The default of the Washington Public Power Supply System became official yesterday, but Wall Street showed little reaction to news of the largest municipal bond market default in history.
The troubled power supply system--known as "Whoops"--turned its last $25 million in unspent construction funds over to Chemical Bank, the trustee for investors holding $2.25 billion in bonds on two abandoned WPPSS power plants.
Late Friday, WPPSS's deputy manager, Alexander Squire, told the bank that WPPSS could not make its interest payment on the bonds, triggering massive losses for bondholders.
The Wall Street bond market, which had been braced for the default, showed little reaction yesterday, but in Congress there was an outcry over efforts to bail out the power network.
The $25 million turned over to the banks yesterday will be used to pay operating, maintenance and legal expenses. If there is anything left over--an unlikely prospect--it will go to the bondholders.
After trying unsuccessfully to sell its physical assets as a whole, WPPSS is now trying to liquidate them piecemeal and is awaiting what is expected to be an avalanche of lawsuits brought by suppliers, disgruntled investors and others.
Chemical Bank plans to sue the individual Northwest public utilities and municipalities that are involved in WPPSS and the supply system's governing body, plus lawyers, analysts and brokers who recommended the bonds. The bank will charge the advisers with fraud and neglect of fiduciary duties for failure to warn investors of the potential hazards, officials said.
Chemical Vice President William Berls said that when interest is added to the principal due, the amount could go as high as $7 billion.
Muncipal bond analysts said the market long ago discounted the WPPSS default. Therefore there was no immediate effect on prices of similar bonds.
As for the long-term effect, Peter Gordon, who heads the municipal bond market of T. Rowe Price Co. of Baltimore, said he expects investors will become skeptical of the market and shy away from bonds for electric generating facilities and Pacific Northwest projects in particular.
Eileen Austen of Drexel, Burnham said she expected a stronger reaction when the first interest payment is missed next Jan. l.
Trading in WPPSS bonds yesterday was very light, as it had been for the last several weeks. Bonds for the cancelled projects, nuclear power plants numbers four and five, are selling for about 15 cents on the dollar. Most of the investors are believed to be individuals.
John Nuveen & Co., a larger issuer of tax-free unit trusts that invest in bonds, said WPPSS number 4 and 5 bonds account for only 1.2 percent of its assets or $108 million out of $9 billion invested. A spokeswoman said the highest loss per $100 unit was $1.23, but the average was closer to 6 to 8 percent of annual income.
There is some activity among speculators who see an opportunity to make a killing if the WPPSS mess is ever resolved. One possibility on which they are betting is that the U.S. Supreme Court may reverse the decision of the Washington state Supreme Court, which held that the utilities do not have to pay 80 percent of their obligations on the two plants.
Another possibility is a federal bailout. Last week, several senators attached a rider to an Interior Department appropriations bill that would allow a new entity to raise money to complete two partially built plants not involved in the default by WPPSS.
Yesterday, Rep. John Dingell (D-Mich.) and Richard Ottinger (D-N.Y.) condemned that tactic. "This WPPSS bailout appears to be on a fast track and we intend to slow the train," warned Ottinger.
Dingell said "it is typical of this entire disastrous project that amendments are quietly added to bills with the express purpose of circumventing the proper legislative committees and process and avoiding public scrutiny."
Dingell and Ottinger, who plan to hold hearings on WPPSS on Sept. 5, warned that the federal taxpayers could be stuck with the power system's debts under the bailout plan.