Haberman v. Washington Public Power Supply System

Citation744 P.2d 1032,109 Wn.2d 107
Decision Date08 October 1987
Docket NumberNo. 52559-5,52559-5
Parties, Blue Sky L. Rep. P 72,662, 56 USLW 2227 Fredric HABERMAN, et al., Appellants, and American Express Travel Related Services Company, Inc., et al., Appellant/Intervenors, v. WASHINGTON PUBLIC POWER SUPPLY SYSTEM, et al., Respondents, and Chemical Bank, Respondent in its capacity as Bond Trustee.
CourtUnited States State Supreme Court of Washington

Note: Also See 750 P.2d 254. Ferguson & Burdell, Christopher Kane, Scott Tucker, Thoreson, Yost, Berry & Matthews, Ernest C. Matthews, IV, Seattle, Ginsburg, Feldman & Bress, Myer Feldman, Robert L. Deitz, Edward J. Tolchin, Washington, D.C., Jaffe & Schlesinger, Robert J. Jaffe, Howard G. Schlesinger, Springfield, N.J., for appellants Haberman, et al.

Smith, Smart, Hancock & Tabler, Walter S. Tabler, Seattle, (Winthrop, Stimson, Putnam & Roberts, John B. Daniels, David G. Keyko, Susan J. Kohlmann, New York City, of counsel), for appellants American Express Travel Related Services Co., et al.

Culp, Dwyer, Guterson & Grader, Robert D. Stewart, Seattle, Donovan, Leisure, Newton & Irvine, Daniel R. Murdock, New York City, for respondent Washington Public Power Supply System.

Helsell, Fetterman, Martin, Todd & Hokanson, David F. Jurca, Linda J. Cochran, Seattle, for Columbia respondents.

Syrdal, Danelo, Klein, Myre & Woods, Peter A. Danelo, Otto G. Klein, III, Seattle (Covington & Burling, S. William Livingston, Jr., Peter J. Nickles, Washington, D.C. of counsel), Davis, Wright & Jones, Evan L. Schwab, Stephen M. Rummage, David C. Tarshes, Reed, McClure, Moceri, Thonn & Moriarty, Roy J. Moceri, D. Bradley Hudson, Karr, Tuttle, Koch, Campbell, Mawer & Morrow, John F. Kruger, Seattle, Schnader, Harrison, Segal & Lewis, Bernard J. Smolens, Ralph Wellington, Arden J. Olson, Philadelphia, Pa., Sirianni & Youtz, Stephen J. Sirianni, Chris Youtz, Seattle, Schulte, Roth & Zabel, Robert M. Abrahams, Irwin J. Sugarman, Robert E. Bartkus, New York City, Williams, Kastner & Gibbs, J. Kenneth McMullin, Seattle, Simpson, Thacher & Bartlett, James J. Hagen, Elizabeth A. York, New York City, for Ebasco Services Inc., et al.

Riddell, Williams, Bullitt & Walkinshaw, John D. Lowery, Hugh R. Tobin, David R. Peeler, Seattle, for respondents Small Utilities Group.

Foster, Pepper & Riviera, Camden M. Hall, Stellman Kiehnel, Daniel L. Thieme, Culp, Dwyer, Guterson & Grader, Robert D. Stewart, Seattle, Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, Albert Malanca, Donald Cohen, Tacoma, Harris, Mericle & Orr, Jack G. Orr, Seattle, Pillsbury, Madison & Sutro, Dennis R. Bromley, Robert A. Gordon, San Francisco, Cal., for respondents Utility defendants.

Lane, Powell, Moss & Miller, Larry S. Gangnes, John R. Tomlinson, Paul D. Swanson, Seattle, Schwabe, Williamson, Wyatt, Moore & Roberts, Rockne Gill, J. Laurence Cable, Bernard M. Ryan, Bullivant, Houser, Bailey, Hanna, Pendergrass Hoffman, O'Connell & Goyak, R. Erick Johnson, R. Daniel Lindahl, Portland, Or., Rankin, McMurry, Vavorsky & Doherty, Peter R. Mersereau, for respondents Oregon Public Entitles.

Hillis, Cairncross, Clark & Martin, P.S., Michael F. Schumacher, Gregory E. Keller, Seattle, for respondents Inland Utilities.

Bennett & Bigelow, David A. Bennett, Elizabeth J. Blagg, Seattle, for respondent Dawson.

Jim Jones, Atty. Gen. for the State of Idaho, Clive J. Strong, Deputy Atty. Gen., Boise, Idaho, amici curiae.

BRACHTENBACH, Justice.

This case involves various bondholders' claims against the Washington Public Power Supply System (Supply System) and others for injuries resulting from the Supply System's default on $2.25 billion in revenue bonds issued to finance construction of two nuclear power generating plants. The trial court dismissed all bondholders' claims for their failure to state a claim for relief pursuant to CR 12(b)(6). We granted direct review and reverse the trial court's judgment on several issues.

