Lessons From WPPSS

A $2.25 billion fiasco illustrates the drawbacks
to "business as usual" approaches for major social decisions

by Elaine Myers and David Lee Myers

One of the articles in Governance (IC#7)
Autumn 1984, Page 28
Copyright (c)1984, 1997 by Context Institute

The previous articles have emphasized possible governance processes for small, voluntary groups. While this may provide a cultural foundation, what about "big time" decisions? The following article explores the history of a set of major decisions (that have now turned sour), and indicates that many of the qualities discussed in the previous articles could have been a great help.

David Lee Myers is an elected Commissioner of Wahkiakum Public Utility District, a county-wide, publicly owned electric utility in southwestern Washington. He has represented Wahkiakum on the WPPSS Board of Directors since mid 1981. When he is not trying to straighten out billion dollar mistakes, he is a superb professional photographer.

Elaine has observed many of the WPPSS meetings, and takes credit for originally getting David to seek the office. Regular readers of IN CONTEXT may recall description of their rural lifestyle in the Spring 1983 and Spring 1984 issues. Copyright ©1984 by Elaine and David Lee Myers 1984.

The Setting

THE WASHINGTON PUBLIC POWER SUPPLY SYSTEM (WPPSS), better known as "Whoops", is a twenty-three member consortium of publicly-owned electric utilities in the state of Washington. Its Board of Directors consists of one representative (each a locally elected utility commissioner) from each of the twenty-three member utilities. It builds and operates power generating plants, or at least it tries to, under contracts with the Bonneville Power Administration (a federal power wholesaler), a hundred public utilities, and four investor-owned utilities.

WPPSS is most famous for defaulting on 2.25 billion dollars of bonds for its canceled projects Washington Nuclear Plants (WNP) 4 & 5. At the time, this was one of the nation's most spectacular nuclear construction failures. A couple of years later, WPPSS has plenty of company.

WPPSS represents a major fiasco of human governance. Several billion dollars have been spent constructing now- canceled projects. The nation's largest ever lawsuit over securities (bonds) is trying to determine who should absorb the loss. Several billion more have been spent on projects of uncertain future. Electric rates over large parts of the Pacific Northwest have been doubled with little benefit to anyone. A federal agency and several investor-owned utilities are near insolvency (not only due to WPPSS). WPPSS issues have distracted Washington state political leaders from their other work for several years. Hundreds of utility leaders in the Northwest have had to focus their creative efforts on coping with the WPPSS-related problems, to the neglect of other issues, for several years.

Like most failures, WPPSS has much to teach us. In telling the story of this broadly shared cultural mistake we hope to share our understanding of what went wrong, what positive actions helped to limit the damage, and how similar situations (of which there are many) could be better governed.

Old Assumptions

Nuclear plant construction projects have encountered trouble all across the country. Federal agencies, investor- owned utilities, and publicly-owned utilities have all stumbled. With skyrocketing interest rates, inflating construction costs, and new safety demands on an immature technology, the times have not been good to nuclear power. WPPSS makes an especially good case study because it is a complex public agency. Many persons and interests contributed to the process, and its workings are open to view.

As a study in governance this would be a dull story if the causes of the fiasco were evil and greed. But not so. The government officials who were trapped into these errors were men of idealism who lived out an ethic of public service. Those who oversaw or participated in planning and management included part-time elected officials, federal career bureaucrats, and professional engineers and lawyers. They achieved their positions through good records of success. They got into this trouble by the same methods which had previously served them well - a sobering thought for all of us. They had encountered a problem whose resolution required a change in basic assumptions - not just doing things better, but doing different things - and that is hard for most people to do.

To understand how it all began, think back to the early 1970s. The Pacific Northwest had vast amounts of cheap hydro generated power. The region's economy developed to use large amounts of cheap power. Partly in response to this cheap power, the regional economy was growing, using an additional seven percent of electricity each year during the early 1970s. Seven percent per year compounded means a doubling of usage in ten years. Utility planners felt a responsibility to provide the electric power to allow this economic growth to continue. They responded by planning five WPPSS and three other, private utility owned, nuclear plants, and several coal plants. What was on their minds as they proceeded?

