Whoops Woes

A $2.25 billion default looms

The U.S. nuclear power industry has suffered many setbacks, one of the worst being the accident at Three Mile Island. But none is potentially more costly than the financial tragedy unfolding in Washington State. Next week the Washington Public Power Supply System is expected to fail to make a $15.6 million monthly debt-service payment to Chemical Bank on bonds worth $2.25 billion. The securities were issued starting in 1976 to pay for two nuclear power plants that have already been scrapped. A default would likely endanger completion of three other unfinished WPPSS plants on which $6.1 billion is owed. Moreover, the uncertainty that it would create could shake the very foundations of the municipal bond market and lead to huge losses for big and small investors alike. Says Robert Adler, a Shearson/American Express vice president: "Small, medium and large investors will all be hurt--all the way across the country."

On Wall Street, the WPPSS (nicknamed Whoops) situation is being compared to the near default by New York City in 1975. Investment bankers are hoping for the best, but some expect the worst. Says David Jones, an economist with the brokerage firm of Aubrey G. Lanston: "This situation is another Mount St. Helens waiting to happen."

WPPSS's troubles are the result of more than a decade of misjudgments. In the early 1970s, when it appeared that the demand for electricity would outrun supply, WPPSS started construction on three nuclear plants and later added two more. The agency, though, was unable to cope with such enormous projects, and deadlines began slipping and expenses ballooning. By 1982 the total cost of the development had leaped to $23.8 billion, more than five times the original estimate. The first plant is not scheduled for completion until 1984, seven years later than expected. Making the situation even worse, energy demand has been falling for several years, so not all the plants are needed. By last year, building had halted on Plants 4 and 5, which were financed by the bonds. Since then work has been slowed on two other plants as well, and the project's construction fund is nearly exhausted.

Utilities in the Pacific Northwest, which agreed to use power from Plants 4 and 5 and were supposed to help finance the project, are now pushing it toward default. They signed contracts, known as take-or-pay agreements, that obligated them to pay for the reactors whether or not they generate any electricity. Now the utilities claim, among other things, that the contracts are unenforceable and that they were misled by official projections about future energy shortages. Most of the utilities have stopped payments to WPPSS, and by the end of June, 88 utilities will owe it $62.4 million.

WPPSS's woes have made consumers in Washington State furious. Since bills for the nuclear plants started coming due, the average residential electric rates have gone up about 80%. Some irate ratepayers urged that WPPSS file for bankruptcy so that its debt payments can be eased.

Congressman George V. Hansen of Idaho has been preparing legislation for a federal bailout of Whoops. The Federal Reserve is watching the situation, but neither the Reagan Administration nor Congress seems inclined to consider a rescue operation.

If WPPSS does not make its debt-service payment on May 31, it will have 90 days to find the money. If it cannot come up with funds, then Chemical Bank, as bond fund trustee, or the lenders will be able to declare the bonds immediately due. Such an action would doom the entire project and push WPPSS into receivership, making it the biggest municipal bankruptcy in U.S. history. This file is automatically generated by a robot program, so viewer discretion is required.