# Appendix — American Express Travel Related Services Co. v. Washington Public Power Supply System

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1988
- **Citation:** 488 U.S. 805

## Text

87 189% peiiaginn

No.

oupreme Court, U.S,

MAY ay 1988

} PANIOL, JR,
—CtERK
IN THE | aa

Supreme Court of the United States
October Term, 1987

FREDRIC HABERMAN, et al.,

V.

Appellants,

WASHINGTON PUBLIC POWER SUPPLY
SYSTEM, et al.,

Appellees.

On Appeal From the Supreme Court
of Washington

APPENDIX TO
JURISDICTIONAL STATEMENT

Of Counsel:

Christopher Kane, Esq.

FERGUSON & BURDELL

Edward J. Tolchin, Esq.
GINSBURG, FELDMAN
and BRESS, Ch.

Robert K. Walsh, Esq.

JAFFE & SCHLESSINGER,

P.A.

Myer Feldman, Esq.
Counsel of Record
GINSBURG, FELDMAN AND
BRESS, Chartered
1250 Connecticut Ave., N.W.
Washington, D.C. 20036
(202) 637-9025

Robert H. Jaffe, Esq.

JAFFE & SCHLESINGER, P.A.
8 Mountain Avenue

Springfield, New Jersey 07081
(201) 467-2246

Counsel for Appellants
Fredric Haberman, ef al.

CASILLAS PRESS ING

17 K ST NW

WASHINGTON |

= etm a TO

Il.

III.

Vil.

Vill.

XI.

(i)

TABLE OF CONTENTS

Page

. OPINION AND JUDGMENT DATED OCTOBER

8, 1987 OF THE WASHINGTON SUPREME

COURT AS REPORTED AT 109 WN. 2d 107 ........... la

ORDER DATED FEBRUARY 17, 1988 OF THE

WASHINGTON SUPREME COURT .................. 85a

ORDER DATED FEBRUARY 19, 1988 OF THE

WASHINGTON SUPREME COURT .................. 86a
. NOTICE OF APPEAL BY APPELLANTS-

PLAINTIFFS FREDRIC HABERMAN, ET AL. ......... 87a
. MEMORANDUM DATED MARCH 7, 1985 BY

THE WASHINGTON STATE DEPARTMENT

Se tees at ed i a ei aus wee. 99a
. FEBRUARY 16, 1986 WASHINGTON STATE

SENATE PLOOR PROCHEIMIGS 6.5 c cc ccc cece, 104a

EXCERPTS FROM WASHINGTON PUBLIC

POWER SUPPLY SYSTEM BOND RESOLUTION

PE eters Vie tuca cans oe K Rha cece kde eewaie s 126a

EXCERPTS FROM RESOLUTION 911 DATED

se oe eka eu eke co ekvaas sae be see i> 130a
. FACSIMILE OF WPPSS BOND CERTIFICATE

FOR NUCLEAR PROJECTS 4 AND 5............... 133a
. EXCERPTS FROM OFFICIAL STATEMENT

ISSUED BY WASHINGTON PUBLIC POWER

SUPPLY SYSTEM DATED MARCH 17, 1981 ......... 135a

ORDER AND JUDGMENT OF DISMISSAL
DATED OCTOBER 7, 1985 OF THE
WASHINGTON SUPERIOR COURT.................. 227a

(il)

XII. AMENDED NOTICE OF APPEAL BY
APPELLANTS FREDERIC HABERMAN,

ge aie dd 08k Se 8 Oe Oe eee See a eee

XIII. PERTINENT EXCERPTS OF WASHINGTON
STATE SECURITIES ACT CIVIL LIABILITY
PROVISIONS PERTAINING TO APPEAL OF
APPELLANTS FREDERIC HABERMAN, ET AL

la

OPINION AND JUDGMENT
DATED OCTOBER 8, 1987
OF THE WASHINGTON SUPREME COURT
AS REPORTED AT 109 Wn.2d 107

Oct 1987 HABERMAN v. WPPSS 107
109 Wn.2d 107

{[No. 52559-5. En Banc. October 8, 1987.]

FREDRIC HABERMAN, ET AL, Appellants, v. WASHINGTON
PusBLic PowER Supply SysTEM, ET AL, Respondents.

[1] Dismissal and Nonsuit — Failure To State Claim — Fac-
tual Basis — Hypothetical Facts. Dismissal of an action for
not stating a claim upon which relief can be granted under CR
12(b)(6) is appropriate only if beyond doubt the plaintiff could not
prove any set of facts, including facts outside the record which are
consistent with the complaint, which would entitle him to relief.

{2} Dismissal and Nonsuit — Failure To State Claim — Con-
version to Summary Judgment — Relevance of Matters
Outside Pleadings. A trial court's consideration of materials
outside the complaint does not convert a motion to dismiss for
failure to state a cause of action under CR 12(b)(6) into a motion
for summary judgment under CR 56 if the court concludes that the
plaintiff cannot obtain relief no matter what facts he proves.

[3] Judgment — Res Judicata — Prior Determination. The
doctrine of res judicata bars only those claims which necessarily
were decided in a previous action.

[4] Bonds — Securities Regulation — Security — Bond
Guaranty. A ‘public instrumentality'’s indirect bond guaranty

[5)

[6)

[7]

[8)

[9)

[10)

[11)

2a

winch could not be purchased seperately from the bonds does not
constitute a security independent of the bonds themselves.

Securities Regulation — Statutory Provisions — Con-
struction — Purpose. The Securities Act of Washington (RCW
21.20) is construed broadly to carry out its purpose of protecting
investors.

Securities Regulation — Civil Remedy — “Seller” —
Privity — Necessity. Under RCW 21.20.430(1), which makes
sellers of securities civilly liable for unlawful sales, a party qualifies
as a “seller” if his acts were a substantia! contributive factor in the

‘gales transaction.

Conflict of Laws — Securities Regulation — Choice of
Law — Significant Contacts. A securities claim is governed by
the law of the jurisdiction having the most significant relationship
with the security. The significance of the relationship depends on
the competing jurisdictions’ contacts with the events giving rise to
the claim and the interests and policies of the jurisdictions.

Commerce — State Regulation — Validity — Factors. The
validity of a state regulation under the commerce clause depends
on the relationship between the state, the subject matter, and the
parties; the existence of a conflict between the state and federal]
regulations; and the degree of the burden placed on interstate
commerce in relation to the local interests served.

Statutes — Validity — Presumption — Burden of Proof. A
party challenging the validity of a statute must overcome the pre-
sumption that the statute is constitutional by proving its invalidity
beyond a reasonable doubt.

Constitutional Law — Equa! Protection — Classifications
— Minima! Scrutiny — Test. A statutory classification not
involving a suspect class or a fundamenta! right does not violate
the equal protection guaranty if all members of each class are
treated alike, there is a reasonable basis for distinguishing between
those included in and those excluded from each class, and the
classification is rationally related to the purpose of the statute.

Securities Regulation — Civil] Remedy — In-State Public
Issuer — Statutory Provisions — Validity. RCW 21.20-
.430(7), which establishes a scienter requirement to hoid the State
and its subdivisions civilly liable for securities act violations and
makes this requirement retroactive, does not violate the constitu-
tional equal protection, special legislation, due process, separation
of powers, or impairment of contracts clauses.

[12)

[13)

[14)

[15]

[16]

[17]

[18)

[19)

3a

Statutes — Validity — Special Legislation — Test. A stat-
ute establishing a claas does not violate the special legislation pro-
hibition of Const. art. 2, § 28(17) if it applies alike to all members
within the class and the classification is reasonably related to the
purpose of the statute

Statutes — Construction — Retroactivity — Due Process
— In General. The retroactive application of a statute violates
due process only if it interferes with a vested liberty or property
right. A claimant has no vested liberty or property right in the
continuation of existing statutory law.

