Progress on US utility crisis

California is facing the prospect of blackouts

US politicians are attempting to rescue two debt-ridden utility companies, amid fears that their failure could undermine the country's banking sector.

Federal and state officials met the struggling electricity suppliers late on Tuesday to discuss ways of ending a month-long crisis which has brought California to the brink of a power blackout.

Seven hours - tough discussions, but progress was made

Energy secretary Bill Richardson

State governor Grey Davis and energy secretary Bill Richardson said progress had been made towards the short-term financial survival of Southern California Edison and Pacific Gas and Electric.

Further talks are scheduled for Wednesday, before Mr Davis and Mr Richardson reconvene at the weekend to finalise a rescue agreement.

Crisis spreads

The utility crisis has been sparked by the escalating cost of wholesale electricity, which the suppliers are prevented from passing on to customers by deregulation laws.

As a result, the utilities have run up huge debts.

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 Clinton administration stepped in earlier this week amid fears the crisis would spread to the wider economy.

It was thought that the collapse of the two utility companies would pose a major threat to banks such as JP Morgan and Bank of America, the utilities' creditors.

But the two dozen participants in Tuesday's talks were upbeat about prospects of a rescue package.

"The spirit was good. Seven hours - tough discussions, but progress was made," Mr Richardson said.

Power rationing

Mr Davis said they had made ground on longer-term issues, such as allowing utilities to enter into forward contracts with power generators to guard against fluctuations in the market price of electricity.

"We made progress, particularly on the issue of long-term contracting to bring down the rates, (and) ensure reliable power at very attractive rates.

"And that, I think, is the key to the long-term solution of this problem."

In the short term, electricity generators and marketing companies said they were prepared to allow Pacific and Edison to defer repayment of debts.

On Monday, Mr Davis pledged to save the two companies from bankruptcy, proposing to create a new state power authority and to crack down on wholesale price-gouging.

California state lawmakers were to hold hearings this week on how to tackle the politically-charged problem.

One option is to issue state-backed bonds - which would give utilities relief from volatile wholesale prices - and charge consumers with a longterm monthly surcharge.

Meanwhile, the state has adopted a power rationing programme and is calling on electricity customers to reduce lighting and non-essential use.

Last week, Southern California Edison announced it would cut 1,450 jobs, or 13% of its workforce, to save cash.