The Associated Press

Wall Street shoved California’s two largest utilities farther out on a flimsy financial limb Thursday after state regulators approved “wholly insufficient” electricity rate increases.

Standard & Poor’s and Fitch Inc., two major credit rating agencies, expressed disappointment with emergency rate increases ranging from 7 percent to 15 percent by downgrading PG&E Corp. and Edison International.

The companies are the corporate parents of San Francisco-based Pacific Gas and Electric and Rosemead-based Southern California Edison.

California’s Public Utilities Commission unanimously approved the rate hikes Thursday.

In response, Fitch deemed the increases “wholly insufficient” and lowered its ratings of PG&E and Edison to junk bond status.

Meanwhile, S&P – the most closely watched agency – gave the utilities a little breathing room by dropping them to “BBB,” just a notch above the credit junk heap.

In a statement, S&P indicated it held back because there still appears to a “reasonable chance” that Gov. Gray Davis and the state Legislature will come to the utilities’ financial rescue.

Meanwhile, the utilities’ stocks nose-dived Thursday for the second consecutive trading session as jittery investors fretted that the cash-strapped companies might be bound for bankruptcy court.

PG&E‘s stock plummeted $5, or 29 percent to $12 on Thursday; Edison‘s shares dropped $1.50, or 12 percent, to $10.75.

In the last two days, PG&E‘s stock has plunged by 39 percent, wiping out $2.9 billion in shareholder wealth. Edison‘s has fallen 28 percent, resulting in two-day paper losses of $1.4 billion.

Industry analysts said the credit rating agencies and stock market investors want to see a long-term solution that will allow utilities to charge rates closer to their electricity costs.

The utilities now operate under a two-year-old rate freeze adopted as part of California’s deregulated electricity market. In recent weeks, that freeze has meant they have bought wholesale electricity at prices up to 10 times higher than the retail rates they can charge.

The temporary surcharges approved Thursday will do little to help the utilities, said analyst Barry Abramson of UBS Warburg.

“This slows down their march toward bankruptcy, but that’s where they’re still headed unless something more is done,” he said.

Consumer activists maintain that the utilities should be allowed to go bankrupt after profiting during the early stages of deregulation.

A bailout would make rate payers “involuntary investors in the utilities…without even providing the rate payers with the right to repayment or stock ownership that investors normally receive,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights.

Industry analysts warned that California’s retail electricity rates might rise even faster if the utilities are placed under the control of a federal bankruptcy judge trying to protect creditors’ interests.

“Everything will be taken out of the hands of the state in a bankruptcy,” said analyst Mike Worms of Gerard Klauer Mattison & Co.

Thursday’s credit downgrades theoretically will make it more difficult for the utilities to borrow money, though analysts said lenders aren’t prepared to extend their credit lines under the current market conditions anyway.

At this stage, the credit ratings have a greater impact on the utilities’ debt, now estimated at about $10 billion.

Had the credit ratings of the utilities’ corporate parents fallen below S&P’s investment grade, banks could have required the companies to immediately repay their debts, a move that probably would have forced them into bankruptcy.

S&P’s decision to let the utilities cling to the lowest rung of investment grades “probably will be enough to keep the lenders from declaring loan defaults,” said Paul Fremont, a utility analyst with Jefferies & Co.

Wall Street’s hopes for a bailout now rest with Davis and the state Legislature, which is holding an emergency session to deal with the state’s energy rates. Investors will be paying close attention to Davis’ comments about the electricity market during his state of the State address Jan. 8.

“It is going to be very interesting to hear what (Davis) says and how he couches the terms,” said S&P analyst Richard Cortright. “But our eyes are really focused now on what the Legislature is going to do.”

The utilities say they can only afford to buy electricity for the customers for a few more weeks.