Some of the old assumptions that governed the behavior and decisions of the old guard included faith in technological progress, bigger is better, reliance on experts from inside the business, allocation of electricity only by price, do it with Other People's Money numerical models of social phenomena, and what you can't put into numbers, ignore.

Rural and small town commissioners deferred to the decisions made by the experts, decisions often based on a narrow scope of understanding. Predictions of future behavior and need were based on models that used straight line extrapolation from past points. Factors which could not be rendered as "reliable" numbers were simply ignored. For instance, the tendency of customers to buy less electricity as the price increased (price elasticity) was omitted because they didn't know exactly how much less would be bought. Later this would turn out to be one of two or three key errors.

An unquestioning belief in technological progress committed billions of dollars on incomplete designs. Specific plant designs were not completed at the time construction was begun. Since each nuclear plant in the U.S.A. is its own design, there had been too little experience with similar plants. Such blind faith in technological progress meant that much work had to be undone, over and over, leading to worker demoralization, poor craftsmanship, and lack of construction progress for the money spent.

Our culture as a whole believes that bigger is better and centralized is better. Imagine a visit to a BPA system control facility. Full color computer screens monitor the region's generators, transmission lines, and the delivery of power to local utilities. Wall maps as big as the side of a house map out the system with colored lines and lights to indicate status - like a Pentagon war room. There's a morale of pride in the refined control over thousands of miles of system. They love it. Can such people understand generators at every home? Can they let go of their control and power?

The decision-makers here were almost entirely governmental and corporate. The publicly-elected decision-makers tended to be men who were successful in business during the 1950s and 1960s. They had seen greater usage lead to lower prices. Live better electrically. They accepted the assumptions listed above, assumptions that had worked well for several decades. But this decade was to be different.

Forces Of Change

A profound shift in cultural assumptions requires that several forces converge on the situation. By the end of 1980, the WPPSS board had begun to feel various pressures pushing for a change in direction.

The five nuclear power projects had fallen far behind schedule, with increasingly large cost over-runs. In 1979, they had spent money at the scheduled rate, and achieved essentially zero progress in construction. A study of the minutes of meetings shows that frequently one or two Directors would express concern that things were not going well. They would ask questions and perhaps request a study. But typically their concern was not echoed by a majority of Directors and their efforts remained ineffective. Often the problems were blamed on outside forces such as the Nuclear Regulatory Commission and labor unions. In response to the Three Mile Island accident, NRC construction requirements were increasing as fast as construction progressed, and much previously done work had to be changed. The partial truth in those excuses made it difficult for a majority of the Board to see the problems inherent in their projects and to see their management deficiencies.

At the same time, editorials in Northwest papers began to call for investigation and governmental action. The Washington state legislature began an inquiry into the management of the projects. The majority on the WPPSS Board of Directors, while beginning to admit that some changes had to be made (like a new managing director) still felt that the plants must be built, that we would soon run out of electricity, and we had to have more.

In all the discussion of the problem (that nuclear power plants were harder to build and more expensive than originally anticipated), the underlying assumption was doing better what we are already doing. The few lone voices who questioned this assumption were simply ignored. For instance, one WPPSS Director suggested a change from debt financing to more of a pay-as-you-go system, with gradually increasing rates. The people whose behavior (electricity consumption) was causing the expense (nuclear power plants) to be incurred would pay that expense. Also, they would notice sooner if costs were becoming excessive. These thoughts were overridden by the desire to delay as long as possible the price increases.

While lone voices were ignored, outside grass roots/activists groups were seen as the "enemy." Directors lacked the curiosity to seek any truth in their arguments. Public comment on a proposed policy was taken after the WPPSS Board had voted. The citizens could only approve or disapprove of the institutional action, without meaningful input of ideas or information.

