While most of California can only dream of a white Christmas, the fact this wasn't a black Christmas was reason enough to give thanks. The lack of snow made heating a state short on power a little easier. And, as the lights stayed on through the holiday weekend, California survived another week without the threat of blackouts becoming reality.

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Still, a solution to the surging power crisis seems to be mired in shades of gray, with California utilities and regulators locked in a political battle that may cause the utilities to drown in a sea of red ink.

California's native utilities -- especially PG&E Corp. (PCG:NYSE - news - boards) and Edison International (EIX:NYSE - news - boards) -- are racking up about $1 million in debt an hour just to buy power from wholesale generators to keep the state bright and warm. And, with threats of ratings downgrades from credit agencies, both utilities have warned of impending doom if the California Public Utilities Commission, or CPUC, does not provide rate relief soon.

Both utilities have said seeking bankruptcy protection might be necessary if they are not allowed to recover the costs of power from ratepayers. Under California deregulation, retail electric rates were frozen until 2002, while wholesale power prices are now market-based. (Sempra Energy (SRE:NYSE - news - boards), the parent of San Diego Gas & Electric, has been allowed to adjust rates as it has completed divestiture of its generation assets in California.) With wholesale power at times of peak demand selling for more than 50 times its cost prior to deregulation, the inability to pass those costs on to consumers has saddled PG&E and Edison with more than $8 billion in debt this year alone.

And, the problem for both utilities is getting worse. In a Securities and Exchange Commission filing late Tuesday, Southern California Edison, the utility division of Edison International, disclosed it has been unable to obtain short-term financing because of its "precarious credit condition." The company said it has been unable to arrange a $1 billion credit line or sell commercial paper or other short-term debt.

Without relief, the company says, it may become insolvent. "The increasing [retail rate] undercollections, coupled with SCE's anticipated near-term capital requirements and the adverse reaction of the credit markets to continued regulatory uncertainty over SCE's ability to recover its procurement costs, have materially and adversely affected SCE's liquidity," the company's filing states. "Unless regulatory actions are taken that restore the confidence of the credit markets in SCE's financial condition, and if SCE is unable to secure additional sources of financing, SCE may have to seek the protection of the bankruptcy court."

The company says its losses from skyrocketing power prices will approach $5 billion by the end of the week. As a result, last week the company eliminated its fourth-quarter dividend, is cutting $100 million from its capital budget for next year and is eliminating 400 contract labor positions. And, for the first time, the company said the impact from SCE's losses may impact the parent company, Edison International.

"The matters discussed above may materially and adversely affect Edison International and certain of its other subsidiaries," the filing states. "If the operations and financial results of Edison Mission Energy and Edison Capital are materially and adversely affected, the impact on Edison International could also be material."

So, how is the state responding to the crisis? California Gov. Gray Davis is on a junket to Washington to meet with President Clinton, Fed Chairman Alan Greenspan and Treasury Secretary Lawrence Summers. The purpose, supposedly, is to seek three wise men's counsel. However, more than one analyst commented that it smelled more like campaign grandstanding than a search for a real solution to the problems at home.

And, Wednesday and Thursday, the CPUC is holding hearings on the crisis while it attempts to find auditors to check the books of PG&E and Edison to make certain they aren't fudging their losses. The CPUC hopes to have an audit done by next week, in time to decide whether a rate increase is warranted. In the meantime, consumer groups are ready to challenge any decision of the CPUC to raise rates, claiming any rate increase under the new deregulation statute requires legislative action.

The problem is that while the governor is grandstanding -- last week he called California generators "pirates" for charging market-based prices for power -- and the CPUC is listening to the pontifications of seasoned lobbyists, the crisis worsens. Last week, one analyst said the chance of a utility bankruptcy filing stood at 80%.

Now, every day that there is no action from the CPUC, the chance of bankruptcy inches higher. And, once a bankruptcy filing occurs, the ability to forge a solution becomes increasingly difficult. Bankruptcy by either utility would take on a life of its own, weaving a web of complexity that may very well be the downfall of California's deregulation experiment and have broad impacts on utilities, power generators and ratepayers.

If you think things are bad now, just wait until the courts get involved. The CPUC and governor should think hard about that as they forge ahead with possible solutions. As Edison's filing on Wednesday shows, time is running short.

Fighting the FERC

Also on Wednesday, Southern California Edison filed suit against the Federal Energy Regulatory Commission, seeking an order requiring it to reinstitute cost-based wholesale power rates in California. Under deregulation, wholesale power rates are market-based. And, although California regulators and utilities have urged FERC to adopt firm price caps until a solution to power prices are found, FERC has resisted the pressure.

The FERC agreed to impose a temporary soft-price cap of $150 per megawatt hour until April. However, generators may charge higher prices under certain circumstances.

PG&E is also said to be preparing a similar lawsuit against the FERC.

Dating in Dayton

Sources tell TheStreet.com that DPL (DPL:NYSE - news - boards), the parent of Dayton Power & Light, has retained Morgan Stanley Dean Witter to help sell the company.

The timing is good as rising stock prices of many utility companies has once again made the use of equity as acquisition currency attractive. And, as deregulation spreads across the country -- notwithstanding the experiences in California -- small, regional utilities such as DP&L are attractive to super-regional utilities in consolidation mode.

The sale is not totally unexpected. Earlier this year, famed financier Kohlberg Kravis Roberts bought a 20% stake in the utility for $550 million. If the company sells for $5 billion, as some suggest is possible, KKR would reap a tidy profit.

Several companies will likely have an interest in the Ohio utility. Its Ohio brethren, AEP (AEP:NYSE - news - boards) and Cinergy (CIN:NYSE - news - boards) are possible suitors, as are regional powerhouses such as Exelon (EXC:NYSE - news - boards) and Dominion Resources (D:NYSE - news - boards). Also in the mix is British utility Powergen (PWG:NYSE ADR - news - boards), which is completing its acquisition of Kentucky-based LG&E. Also, a number of unregulated power companies are likely candidates as they look to spend cash from recent equity offerings.