Duke Energy insured against drought

CHARLOTTE, NORTH CAROLINA - Duke Energy said it expects the drought to further disrupt the region's electricity supply this summer, forcing the utility to arrange for extra power months ahead of time and pass along that added cost to customers.

Even though it has rained lately, the region remains in extreme drought and still needs significant rain over the next few months to get out of it. Charlotte-based Duke said it negotiated a standing arrangement with an outside power company to supply extra electricity as needed to help Duke get through the summer and the year. At issue is available river and reservoir water for cooling coal-fired power plants, which Duke might have to throttle back or shut down at times this summer because of government water regulations. When lake and river levels drop, the water Duke sucks in for cooling and later discharges can sometimes make the rivers too hot for aquatic life.

The utility already has money built into rates to buy power as-needed on the wholesale market if a plant breaks down or if there's extremely high demand. But it's rare for Duke to reserve extra power generation so far in advance, the company said. Duke finalized the arrangement late last year and announced it recently. Duke made the deal with San Jose, Calif.-based Columbia Energy, which owns a natural gas-fired power plant in Gaston, S.C., about 100 miles south of Charlotte. The move is a clear sign of just how bad the extended drought has become and the stresses on a power system that will ultimately result in higher electricity bills for consumers.

Buying outside power is more expensive than producing it at home. The costs of the yearlong arrangement would be passed to consumers through higher rates. Duke says that equals about 36 cents a month tacked onto the average N.C. homeowner's bill over 2008. Duke recently filed a rate increase request with N.C. regulators to cover the cost of the power purchase. It hasn't decided, yet, how to deal with the cost for its S.C. customers. If the power isn't needed, Duke would resell it on the wholesale market and share 90 percent of the revenue with ratepayers and 10 percent with shareholders. Summertime drought is a double-whammy for Duke because power demand in the Carolinas is at its highest as customers crank energy-hogging air conditioners.

Last summer, during a stretch of record heat, the utility had to pull back generation at its River end and Allen power plants for half a day, said spokeswoman Marilyn Lineberger. The deal is another sign of continued upward pressure on the historically low price of electricity in the Carolinas, which has been around 7 or 8 cents per kilowatt hour for years. That compares with 15 cents or more in California and other states that ave frequent power shortages and also rely on more-expensive natural gas-fired plants. The Charlotte region is also growing with 80,000 new residents a year. Power demand continues to rise as Duke signs up from 40,000 to 60,000 new customers a year, the company said.

Even as homes have become more energy efficient, annual household usage has increased steadily to the point that new plant construction is needed, Duke says. Add to the equation: the escalating cost of plant construction materials, the fossil fuels to run them, federal global-warming regulations expected from Congress next term, and the scarcity of water needed to run plants efficiently and at lower costs. Duke said it's planning for a dry spring and needs the 520 megawatts of available generation it purchased as an insurance policy. The deal is good for all of 2008, and, in general, Duke can call on the power when it needs it, said Sam Holeman, director f systems operations for Duke in the Carolinas.

Supply of electrical power relies on water Duke relies heavily on water for operations, including its three nuclear plants. Duke said the nuclear operations won't be affected this summer. The utility pumps 4.6 billion gallons a day into its five power plants on the Catawba River, of which 73 million gallons a day evaporates. Drought to continue According to the U.S. Drought Monitor, nearly all of the Charlotte region is listed as being in "exceptional" drought conditions, the worst level possible. While some areas have seen improvement, federal weather forecasters expect drought to continue.