2002. While Duke downplays the role that California has played in its profits, the company's total wholesale profits soared 374 percent to $744 million for year-end 2000. For the year, Duke's California power plants generated 70 percent more electricity than they did in 1999. In addition, in 2000 the plants provided 17 million megawatt hours of electricity to the state's power grid versus 9.5 million the previous year. Further, in January and February 2001, Duke charged more for power through "credit premiums," which were levied because of the risk of non-payment associated with California's financially struggling utilities. Duke claims that it is still owed about $100 million by the Department of Water Resources, California's power purchaser. Duke is not the only company forging settlement contracts with California. On May 2, Tulsa-based Williams Co. (also one of the top four companies reportedly owing the most to California) announced that it has agreed to pay $8 million to the California ISO to end FERC's investigation into whether the company's plants were kept offline to drive up prices. For several months, FERC has been investigating Williams regarding the company's alleged shutdown of two power generation units owned by AES, which reportedly allowed Williams to sell power from other units at higher prices. The stipulation and consent agreement reached between Williams and FERC identified no improprieties. In other words, Williams has made the payment but has admitted to no wrongdoing or price manipulation. A Williams spokesperson has said that the $8 million will be deducted from the $252 million that Williams is still owed for power sales to the California ISO and the California PX. Much like Duke, Williams has reported stellar profits over the last year. For year-end 2000, the company reported unaudited income from continuing operations of $873.2 million, or $1.95 per share on a diluted basis, versus $178 million, or 40 cents per share on a restated basis, for 1999. In addition, the company reported 1Q 2001 unaudited results that were more than double that of 1Q 2000-$378 million, or 78 cents per share, compared with a restated $139 million, or 31 cents per share. Moreover, the offers that Williams and Duke are forging with the state of California are probably only a small portion of what both companies have made from power sales to the state. However, one benefit of the deals is that they would keep the parties out of years of expensive litigation. Yet, at least as of this writing, Gov. Davis remains less than enthused about Duke's offer and has not eased off from his accusation that Duke (along with the other power generators) has "bilked millions of dollars from California consumers." In fact, although the governor has said that he is willing to continue negotiations with the various power generators, he has also vowed "not to call off the dogs" in the state and federal investigation of any price gouging. Toward that end, the state's lieutenant governor has initiated a class-action suit on behalf of California consumers against Duke and other power generators accused of price fixing. This legal claim follows similar suits initiated by the city of San Francisco and lawyers in San Diego. All of the suits basically claim the same thing, that Duke and four other power generators engaged in unlawful trading practices-such as shutting down plants-to drive up market prices in California. Duke, of course, maintains its innocence and says that the new lawsuit merely makes the same old claim that the company has repeatedly denied. Nevertheless, Duke has made a monetary offer to the state of California, which could be driven merely by the desire to avoid lengthy legal proceedings or by a concern that some wrongdoing on the company's part could eventually be determined. The stakes have also been raised with some California attorneys suggesting that any generators found to have engaged in price gouging should face civil and criminal penalties, which could include incarceration for any executive at the company who knowingly allowed the price manipulation to take place. Consequently, despite Duke's offer and any other proposals that subsequently come from power generators, it appears that litigation over the price gouging matter is unavoidable. An archive list of previous IssueAlerts is available at www.scientech.com [IMAGE] The most comprehensive, up-to-date map of the North American Power System by RDI/FT Energy is now available from SCIENTECH. Reach thousands of utility analysts and decision makers every day. 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