Some Lessons in the Political Economy of Megapower: Wppss and the Municipal Bond Market

The municipal bond market is the institutional mechanism for allocating capital to cities and other tax-exempt borrowers. A key function of this market is to provide investors and borrowers with information that allows them to gauge relative degrees of risk in bond sales, including the possibility of default. The present study examines the risk signals communicated by the municipal bond market to potential investors in five nuclear power plant proposed by the Washington Public Power Supply System (WPPSS) during 1973–1982. The behavior of WPPSS bonds is compared with other electric revenue bond issues floated during the same time period. Based on pooled regression analysis, it is concluded that the municipal bond market did not encourage least-cost capital or energy choices in the Pacific Northwest, and it cannot be expected to forecast the full risks of megapower projects such as WPPSS.