News Release
July 31, 2000

Duke Energy North America's Perspective On California's Wholesale Electricity Market

Duke Energy North America is a major player in the California wholesale electricity market and we have plans to make major investments in the state to address the electricity shortfall.
Duke Energy North America was one of the first major entrants in the California electricity market with our purchase of 2,645 megawatts from PG&E on July 1, 1998. On April 27, 1999, we entered into a 10-year lease agreement with the Port of San Diego to add the 706-megawatt South Bay Power to our portfolio. Collectively this is enough capacity to power 3.4 million California households.

The intent of the lease agreement was to enable the Port of San Diego to obtain land around the plant while we agreed to demolish the 1960s-vintage plant and replace it with a smaller, cleaner plant that could better meet the growing demand for electricity in the San Diego area. This and a similar power plant demolition and replacement project in Morro Bay have been heralded as exactly the kind of behavior deregulation was intended to create in the private sector. These investments, and an investment in our Moss Landing plant, total more than $1.6 billion and will add more than 1,300 megawatts to the state's grid. This is enough to serve an additional 1.3 million California households - and do so in a much more efficient and environmentally-friendly manner.

In addition, we are investing more than $100 million in our existing plants to make them cleaner, more reliable and more flexible to meet the needs of the marketplace.

To make investments totaling $1.7 billion there must be regulatory clarity and stability in California.
Since we entered the California electricity market, we have demonstrated our commitment to work creatively with all segments of the local communities where we operate. And we have faithfully done so and committed to make tremendous investments in improving the state's electricity shortfall -- as our regulatory environment under the Cal-ISO has continued to change.

In 1998 there were no price caps on the wholesale price of electricity in California. Later that year the Cal-ISO was authorized by the Federal Energy Regulatory Commission to implement price caps, and since that time we have seen several adjustments in our regulatory situation. Throughout this period we have remained committed to our investments -- and to bring new generation on-line as rapidly as possible.

The recent market volatility has been caused by a lack of supply that exists not only in California, but throughout the West. It has created justifiable concerns for the retail consumers in the San Diego area. Duke Energy, as a member of the California community, is just as concerned, but we believe that competitive markets are a better structure than the days of the regulated utility system and the "cost plus 10 percent mentality."

How we got here and what's being done throughout the state to address the situation
The main reason officials deregulated California's wholesale electricity market was because the state's prices were about 40 percent higher than the national average in the 1980s and 1990s. Several years ago, it was predicted that the summers of 2000, 2001 and 2002 would have very tight wholesale electricity supplies, and that market prices would reflect those tight supplies. Regardless of whether California deregulated its electricity market, the state would be facing the electricity crisis today.

All one has to do is look at the California Energy Commission siting map detailing 19 new power plant projects adding more than 10,000 megawatts of capacity to see that the incentive of the free market is rapidly addressing the state's need for more power. What is needed is an expedited permitting process for these clean, state of the art power plant projects, and for additional transmission facilities to move the power - that also adequately considers local and environmental considerations.

Duke Energy's commitment to California
Duke Energy remains committed to the California market, but we have serious concerns about our ability to manage our business in this very uncertain regulatory environment.

Energy companies have expressed concern about the lack of regulatory stability and have indicated they will possibly not proceed with their proposed projects. These are not idle threats, but economic realities given the significant capital costs in developing, constructing and operating power generating facilities.

Outcries of re-regulation send shivers throughout investment communities we look to for loans to construct the new power plants to address the electricity shortfall. Regulatory clarity is imperative if we are to move forward with our power plant projects.

We must stay the course to achieve the goals envisioned in the legislation that created the competitive market. A great deal of progress has been made already, and Duke Energy North America is committed to continuing to be a part of the solution.

Higher electricity prices in San Diego
San Diego Gas & Electric Company was the first utility in California to have the wholesale electricity portion of their customers' power bill pass through the "real time" price of electricity directly to customers. Wholesale electricity prices have always been high in the summer, but conversely, prices are lower in the fall and spring months when demand is lower.

The following are some key reasons why electricity prices are high in San Diego this summer as compared to the summer of 1999.

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