Statutes — Construction — Retroactivity — Separation
of Powers. A retroactive statutory amendment does not violate
the separation of powers doctrine if it establishes new law to be
applied to the facts before the court, does not dictate how factual!
issues are to be decided, and does not affect a final judgment.

Statutes — Construction — Retroactivity — Impairment
of Contracts. A retroactive statutory amendment changing a
remedy does not impair the obligation of a contract executed
before the amendment unless the Legislature intended that the
statute create private rights of a contrectua) nature or the remedy
wes incorporated as a term of the contract.

Corporations — Derivative Action — Defense — Stand-
ing. In a derivative action, the entity which the plaintiff ulti-
mately seeks to represent has standing to challenge the plaintiff's
authority to bring the action.

Corporations — Derivative Action — Standing — Bond-
bolder — Equitable Right. A bondholder has no equitable right
to bring a derivative action to enforce a right of the bond issuer.

Corporations — Derivative Action — Standing — Bond-
holder — Indenture Agreement. A bondholder's contractual
right to bring a derivative action is limited by restrictions in the
indenture agreement if the bonds refer to the agreement

Corporations — Derivative Action — Standing — Bond-
bolder — Prior Demand on Trustee — Necessity. When a
bond indenture agreement requires bondholders to demand that
the bond trustee bring # derivative action to enforce the rights of
the issuer, whether the bondholders are excused from the demand
requirement before commencing their own derivative action is a
decision within the trial court's discretion The doctrine of futility
does not excuse demand if the trustee was involved neither in the
wrongdoing sought to be remedied nor in an action arising out of
the same facts as the bondholders’ derivative action. The demand

[20]

[21]

[22]

[23]

[24)

[25)

[26)

da

requirement is not excused by a running of a statutory limitation
period after the bondholders’ derivative action is commenced.

Credit — Creditor's Equitable Action — Condition Prece-
dent. Absent statutory provisions to the contrary, a creditor must
reduce the debt to judgment before bringing an action in equity to
satisfy his claim.

Government — Toris — Sovereign Immunity — Discre-
tionary Acts — What Constitutes. A governmenta! body is
not immune from tort liability unleas its act, omission, or decision
involves the formulation of basic policy at an executive level,
rather than the implementation of such policy.

Government — Torts — Public Duty Doctrine — Specia!
Relationship — Class of Persons. The public duty doctrine
does not immunize a governmenta! body from tort liability for its
breach of a duty owed to a particular circumscribed class of per-
sons rather than to the public as a whole.

Conflict of Laws — Torts — Choice of Law — Sovereign
Immunity — Significant Relationship. A court will apply the
most significant relationship test to determine if a foreign jurisdic-
tion's sovereign immunity wil) bar a tort claim. Among the factors
which must be considered are the competing policies of the juris-
dictions, the place of the injury, the place where the conduct caus.
ing the injury occurred, the residences of the parties, the place
where the relationship is centered, and any choice of law provision
in the contract out of which the tort claim arose.

Conflict of Laws — Torts — Choice of Law — Sovereign
immunity — Full Faith and Credit. The ful) faith and credit
clause does not require the application of a foreign jurisdiction s
sovereign immunity unless not to do so would threaten the foreign
jurisdiction's ability to govern

Conflict of Laws — Comity — Discretion of Court. The
doctrine of comity permits, but does not require, a state to apply
the laws of a foreign jurisdiction out of deference and respect after
considering the interests of each jursdiction. Basing a choice of
law decision on considerations of comity & a matter within the
court's discretion.

Negligence — Misrepresentation — Elements of Tort. A
party who fails to exercise reasonable care in obtaining or commu-
nicating false information involving a transaction in which he has a
pecuniary interest is liable for pecuniary loss caused by justifiable
reliance on the information if the supplier of the mformation
knows of the injured party s reliance or has specia) reason to knoe

{27}

[28)

(28)

[30)

{31)

[32)

[33)

[34)

te

that some member of « limited group will rely on the information.
or the injured party w a member of « group which the supplher
sought to influence

Fraud — Complaint — Specificity — Test. A complaint sock
ing damages for common law fraud satisfies the particularity
requirement of CR ®8(b) if it describes the fraud, alleges that the
defendant committed it, and gives the defendant sufficient notice
to allow him to prepare an answer and defense

Fraud — Misrepresentation — Scope of Duty — Privity A
person who fraudulently conceals or misstates information i e
business transaction w lable to persona whom the person intends
or has reason to expect will be musied by hu acta Privity or «
fiduciary relationship between the parties w nol @ condition prece
dent to hability in such e situation

Attorney and Client — Consumer Protection — Law or
Otber Professional! Practice — Beope — Malpractice A
claim for damages based on an attorneys or other professionals
megligence in the exercise of bu judgment w not cognizable under
the Consumer Protection Act (RCW 19.46)

Waters — Irrigation Districts — Status — Municipal
Corporations. Irrigation districts established pursuant u KOCW

Title 87 qualify as municipal) corporations

Utility Bervices — Consumer Protection — Beope -—
Rure! Electric Cooperatives Kurai electrw ceommperatives are
ummune from hability under the Consumer Protecuon Act (KCW
19.56)

Pleading — Amendment — Kelation Back — New Parties
— Piaintiffe. CK 15ic), whach governa whetner amendment wv
pleadings relate back Ww the origina) filing dav for statuls of lim,
telion purposes applies \& the clarms of newly added plaintiffs as
well as newly added defendants

Pleading — Amendment — Addition of Party — Inexcus.
able Neglect. A complaint may not be amended & add an add,
tonal party if the moving partys faslure Ww include Une omnitied
party mitsally was due Ww inezcusabie negiect The nemmeorvsirg
party need not show prejudice from the edditucr of Une additucma!
party

Process — Service — Foreign Party — Degree of Comp!
ance. Service of procens on ar wut-of-elale pert, requires atric’
compliance with Ube presedures wf! fortn a KCW 4 2% (Wy 4) an
18 Receipt of procew ant actus motuce Go net by tnemmariven

6a

establish valid service of process
Pearson, C.J., and Doiirver and Anpersen, JJ., dissent in part by sep
arate opinion; CaLiow, J., did not participate in the disposition of this
case.

Nature of Action: Holders of revenue bonds in default
which were issued to finance the construction of two termi-
nated nuclear power plants sought damages under multiple
theories from various parties involved in the construction
and financing of the plants.

Superior Court: The Superior Court for King County,
No. 84-2-06452-8, Terrence A. Carroll, J., on October 7,
1985, dismissed the action for failure to state a claim upon
which relief could be granted.

Supreme Court: Holding that the bondholders had
stated cognizable claims for violation of the state securities
act, negligent misrepresentation, and common law fraud,
and that the claims of bondholders added by an amend-
ment to the complaint related back to the date the action
was filed, the court affirms the judgment in part, reverses it
in part, and remands the case to the trial] court for further
proceedings.

Ferguson & Burdell, by Christopher Kane and Scott
Tucker, and Thoreson, Yost, Berry & Matthews, by Ernest
C. Matthews IV (Myer Feldman, Robert L. Deitz, Edward
J. Tolchin, and Ginsburg, Feldman & Bress; Robert H
Jaffe, Howard G. Schlesinger, and Jaffe & Schlesinger, of
counse]), for appellants Haberman, et al.

Smith, Smart, Hancock & Tabler, by Walter S. Tabler
(Winthrop, Stimson, Putnam & Roberts, by John B. Dan-
iels, David G. Keyko, and Susan J. Kohlmann, of counse)),
for appellants American Express Travel Related Services
Co., et al.

