Financial History 141 Spring 2022 - Page 21

By Michael A . Martorelli
In 1983 , the Washington Public Power Supply System ( WPPSS , ominously pronounced “ Whoops ”) defaulted on $ 2.25 billion worth of municipal bonds it had issued on behalf of 88 regional utilities to finance the construction of two nuclear power plants . This state-sanctioned consortium of municipally owned utilities survived that episode . Under the new name Energy Northwest , it continues to provide electricity to more than 1.5 million customers in the State of Washington . And yet , the story of that municipal corporation ’ s ill-fated expansion program in the late 1970s still looms as a cautionary tale for utility company executives , municipal bond underwriters and local political leaders .
The Prelude
In the Pacific Northwest , governmental control of both the generation and transmission of electric power reveals a popular social policy dating back to the 1930s . In 1937 , Congress established the Bonneville Power Administration ( BPA ) and authorized it to market the output of hydroelectric power-producing dams on the Columbia River . In the late 1960s , the federally owned Bonneville and Grand Coulee Dams remained the region ’ s prime suppliers of electricity . Business analysts expected the recent pattern of solid economic growth to continue across the Pacific Northwest well into the 1970s and 1980s . Officials at both the BPA and the trade group Pacific Northwest Utilities Conference Committee ( PNUCC ) believed the concomitant increases in the demand for power would outstrip the ability of the region ’ s hydroelectric sources to satisfy those requirements .
In January 1969 , the BPA published A Ten-Year Hydro-Thermal Power Program for the Pacific Northwest , which described the need to construct 20 1,000-megawatt nuclear power plants to provide the energy the region would require through the year 1990 . Unlike the Tennessee Valley Authority profiled in Financial History ’ s Winter
Aerial photograph showing the locations of WNP-2 ( left ), WNP-1 ( bottom right ) and WNP-4 ( top right ), June 2009 .
2022 issue , the BPA was not authorized to construct or operate power plants , only to market their power . While more than 140 utilities operated within the region , none appeared large enough or interested enough to tackle a large nuclear project .
Enter the Washington Public Power Supply System ( WPPSS ). This group of 19 public utility districts ( PUDs ) was formed in 1956 to ensure that public entities retained control of the region ’ s electric power . PUDs themselves dated back to the late 1930s . They were instrumental in keeping the investor-owned utility industry from becoming as dominant in the Pacific Northwest as it became in most other sections of the country . In 1966 , 110 consumer-owned utilities and cooperatives within BPA ’ s service area formed the Public Power Council ( PPC ), a voluntary planning agency intent on acting as another countervailing force to the investor-owned utilities in the region .
In 1963 , WPPSS financed and built a 400-megawatt power plant near a plutonium-producing reactor on the Hanford Nuclear Reservation . Given that experience , in 1967 Managing Director Owen Hurd proposed the WPPSS build a 1,000-megawatt nuclear power plant , also on the Hanford Reservation . In 1969 , he extended that offer with a commitment to the BPA to build the first three nuclear power plants called for in the Ten-Year Program . It took time to work out the details of the complicated agreement involving the BPA , the WPPSS , the Atomic Energy Commission ( AEC ), local government officials and the region ’ s energy consumers . Finally , in June 1973 WPPSS sold its first municipal bond issue of $ 150 million to support its work on this project .
Constructing the “ Washington Nuclear Projects ” power plants labeled WNP-1 , 2 and 3 proved to be more difficult and complicated than anyone at WPPSS imagined . Many of the problems related to choices made by the Supply System , i . e ., using different architectural-engineering firms , different suppliers of the distinct types of reactors it chose to build and different construction management firms it charged with using “ fast track ” procedures to complete such inherently complicated projects in record time . The projects were also plagued by weather delays , labor strikes , regulatory changes , equipment failures and other problems . Moreover , the WPPSS itself did not have the project management infrastructure , experience or expertise to deal effectively with even the smallest disruptions to its plans .
Within a couple of years , the estimated costs of each project doubled and the time to their expected completions increased by more than a year . Due to the use of an unusual financing mechanism known as “ net billing ” however , WPPSS did not suffer the economic consequences one would have expected such problems to produce . The excess costs were borne by the participating utilities ’ customers and the BPA itself . The customers paid with unusually large rate increases several years in a row . The BPA paid by both 1 ) accepting the responsibility for repaying the interest and principal on more than $ 6 billion worth of municipal bonds WPPSS would float to finance the projects and 2 ) agreeing to pay off those debts even if the power plants were never completed or never produced electricity . A 1972 Internal Revenue Service ruling ended net billing by denying tax-exempt status to bonds sold to finance a power plant whose output was to be sold through an agency such as the BPA . The WPPSS bonds ’ taxexempt status was grandfathered . But its leadership knew it would not enjoy the federal government backstop for any bonds it issued to finance what would be called Phase II of the Ten-Year Program .
The Saga of WNP-4 and WNP-5
In December 1973 , the BPA and its utility customers agreed on the need to continue building new power plants in accordance with the Ten-Year Program . At that time , few were aware of the aforementioned design and construction difficulties of WNP-1 , 2 and 3 . So it was not a surprise when in mid-1974 the Board of WPPSS voted to accept the PPC ’ s invitation to build WNP-4 and 5 . Based on its record , the Board was confident it could finance the projects with additional sales of taxexempt municipal bonds . Without net billing and the BPA backstop , however , WPPSS asked the BPA ’ s utility customers to help secure the estimated $ 2.25 billion it would cost to build WNP-4 and 5 . It asked them to sign what it called a Participant ’ s Agreement that would commit them to investing in the capability of the plants and to paying their proportionate share of the system ’ s bond debts if WNP-4 or 5 were never completed or
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