Well, if the Board did not choose to listen to the citizens, perhaps they could be forced. The Don't Bankrupt Washington group began an initiative campaign, I-394, to require a public vote on future bond sales.

Regional Power Act Meanwhile (1975-1980), back in Washington D.C., another set of forces was gathering. In an attempt to form an explicit and conscious method for dealing with the looming energy (electric) shortage, the Pacific Northwest Electric Power Planning and Conservation Act was drafted. Citizen groups that had been activated by the oil shortage in 1973 contributed information, ideas, and economic models to provide some alternatives to the old assumptions seen above. The Northwest Conservation Act Coalition (NCAC), a network of groups such as the Sierra Club and the League of Women Voters, played an important role in redefining the methods used to achieve the goal of human progress. Actually, the bill was initiated partly to arrange funding for WNP 4 & 5, and then the alternative ideas supplanted the nuclear plants in the bill. Conservation was defined as a power supply resource and was given a 10% advantage over other power sources when evaluating the least expensive resource to develop. When costs were the same, renewable energy sources were to be given priority in development over non-renewable resources. Outside ideas (previously ignored) became part of the rules governing the actions of the WPPSS Board.

(We've pointed out some good features of the Regional Act, establishing new priorities for energy strategy. There are also some very troublesome features - how the costs and benefits are divided up - but that's another whole article.)

Unfortunately, these new definitions and methods were all cast in another old assumption, that we were going to have an electricity shortage, and we would have to allocate scarce resources. Almost before the ink was dry on the signature to the act, the region was awash in a surplus.

Weatherization With various starts and stops, political maneuvering and rule changes, the Bonneville Power Administration (BPA) and the local utilities began to implement the conservation mandate of the Regional Power Act.

As the news media began to focus on the energy problems and costs, public resistance to continuing the building program grew. As a person close to the action, I (Elaine) was often asked what a person could do to shut down WPPSS. I replied, "Weatherstrip your windows." This was never greeted with much enthusiasm. (As efficient as conservation might be, it has no sex appeal.) I explained that the WPPSS Board was now legally bound to match construction with demand, and if we didn't want the plants built, we must change our behavior so the region didn't need the power.

Under BPA programs, electrically heated homes in the Northwest have been insulated and weatherized, creating construction jobs, saving ratepayers money, and continuing the energy surplus.

Termination Of Plants 4 & 5 In 1980, WPPSS hired a new manager who was far more experienced in managing complex projects. He wrote new construction budgets, far more accurate than previous ones.

The funds required to complete all five projects suddenly looked more like $25 billion than $16 billion. Wall Street underwriters who had arranged all financing so far, said they couldn't do it, they couldn't sell that many more WPPSS bonds. Talk about internal contradictions! $2.25 billion spent on projects 4 & 5, and WPPSS can't raise enough money to finish.

The utility contracts providing financial support for the projects had no provisions for funding a period of "suspended animation" or "mothballing" of the projects. Bonds could not be sold for that purpose, and efforts to make ad hoc funding arrangements failed. So in January, 1982, projects 4 & 5 were terminated.

Meanwhile, the Washington state legislature was adding its influence to the situation by changing some of the players in the game. Starting with a legislative inquiry in 1980, they restructured the governing board of directors of WPPSS from all elected officials to mostly appointed industry experts (do the old way better).

As the bonds sold to finance the power plants (not yet producing any power/revenue) started to come due, revenue had to be increased by raising the rates. Price elasticity, ignored back in the projections of 1976-1980, began to shape electrical demand downward, creating more internal contradictions. Although BPA calculated rates to produce the needed revenue, the decrease in demand was sufficiently great that the anticipated revenue did not materialize. There was a possibility that raising the rates still higher would actually decrease the revenue collected. This is known as the death spiral in the rate/revenue relationship, and suggested that there were inherent limits to the rate increases that the regional economy could bear.