Culp, Dwyer, Guterson & Grader, by Robert D. Stewart,
and Donovan, Leisure, Newton & Irvine, by Daniel R
Murdock, for respondent Washington Public Power Supply

7a

System.

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

Syrdal, Danelo, Klein, Myre & Woods, by Peter A. Dan-
elo and Otto G. Klein II] (S. William Livingston, Jr., Peter
J. Nickles, and Covington & Burling, of counsel); Davis,
Wright & Jones, by Evan L. Schwab, Stephen M. Rum-
mage, and David C. Tarshes; Reed, McClure, Moceri,
Thonn & Moriarty, by Roy J. Moceri and D. Bradley
Hudson; Karr, Tuttle, Koch, Campbell, Mawer & Morrow,
by John F. Kruger (Bernard J. Smolens, Ralph Welling-
ton, Arden J. Olson, and Schnader, Harrison, Sega! &
Lewis, of counsel); Sirianni & Youtz, by Chris R. Youtz
and Stephen J. Sirianni (Robert M. Abrahams, Irwin Jd.
Sugarman, Robert E. Bartkus, and Schulte, Roth & Zabel,
of counsel); Williams, Kastner & Gibbs, by J. Kenneth
McMullin (James J. Hagan, Elizabeth A. York, and Simp-
son, Thacher & Bartlett, of counsel), for respondents
Ebasco Services, Inc., et al.

Riddell, Williams, Bullitt & Walkinshaw, by John D.
Lowery, Hugh R. Tobin, and David R. Peeler, for respon-
dents Smal) Utilities Group.

Foster, Pepper & Riviera, by Camden M. Hall, Stellman
Keehnel, and Daniel L. Thieme; Culp, Dwyer, Guterson &
Grader, by Robert D. Stewart; Gordon, Thomas, Honey-
well, Malanca, Peterson & Daheim, by Albert R. Malanca
and Donald S. Cohen; Harris, Mericle & Orr, by Jack CG.
Orr (Dennis K. Bromley, Robert A. Gordon, and Pillsbury,
Madison & Sutro, of counsel), for respondents Utility
Defendants.

Lane, Powell, Moss & Miller, by Larry S. Gangnes, John
R. Tomlinson, and Paul D. Swanson (Rockne Gill, J. Lau-
rence Cable, Bernard M. Ryan, and Schwabe, Williamson,
Wyatt, Moore & Roberts. R. Erick Johnson, R. Daniel Lin-
dahil, and Bullivant, Houser, Bailey, Hanna, Pendergrass,

8a

Hoffman, O’Connel & Goyak; Peter R. Mersereau and
Rankin, McMurry, Vavorsky & Doherty, of counsel), for
respondents Oregon Public Entities.

Hillis, Cairncross, Clark & Martin, P.S., by Michael F.
Schumacher and Gregory E. Kelier, for respondents Inland
Utilities.

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

Jim Jones, Attorney General for the State of Idaho, and
Clive J. Strong, Deputy, amici curiae.

BRACHTENBACH, J.—This case involves various bondhold-
ers' claims agaist the Washington Public Power Supply
System (Supply System) and others for injuries resulting
from the Supply System's defauit on $2.25 billion in reve-
nue bonds issued to finance construction of two nuclear
power generating plants. The trial court dismissed al]
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 construc-
tion of three nuclear power generating plants WNP 1,
WNP 2 and WNP 3. Those plants were developed in con-
junction with a number of participating utilities from sev-
eral northwestern states, including Washington. The
_ Bonneville Power Administration (BPA), a federal agency,
facilitated financing of the first three plants through com-
plex "net-billing" agreements that allocated the risk of
noncompletion to the federal agency, combined the costs of
the nuclear plants’ construction with less costly hydro-
power, and resulted in an indirect guaranty by BPA. See
Chemical Bank v. WPPSS, 99 Wn.2d 772, 779, 666 P.2d

9a

329 (1983) (Chemica! 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, wouid be necessary. WNP 4
was to be owned entirely by the Supply System; WNP 5
was to be uwned 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 irrigetion 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 fed-
eral law, however, precluded use of "net—billing” as ae aecu-
rity device as used in the WNP 1, WNP 2 and WNP 3
financing. As a result, in 1976 the Participants al] 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 cur-
tailed, 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 Par-
ticipants agreed to pay for their share of Project Capability

10a

regerdless 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 Partici-
pants’ Agreement also established a Participants’ commit-
tee 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 Partici-
pants' Agreement so as to provide for payment of interest
due on the revenue bonds issued. The effect of the Partici-
pants' 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
~ thin 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. Con-
struction 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 and accountants as to the struc-
tural and financ al 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

lla

bonds on their faces referred to resolution 890 and the
Participants’ guaranties to purchase Project Capability.

The Supply System gold the bonds through a 15-part
integrated offering beginning in F ebruary 1977. All bonds
were sold directly to underwriters pursuant to bidding pro-
cedures 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
48 anticipated, it was terminating WNP 4 and WNP 5. The
Supply System formally withdrew the 15th bond offering,
and announced that the cost estimates contained in the
Official Statements issued with the last series of bonds on
May 17, 1981, had been understated by approximately $5
billion. Final estimates of completion costs for WNP 4 and
WNP 5 had also grown from the original $3.4 billion to
nearly $12 billion. On January 22, 1982, the Supply Sys-
tem's board of directors unanimously voted to terminate
WNP 4 and WNP 5 due to conditions beyond its ability to
control. By that time, bonds outstanding had an agpregate
face value of approximately $2.25 billion.

The Supply System's termination of the projects estab-
lished a trigger date for various debt service payments,
which by virtue of the Participants’ Agreement and resolu-
tion 890, became the Participants’ obligations. The esti-
mated amount necessary to service the outstanding bonds
is $7 billion.

Chemical Bank, on behalf of the WNP 4 and WNP 5
bondholders, filed a declaratory action to determine the
enforceability of the Participants’ Agreement. This court
determined that all Washington Participants lacked statu-

12a

tory authority to enter into the Participants' Agreement,
and declared the Agreement void and unenforceable. See
Chemical Bank I, at 799. Moreover, this court held that the
remaining Participants were released from their obligations
under the Participants’ Agreement on the basis of commer-
cial frustration or impossibility, and mutual mistake. See
Chemical Bank v. WPPSS, 102 Wn.2d 874, 888-89, 691
P.2d 524 (1984) (Chemical Bank II), cert. denied, 471 U.S.
1065, 1075 (1985).

This court denied plaintiffs Fredric Haberman and five
others’ motion to intervene in Chemical Bank II. Subse-
quently, on May 7, 1984, Haberman and other individual
bondholders (plaintiffs) instituted this suit against the
Supply System and others for numerous causes of action
arising out of the WNP 4 and WNP 5 termination and
resulting bond default. A group of institutional bondhold-
ers, including American Express Travel Related Services
Company, Inc. (Amexco) and United States Trust Com-
pany of New York, joined the action as intervenor-plain-
tiffs (intervenors).

Five basic groups were named as defendants and are
respondents on this appeal: the Supply System, the 23
members of the Supply System, Chemical Bank, the 88
WNP 4 and WNP 5 "Participants", and the professionals
who rendered services to the Supply System. The respon-
dent professionals include accountants Ernst & Whinney;
investment advisors Blyth, Eastman, Paine, Webber, Inc.,
and its officers Donald Patterson and Stanley Pardo; engi-
neers R. W. Beck and Associates, United Engineers and
Constructors, Inc., and Ebasco Services, Inc.; attorneys
Wood & Dawson, and Houghton, Cluck, Coughlin & Riley;
and other unnamed professionais.

