Duke to Sell State Power Plants

Duke Energy plans to sell its California generating facilities within a year. Company officials said that Duke has sold power at prices below today's forward market, at a projected loss of $2.3 billion. They added that while the company has bought gas to fuel those plants at a cost below today's prices, creating $1.4 billion in savings, they doubt Duke can break even on its power plants, other than those in the Midwest, by 2006. Duke expects the power plants in aggregate to be worth $500 million in cash but would not pin a book value on them. Most of Duke's West Coast plants are in California. These include the 165 MW Oakland combustion turbine facility; the 2,538 MW Moss Landing plant; the 1,002 MW Morro Bay facility; and its leased 700 MW South Bay plant. Oakland and South Bay have reliability-must-run contracts for next year with the California Independent System Operator, providing income whether or not they run. Morro Bay has a contract with Pacific Gas & Electric for 650 MW of its output through 2007. The power from the balance of the plants' capacity is sold on a merchant basis-into the spot market. "I hope they are purchased" instead of mothballed, said Gregg Fishman, CAISO spokesperson. He could not specify what the effect on the grid would be if the plants were shut down, but noted that Duke's move "does not portend well" for the grid operator's feared trend of shutdowns of older power plants. Regulators—both the California Public Utilities Commission and the California Energy Commission—have also expressed concern that without a capacity tagging market or other market incentive, there's little reason for owners of aging, less efficient power plants to keep them running. The CEC, in its September 15 Draft 2005 Integrated Energy Policy Report, said that the state's supplies should be diversified but that maintaining reserve margins still depends on aging power plants. The chiefs of the two commissions did not return requests for comment on the Duke situation before press time. Duke officials said they have a list of 10 potential buyers for their power plants—in both the West and the East. They would not reveal the list. Pacific Gas & Electric spokesperson Jon Tremayne said the utility is "always interested in pursuing opportunities" but did not say whether there was a specific interest in purchasing the Morro Bay and Moss Landing plants. PG&E sold these two facilities at the behest of the CPUC at the start of a deregulated market. Other state utilities would not indicate any interest in buying Duke's plants. Utility affiliates, such as Sempra Generation, would likely not be interested in buying power plants that don't have contracts for their output. Buying a plant without a long-term contract means the buyer would be at the same financial risk as the seller. Competitors, such as West Coast Power, would suddenly find their existing but also aging plants in higher demand if Duke shuts down its plants. Environmentalists suggested the community could buy Morro Bay. "Since the broad community is affected by the environmental impacts of a power plant, including long-term degradation of the Estuary and economic value to Morro Bay and the county, exploration of alternatives seems particularly appropriate," Jack McCurdy, Coastal Alliance on Plant Expansion spokesperson, stated. Fueling the sale is Duke's pending merger with Cinergy announced in May. If it's approved, the merged company would focus Duke's corporate energies on its Midwest plants and add Cinergy's coal-fired generation to Duke's current Midwest gas-fueled power plants. The financial community showed little reaction to Duke's announcement. Fitch said it had no effect on the company's ratings. Standard & Poor's said it's no longer considering a downgrade. S&P removed Duke from its credit watch and said its outlook is "stable" and expected to improve if the sales are completed. As of June 30, Duke Energy had $16.2 billion of debt outstanding, according to the ratings agency. S&P's ratings on Cinergy, however, remain on credit watch with "negative implications." With the repeal of the Public Utility Company Holding Act in the recent federal energy bill, observers say that such sales will become more common as more utilities are able to merge and divest less profitable assets. With new mergers, a sudden ownership of many power plants might raise concerns about market power with federal regulators. About-to-be-merged entities might help avoid scrutiny by selling power plants.

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Duke to Sell State Power Plants

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