The increased rates (perceived cost doubled in about one year, 1981-82), occurring at the same time as the termination of two power plants ($2.2 billion down the hole) ignited a ratepayer revolt. Angry consumers are a very mixed group. On the one hand, they did succeed in recalling some of the least competent of the old guard commissioners, and focusing community attention on the upcoming November 1982 elections. However, they tended towards a very negative agenda (hell, no!), and a short attention span dictated by the evening news and newspaper headlines. The increasing public debate at utility meetings, and the letters to the editor in local papers contained a mix of reasoned analysis and hysterical ranting. The new WPPSS manager, while setting new heights in project productivity, was constantly berated for the failures of his predecessor.

The elections in November 1982 accelerated the acceptance of new points of view. Many of the older commissioners, men who had been successful in small town business in the 1950s and 1960s, were replaced by people who had been urban activists, city planners, and back-to-the-landers of the 1960s and 1970s. New decisions could be made by people not associated with the mistakes of the past.

In the same election, I-394 passed, 2 to 1, creating more external pressure for change in the construction program. The rules for selling bonds and financing projects were changed to incorporate the public's consent. WPPSS took the new law to court, claiming it could not apply to projects underway. Though WPPSS eventually prevailed, the pressure on it had been very significant.

Another feature of I-394 was a requirement for a cost- effectiveness study of the plants, before any more bonds could be sold. This became the most detailed calculation of the relative costs of the nuclear plants and other energy strategies. Public comments were taken on the methods and assumptions for the computing. Even when the results are flawed, such a process reveals the assumptions and values behind policy decisions. Thus any proposal must be more thoroughly thought out, and may be more knowledgeably debated.

Default And Litigation Internal contradictions once awakened soon acquire lives of their own. According to the Participants' Agreements of utilities contracted to support WNP 4 & 5, those utilities seemingly guaranteed bond payments in the event of termination. A very expensive appearing prospect. The power supply which had been intended to save all the utilities from crippling shortages now threatened to price some of them out of the market into insolvency, taking their customers with them. So they sued, claiming the contracts should not be binding. Soon the bond Trustee, Chemical Bank of New York, was in court against all the participating utilities, seeking declaratory judgment that the utilities must pay. Much to most everybody's surprise, the state Supreme Court soon ruled that the contracts were flawed and the utilities were not bound to repay the bonds. Holders of a couple billion dollars of bonds were left in the lurch. WPPSS defaulted on its bond obligations in July 1982, and the bondholders sued, claiming fraudulent issuing of securities.

The securities case is big. Alleged damages against each utility far exceed its worth. Evidence to be considered includes 140 million pages of documents. Years will be required for any conclusion to be reached. Litigation is not an efficient form of governance. It's "nyah nyah" and "gotcha," when what we need is to rebuild cooperation and optimism.

The Regional Plan The Regional Power Act created the Regional Power Council, eight members appointed by the states' governors, to plan the region's power supply and level of conservation effort, together with other uses of rivers, such as fish and wildlife. Many competing uses were to be balanced in a single, whole-systems plan. The Council began work on this Plan in 1981.

The process of developing the Plan provoked intense argument by governmental agencies, corporations, and interest groups. Citizen groups such as NCAC and Natural Resources Defense Council developed alternative models for future plans. The institutional insiders (establishment/money/power) drafted Plan A as they interpreted the Regional Power Act. The citizen outsiders (passion/voluntary/vision) offered Plan B based on new goals and methods. The result was a hybrid Plan.

Slowdown Of Plants 1 & 3 The litigation destroyed Wall Street's confidence in WPPSS, so it couldn't sell bonds for continuing construction of plants 1 & 3. This became one reason they were soon to be slowed down.

There was also a decline in power demand (1981 -1982), which suggested persistent regional surpluses. We wouldn't need the plants finished until several years later than scheduled, if ever. Although there was new worker pride on the job, and the projects had become leaders in efficient management, construction was suspended. Since they are covered by a different set of contracts, provisions were being made for the possible restart of construction. Their future is one of the hottest regional debates today.