Plaintiffs’ and intervenors' complaints allege that all
defendants knew or should have known: that the market
could not support the extensive bond sales required to
finance WNP 4 and WNP 5, and that the financing plan
was otherwise insufhcient; that the Participanis' Agreement
was unenforceable or that a declaratory judgment test case

l3a

should have been filed to determine its enforceability
before the bond issues; that all professionais performed
their jobs negligently and rendered inaccurate information
to the Supply System; and that predictions of the need for -
power made by the BPA were inaccurate. Several of plain-
tiffs' counts were not addressed by the trial court and were
not briefed on this appeal.

The complaints reveal several bases upon which these
actions are brought: aid in preparation of the Official
Statements, which contained misstatements and material
omissions; making negligent or fraudulent recommenda-
tions regarding need, cost, and feasibility to the Supply
System that were placed in the Official Statements and
Annual Reports, and were relied upon by the Supply Sys-
tem, bond rating agencies, government agezcies, plaintiffs
and intervenors; participation in the Supply System board
of directors meetings and Participants’ committee meet-
ings; and omissions and misstatements regarding the
enforceability of the Participants' Agreement.

Both plaintiffs and intervenors alleged violations of The
Securities Act of Washington (WSSA), RCW 21.20, and
asserted derivative negligent misrepresentation claims. The
intervenors also alleged common law negligent misrepre-
sentation, fraud, and violations of the Consumer Protection
Act. Plaintiffs also alleged violations of the federal Securi-
ties Act of 1933, sought to add new plaintiffs and defend-
ants, and to overturn the trial court ruling that service on
Patterson and Pardo was defective.

The trial court dismissed all plaintiffs' and intervenors'
claims pursuant to CR 12(b)(6) (failure to state a claim
upon which relief may be granted). Plaintiffs and interve-
nors appealed; we accepted direct review.

|
THE STANDARD OF ReEvIEwW
[1] A trial court may grant dismissal for failure to state
a claim under CR 12(b)(6) only if "'it appears beyond
doubt that the plaintiff can prove no set of facts, consistent

l4a

with the complaint, which would entitle the plaintiff to
relief." Bowman v. John Doe, 104 Wn.2d 181, 183, 704
P.2d 140 (1985); Orwick v. Seattle, 103 Wn.2d 249, 254, 692
P.2d 793 (1984). CR 12(b)(6) motions should be granted
"sparingly and with care". Orwick, at 254.

A plaintiffs factual allegations are presumed true for
purposes of a CR 12(b)(6) motion. Lawson v. State, 107
Wn.2d 444, 448, 730 P.2d 1308 (1986); Bowman, at 183. A
complaint survives a CR 12(b)(6) motion if any state of
facts could exist under which the court could sustain the
claim for relief. Lawson, at 448; Bowman, at 183; Orwick, at
255. Thus, a court may consider hypothetical facts not part
of the forma! record in deciding whether to dismiss a com-
plaint pursuant to CR 12(b)(6). Halvorson v. Dahl, 89
Wn.2d 673, 675, 574 P.2d 1190 (1978).

CR 12(b)(6), read together with CR 8(a)(1), requires the
court to decide whether the allegations in a complaint con-
stitute a short and plain statement of the claim showing
that the pleader is entitled to relief. Orwick, at 254. The
court need not accept legal conclusions as correct. See
Orwick, at 254; State ex rel. Pirak v. Schoettler, 45 Wn.2d
367, 370, 274 P.2d 852 (1954). When an area of the law
involved is in the process of development, courts are reluc-
tant to dismiss an action on the pleadings alone by way of a
CR 12(b)(6) motion. 3A L. Orland, Wash. Prac. § 5152 (3d
ed. 1980).

Notwithstanding the trial court's characterization of its
dismissal as pursuant to CR 12(b)(6), respondents argue
that because the court considered materials outside the
complaint in reaching its decision, the dismissal should
have been pursuant to CR 56 (summary judgment). See CR
12(b). (CR 12(b)(6) motion is converted into CR 56 sum-
mary judgment motion whenever matters outside the
pleadings are presented to and accepted by the court.)

[2] While the submission and consolidation of extrane-
ous materials by either party normally converts a CR
12(b)(6) motion to one for summary judgment, if the court
can say that no matter what facts are proven within the

l5a

context of the claim, the plaintiffs would not be entitled to
relief, the motion remains one under CR 12(b)(6). See
Loger v. Washington Timber Prods., Inc., 8 Wn. App. 921,
924, 509 P.2d 1009, review denied, 82 Wn.2d 1011 (1973).
In such @ case, the presentation of extraneous evidence
would be immaterial. Loger, at 924. In Loger, the trial judge
considered matters outside the pleadings to enable him to
understand the context of the CR 12 motion ao as to rule
on it as a matter of law, without reaching or resolving any
factual dispute. Loger, at 926.

Plaintiffs and intervenors also argue that the trial court
made factual findings. These purported findings were, now-
ever, determinations of law based upon the facts alleged in
the complaint. We find that although the trial court con-
sidered matters extraneous to the complaints, it ruled as a
matter of law that plaintiffs and intervenors had not stated
a claim and did not make any determination of facts in
dispute. We conclude that the proper standard of review
remains that required by CR 12(b)(6). We therefore pro-
ceed to the remaining issues with this standard of review in
mind.

II
Res JupicaTa CLaims

Respondents argue that the doctrine of res judicata bars
plaintiffs’ and intervenors' claims. We disagree. This court
previously determined that the Participants were not liable
to repay principal and interest on WNP 4 and WNP 5
bonds because their obligations to do so were ultra vires
acts, or unenforceable because of commercial frustration,
impossibility, and mutual mistake. See Chemical Bank I;
Chemical Bank II.

[3} Res judicata prevents relitigation of claims already
decided. Meder v. CCME Corp., 7 Wn. App. 801, 803, 502
P.2d 1252 (1972), review denied, 81 Wn.2d 1011 (1973).
While res judicata bars relitigation of claims necessarily a
part of a previous matter in controversy, it poses no bar to
claims not in fact adjudicated previously. Seattle-First

| | ——————

16a

Nat'l Bank v. Kawachi, 91 Wn.2d 223, 226, 588 P.2d 725
(1978).

The prior Chemical Bank litigation dealt solely with
contract claims between the Supply System and the Partic-
ipants. No securities, consumer protection, or common law
tort claims were at issue. A motion brought by plaintiffs to
intervene in the Chemical Bank cases was denied as
untimely. See Chemical Bank Il, at 889. We conclude that
res judicata does not bar the claims before this court.

Il
FEepeRAL Securities Act CLaims

Plaintiffs argue that the trial court improperly dismissed
their federal securities claims. Section 12(2) of the federal
Securities Act of 1933, 15 U.S.C. § 77/(2), provides a cause
of action against any person who “offers or sells a security"
through a prospectus containing misrepresentations or
omissions. Section 3(a)(2) of the act exempts from section
12 any security issued by a public instrumentality. 15
U.S.C. § 77c(a)(2) (1981). While plaintiffs acknowledge that
the WNP 4 and WNP 5 bonds are exempt from section 12,
they claim that the Participants’ guaranties of those bonds
constitute separate securities that are subject to section 12
liability. Plaintiffs contend that whether the guaranties
were separate securities was a factual question improperly
decided by the trial court on a motion to dismiss.

