California residents have grown accustomed to threats of rolling power cuts as the state struggles to meet electricity demand. Meanwhile, power generators have been threatening to call in the debts of distribution firms Southern California Edison (SCE) and Pacific Gas and Electricity (PG&E).

The two utilities have been hit by spiralling energy prices while the prices they can charge are capped. This left them with rapidly souring debts and their investors exposed.

The crisis escalated when SCE suspended US$596 million of payments to bondholders and suppliers and PG&E defaulted on a US$76 million loan, prompting power generators to cut off nearly half of California's power requirement.

Standard & Poor's had flagged investors' exposure when it downgraded its ratings on PG&E and warned that SCE is on CreditWatch for a possible downgrade. The credit rating agency warned investors that both companies faced imminent default unless the authorities come up with a solution to restore the utilities' liquidity.

Some investors had shown forethought ahead of such warnings. Citigroup's asset management operation reported it held a relatively small amount of short-term debt from the two utilities. But a spokesman said it would be "highly unlikely" any default would affect the fund since its holdings are backed by bank letters of credit.

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