- The Washington Times - Wednesday, January 17, 2001

Wall Street credit agencies declared California's largest utilities in default yesterday and said bankruptcy looms within days unless the state acts immediately to prevent it.

As California declared yet another statewide power emergency, Moody's Investors Service and Standard & Poor's Corp. downgraded Southern California Edison Co. debt deeply into "junk" territory after the utility said it would suspend $600 million of payments on its bonds and power purchases yesterday.

Standard & Poor's also downgraded into "junk" the debt of California's other failing utility, Pacific Gas & Electric, putting both utilities automatically in default on some $12 billion of debt and leaving them unable to get new loans.

The huge power companies have been caught in a financial squeeze in the last year between the exorbitant rates they must pay to buy power on California's spot market and the low rates the state requires them to charge consumers, the Wall Street firms said.

California's governor and Legislature, which approved the regulatory structure that created the problem, have failed to resolve the crisis in the weeks the Legislature has been in emergency session to address the situation.

Moody's said it was still hopeful that a "sketchy" plan the Legislature is considering to buy power on behalf of the utilities will be altered to deal with the financial crisis. But Standard & Poor's deemed the chances of any breakthrough "increasingly remote."

The defaults shook the credit markets yesterday and sent investors fleeing into safe-haven Treasury bonds. Analysts said the defaults hurt all companies that are in financial trouble and need credit. Bank of America, one of the utilities' main lenders, said it was setting aside $1.2 billion to cover bad loans.

Fitch Investors Service had already downgraded the utilities' debt into junk status earlier this month but yesterday kicked them down a notch further, into the "highly speculative investment" category.

Gov. Gray Davis and the Democratically controlled Legislature have refused to take steps most analysts say are needed to prevent a bankruptcy. Mr. Davis has ruled out raising consumer electricity rates or backing up the utilities' debt with state guarantees.

"They want a bailout from the governor, and he won't bail them out," said Steve Maviglio, spokesman for the California Democrat. He said the utilities' profitable parent corporations should bail them out. "Clearly, they're going to have to eat some of their debt."

Moody's warned that a bankruptcy would result in the brownouts that the state so far has averted and did so again yesterday by relying on an emergency order from the federal government.

That order, which expires today, requires power generators to keep supplying the failing utilities despite their inability to pay. Clinton administration aides said the order, in place since December, is unlikely to be renewed with President Clinton leaving office at the end of the week.

The administration failed to come to Mr. Davis' rescue yesterday by issuing an emergency order he requested that would have required suppliers of natural gas to keep selling to PG&E.;

"They themselves have to come up with some sort of solution," White House spokesman Jake Siewert said. "The federal government has a limited role."

The state's power suppliers have suggested they will force the utilities into bankruptcy, perhaps by week's end, unless the state acts quickly to make them financially whole.

The Legislature yesterday moved toward enacting a bill that would authorize the state's Department of Water Resources to negotiate low-rate power purchase contracts with power generators and then resell the power to the utilities and consumers at cost.

Most analysts said the legislation is a good way to lower the cost of purchasing power in the future but fails to deal with the immediate crisis. Bankruptcy "could scuttle the Legislature's long-term plans," said Pete Otersen, analyst with Standard & Poor's.

Mr. Davis contends, however, that the wholesale power rates the state is negotiating with power generators would be so low that they would enable the utilities to make profits as well as pay off their debts without raising consumer electricity rates.

California's power crunch started with rolling blackouts in the San Francisco area last summer and became critical again in the last month as the state declared three "stage three" power emergencies, including yesterday's, which are called when power supplies drop below 1.5 percent of electricity demand.

The state was barely able to avoid blackouts again through a variety of conservation and emergency measures, state officials said. But the crunch is likely to get worse in the months ahead as power generators, spooked by the prospect of bankruptcies, are backing off plans to bring new power plants on line during the peak electricity season this summer.

"The solvency and creditworthiness of the investor-owned utilities is a serious situation that is impacting us significantly," said Kellan Fluckiger, chief operating officer of California's Independent System Operator, the state agency that controls the electrical grid.

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