First, we note that federal courts consistently dtermine
as a matter of law whether investment schemes are securi-
ties. See, e.g., Black v. Payne, 591 F.2d 83, 86 n.1, 88 (9th
Cir.) (affirming Fed. R. Civ. P. 12(b)(6) dismissal because
no security involved), cert. denied, 444 U.S. 867 (1979); De
Luz Ranchos Inv. Ltd. v. Coldwell Banker & Co., 608 F.2d
1297, 1299-1301 (9th Cir. 1979) (question of law whether
investment scheme constituted a security); Mason v. Unke-
less, 618 F.2d 597, 598 (9th Cir. 1980) (dismissal for failure
to show a security was involved proper on Fed. R. Civ. P.
12(b)(6) motion); Frederikson v. Poloway, 637 F.2d 1147,
1153-54 (7th Cir.), cert. denied, 451 U.S. 1017 (1981) (dis-

17a

missal because no security involved); Ahrens v. American-
Canadian Beaver Co., 428 F.2d 926, 928 (10th Cir. 1970)
(question of law whether contracts were securities).

[4] Next, we agree with the trial court's conclusion that
the Participants' guaranties were not separate securities. A
similar argument was rejected in Woods v. Homes & Struc-
tures of Pittsburg, Kan., Inc., 489 F. Supp. 1270 (D. Kan.
1980). There, municipal bond purchasers sought to avoid
the section 3(a)(2) exemption by arguing that certain
insurance company guaranties attached to the bonds as
certificates were separate securities subject to section 12(2).
Woods, at 1292-94. The court noted that the guaranties
had not been sold, nor could they have been purchased
separately from the bonds. Woods, at 1293. The court con-
cluded that the presence of the guaranties did not destroy
the exemption created by the Securities Act of 1933
because the bonds were exempt and because the guaranties
were part of those bonds. Woods, at 1293. See also Johns
Hopkins Univ. v. Hutton, 422 F.2d 1124, 1128 (4th Cir.
1970).

Here, no separate Participants’ guaranty existed. The
Participants "guaranteed" only that they would purchase
their share of WNP 4 and WNP 5 Project Capability
whether or not power was produced. This obligation was an
indirect guaranty of the bonds only by virtue of resolution
890, which empowered the Supply System to collect the
amounts owed by the Participants pursuant to the Partici-
pants’ Agreement to pay debt service to the bonds issued.
The Participants did not guarantee payment on the bonds
directly. The guaranties were neither sold, nor marketed,
and could not have been purchased apart from the bonds.
We conclude that the guaranties were not separate secur-
ities.

Finally, plaintiffs argue that our ruling in Chemical Bank
I, voiding the Participants’ guaranties as ultra vires, con-
verted them into separate, nonexempt securities. This con-
tention is without merit. Our Chemical Bank | and II
decisions did not hold the guaranties nonexistent; rather we

18a

held the guaranties unenforceable. Even if we assume that
the guaranties were somehow "converted" into separate
securities, such securities remain exempt from section 12(2)
liability because the Participants are all public instrumen-
talities within the meaning of section 3(a)(2) of the Securi-
ties Act of 1933. The trial court's dismissal of plaintiffs’
Securities Act of 1933 claims is affirmed.

IV
Securities ACT OF WASHINGTON

Plaintiffs and ‘ntervenors allege that all respondents
made materia] misrepresentations and omissions in connec-
tion with the bond sales in violation of the Securities Act of
Washington (WSSA). They sought recovery pursuant to the
civil liability provisions of RCW 21.20.430(1), (3). The trial
court dismissed all WSSA claims, holding as a matter of
law that no respondent was a seller under RCW 21.20-
.430(1); that no respondent controlled a seller within the
meaning of RCW 21.20.430(3); and that RCW 21.20.430(7)
barred negligence claims against all respondents except
bond counse! Wood & Dawson because it requires proof of
scienter.

A
Seller Claims Under RCW 21.20.430(1)
Plaintiffs and intervenors seek recovery under RCW
21.20.430(1) which provides that:

Any person, who offers or sells a security in violation
of any provisions of RCW 21.20.010 or 21.20.140 through
.. 20.230, is liable to the person buying the security
from him or her, who may sue either at law or in equity
to recover the consideration paid for the security,
together with interest at eight percent per annum from
the date of payment, costs, and reasonable attorneys’
fees, less the amount of any income received on the secu-
rity, upon the tender of the security, or for damages if he
or she no longer owns the security. Damages are the
amount that would be recoverable upon a tender less (a)
the value of the security when the buyer disposed of it
and (b) interest at eight percent per annum from the
date of disposition.

19a

(Italics ours.) Plaintiffs and intervenors allege that respon-
dents violated RCW 21.20.010(2) and (3) by making mate-
rial misrepresentations, or omitting necessary facts to make
statements not misleading, in the Official Statements and
Annual Reports.

Plaintiffs and intervenors contend that the trial court
erred in concluding that RCW 21.20.430(1) imposes liability
only on the literal seller of & security who passes title
directly to the plaintiff. Instead, plaintiffs and intervenors
argue that RCW 21.20.430(1), like its federal counterpart
from which it was derived, section 12(2) of the Securities
Act of 1933, 15 U.S.C. § 77/(2), imposes liability on those
persons who are a substantial factor in a sale of securities

[5] Washington's securities fraud laws are modeled after
the Uniform Securities Act. RCW 21.20.430 parailels sec-
tion 410 of the Uniform Securities Act, which in turn is
modeled after section 12(2) of the federal Securities Act of
1933. See Comment, Uniform Securities Act § 410, 7B
U.L.A. 644 (1985); L. Loss, Commentary on the Uniform
Securities Act 147-48 (1976). Our Legislature provided that
the WSSA

shall be so construed as to effectuate its general purpose

to make uniform the law of those states which enact it

and to coordinate the interpretation and administration

of this chapter with the related federal regulation.
RCW 21.20.900. We have interpreted this provision to
require harmony but not exact parallelism with other
states’ and federal] law. Kittilson v. Ford, 93 Wn.2d 223,
227, 608 P.2d 264 (1980); see Clausing v. DeHart, 83 Wn.2d
70, 72-73, 515 P.2d 982 (1973) (applying federal analysis of
Securities Exchange Act of 1934 to RCW 21.20.010). We
note that while the purpose of federal securities laws is to
maintain the integrity of the secondary securities markets
and to enforce disclosure, the WSSA is intended to protect
investors. Comment, Securities Fraud Under the Blue Sky
of Washington, 53 Wash. L. Rev. 279, 282 n.10 (1978).
Rooks, The Blue Sky of Washington: Registration of Secu-
rities of a New Venture, 6 Gonz. L. Rev. 187, 188 (1971).

LOE

20a

‘lo this end, this court has construed the WSSA broadly.
See McClellan v. Sundhelm, 89 Wn.2d 527, 533, 574 P.2d
371 (1978).

At least two Washington Court of Appeals decisions have
interpreted the WSSA to impose liability upon persons
rendering assistance in preparation of an unlawful sale of
securities in violation of RCW 21.20.010. See Goiberg vw.
Sanglier, 27 Wn. App. 179, 193, 616 P.2d 1239 (1980) (rely-
ing on Kaas v. Privette, 12 Wn. App. 142, 151, 529 P2d 23
(1974)), rev'd on other grounds, 96 Wn.2d 874, 639 P.2d
1347, 647 P.2d 489 (1981). However, both decisions appar-
ently presumed that liability attached pursuant to RCW
21.20.010 without determining civil liability under RCW
21.20.430{1).

In McClellan v. Sundholm, supra at 534, the court held a
salesman liable under RCW 21.20.430(1) as a seller
although the purchase agreement was between the buyer
and the salesman's employer. Without discussing the
absence of privity, the court found that because the eales-
man’s actions constituted an “affer* of a security, hm dis-
position of the security through the purchase agreement
constituted a sale. McClellan, at 534.

