Is the colossal game of financial chicken that has been a major part of the response to California’s lingering energy crisis finally going to play out as the backdrop to the latest initiatives by the governor and his regulatory leaders?

The creditrating agency, Standard & Poor’s, for one, indicated Thursday a resolution needs to come soon. The state’s two major investor-owned utilities said earlier this week that are facing the prospect of taking after-tax write-offs of $6.8 billion collectively as California continues to fall short of solving its electricity problems.

The state could see its current AA credit rating be reduced as a result of the electricity woes, and its role as the principal spot power buyer could be in trouble, according to Steve Zimmermann, a managing director at S&P’s California offices, speaking at an economics forum at UCLA’s Anderson Business School Wednesday. “The current situation can’t go on indefinitely,” he noted.

“The state did have liquidity, and its coffers were full. And it had the capacity to [do the power] purchasing, but not for too long,” said Zimmerman. “There was about $5.8 billion in the state’s budget surplus at the first of the year, and up until recently the state had spent about $3.5 billion [on spot power purchases] and the legislature has authorized up to $4.2 billion.”

Longer term, Zimmermann said, the state bond issue is absolutely necessary. If the bond issue goes forward, it should restore quite a bit of the liquidity for this year, but longer term, revenues will slow.

In recent conference calls with creditors, senior officials with both Pacific Gas and Electric Co. and Southern California Edison Co. have expressed concerns about newly authorized rate increases of up to 40% being insufficient to cover all of the wholesale power costs, including the cost-based charges for their own generation. The utilities’ negative reaction has prompted creditors to more seriously consider moves toward involuntary bankruptcy.

At the same time, the state treasurer’s office Wednesday noted it has completed a $4.1 billion bridge financing package to cover the period between when surplus funds run out and the state bond revenues begin flowing later in the year. But it has placed a contingency on the bridge financing that would delay it if the two utilities challenge the currently authorized rate increase and the way it is ultimately allocated.

If PG&E’s utility and Edison proceed with their respective $4.1 billion and $2.7 billion after-tax charges, S&P said it doubts that they will be “restored to financial viability in the foreseeable future.”

S&P’s announcement characterized the California Public Utilities Commission’s rate hikes in January and March as not being structured “to financially rehabilitate the utilities.”

CPUC President Loretta Lynch in her remarks at the UCLA conference said that “to the extent that the utilities encouraged the deregulation experiment in California, they were part of the [current] problem, but they are an integral part of the state’s energy future.”

She said that the utilities’ own cost-plus generation, bilateral contracts and still-to-be-reformed qualifying facility (QF) power contracts are “what will get California through this pricing crisis because thankfully only about 30% to 40% of our power is bought from the merchant generators and sellers.”

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