With just 10 days to go before the financially wracked Washington Public Power Supply System must come up with $15.6 million in interest payments, federal and state officials are scrambling to find a way to avert what could be the country's largest municipal bond default.
WPPSS, 88 municipally owned utilities, is stuck with a series of five nuclear generating plants in Washington state that has gone sour due to overruns causing the project's cost to rise from $4 billion to $23 billion and the decreased demand for energy. Two of the reactors have been cancelled, two others face long construction delays, and only one appears near completion. Without revenues to pay interest on the $2.25 billion in bonds backing the two cancelled units, WPPSS has declared it "likely" it will be unable to make its payment to Chemical Bank, trustee for the bonds, by May 31, thus putting it in technical default.
The face value of all the outstanding WPPSS bonds is $8.4 billion, or 2 percent of the total state and local bond market.
Next Monday Rep. George V. Hansen (R-Idaho) plans to introduce a bill calling for a federal bailout of WPPSS. Hansen's proposes a pool of $5 billion, out of which current bondholders would be reimbursed at cost. One fifth of that pool would be paid by the federal government and the rest would come from rate surcharges placed on the utilities involved in all the projects and from reserves of the Bonneville Power Administration (BPA).
Hansen has proposed the bailout because 16 of the utilities that are supposed to guarantee the bonds are located in his state.
However, the prospect of WPPSS joining Lockheed Corp., New York City and Chrysler Corp. on the federal bail-out roster, is considered doubtful. A survey of federal legislators this week by The Bond Buyer, a trade publication, found that "opposition to any form of federal assistance runs deep within the entire Northwest delegation."
Those who favor a bailout claim that BPA, a federal agency, played a central role in the planning and construction of the project. The director of BPA at the time the fourth and fifth reactors were conceived was Donald Hodel, now Secretary of Energy. At a press conference yesterday in Portland, Hodel denied that BPA was responsible for drawing the utilities into the WPPSS projects. He said it was a consortium of utilities that forecast an increased need for power and consequently prompted construction of the plants.
He also said that he was not sure if the critical financial problems caused by the abandonment of the fourth and fifth plants could be separated from the less severe problems of the other facilities. But he urged that the matter be settled by the utilities rather than the courts, where many WPPSS suits are pending.
Although WPPSS has sufficient reserves at Chemical Bank so that bondholders will not miss an interest payment until next January even if WPPSS defaults next week, the effect on the municipal bond market might be felt earlier. According to Howard Sitzer, director of municipal bond research at Thomson McKinnon, Inc. in New York, many individual investors would be so shaken that they would withdraw from the market.