Thus, although we have imterpreted the offer and aell
language in RCW 21.20.430(1) to be brosd enough to
include face to face "dispositions" of securities where priv-
ity is absent, we have not yet decided the scope of liability
where privity is lacking.

An examination of federa! court decisions interpreting
section 12(2) of the Securities Act of 1933, 15 U.S.C. §
771{2) shows that only two circuiis require privity between
a plainud -purchasar and defendant-seller. See, e.g., Col-
lins vw. Signetics Corp., 605 F.2d 110, 113-14 (3d Cir. 1979);
Sanders v. John Nyveen & Co., 619 F.2d 1222, 1226 {7tb
Cir. 1980), cert. denied, 450 U.S. 1005 (1981). This
approach emphasizes the statutory language of section
(2(2) im light of the Supreme Court's strict construction in
securities cases not involving section 12(2). See, e.g., Tou-
che Russ & Co. v. Redington, 442 US. 560, 578, 61 L. Ed.

Zla

2d 82, 99 S. Cu 2479 (1979) (generelized references to the
remedia) purposes of The Securities Exchange Act of 1934
do not justify reading a provision more broadly than its
language and the statutory scheme reasanably permit). In
Collins, for example, the court concluded that a hroad
interpretation of section 12(2) would be contrary to its
plain meaning and frustrate the overall statutory scheme
where Congress had already provided a specific remedy for
the purchaser against the defendant issuer of the securities
in section 11 of the Securities Act of 1933. Collins, at 113.

The majority of the federal circuits, however, have con-
strued the term seller to include those whose participation
in the sale was a substantial factor in causing the transac
tion to take place. See, e.g., Lawler v. Gilliam, 569 F.2d
1283, 1287 (4th Cir. 1978); Pharo v. Smith, 621 F.2d 656,
665-67 (5th Cir. 1980), rev'd in part on other grounds on
rehearing, 625 F.2d 1226 (5th Cir. 1980); Davis »v AVCO
Fin. Servs., 739 F.2d 1057, 1063-63 (6th Cir. 1984), cert.
denied, 470 U.S. 1005, 472 U.S. 1012 (1985); Stokes v. Lok-
ken, 644 F.2d 779, 785 (8th Cir. 1981); Anderson v. Auro-
tek, 774 F.2d 927, 930 (9th Cir. 1985); SEC v. Murphy, 626
F.2d 633, 650 (9th Cir. 1980); Foster uv. Jesup & Lamont
Sec. Co., 759 F.2d 838, 843-44 (11th Cir. 1985), afPd, 782
F.2d 901 (11th Cir. 1986); see also In re Wicat Sec. Litig ,
600 F. Supp. 1236, 1239, 1242 (D. ijtah 1984) (althougi
question of whether strict privily required not yet decided
by Tenth Circuit, heavy weight of authority suggests sub-
stantial factor approach); Cady v. Murpky, 113 F.2d 988,
990 (ist Cir.), cert. denied, 311 U.S. 785 (1940) (broker who
acted as agent for seller could be liable under section
12(2)).

‘The Supreme Court has aot yet addressed this issue, but
has most recently emphasized the cumulative remedial!
purpose of the securities laws is not to be ignored in their
interpretation. See Herman & Maclean v Huddleston, 459
U.S. 375, 386-87, 74 L. Ed. 2d 548, 103 S. Ct. 683 (1983).
see also Davis, 739 F.2d at 106¢ (Supreme Court has called
for flexible yet litersi mterpretetian of the securities acts)

22a

This substantial factor-proximate cause approach origi-
nated in Lennerth v. Mendenhall, 234 F. Supp. 59, 65
(N.D. Ohio 1964), where the court stated:

[L]jiability must lie somewhere between the narrow view,

which holds only the parties to the sale, and the too-lib-

eral view which would hold all who remotely participated
in the events leading up to the transaction. We think
that the line of demarcation must be drawn in terms of
cause and effect: To borrow a phrase from the law of
negligence, did the injury to the plaintiff flow directly
and proximately from the actions of this particular
defendant? If the answer is in the affirmative, we would
hold him liable. But for the presence of the defendant

. . in the negotiations preceding the sale, could the sale
have been consummated? If the anawer is in the nega-
tive, and we find that the transaction could never have
materialized without the efforts of that defendant, we
must find him guilty.

. . . The hunter who seduces the prey and leads it to
the trap he has set is no less guilty than the hunter
whose hand springs the snare. We find that the activity
of the corporate defendant's agent . . . is tantamouni to
that of a "seller" within the liberal remedial spirit of the
securities laws.

The Lennerth court's proximate cause theory has been
refined to the present substantia] factor—proximate cause in
subsequent cases. Davis, at 1066-67.

The Davis court concluded that a substantia! factor test
"constitutes an appropriate synthesis of the sometimes
antithetical policies that the securities laws are to be con-
strued as statutes while, at the same time, giving effect to
their far-reaching remedial purpose." Davis, at 1067.
Indeed, as noted by one commentator, a strict privity
requirement applied to a firm commitment underwriting
agreement, where underwriters buy the securities from the
corporation without recourse if they cannot sell the entire
block of shares, would allow a cause of action only against
the underwriter, even where the corporation was the issuer
raising capital through the sale. Note, Seller Liability
Under Section 12(2) of the Securities Act of 1933: A Prox-

23a

imate Cause Substantial Factor Approach Limited by a
Duty of Inquiry, 36 Vand. L. Rev. 361. 389-90 (1983). Such
a result could not have been intended by Congress and
should not be allowed to defeat the remedial purposes of
the securities laws. Note, 36 Vand. L. Rev., at 389-90.

A review of other states’ decisions as to the scope of
"seller" under their securities laws is inconclusive. The
Oklahoma Supreme Court refused to construe language in
its statute similar to that in RCW 21.20.430(1) to include
participants in the securities transaction. Nikkel v. Stifel,
Nicolaus & Co., 542 P.2d 1305, 1307 (Okla. 1975). On the
other hand, the Minnesota Court of Appeals has adopted a
substantial factor test to determine seller liability under its
securities act based on section 410 of the Uniform Securi-
ties Act and section 12(2). Anders v. Dakota Land & Dev.
Co., 380 N.W.2d 862 (Minn. Ct. App. 1986). This court's
research disclosed no other state court decisions construing
state securities laws similar to RCW 21.20.430(1).

Although other federal courts have construed similar
state securities statutes, the decisions do not reflect state
court analysian They instead reflect a federal analysis of
section 12(2) as applied to the state law in question. More-
over, the analysis applied by federal trial courts in these ~
cases is usually that of their respective federal circuits. See.
e.g., Dahl v. Pinter, 787 F.2d 985, 991 (5th Cir. 1986)
(Texas test for seller liability substantially similar to Fifth
Circuit substantial factor test), cert. granted, __ U.S. ame
95 L. Ed. 2d 493, 107 S. Ct. 1885 (1987); Huddleston v.
Herman & MacLean, 640 F.2d 534, 550-51 (5th Cir. 1981)
(interpreting Texas Securities Act to impose liability on
persons constituting a substantial factor in sale, noting that
Texas statutory comments referred to section 12(2) as
model for state act and noting that the Fifth Circuit uses
substantial factor test), rev'd on other grounds, 459 U.S.
375 (1983); see also Anderson v. Aurotek, 774 F.2d at 929
n.l (assuming that Washington securities statute inter-
preted in same manner as section 12(2), finding substantia!
factor liability); SEC v. Seaboard Corp., 677 F.2d 1289,

24a

1295 (9th Cir. 1982) (California requires direct privity, no
California precedent); Jn re Victor Technologies Sec. Litig.,
Blue Sky L. Rep. (CCH) # 72,491 (N.D. Cal. 1987) (relying
on Jn re Diasonics Sec. Litig., 599 F. Supp. 447, 459 (N.D.
Cal. 1984) (finding that California Securities Act requires
privity)); Jn re Catanella & E.F. Hutton & Co. Sec. Litig.,
583 F. Supp. 1388, 1440 (E.D. Pa. 1984) (Pennsylvania
securities statute privity requirement likened to that found
in section 12(2)); Ging v. Parker-Hunter, Inc., 544 F. Supp.
49, 52 (W.D. Pa. 1982) (determining that Pennsylvania
Securities Act requires strict privity, no Pennsylvania
precedent). In any event, federal law does not preempt or
control] state securities acts. See Securities Act of 1933, §
18, 15 U.S.C. § 77r.

