Duke Charged Record Price for Electricity

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But energy firm agrees to waive 80% of its $3,880-per-megawatt-hour tab, if it gets paid.

Los Angeles Times

Duke Energy Corp., one of the power wholesalers that the state has accused of price gouging, charged $3,880 per megawatt-hour for electricity during a brief period last winter–by far the highest price yet disclosed for emergency power.

The price was more than double the $1,900 that Gov. Gray Davis excoriated Texas wholesaler Reliant Energy Inc. for charging during an emergency last month.

Spokespeople for Davis and Duke agreed Friday–but for entirely different reasons–that the case illustrates nearly everything that has gone wrong with California’s power market.

From the governor’s perspective, the Duke sales represent a clear-cut case of gouging. He has cited the opportunism of such out-of-state energy merchants as a major cause of the ongoing energy crisis.

“It’s obscene,” Davis spokesman Steven Maviglio said. “The state is on its knees, and they’re out to get every last dime from us.”

But Duke, based in Charlotte, N.C., said that it hasn’t yet received a dime for the power and that if it ever does get paid, it will gladly waive the “credit premiums” that made up 80% of the $3,880.

Moreover, Duke said it made the sales in question only because it was ordered to do so by the California Independent System Operator, the private agency that runs 75% of the state’s power grid. To provide the power, Duke had to start up an idle generating unit at its Chula Vista station–the dirtiest and least efficient of the four units at that former San Diego Gas & Electric Co. plant, spokeswoman Cathy S. Roche said.

“We tried to convince ISO that this was not a good unit to run in January–that the power would be more needed in the summer,” Roche said.

ISO declined to comment on the sales, citing a policy of confidentiality regarding its transactions, spokesman Gregg Fishman said.

The sales, first reported Friday by the Charlotte (N.C.) Observer, took place over eight or nine days beginning Jan. 17 and continuing into early February, Roche said. Each sale occurred after ISO had declared a Stage 3–highest level–emergency, and two of the sales took place on days when there were rolling blackouts.

In all, Duke said it sold 5,000 megawatt-hours at $3,880 each, for a total of $19.4 million. The sales represent less than one-tenth of 1% of the power Duke sold in California during the first three months of this year, the company said. A megawatt-hour is enough power to serve about 750 homes for an hour.

Duke‘s average price in California over that span was $136 per megawatt-hour, up from $76 per megawatt-hour during all of 2000, the company said Friday.

Duke, like other wholesalers, tacks on credit premiums as a kind of insurance to reflect the financial condition of its buyers.

In this case, though ISO ordered the sales, the actual buyers were SDG&E, Southern California Edison and Pacific Gas & Electric Co. Edison and PG&E were on the brink of insolvency and discussing bankruptcy at the time, though it was not until April 6 that PG&E filed for bankruptcy protection. Their shaky finances justified the big surcharges, Roche said.

By imposing an 80% credit premium, Duke indicated it wouldn’t expect to get more than 20 cents on the dollar in a bankruptcy.

However, Maviglio and Joe Newlin, consumer advocate at the Foundation for Taxpayer and Consumer Rights in Santa Monica, both called the surcharges excessive.

“It’s greed on top of greed,” Newlin said.

Subtracting the 80% premium leaves a price of $776 per megawatt-hour, which Newlin said is still unjustifiably high.

But Tom Williams, another Duke spokesman, explained it this way: To start up a generator that it hadn’t planned on operating, Duke had to buy natural gas on the spot market at a stratospheric $30 to $40 per million British thermal units (BTUs), which meant it cost $450 per megawatt-hour for fuel alone.

The balance of the price included operating and maintenance costs, a large fee for emissions credits to run the environmentally costly plant, plus a reasonable profit, Williams said.

The Duke sales were different from Reliant‘s; Reliant sold its $1,900-per-megawatt-hour electricity to the state Department of Water Resources, which has become the emergency purchaser of power.

“The difference is, Reliant got paid,” Roche said.

In any case, consumers do not pay these market prices. Instead, their power rates are set by the state Public Utilities Commission.

But if residential customers were on the hook for Duke‘s $3,880 per megawatt-hour on a regular basis, it would translate into $3.88 per kilowatt-hour on a household’s bill.

That compares to the 7.5 cents per kilowatt-hour that Southern California Edison customers have paid for electricity since January, with another 5.5 cents per kilowatt-hour going to such services as transmission and distribution. In March, the PUC added another 3 cents per kilowatt-hour on average to electricity rates.

If the average household in Edison territory paid that $3.88 for each of the roughly 500 kilowatt-hours used each month, the electricity portion alone of the monthly bill would reach $1,940.

Consumer Watchdog
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