WHAT HAPPENS when a public agency defaults on $2.25 billion worth of municipal revenue bonds? The country is apparently about to find out. The Washington Public Power Supply System--Whoops, as it is universally known--has for months been sliding toward the brink where it now perilously teeters.
The reasons for this disaster have very little to do with the recession and the larger economic troubles of recent years. It is a case of a coalition of small utilities that undertook a gigantic plan to build five large nuclear reactors--a venture for which they had neither the managerial competence nor the technical experience. The project rapidly developed huge overruns of cost as, simultaneously, the planners began to realize that their original estimates of power demand were greatly exaggerated. They were building machines at too high a price to generate electricity for which there would be no customers.
Of the five reactors in the Whoops plan, one is now nearing completion. Two have been mothballed, about two-thirds completed. Two have been cancelled, and it is the bonds floated for those two that are the immediate issue.
The bonds were originally issued on the strength of contracts under which local utilities promised to stand behind them. But last month the Washington State Supreme Court held that the utilities didn't have the legal authority to make that kind of commitment. The costs of a default on this grand scale are likely to be widely distributed. Investors have been reminded that their risks are real. In response, risk premiums will rise. That will not be helpful to the national economy, since interest rates are already rising for other, unrelated reasons.
But among all the gloom and losses, some of the results of this fiasco will be very much to the good. It is the financial counterpart of the Three Mile Island accident, another lesson that nuclear power is an unforgiving technology. This country is going to need more reactors because, properly run, they provide power that is both safe and clean. But, as Whoops demonstrates, it is unwise to leave the management of nuclear systems to amateurs and people whose previous experience is limited to operating dams. As for the bond holders, it seems that the securities industry had got rather casual about handing out large sums of money regardless of borrowers' qualifications and performance, as long as there was a piece of paper somewhere saying that someone would pay for the mistakes. Starting right now, the lenders are going to begin using their considerable influence to enforce more careful standards on the builders of large power projects--and that is not at all a bad thing.