[6] We conclude that the substantial factor—-proximate
cause definition of seller prevailing in the federal circuits
provides the best guidance for our analysis of seller liability
under RCW 21.20.430(1). We note that our conclusion is in
accord with the views expressed in the official comments to
the recently revised Uniform Securities Act of 1985.
Although not adopted in Washington, new section 605(a) of
the Uniform Securities Act contains the language of old
section 410 upon which RCW 21.20.430(1) was based. The
official comments to section 605(a) state that under this
section, "liability may be imposed on a person in addition
to the immediate seller if the person's participation was a
substantial contributive factor in the violation." Uniform
Securities Act, § 605 comment, 7B U.L.A. 81 (Supp. 1987)
(citing Davis, 739 F.2d at 1057). We believe this approach
best promotes the legislative purpose behind the WSSA,
while harmonizing our statutory scheme with federal and
other state decisions. We also believe this definition is in
harmony with similar developments in general tort law.
Davis, at 1066.

The Ninth Circuit has described its substantial factor-
proximate cause analysis as follows:

In assessing proximate cause, courts focus first on
whether a defendant's acts were the actual cause of the

25a

injury, i.e., whetner ‘but for’ the defendant's conduct,
there would have been no sale. Nicewarner v. Bleavins,
supra, 244 F. Supp. [261] at 266 (D.Colo.1965); see Hill
York Corp. v. American International Franchises, Inc.,
448 F.2d [680, 693 (5th Cir. 1971)]; Lennerth v. Menden-
hall, supra, 234 F.Supp. at 65. A finding of "but for’
causation, alone, does not satisfy proximate cause, how-
ever. See Nicewarner v. Bleavins, supra, 244 F.Supp. at
266; R. Jennings & H. Marsh, Securities Regulation 1096
(4th ed. 1977); W. Prosser, Handbook of the law of Torts
238-39, 244 (4th ed. 1971). Prior to the issuance of a
security, numerous persons perform mechanical acts
without which there could be no sale. For example, a
printer may prepare key documents or a bank may
advance cash to a customer upon the customer's presen-
tation of an instrument and then pass the instrument to
another person. Both would satisfy a "but for" causation
test, but these acts nonetheless do not render the
defendants sellers. See First Trust & Savings Bank v.
Fidelity-Philadelphia Trust Co., 214 F.2d 320 (3d Cir.
1954); Ruder, Muitiple Defendants in Securities Law
Fraud Cases, 120 U.Pa.L.Rev. 597, 646 (1972). Before a
person's acts can be considered the proximate cause of a
sale, his acts must also be a substantial factor in bringing
about the transaction. Lewis v. Walston & Co., Inc., 487
F.2d 617, 621-22 (5th Cir. 1973). See Restatement (Sec-
ond) of Torts § 431 (1965).
SEC v. Murphy, 626 F.2d 633, 650 (9th Cir. 1980).
In a similar fashion, we hold that a defendant is liable as
a seller under RCW 21.20.430(1) if his acts were a substan-
tial contributive factor in the sales transaction. Considera-
tions important in determining whether a defendant's
conduct is a substantial contributive factor in the sales
transaction include: (1) the number of other factors which
contribute to the sale und the extent of the effect which
they have in producin, t; (2) whether the defendant's con-
duct has created a force or series of forces which are in
continuous and active operation up to the time of the sale,
or has created a situation harmless unless acted upon by
other forces for which the actor is not responsible; and (3)
lapse of time. See generally Restatement (Second) of Torts

26a

§§ 432, 433 (1977). Whether a defendant's conduct was a
substantial contributive factor is necessarily a question of
fact.

We emphasize that our adoption of a substantial con-
tributive factor test to determine seller liability under
RCW 21.20.430(1) is distinct from the test for participant
liability pursuant to RCW 21.20.430(3). Our substantial
contributive factor analysis simply expands the strict priv-
ity approach to sellers so as to include those parties who
have the attributes of a seller and thus who policy dictates
should be subject to liability under RCW 21.20.430(1), but
who would escape primary liability for want of privity.

Here, for example, the Supply System sold all the bonds
to underwriters who then sold them to plaintiffs and inter-
venors. If we were to require strict privity for liability
under RCW 21.20.430(1), only the underwriters would be
potentially liable for prospectus fraud, cutting off all
potential claims against the issuer of the bonds and others
acting together with the issuer who were the actual benefi-
ciaries of the sale proceeds. The result allows issuers of
securities to insulate themselves from liability to ultimate
purchasers simply by selling to middlemen beyond their
control, even in situations where they know that the securi-
ties will be resold immediately to buyers who will rely on
Official Statements and Annual Reports written by the
issuer to facilitate the sales. Unlike the federal Securities
Act of 1933, § 11, the WSSA does not provide for separate
issuer liability. Thus, if privity were required for liability
under RCW 21.20.430(1), an issuer in a firm commitment
underwriting would never be liable, regardless of its culpa-
bility. We find such a result contrary to the clear purposes
of the WSSA.

RCW 21.20.430(1) liability remains based on a defend-
ant's status as seller. RCW 21.20.430(3) liability is based on
other defendants’ relationships to a seller liable under
RCW 21.20.430(1). Therefore, respondents' argument that a
substantial contributive factor approach to seller in RCW
21.20.430(1) would render RCW 21.20.430(3) meaningless is

27a

without merit. Although some secondarily liable parties
under RCW 21.20.430(3) may also be liable as sellers under
RCW 21.20.430(1), clearly not all secondarily liable parties
are sellers under the substantial contributive factor test.
Thus, as contemplated by the statutory scheme, partici-
pants who are involved in a securities sale, but who are not
substantial contributive factors, may be subject to second-
ary liability under RCW 21.20.430(3).

We therefore reverse the trial court's dismissal of plain-
tiffs’ and intervenors' securities claims under RCW 21.20-
.430(1).

B

Secondary Liability Claims Under RCW 21.20.430(3)

Our conclusion that seller liability pursuant to RCW
21.20.430(1) is to be determined through a substantial con-
tributive factor analysis necessarily requires us to reverse
the trial court's dismissal] of plaintiffs' and intervenors' sec-
ondary liability claims pursuant to RCW 21.20.430(3).
Because secondary liability under RCW 21.20.430(3) would
be based on a party's relationship to a seller of securities,
the sufficiency of plaintiffs’ and intervenors' allegations of
secondary liability can only be determined after the sellers
are identified. We also reverse the trial court's determina-
tion that respondent nonmember Participants are not sec-
onderily liable because they did not control the Supply
System. For purposes of our CR 12(b)(6) standard of
review, it is conceivable that nonmember Participants may
be secondarily liable because of their relationship to a party
other than the Supply System. We cannot say, without a
determination of all sellers potentially liable under RCW
21.20.430(1), that these respondents did not contro! any
seller.

