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Monday, 8 January, 2001, 16:29 GMT
Utility fears hit US banks
San Francisco at night
California is facing the prospect of blackouts
Speculation is mounting that US politicians will step in to rescue two debt-ridden utilities, out of fear that their failure could undermine the banking sector.

If the two Californian utilities go bankrupt, it could pose a major threat for banks such as Bank of America and JP Morgan, the utilities' creditors.

The chance of bankruptcy has already sent fears through the nation's jittery equity and debt markets, amid rumours that the Bank of America is in financial difficulties.

The Clinton administration is to meet on Tuesday to try and solve the utilities' problems.

Amassed debt

California's two biggest electricity suppliers - Southern California Edison and Pacific Gas and Electric - are on the brink of bankruptcy.

Not for a single instant do I believe that politicians are so stupid as to allow the utility industry in the largest state in the country to go out of business.

Lawrence Cohn
analyst, Ryan, Beck and Co
The utilities' financial difficulties led to widespread power cuts throughout the state, home of Silicon Valley, throughout the summer.

The firms have been legally prevented from raising electricity bills, whilst being forced to pay much higher costs for wholesale electricity.

This combination has forced the utilities to amass debt at an alarming rate.

Pacific Gas and Electric is currently borrowing an average $1m per hour to pay for electricity delivered to its 4.5m customers.

And at the end of December, Southern California Edison had unrecovered power costs estimated at $4.9bn.

The companies will run out of cash within three weeks if they do not get state help or regulatory relief.

State intervention

Analysts think that this relief is likely to come, with either the state or the courts intervening to avoid a further setback to the US economy during its current sharp slowdown.

Utility statistics
Pacific Gas and Electric
4.5m electricity customers
18,800 employees
$7.3bn of unrecovered power costs
Southern Californian Edison
4m electricity customers
11,000 employees
$4.9bn of unrecovered power costs
"Not for a single instant do I believe that politicians are so stupid as to allow the utility industry in the largest state in the country to go out of business," said Lawrence Cohn, an analyst at Ryan, Beck and Co.

The fear is that the bankruptcies could create a crisis in the banking sector which would then exacerbate the US economic slowdown.

And it would counter the Federal Reserve's attempt to prop up the economy by cutting interest rates.

"Interest rates don't solve everything," said Bill Meehan, chief market analyst at Cantor Fitzgerald. "You can't have any real rally if the banks aren't rallying."

The perils of competition

Electricity utilities may seem unlikely candidates to spark a bad loan scare.

Electricity is used by almost everybody almost every day, thereby guaranteeing a revenue for electricity suppliers.

But it all started to go wrong for the electricity suppliers when the government deregulated the power sector.

Deregulation allows competition in the marketplace, theoretically ensuring better customer service and lower prices.

But these intentions backfired when it emerged that demand for electricity outstripped the capacity to generate it, and prices soared.

In an attempt to keep prices lower, the regulator dictated a maximum price, or price cap.

No win situation

But the suppliers argue that in a free market, prices should be dictated by strength of demand rather than regulation.

As the regulation stands, the electricity suppliers are left in a no-win situation: they must pay up for wholesale electricity, but cannot pass this cost onto the customers.

The utilities will be fighting for a change to this legislation at Tuesday's meeting.

The meeting is to be attended by Treasury Secretary Lawrence Summers, Energy Secretary Bill Richardson, members of the Federal Energy Regulatory Commission and executives from the two utilities.

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See also:

11 Dec 00 | Business
Power trade left 'open to abuse'
05 Jan 01 | Business
Stocks slide on fresh US fears
21 Dec 00 | Business
US economy slows sharply
05 Jan 01 | Business
Signs of a slowdown
02 Aug 00 | Americas
California faces power cut threat
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