Respondent Supply System is a "joint operating agency" and municipal corporation established and authorized by state law to finance, construct, own and operate electrical generating facilities. See RCW 43.52.360. Its members are 19 public utility defendants and four cities.

In the early 1970's, the Supply System began construction of three nuclear power generating plants WNP-1, WNP-2 and WNP-3. Those plants were developed in conjunction with a number of participating utilities from several northwestern states, including Washington. The Bonneville Power Administration (BPA), a federal agency, facilitated financing of the first three plants through complex "net-billing" agreements that allocated the risk of noncompletion to the federal agency, combined the costs of the nuclear plants' construction with less costly hydropower, and resulted in an indirect guaranty by BPA. See Chemical Bank v. WPPSS, 99 Wash.2d 772, 779, 666 P.2d 329 (1983) (Chemical Bank I).

By 1974, it appeared that additional electrical power generation facilities would be needed to meet growing northwest power demands. To meet these demands, the Supply System decided that two additional nuclear power plants WNP-4 and WNP-5, would be necessary. WNP-4 was to be owned entirely by the Supply System; WNP-5 was to be owned 90 percent by the Supply System and 10 percent by Pacific Power and Light Company, a private utility.

In addition to the Supply System and Pacific Power and Light Company, 88 "Participants" were involved in these two projects: 9 Washington cities, 19 Washington public utility districts (PUD's), 1 Washington irrigation district, 7 Oregon cities, 4 Oregon peoples' utility districts, 5 Idaho cities, and 43 rural electric cooperatives, of which 13 are in Washington. The remaining rural electric cooperatives are in Idaho, Montana, Nevada, Oregon and Wyoming. These Participants include 20 of the 23 Supply System members.

The Supply System financed construction of WNP-4 and WNP-5 through the sale of revenue bonds. Changes in federal law, however, precluded use of "net-billing" as a security device as used in the WNP-1, WNP-2 and WNP-3 financing. As a result, in 1976 the Participants all entered into a "Participants' Agreement" with the Supply System. In this agreement, the Supply System promised to sell, and each Participant promised to buy its share of WNP-4 and WNP-5 "Project Capability". Project Capability was defined by the Participants' Agreement as:

the amounts of electric power and energy, if any, which the Projects are capable of generating at any particular time (including times when either or both of the Plants are not operable or operating or the operation thereof is suspended, interrupted, interfered with, reduced or curtailed in each case in whole or in part for any reason whatsoever), less Project station use and losses.

Participants' Agreement, section 1(v). In essence, the Participants agreed to pay for their share of Project Capability regardless whether the projects ever produced electricity.

Each Participant agreed to begin monthly payments for its share commencing with the projects' date of completion, or within 1 year of the projects' termination. The Participants' Agreement also established a Participants' committee through which the Participants could disapprove certain actions taken by the Supply System's board of directors.

In 1977, the Supply System adopted bond Resolution 890, a trust indenture which provided for its issuance of a series of revenue bonds to finance the WNP-4 and WNP-5 plants. Resolution 890 appointed a bond trustee, Chemical Bank, to represent the bondholders' interests. Resolution 890 required the Supply System to collect charges for Project Capability from the Participants as agreed in the Participants' Agreement so as to provide for payment of interest due on the revenue bonds issued. The effect of the Participants' Agreement together with Resolution 890 was that the Participants indirectly guaranteed debt service on all the bonds issued by promising to purchase their shares of Project Capability once the projects were completed, or within 1 year of termination of construction.

Financing for the plants involved the capitalization of interest on a series of bonds. Under this arrangement, the Supply System would use future bond sales revenue to pay interest due on outstanding bonds until the completion of WNP-4 and WNP-5, when the operating revenues would then pay the debt service on the final series of bonds. Construction of WNP-4 and WNP-5 was originally projected to require $3.4 billion.

The Supply System, along with its investment advisors, prepared Official Statements to accompany the WNP-4 and WNP-5 bond offerings. These Official Statements contained opinions from engineers as to the structural and financial feasibility of the plants. Additionally, the Official Statements explained that the Participants were obligated to pay the costs of the plants, including debt service on the bonds, whether or not the plants ever were completed or generating power. The WNP-4 and WNP-5 bonds on their faces referred to Resolution 890 and the Participants' guaranties to purchase Project Capability.

The Supply System sold the bonds through a 15-part integrated offering beginning in February 1977. All bonds were sold directly to underwriters pursuant to bidding procedures in RCW 43.52.343. These underwriters then resold the bonds to investors.

WNP-4 was projected to be operational by March 1982; WNP-5 by April 1984. Presumably, the final series of bonds would have been issued so as to coincide with these dates, allowing the operating revenues to pay the debt service obligations on the final series of bonds as originally planned. On May 29, 1981, however, the Supply System announced that because it was not able to obtain bond financing for its nuclear power projects for the following year, and because northwest power demands had not grown as anticipated, it was terminating WNP-4 and WNP-5. The Supply System formally withdrew...

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