BUSINESS

‘Whoops’ to the bond market

WILLIAM LOWTHER November 1 1982
BUSINESS

‘Whoops’ to the bond market

WILLIAM LOWTHER November 1 1982

‘Whoops’ to the bond market

Almost from the start, the Washington Public Power Supply System has been tagged with the name “Whoops,” a word formed from its initials, WPPSS. But the pun is rapidly turning into a bitter joke for customers of the 88 West Coast utilities involved in an ambitious scheme to build a series of nuclear power plants. Consumers now face soaring utility bills as the project tries to pull itself from a quagmire of cancelled reactors, 360-per-cent cost overruns, falling demand, and the first of a threatened blizzard of lawsuits. Also threatened are thousands of individuals and institutions holding billions of dollars worth of bonds used to finance WPPSS, which is now facing bankruptcy and looking for a federal bailout.

Ten years ago local utilities in Washington, Oregon and Idaho banded together in the plan to meet the region’s future electrical needs with five reactors. It was a massive undertaking, estimated at that time to cost $6.67 billion (U.S.). Since then, says Washington state Gov. John Spellman, “everything” seemed to go wrong. The first setbacks involved regulatory delays and a bout of labor strife. Then, once construction was under way, interest rates shot up, adding substantially to the project’s debt burden. Equally frustrating, the increased power demand that the plants were supposed to meet never appeared. Says Spellman: “At its base, most people feel that bad management is to blame.”

Indeed, there is considerable evidence to support Spellman’s position. While overestimating future power needs, WPPSS’S original planners underestimated the scheme’s cost. At last account, completing all five reactors would require at least a $24-billion in-

vestment. The debt run up to cover the project’s escalating costs has turned WPPSS into the U.S. municipal bond market’s largest borrower. One issue alone, offered in February, picked up $821 million. That will translate into $4.6 billion in interest payments over the next 30 years.

Eight years after the project’s disastrous start a new management team stepped in. The group made its most dramatic move in January when it announced that two partly built reactors would be scrapped, because WPPSS had simply run out of money. Says Creigh Agnew, an energy adviser to Washington Senator Slade Gordon:

“All we have to show for it is two big dry holes in the countryside that have cost $2.25 billion to dig.”

What is more, it appears certain that a third reactor will be mothballed as soon as it is completed.

Now, the local utilities must cope with the $2.25-billion bill for the abandoned reactors and the costs of finishing the other three. They, in turn, intend to pass the cost along to their customers in rate increases ranging between 50 and 300 per cent over the next three years. Among the hardest hit is the tiny Public Utilities Commission in Bonners Ferry, Idaho. The town’s 1,900 residents have been given a share of the debt, which amounts to $4.27 million, or $2,250 per capita.

Not surprisingly, many customers are balking at paying their increased power

bills. As a result, many observers fear that utility bankruptcies may be in the offing. Not only that, but Alber Bellas, a senior executive of major WPPSS bond holder Shearson-AmericanExpress Inc., warns that the power project may default on its bonds, throwing money markets into a spin and jeopardizing the savings of thousands. Alarmed by that danger, many utilities—and a few customers—have gone to court in the hope of proving that they are not responsible for the debt. At least 14 such actions are now pending.

For its part, Shearson has sold WPPSS on the idea that U.S. government funds should be used to pay off the $2.25 billion. While full details have as yet

to be worked out, the key to the scheme is congressional approval for a U.S. government agency—the Bonneville Power Administration—to loan WPPSS $1.5 billion. The other $1 billion needed for the payoff would be made up by investing the loan.

If Congress does not go along with the bailout when it reconvenes in November, many believe that WPPSS is certain to declare bankruptcy. But

that may mean far more than just the end of the West Coast project. The entire U.S. nuclear power industry—like its counterparts in many other countries—is in the throes of economic difficulties. As a result, the death of WPPSS would not bode well for its future. As one member of the U.S. administration put it: “WPPSS is doing for nuclear power what cyanide did for Tylenol. If WPPSS goes down, that will be it.”

-WILLIAM LOWTHER in Washington.

WILLIAM LOWTHER