On the morning after the largest municipal bond default in U.S. history, the Pacific Northwest awoke today to find itself transformed into a huge financial disaster area, indelibly tainted by the abandonment of nuclear plants that will raise the price of dams, power plants and even neigborhood schools.
Officials on all sides of the default by the Washington Public Power Supply System (WPPSS), including New York bankers, Seattle attorneys and Northwest politicians, said a local court decision freeing utilities of responsibility for a $2.25 billion debt on two defunct nuclear plants--and yesterday's official default on that debt--will hurt development here for years to come.
Investors will "no longer feel they have recourse to the courts here," said William Berls, vice president of Chemical Bank of New York. He said the bank, as trustee for holders of the defaulted bonds, is preparing a suit that could result in the attachment of assets of several Northwest utilities and cities, including Seattle's.
"It's guilt by association," said Paul O'Connor, press secretary to Washington's governor, John Spellman. He said investor reluctance to buy bonds for Northwest construction projects except at exorbitant rates will affect "even schools and school districts." One legal expert warned that the Washington State Supreme Court ruling voiding popular "take or pay" financial arrangements, which helped precipitate the default, could affect similar arrangements in other states.
Local officials said they anticipated years of expensive litigation--Seattle has already hired a San Francisco law firm at rates of up to $180 an hour--and continuing electric-rate increases in the wake of the default. Berls said Chemical Bank would file suit soon against the regional municipal corporation formed by 19 public utility districts and four cities, including Seattle, to recover the debt on the two nuclear plants, which totals $7 billion when 30 years' interest is added.
Seattle attorney Robert Graham, who started a task force on the problem for chambers of commerce in the region, said the only advantage of the default may be to frighten bondholders into cooperating with efforts to save at least two remaining WPPSS nuclear plants so that they can start earning revenues to pay off creditors.
Attorneys said it would be years before most of the major issues are resolved and any money is paid. The deluge of lawsuits flooding into WPPSS's offices all flow toward untraveled legal ground, likened by one participant as "a Lewis and Clark expedition in municipal law."
Berls said his bank would go after revenues from remaining WPPSS assets, such as three remaining nuclear plants under construction, plus a generating plant at Hanford and a hydroelectric project at Packwood Lake. If permitted by the courts, the bondholders might even seek to attach the assets of the city of Seattle, which, although a member of WPPSS, wisely declined to join other cities in agreeing to pay for the two failed plants--Nos. 4 and 5.
"We don't know at present if we have the right to attach the assets of a municipal corporation," Berls said. Graham said, however, that "politically it makes a hell of a lot of difference" if Seattle's assets are threatened and a move in that direction might stimulate an area-wide solution.
The Washington State Supreme Court ruled 7 to 2 on June 15 and reaffirmed last week that utilities, municipalities and electric companies in Washington had no authority under state law to agree to pay for the two nuclear plants, even if they were never built. Attorneys here expressed surprise at the interpretation of the state law, which has been used for years to assure investors they would be paid even if disaster befell a public construction project.
One attorney involved in the case, who asked not to be identified, said the ruling could "create shock waves in the rest of the country" since such financial arrangements are used under similar laws in other states. The state supreme court's interpretation of the state law cannot be appealed, although attorneys said they may appeal to federal courts on other grounds. Local courts in Oregon and Idaho have absolved participants there in the defunct nuclear plant projects of responsibility to pay for them, although the rulings are being appealed.
A survey of 351 municipal bond investors commissioned by Spellman reports that a majority will henceforth refuse to buy utility or nonutility revenue bonds or general obligation bonds issued by Pacific Northwest municipalities in the wake of the WPPSS default. They indicated they would still purchase Washington state general obligation bonds, but would demand much higher interest rates. Washington is due to negotiate a $149 million bond issue next month, the first major test of the impact of the WPPSS bond default.
Originally projected to cost $6.5 billion in the early 1970s, the estimated price of five WPPSS nuclear plants ballooned through inflation, management errors and cost overruns to $23.8 billion in 1981, a figure double the annual budget of the federal energy department.
In 1982, WPPSS terminated plants Nos. 4 and 5, admitting they could not easily borrow more money for them and that they might not find buyers for their electricity if they were completed. Plant No. 1--67 percent complete--was ordered mothballed for at least five years. Work on plant No. 3--76 percent complete--was halted in May when $960 million in completion funds could not be found. Plant No. 2 in Hanover remains the only healthy WPPSS nuclear project. It is 97 percent complete and is due to begin loading fuel this fall.
Late today, an aide to Sen. Howard Metzenbaum (D-Ohio) said he would put a hold on the Interior Department appropriations bill due for a vote as early as Wednesday. The bill contains a rider, introduced by Sens. James McClure (R-Idaho), Henry Jackson (D-Wash.) and Mark Hatfield (R-Ore.), to allow new funds to be raised to complete plant No. 3 without the risk of it being attached by creditors.