Financial Community's Perceived Impacts Which Could Result From Default or Successful Legal Challenge by Participants in Washington Public Power Supply System Nuclear Project Nos. 4 and 5

In response to a congressional request, GAO reviewed the impacts and consequences of a default or a successful legal challenge by Pacific Northwest utilities participating in the construction of the Washington Public Power Supply System Nuclear Projects Nos. 4 and 5. GAO examined three scenarios which would relieve participants of their financial responsibilities with respect to the Projects' bonds: (1) one or more utilities voluntarily defaulting on their obligations and throwing that class into default; (2) one or more of the participants being forced into bankruptcy by the debt service obligations and creating a default among the class of participants; and (3) all participants being relieved of their obligations because of a successful court action by ratepayers or utilities challenging their obligation to make payments whether or not the projects are completed.

The Bonneville Power Administration (BPA) and Pacific Northwest utility companies formed the Supply System and constructed three nuclear projects. The Supply System built two additional nuclear projects which would be financially backed by participating utilities. The plants were financed through the issuance of municipal tax-exempt bonds by the Supply System. The projects were terminated because the financial market was not able to absorb the bond financing. However, by this time, the Supply System had sold $2.25 billion in bonds which required the participants to pay off the bonds in the amount of their proportionate share whether or not the plants were ever completed or operated. A number of participants and rate payers have filed lawsuits contesting the validity of these obligations. Financial experts agree that a default by the participants on the bonds could adversely affect the region's economy and its ability to raise capital in the bond market. A voluntary default could have a more negative impact on the participants and the region. Participants that default could expect to pay higher interest rates for future bond sales. Although a successful legal challenge to the contract could relieve the participants of their debt obligation, it could create difficulties for and raise the cost of utility financing.