Facts
- Washington Public Power Supply System (WPPSS), a municipal joint operating agency, financed construction of nuclear generating projects WNP-4 and WNP-5 through revenue bonds totaling about $2.25 billion (with projected repayment with interest far higher).
- Bond repayment was structured around “Participants’ Agreements” between WPPSS and numerous municipal utilities, cities, towns, and public utility districts (participants).
- The agreements were “take-or-pay” contracts requiring each participant to pay an allocated share of project costs and WPPSS debt service regardless of whether the projects were completed or whether the participant received electricity.
- Cost escalation, construction problems, and reduced demand made the projects uneconomic, and WPPSS cancelled WNP-4 and WNP-5.
- Chemical Bank, as trustee for bondholders, sought to enforce the Participants’ Agreements and the associated revenue security for bond repayment.
- The participant municipal entities contended they lacked statutory authority to assume unconditional long-term payment obligations divorced from actual power delivery, rendering the contracts ultra vires.
Issues
- Whether Washington municipal utilities and public utility districts had statutory authority to enter into long-term “take-or-pay” agreements requiring payment of project costs and bond debt service irrespective of completion or power delivery.
- Whether the agreements unlawfully committed public revenues in a manner inconsistent with constitutional or statutory limits on municipal indebtedness and contracting authority.
- If the agreements exceeded municipal authority, whether they were void and unenforceable, including against bondholders acting through the trustee.
Decision
- The Washington Supreme Court held that the Participants’ Agreements exceeded the statutory powers of the Washington municipal participants.
- Because the agreements were ultra vires in the sense of being beyond the municipalities’ authority to make, they were void and unenforceable against the Washington cities, towns, and public utility districts.
- The court declined to enforce the agreements to protect bondholders where statutory authority for the municipal commitments was absent.
- The declaratory judgment relief favored the participant municipalities on contract validity, relieving them from the asserted debt-service payment obligations under the agreements.
Legal Principles
- Municipal corporations possess only powers (1) granted expressly, (2) necessarily or fairly implied from express powers, or (3) essential (not merely convenient) to the entity’s declared purposes.
- Courts strictly construe municipal powers; implied authority is limited and will not be inferred to support major, open-ended financial commitments without clear legislative authorization.
- Municipal contracts made beyond statutory authority are ultra vires and void, not merely voidable, and are unenforceable even by third parties who relied on them.
- Long-term obligations committing future revenues to pay project costs and bond debt service, independent of receiving the contracted benefit, require specific statutory authorization; general authority to participate in power projects does not alone authorize unconditional “take-or-pay” debt-support promises.
Conclusion
The court invalidated municipal “take-or-pay” Participants’ Agreements supporting WPPSS nuclear project bonds, holding the agreements ultra vires and void because the participating Washington municipal entities lacked statutory authority to bind themselves to unconditional long-term debt-service payments unrelated to power delivery.