SEC to Take No Action in WPPSS Case : Says Enforcement Is Not Necessary Due to Suit in Bond Default

The Securities and Exchange Commission today announced that no enforcement action will be taken against those involved in the sale and default of $2.25 billion of Washington Public Power Supply System bonds.

In a 376-page report on its five-year investigation, the commission staff criticized several parties involved in the sale of the WPPSS bonds, which were issued to finance two nuclear power projects that eventually were terminated.

The report concluded that enforcement action was unnecessary because of a civil trial, difficulty in determining responsibility for disclosure statements attached to the bonds and concern that the commission lacked the resources to pursue the case.

18 Utilities Sued

Bondholders are suing 18 utilities that are members of WPPSS, the construction arm of the state’s public utilities, plus a financial adviser and two engineering firms in a trial that began Sept. 1 in Tucson, Ariz.

Most parties originally named as defendants in the suit, including WPPSS itself, have settled out of court for a total of $461 million, including $96 million in contested insurance claims.

The report concluded that the default, the largest in municipal bond history, resulted from extensive cost overruns and construction delays at WPPSS Project No. 4 at the Hanford nuclear reservation and No. 5 at Satsop, west of Olympia.

WPPSS, which issued the bonds, was responsible for the official statements used to sell them but “avoided disclosure of negative developments,” the report said. “Most significantly, the supply system failed to disclose that, in October, 1980, participants, who were concerned about rising project costs and falling power demands, asked the supply system to study a possible slowdown or termination of the projects.”

Work Stopped in 1982

Work was halted on the projects in 1982, both were abandoned later that year and in 1983 WPPSS quit making payments on the bonds after the Washington state Supreme Court held that the utilities’ contracts with the consortium were illegal and thus unenforceable. Without payments from the 88 participating utilities, many in other states, WPPSS defaulted.

The commission report also faulted the WPPSS bond counsel, who was responsible for assuring that the disclosures accompanying the bond sales were clear on the requirements that participating utilities pay for the projects.

“Although opinions on legal issues frequently contain some uncertainty, the state of the law was not as clear as those relying on the counsel’s opinions might reasonably have assumed,” the report said. “Further steps were not taken to clarify legal matters.”