The Associated Press

The battle over who should foot California’s astronomical electricity bill is becoming a political showdown that pits the financial might of Wall Street financiers against the voting power of Main Street consumers.

The tensions are likely to be reflected in Gov. Gray Davis‘s State of the State address Monday night as he seeks to send a reassuring message to the financial community without incensing the general public.

“We are redoubling our efforts to approve a significant amount of new (power) generation,” Davis said in a statement Sunday.

California’s Independent System Operator and two major utility-owned power companies reported no significant power problems over the weekend.

Southern California Edison and Pacific Gas & Electric officials are looking to Davis, state lawmakers and the federal government to provide some long-term assistance to both the companies and their customers this week.

“We’re waiting like everybody else,” PG&E spokesman Jonathan Franks said Sunday. “We’re just waiting to see what the governor and the Legislature are going to do.”

“We’re certainly hopeful something may transpire this week,” agreed SoCal spokesman Steven Conroy.

One of two generators at PG&E‘s Diablo power plant was off-line Saturday for routine maintenance, but was powering back up Sunday, Franks said. However, “there’s not a crunch for power this weekend.”

Investors and lenders want Davis and the Legislature to protect their interests by quickly drawing up a plan that would saddle California’s utility customers with the staggering losses suffered by PG&E and SoCal Edison.

As wholesale electricity rates have skyrocketed since May during a freeze on customer rates, the two utilities’ combined power costs have exceeded their incoming revenues by more than $10 billion.

The utilities – supported by their financial backers – want to pass on those costs to their customers by raising their rates by more than 25 percent this year, with the flexibility to impose more increases down the line.

The California Public Utilities Commission last week approved temporary rate hikes ranging from 7 percent to 15 percent that sorely disappointed the utilities’ financiers.

Last week, Wall Street essentially issued an ultimatum to Davis and the Legislature: find a way to bail out PG&E and SoCal Edison or the utilities will have their allowances cut off and sent to bankruptcy court.

“The Legislature has to take the bull by the horns,” said Richard Cortright, an analyst for Standard & Poor’s in New York.

“It is our contention that the Legislature has all the tools to resolve this crisis. The only question is whether they have the political will to do so.”

As Wall Street’s leading credit rating agency, S&P will play a pivotal role in determining the destiny of utilities.

On the other side of the fence, lawmakers face a possible backlash from their constituents if they raise electricity prices too much.

“Everyone should be concerned that Wall Street is using financial threats to extract a bailout from the Legislature,” said Doug Heller, consumer advocate for the Foundation for Taxpayer and Consumer Rights.

“The only thing that can counteract Wall Street now is an angry voting public. If (lawmakers) think they can please all their campaign contributors from Wall Street without pressure from the public, then that’s what they will do.”

Rate increases also threaten to sap the spending power of households and businesses throughout the state, a phenomenon that could push California’s slowing economy into a recession.

“We don’t want to solve one financial crisis by creating another,” said state Sen. Debra Bowen, D-Redondo Beach, and chair of the Senate’s Energy, Utilities and Communications committee.

Lawmakers hope to come up with a remedy as quickly as possible, Bowen said, but won’t be pushed into adhering to Wall Street’s timetable for a solution by the end of this month.

The utilities say they have enough cash to buy electricity for their customers for another three to seven weeks.

“Everyone is engaged on an urgent basis, but we are going to act prudently,” Bowen said.

The possible solutions so far include additional rate increases, the issuance of customer-backed bonds to pay the utilities’ bills or leveraging California’s huge budget surplus to provide short-term financing to the cash-strapped utilities.

S&P upped the ante in the political poker game last week by downgrading the credit ratings of the two utilities to a notch above junk status.

The agency will probably lower the ratings all the way down to the junk category if meaningful action isn’t taken by the Legislature within three weeks, Cortright said.

Fitch Inc., another major credit rating agency, already has tossed the utilities on to its junk heap.

Even before the credit downgrades, the utilities had been cut off from the bond market because of their huge losses on electricity purchases. Both utilities now must rely on the credit lines that they already have secured from banks and the access to the funds are now imperiled by the credit downgrades.

After S&P’s action, PG&E disclosed that it will be declared in default on an $850 million credit line unless it can improve its credit rating by early April.

SoCal Edison is in even worse shape than PG&E, according to S&P officials, who are given daily updates on the two utilities finances. Barring a legislative solution, SoCal Edison would probably be the first utility to file bankruptcy, S&P said.

In an effort to conserve its dwindling cash, SoCal Edison has reduced its expenses by more than $500 million. The cost-cutting has included the suspension of its quarterly shareholder dividend and plans to eliminate 1,850 jobs, including contractors and temporary workers.