SAN FRANCISCO, California (CNN) -- The California Public Utilities Commission ordered Thursday an independent audit of the state's two biggest utilities.
The commission also called emergency hearings on whether to allow the utilities to pass their increased costs on to consumers.
Skyrocketing electricity prices and a shortage of supplies from neighboring states have triggered a power crisis in California, and driven the utilities to the brink.
In ordering the audit, the commission said it needed to make a quick determination of the utilities' financial standing.
Pacific Gas and Electric and Southern California Edison said they are a combined $8 billion dollars in debt because under California's 1996 deregulation law, they are not yet allowed to pass wholesale price increases on to their customers.
"We acknowledge the utilities' claims that there is an extraordinary and unforeseen crisis in the wholesale and retail power markets in California," the commission said. "Therefore, we believe that utility rates in California must begin to rise. It is our intention to maintain the utilities' access to capital on reasonable terms."
Waiving its usual 10-day notice, the panel scheduled its hearings for next Wednesday. Its ruling will be issued January 4.
Power emergency declared
Electricity reserves ran dangerously short in northern California on Thursday, prompting the manager of the state's main power grid to declare an emergency.
The Independent System Operator (ISO) issued concurrent Stage One and Stage Two emergency declarations for northern California only. A Stage Two emergency means power reserves have dipped below 5 percent. Under a Stage One emergency, residents are urged to conserve power.
The power flow from southern California to northern California has been limited this week by a strained transmission link, and electricity imports from the Northwest have slowed to a trickle, the ISO said in a news release.
Wednesday, Energy Secretary Bill Richardson extended for one more week an emergency order which compels Northwest power generators to supply electricity to California. Suppliers from other states have been reluctant to sell power to California because of fear they would not be paid by the state's two biggest utilities.
No agreement on price caps, contracts
Talks aimed at easing the crisis hit roadblocks on Wednesday.
In Denver, Colorado, Richardson failed to persuade a group of Western governors to go along with his proposal for a regional cap on wholesale electricity prices.
The governors called for a study on the proposed cap. They also asked federal authorities to look into why electricity prices in California have skyrocketed.
And they urged California to step up its conservation efforts.
"We in the rest of the Western states say okay, if we're going to conserve and if we're going to provide excess power and then we find you in California could have done more, there is going to be resentment," said Wyoming Gov. Jim Geringer.
Richardson's only support for the price cap came from Washington Gov. Gary Locke, whose state receives power exports from California during the winter.
"We are in dire straits come this January," Locke said. "If they're (California) telling us now they will not be able to give us any bit of electricity, we have a major crisis coming up."
In Washington D.C., U.S. and California energy regulators failed to work out a deal on long-term power contracts. The contracts would set electricity prices for several years at a time, allowing utilities to shore up their supplies while protecting them from sudden price increases.
The Federal Energy Regulatory Commission (FERC) asked the California officials to come back for more talks on January 3. The FERC judge mediating the talks said representatives from consumer groups would also be asked to participate.
The Associated Press and Reuters contributed to this report.
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