Generators of Bankruptcy

By John S. DeMott

Some utilities are approaching the brink

Planned and built in another, more optimistic age, America's electric utilities were modeled after the grandiose ideas of Thomas A. Edison, a hero of 19th century applied science. Now the industry is wallowing in unheroic times. In Midland, Mich., last week, directors of Consumers Power voted to stop construction on a nuclear project that is already $3.25 billion over budget, while local companies and state officials debated whether to save the plant. In New York, nearly 4,000 maintenance workers went on strike over wages against troubled Long Island Lighting, which is on the brink of default, the first ever in the 74-year history of the utility. Lilco Chairman William Catacosinos has bluntly stated that the company could be "forced into involuntary bankruptcy" next week.

Lilco is not the only power company whose managers are seriously talking about bankruptcy, which has not happened to a major utility in the U.S. since World War II. About half a dozen of America's 100 largest electric utilities are near that drastic step. What is more, these are among the biggest and most respected in the country, and how they handle their problems will determine the response of the entire industry.

The failures of the 1930's and 1940's were brought about by stock manipulation; the companies underneath remained sound. That is not the case this time. The companies themselves are teetering. Warns Ernest Liu, energy analyst at New York City's Goldman, Sachs: "This is the closest utilities have come to bankruptcy in any time in our history."

The objects of the most pessimism, in addition to Consumers Power and Lilco, are Public Service Co. of Indiana, Public Service Co. of New Hampshire and United Illuminating of Connecticut. All undertook ambitious nuclear power programs in the 1970's, then saw those projects threatened by antinuke sentiment after Pennsylvania's Three Mile Island accident. On top of that came searing double-digit inflation and rising interest rates that drove up construction costs to four and five times the estimates. The oil shocks of the 1970's made it all the harder for the utilities to produce cheap power. Finally, recession cut into demand for industrial and residential electricity and left many utilities with too much capacity, even before the completion of then- new generators. During the 1970's, consumer demand rose 7% annually. By 1983, though, the yearly rise had fallen to about 2%. Meanwhile, the stocks of the utilities dropped way off in value, to between a third and a half of what they once were, and Moody's and other rating services have been downgrading the once sterling utility bonds.

New York's Lilco is in the worst shape of all, and Wall Street analysts bet that if there is a utility bankruptcy, Lilco will be the first. Lilco is awaiting approval of $200 million in bank loans, along with rate increases of another $200 million, but help from both quarters is uncertain. Governor Mario Cuomo has said he will not support a state bailout to prevent a Lilco bankruptcy, and regulatory authorities are ensnarled in what size rate hikes to grant.

Lilco's albatross is its Shoreham nuclear power plant, completed in 1975 but inoperative since then because of lawsuits over safety and evacuation plans that would be used in case of an accident. Shoreham's cost was originally projected at $241 million, but the utility has already spent closer to $4 billion. The company loses about $1.5 million for each day that Shoreham's start-up is delayed.

Lilco has cut nearly 1,000 jobs, trimmed wages and reduced its budget by $100 million. But that is not expected to be anywhere near enough. Even if Lilco makes it through the summer, more pressures await in the fall. The utility faces a $90 million bond redemption in September that it says it cannot pay on time. If the bondholders demand money just the same, Lilco could be forced into bankruptcy.

Critics dismiss some of the bankruptcy talk as a scare tactic. Says Michael Totten, director of the Critical Mass Energy Project, a Washington conservation group: "It could be a bluff or a negotiating ploy. You can get a lot of mileage by scaring people. The companies have found a new weapon to force states to raise rates."

There is no doubt, though, that if Lilco or any other major utility declared bankruptcy, the ripples would spread through the financial community. Just one bankruptcy, says Analyst Liu, would "cost the entire industry its credibility." Bank credit, already difficult to obtain because of heavy risk, would dry up altogether. The various state public service commissions would move in and run the reorganized, bankrupt utilities. Whatever happens, says Francis Rivett, a spokesman for the New York PSC, "the lights won't go out."

Bankruptcy or no, bills to users are probably going up. Public Service of New Hampshire, drained by its Seabrook nuclear complex, is hanging on with money from Merrill Lynch's sale to investors of $90 million in short-term notes. The real rescue money, though, will come from users, who face rate hikes of 60% during the next five or six years. Seabrook defenders point out that the project will sharply lessen the state's dependence on foreign oil, whose price rises drove up bills by as much as 80%.

For some customers, though, there is no consolation at all. In Indiana, a task force set up by Governor Robert Orr is recommending a 3% rate hike in each of the next five years to pay for the $2.8 billion spent for the abandoned plants in Marble Hill. That means 540,000 customers in 69 counties would be paying for plants that never produced a single kilowatt of power. --By John S. DeMott. Reported by Barbara B. Dolan/Detroit and Thomas McCarroll/New York

With reporting by Barbara B. Dolan, THOMAS McCARROLL