Opinion ID: 1254414
Heading Depth: 1
Heading Rank: 2

Heading: the participants' agreements

Text: The Washington Public Power Supply System, organized in 1957, is a municipal corporation and a joint operating agency under Washington law. RCW 43.52. It is an association of 19 Washington public utility districts and four Washington cities. Its role in financing facilities to generate power for distribution by nonmembers grew from the search by the federal Bonneville Power Administration and the region's utilities, through such planning groups as the Public Power Council and the Pacific Northwest Utilities Conference Committee, for ways to meet the region's expected future power needs by means other than the federal appropriations that built most of the large hydroelectric projects from the 1930s to the 1950s. Under one such arrangement, WPPSS financed and owns the region's first major thermal generating plant, a nuclear reactor at Hanford, Washington, that was authorized by Congress in 1960 and completed in 1966. The projected output of the Hanford reactor was integrated into the Bonneville system by assuring participating utilities of firm power from BPA in return for their shares of the Hanford output, whether or not the Hanford project in fact produced any power. BPA promoted the construction of additional generating plants in various ways. One of these was the device of net billing, by which utilities financing the plants would assign their share of the generating capacity to BPA in exchange for credits on hydroelectric power purchases from BPA. Because this arrangement assured that the utility would receive BPA power to the amount of payments so credited, BPA in effect assumed the risk that the generating capacity assigned to it would fall below expectations. This device was used for the Trojan nuclear power plant at Rainier, Oregon, and for three earlier WPPSS plants, Washington Nuclear Projects (WNP) 1, 2, and 3. BPA withdrew the net billing device for the two projects, WNP 4 and 5, that are involved in the present litigation. BPA nevertheless encouraged its public power preference customers to go forward with WNP 4 and 5, predicting a deficiency in federally generated power for their needs, but BPA did not offer protection against the possible failure of these projects corresponding to the earlier arrangements. [1] In order to finance projects WNP 4 and 5, WPPSS executed five sets of contracts. Those relevant to the present issues are the Participants' Agreements and a bond resolution for the sale of bonds to investors which is incorporated in the Participants' Agreements. There also is an agreement for assigning to WPPSS for resale any power that a participant might not use, an agreement for acquisition by Pacific Power and Light Company of a 10 percent undivided ownership share in project 5, and an agreement for short term sales of power to certain industries. A number of the disputed issues depend on how the Participants' Agreements are characterized. The agreements themselves are written as contracts for the sale of shares of project capability, a phrase which in turn is defined to mean amounts of electric power and energy, if any, which the Projects are capable of generating at any particular time. Under the terms of the Participants' Agreements, WPPSS undertook the financing, design, construction, operation, maintenance, and eventual termination of the power plants, to issue and service bonds for that purpose, and to deliver power from the plants to the federal transmission grid for the account of each participant. The participants, in turn, promised to pay proportionate shares of the costs of constructing, operating, and terminating the two projects, whether or not they received any power from them. Each agreement went into effect only when agreements allocating 100 percent of the projects' capability and costs were executed. An Official Statement issued by WPPSS in marketing its bonds summarized the agreement as follows: Each Participant is obligated to pay the Supply System its share of the total annual cost of the Projects, including debt services on the Bonds ... whether or not the Projects are operable or operating and notwithstanding the suspension, reduction or curtailment of the Projects' output. Certain other provisions of the Participants' Agreements are important. Participants undertook to make payments only from electric utility revenues; in turn, each promised to maintain electric rates high enough to cover its payments to WPPSS along with its other obligations. [2] A participant's share could increase as much as 25 percent if another participant of the same type were to default. This step-up clause was designed to cover possible gaps in financing. [3] The agreements provide for election of a Participants' Committee with powers to review proposals of WPPSS on specified subjects and, in case of disapproval, to submit the matter to a Project Consultant. By its Bond Resolution 890, WPPSS authorized issuance of revenue bonds to finance the construction of WNP 4 and 5. The resolution covenanted that WPPSS would collect revenues from charges for power, including capability, sufficient to service the bonds and that it would not rescind or amend the participants' obligations or payments. Chemical Bank was named as the bond fund trustee and empowered to enforce the agreements. A provision of the Participants' Agreement, in turn, recognized that WPPSS was bound to comply with the Bond Resolution, among other regulatory and contractual obligations, and provided that this Agreement is made ... subject to the terms and provisions of ... the Bond Resolution and regulatory requirements. In short, the transactions were designed so that WPPSS could raise the capital needed to build two nuclear power plants by assuring that 100 percent of the costs would be recovered through irrevocable contracts with distributing utilities, which agreed to maintain their own rates high enough to meet those costs but were not obliged to meet them from any other source of funds. At the time of this litigation, WPPSS had terminated the projects after raising and spending several billion dollars toward their construction, when accumulating costs and marketability of power at the resulting prices proved vastly different from the initial assumptions. These events, however, do not bear on the issues before the court, apart from illustrating the risk that was present from the beginning. The question whether the cities and PUDs had authority to enter the transaction will not be judged by hindsight. That question is important beyond this case and will remain important for the future ability of the cities and districts to serve their communities, unless their authority is changed by law. It will not be decided with a view to the fate of WPPSS projects and its consequences. The answer must be the same as if the project still promised to deliver power at reasonable cost, and the cities and PUDs were defending their participation against a challenge, for instance, by opponents of nuclear power seeking to attack the legal basis for the projects.