UPDATE 1-Spain reviews power auctions after threat of price rise
* PM says govt looking for new method to set power prices
* Competition watchdog annuls wholesale auction results
* Urgent measures could be passed before year-end - source
* Spanish utility shares fall sharply (Recasts with government plans for review)
By Jose Elías Rodríguez and Tracy Rucinski
MADRID, Dec 20 (Reuters) - Spain is looking for a new way to set electricity prices after a double-digit spike at a wholesale auction threatened a painful rise in household bills, the prime minister said on Friday, a move that could hit the country's utilities.
Spain's competition watchdog CNMC had previously annulled the results of a quarterly auction of wholesale electricity, in which prices logged a big jump that could have translated into a 10.5 percent rise in power bills.
Prime Minister Mariano Rajoy said the government was working on a replacement for the method by which Thursday's auction set price changes and hoped to resolve the matter before the year-end.
"The price hike that would have resulted from the auction was excessive and totally unjustified," Rajoy told reporters in Brussels after a two-day meeting of European leaders.
A source with knowledge of the matter said Industry Minister Jose Manuel Soria would present urgent measures on Dec. 27, the last weekly cabinet meeting of the year.
The auction had added to doubts on whether Soria's signature energy reform passed in July would be enough to fix a distorted power market that has led to 30 billion euros ($41 billion) of state-backed debt known as the tariff deficit.
The reforms, which include subsidy cuts and tax hikes, were meant to stop further annual growth in the tariff gap in a way that spread the pain among consumers, companies and the state.
The 3.6-billion-euro deficit this year will be held on the balance sheets of utilities such as Endesa, Iberdrola and Gas Natural, which are being probed over a potential manipulation of the wholesale power auction to compensate for their debt burden.
The utilities, which have managed to post respectable profits even after taking a hit from the tariff deficit reforms, have faced sharp criticism from consumers and the government over their alleged role in Spain's high electricity prices, which are some of the loftiest in Europe.
Shares in Endesa, Gas Natural and Iberdrola fall sharply on Friday, underperforming Spain's blue-chip index after the CNMC said it would not validate the quarterly auction due to the "concurrence of unusual circumstances" in which it was held.
Utilities as well as banks and brokerages participate in the auction, organised by market operator OMIE. An OMIE spokesman declined to comment on the auction or the probe.
Justifying its investigation, the Spanish watchdog also cited high daily market prices in previous weeks, just after the government reneged on a pledge to provide 3.6 billion euros in funds to cover the 2013 deficit.
Wholesale prices in the daily electricity market, or pool, have topped 90 euros per megawatt-hour in December versus an average of 45 euros during the rest of the year. ($1 = 0.7316 euros) (Additional reporting by Paul Day; Editing by Julien Toyer and Dale Hudson)
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