If the state of Washington decides to default on $2.25 billion in bonds sold to finance two nuclear power plants, analysts say, shock waves would rumble through the whole municipal bond market. The assumptions of safe investing that market rests on would be shaken.
Northwest lawmakers, utility officials, and even New York bankers have been searching for a way out since late fall, when it became clear that the Washington Public Power Supply System (WPPSS) might default on the bonds. One possibility, just proposed by a group of Washington public utilities, is for the state to create a Municipal Refinancing Authority that would sidestep default by issuing $680 in new bonds on behalf of the public utilities who are responsible for the enormous debt.
Here's what happened:
The mid-1970s were a boom time in the Northwest, with experts forecasting nothing but the cheeriest of economic futures. Then Gov. Daniel Evans approved the building of five nuclear power plants at once.
At the time, the Northwest was riding a 7 percent growth rate. ''If growth like that continued, we would have doubled our electric power needs in 10 years, '' says Mr. Evans.
The first three plants were backed by the federal Bonneville Power Administration and some private utilities. But the two now-abandoned plants were backed by 88 public utilities in the Northwest.
No one has decided yet who will directly pay the bill, or whether it will even be paid. One court trial is under way to decide whether those utilities that signed agreements to build the five plants are responsible for the debt. Some claim WPPSS misrepresented its ability to build and finance the projects, so the utilities claim they should not have to pay for WPPSS' mistakes.
''The potential for default is having more of an effect than anything,'' says municipal bond analyst Chuck Silverstein of New York's Prescott, Ball & Turben. Shaking confidence in such municipal bonds in turn may make it more expensive for utilities and local governments in the Northwest to borrow money again.
Only a handful of the 88 public utilities have paid WPPSS the first installment payment due in January on the debt financed by the sale of bonds. But more than 20 percent of the utilities have paid into an escrow account that will be sprung loose only after the courts decide who is responsible for the debt.
The $2.25 billion error - which quickly balloons to $7 billion with interest payments added in - is not only due to alleged WPPSS mismanagement, inflation, construction delays, and a public souring on nuclear power. It's also, says Mr. Silverstein, a result of a troubled Northwest economy.
Evans says the chance for a federal bailout is ''unlikely,'' and the possibility of reviving and finishing the two abandoned plants even more remote.
The New York brokerage house of Drexel Burnham Lambert Inc. has warned clients that WPPSS will probably default sometime before July on the bonds sold to finance the two plants.
But Howard Sitzer, director of municipal bond research at Thomson McKinnon Securities, says he thinks ''most of the (utilities) will kick in their share'' and could salvage the situation.