Expansionary Institute

Michael Zey
futurist3000@aol.com

 
NEW YORK, Jan 5 (Reuters) - California's power crisis widened on Friday as major ratings agencies slashed the credit standings of the state's two biggest utilities, raising the threat of bankruptcy for them and sending ripples through financial markets.

The downgrades came a day after state regulators agreed to immediately allow Pacific Gas and Electric Co. and Southern California Edison to raise electricity rates an average 10 percent for 90-days, but the cash-strapped firms said the decision was woefully inadequate to meet their wholesale power costs.

Pacific Gas and Electric, a unit of PG&E Corp, and Southern California Edison, part of Edison International -- are in financial crisis because they may not have enough cash to continue operations.

The two companies have sunk into more than $8 billion of debt as power deregulation rules in 1996 put a freeze on retail rates until March 2002, but left wholesale prices open to the free market.  

Wholesale power costs have however soared four times higher than in 1999 amid a shortage of power plants, soaring natural gas prices and bad weather cut which production from hydroelectric dams.

California, while once considered a pioneer in deregulating electricity markets, has since summer been faced with warnings of widespread blackouts amid growing power demand in the world's sixth-largest economy.

WASHINGTON STEPS IN

A federal court in Washington denied a lawsuit by Southern California Edison which challenged California's law on deregulation.

Top White House economic advisors however will convene an emergency meeting Tuesday with California Gov. Gray Davis, and senior federal and state energy officials.

White House spokesman Jake Siewert said Gene Sperling, director of the National Economic Council would meet with Davis and representatives from the state's utilities "to get a sense of where things are and whether there is anything we can do to help ease the supply crunch."

Sources in the Energy Department said Energy Secretary Bill Richardson would attend the meeting. Federal Energy Regulatory Commission (FERC) Chairman James Hoecker and Treasury Secretary Lawrence Summers were also expected to attend the conference.

DOWNGRADES PROMPT WALL STREET JITTERS  

Jitters that a banking crisis could develop if major lenders are forced to pump funds into cash-trapped utilities rocked financial markets in morning dealings.  

Financial stocks led shares lower, while Treasury notes, bills and other short-term money market instruments such as Eurodollar futures flew higher.

Investors scooped up safe haven U.S. Treasuries and dumped stocks as speculation swirled that major U.S. commercial banks may face big losses due to their involvement with troubled California utilities.

Bank of America, the largest U.S. bank with a heavy presence in California, was caught up in a swirl of market rumors that the utilities' predicament was causing problems for the bank, but a bank spokesman said it was business as usual.

The utilities and their parent companies, which had asked the California Public Utilities Commission (CPUC) for much higher hikes ranging from 26 to 30 percent, could face bankruptcy within weeks after their credit ratings from Moody's Investors Service and Standard & Poor's were lowered to one step from junk bond status.

The parent companies have seen their stock prices tumble as investors fear they cannot pay their bills.

The ratings cuts threaten the companies' ability to tap essential credit.  Major banks also could face problems if the utilities cannot pay back loans.

Rumors that the utilities had drawn down a line of credit at the Bank of America Corp  were followed by a halt in the trading of the bank's stock on the New York Stock Exchange and broad declines in stocks.

But a Bank of America spokesman said it had not seen any significant losses in derivatives or other trading and it remained comfortable with its 2001 credit quality outlook.

The spokesman said it was against the bank's policy to comment on customer relationships. "We know of no basis to support speculative rumors about our operations," the Charlotte, N.C.-based bank said in a statement. "We are conducting business as usual."


But the rumors rippled through the equities and bond markets.

"The financial stocks are getting pounded," said Bill Meehan, chief market analyst at Cantor Fitzgerald & Co., before Bank of America's statement.

14:56 01-05-01

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