Despite three defaults this month, the commercial paper market remains stable, experts say - largely because of a decades-old ratings system.

Commercial paper, short-term IOUs issued by the highest-quality companies and bought by institutional investors, is considered to be a dependable and liquid investment, generally maturing in 30 to 270 days. The commercial paper market has grown dramatically since 1980 as a debt alternative for conservative investors.

But lately some issuers, notably the California utilities, have fallen on hard times, dragging their IOUs down with them.

PG&E Corp., beset with rising costs for wholesale electricity and bound by laws preventing it from passing on higher costs to consumers, defaulted Jan. 17 on $43 million of commercial paper. Two days later, Pacific Gas & Electric Co., a unit of PG&E, defaulted on $33 million of paper.

Another California utility facing bankruptcy, Southern California Edison, a unit of Edison International, defaulted Jan. 18 on $32 million of commercial paper, and industry watchers said they expect the utility to default on another $223 million by the end of the month.

Standard & Poor's cut PG&E's commercial paper rating to "C" from "A-3," and Moody's Investors Service downgraded the utility's rating to "not prime" from "prime-3." Both rating agencies also cut Edison International's commercial paper to below investment grade.

Such ratings have in the past prevented more defaults as former blue chip companies fall from grace. Xerox Corp., for example, was effectively barred from issuing more commercial paper last year to solve its cash crunch because debt ratings agencies downgraded the company to junk status.

Because of the ratings system, the impact of the most recent defaults on the commercial paper market overall should be "very little, unless the default process triggered something about the reliability of ratings," said Mark D. Vaughan, supervisory policy officer and economist at the Federal Reserve Bank of St. Louis.

At one time investors bought commercial paper based only on a company's reputation. But when Penn Central Railroad defaulted on $82 million of commercial paper in June 1970, investors questioned the entire commercial paper market. "In the 1970s there was no way to separate the bad guys from the good guys," Mr. Vaughn said.

Salomon Samson, a managing director at Standard & Poor's Corp., said that after the mid-1970s, when rating agencies developed reliable systems, buyers have been able to determine the quality of the issuers. Companies are not bound by law to have ratings on their paper, but "as a practical matter, it is a requirement," he said, and investors often insist on having commercial paper rated by two agencies.

Commercial paper issuers are among the most creditworthy of borrowers, Mr. Samson said. "If somebody is going to start getting nervous about this type of a credit, then where do they really have to turn? Just to treasuries."

Before the utilities, the most recent company to default on its commercial paper was Armstrong World Industries, when it failed to pay $50 million in November. Before that was automobile lender Mercury Finance Co., which defaulted on $17 million of paper in January 1997. By the end of February that year, Mercury's commercial paper defaults had soared to $315 million.

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