The Present

Energy policy is being conducted more openly and democratically than when the WPPSS nuclear plants were begun. WPPSS Board committee meetings are open to the public and attended by reporters and interest group leaders. The Regional Council meets only in public. BPA conducts Town Hall Meetings to explain its policy options and collect comments from the public, before making its decisions. Ratepayer protest groups, and alternative policy groups have been vigorous. Many public utility official elections have been contested. It will be a challenge to sustain this energetic public involvement as the headline crises recede, yet we can only benefit if we do.

Events continue to expose hidden assumptions, which may warrant re-evaluation. The key one is that human progress is seen as synonymous with material progress. A delay in building power generation is seen as giving up on progress. Other frontiers for the human spirit are forgotten. This view is so widespread in our culture that it does not surprise. Harder to understand are the many people who think of conservation as sacrifice. As if insulating one's house and having more money left over after paying the utility bill is being worse off.

Another erupting issue is the extent to which the federal government, through the Bonneville Power Administration as power wholesaler, should use residential consumers as a revenue resource to guarantee conditions for profitable operation of major private industries and private utilities. For example, residential customers may be asked to support construction costs of plants needed to supply power not so much for themselves as for the region's aluminum industry. Industry would not guarantee to buy the power.

For several decades utilities have relied on centralized power generation and control. The economic risks of building the largest generating plants have become unacceptable. Also, a system relying on a few large plants is more vulnerable to operational failures. Increasing numbers of utility leaders are taking an interest in dispersed, smaller units of generation. In the near future, new micro-electronic equipment may allow practical coordination of large numbers of these units.

It is our tradition to resolve social needs by seeking new technology, new equipment, new materials, new processes, and more of all of them. This strategy is becoming more expensive and increasingly limited by material supplies or by pollution concerns. It is going to look more effective to examine and modify our style of action. Self examination makes us feel very anxious, whereas building new toys is lots of fun. But when the toys get too expensive, we'll learn.

Strange as it may seem, centralized, technological activities are often seen as "masculine," and decentralized or behavioral solutions as "feminine." This presents an emotional barrier to many men's acceptance of some alternatives like insulation, passive solar building design, and small generation sources.

The securities litigation has come to dominate utility decision-making. The dominant concern is "cover your ass:" yours and your utility's. Don't make any statement or decision now which admits or even suggests past error or inadequacy. In this way the lawyers have almost taken over utility management. Any new policy must first be examined in light of court defense of past policies. Sure makes it hard to change direction.

The history of the WPPSS fiasco cannot be openly explored in detail because everybody involved is in court. Say something and it may be used against you. So, many people keep quiet. Just for instance, this article lacks specific names because of the litigation, and lacks specific numbers and anecdotes because my own (David's) reference materials and meeting notes are in out-of town law offices.

Conclusions

It is uncertain how far, how fast the described shift will go. Opponents are still vigorous.

There are three points we especially emphasize:

The decision-making process in any particular business needs continual invigoration by infusion of fresh factors. These include personnel neither scarred nor fettered by involvement in past decisions, new institutional arrangements to sidestep stale routines, and a wide range of fields of thought and expertise.

Several factors are needed simultaneously to change a major, sustained way of doing business:

• The system must start to stumble and fail in its own terms, for internal reasons.
  
• Someone has to develop an attractive alternative.
  
• Great pressure must be applied from outside.
  
• Some new people are required.

Aggregate and individual behaviors closely reflect one another. Strengths and weaknesses of the overall social organism are those of the bulk of individuals within it. A democratic governmental body is shortsighted and materialistic only because its citizens are. Likewise it can be farsighted and humanitarian - if enough citizens want that.

Though our story has revolved around Northwest energy policy, the dynamics of the governance issues are typical for our society. We hope our account helps us all to better understand other unfolding cultural dramas, to nurture the positive directions, and to effectively push on vulnerable points of the old systems.

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