C
Implied Remedy Under RCW 21.20.010
In the alternative, intervenors argue that RCW 21.20.010
provides an implied remedy to fil! any liability gap created
by a strict privity requirement under RCW 21.20.430(1).

28a

Because we find that RCW 21.20.430(1) provides an express
remedy available to intervenors, we need not address the
issue.

D
Extraterritorial Application of the WSSA

Respondent Smal! Utilities Group contends that the trial
court's dismissal of plaintiffs’ and intervenors’ WSSA
claims should be upheld because the WSSA should not be
applied extraterritorially to out-of-state defendants or
transactions. Small Utilities Group also contends that
extraterritorial application of the WSSA would violate the
commerce clause. We disagree with both contentions.

[7] Initially, we note that this issue involves the choice
of law to be applied in this case rather than whether the
WSSA can be applied extraterritorially to regulate out-—of-
state transactions. Here, we are not concerned with the
application of the WSSA within another state's jurisdiction.
Instead, the question before us is whether the WSSA
applies in an action brought in a Washington forum where
out-of-state parties are under this State's jurisdiction. As a
result, choice of law principles govern our analysis.

This court employs a "most significant relationship"
standard to determine what law governs in a contracts or
torts case. Southwell v. Widing Transp., Inc., 101 Wn.2d
200, 204, 676 P.2d 477 (1984); Johnson v. Spider Staging
Corp., 87 Wn.2d 577, 580, 555 P.2d 997 (1976). This stand-
ard requires a court to evaluate the contacts of the inter-
ested jurisdictions with respect to the claims at issue and
the interests and policies of those jurisdictions. Southwell,
at 204.

Here, Washington is clearly the state with the most sub-
stantial contacts with the subject matter of this case. The
bonds at issue were issued by the Supply System to finance
two nuclear power plants in Washington. The Supply Sys-
tem, respondent members and directors, one respondent
bond counsel, as well as the majority of the respondent
Participants are Washington residents. All respondents had

29a

substantial business dealings in Washington, and the Offi-
cial Statements and Annual Reports allegedly containing
misrepresentations emanated from this state. No party
contends that another state's securities act applies. More-
over, Washington State has an interest in regulating the
conduct of parties involved in the sale of bonds issued by a
municipal corporation, the Supply System, to finance con-
struction of in-state power generating facilities. We con-
clude that the contacts of the parties involved, the claims at
issue, and the interests of this State dictate our application
of the WSSA to this case.

Nevertheless, Smal] Utilities Group contends that our
application of the WSSA would violate the commerce
clause. Their argument is based on Edgar v. MITE Corp.,
457 U.S. 624, 641, 73 L. Ed. 2d 269, 102 S. Ct. 2629 (1982).
Edgar involved a commerce clause challenge to an Illinois
statute regulating corporate takeovers in a multistate con-
text. The statute could be applied to regulate tender offers
not affecting Illinois shareholders. Edgar, at 642. The Court
found that the burden on interstate commerce posed by the
statute was not counterbalanced by local interests, and that
the statute upset the balance struck by Congress between
corporate management and takeover bidders in its regula-
tion of interstate tender offers. Edgar, at 643-46. The Court
noted that an impermissible conflict between federal and
state regulation of commerce exists where compliance with
both federal and state regulations is physically impossible,
or where state law interferes with the accomplishment and
execution of congr
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CERTIFICATION

it is hereby certified that the following is a true and complete copy (except for letterneads) of the fina! legal opinions of Messrs. Wood &
Dawson. New York. New York. and Messrs. Houghton Cluck Coughlin & Riley, Seattle, Washington, approvigg he series of bonds of which the
within Dond 1s one. the originals of which opinions were manually executed, dated and issued as af the date of delivery of and payment for said
~bonds and are on file in the office of the Secretary of Washington Public Power Supply System. ss

Secretary of Washington Public Power Supply System

LEGAL OPINION

WOOD & DAWSON
48 Wail Street, New York, New York 10005

HOUGHTON CLUCK COUGHLIN & RILEY
900 Hoge Building, Sesttie, Washington 94104

Board of Directors
Washington Public Power Supply System
Richland, Washington

Dear Sirs

WASHINGTON PUBLIC POWER SUPPLY SYSTEM, GENERATING FACILITIES REVENUE BONDS,
? SERIES 1978C (NUCLEAR PROJECTS NOS. 4 AND 58), $170,000,000

At your request we have examined into the validity of an issue of $170,000 000 Generating Facilities Revenue Bonds, Series 1978C (Nuclear
Projects Nos 4 and 5), of Washington Public Power Supply System (the “System™), a municipal corporation and joint operating agancy of the State
of Washington Said bonds are issuadle in coupon form. registraoie as to principal only, in the denomination of $5,000 each, and in fully registered
form. without coupons, in denominations of $5,000 and any multiples thereo!. The coupon bonds are numbered from 1 upwards and are dated
October 1, 1978 The fully registered bonds are numbered from R-! upwards and, except fully registered bonds initially issued, which are dated
October 1, 1978. shali be dated so thal no gain or loss of interest shall resull from exchanges or transfers thereof! as provided therein and in the Bond
Resolution hereinafter mentioned. Said bonds mature on July 1 in each of the years and in the amounts and bear interest at the rates per annum,
Payable semi-annually on January 1 and July 1 deginning July 1, 1979. as follows:

: taterest Interest
Year Amount Rate Year Amount _ Rate
1989 $1.800 000 6.00% 1997 $ 3.090.000 6.10%
| 1990 1.925.000 600 1998 3,310,000 6.20
1991 2.060.000 6.00 1999 3.540.000 625
1992 ? 205.000 6.00 — 2000 3,790,000 6x
1983 2.360.000 6.00 2001 - 4,065,000 6.40
Fe 2.525 000 6.00 2002 4,335,000 6.40
1995 2.700.000 - 60 2003 4,840,000 62
1996 7 2.*90 000 6.10 2010 42.970.000 ‘ 6.75
2018 81,805,000 7.00

Said bonds are subject to redemption prior to maturity upon the terms and conditions set forth therein, and recite that they are issued under and
pursuant to Resolution No 890. adopted by the Board of Directors of the System on February 23, 1977, as amended, and a resolution supplemental
thereto, Resolution No. 984, adopted by said Board on October 12. 1978 (collectively, the “Bond Resolution”). and under the authority of and in
full compliance with the Constitution and statutes of the State of Washington. inciuding Titles 43 and 54 of the Revised Code of Washington. for the
purpose of paying the cost to the System of the construction and acquisition of all or an undivided ownership interest in certain nuciear electric
generating facilities, constituting and to be known as the Washington Public Power Supply System Nuclear Projects Nos. 4 and 5. as a separate
ulility system of the System and for certain other corporate purposes of the System.

We have examined the Constitution and statutes of the State of Washington, certified coples of proceedings of the Board of Directors of the
System authorizing the issuance of said bonds, including the Bond Resolution, other proofs relating to the issuance of said bonds and an executed
coupon bond of said series.

In our opinion, the System is @ municipal corporation and joint operating agency of the State of Washington, duly created and validly
existing. Ihe Bond Resolution has been duly adopted and the provisions thereof are valid and binding upon the System, said bonds have been duly
authorized and issued in accordance with the Constitution and statutes of the State of Washington, and said bonds constitute valid and legally
Dinding obligations of the System payable solely from the funds and revenues as set forth and provided in the Bond Resolution on a parity with the
bonds heretofore or hereatter issued on a parity therewith pursuant to the Bond Resolution. °

In a lawsuit pending in the Superior Court for Grays Harbor County, Washington (Weshington Public Power Suppty System v. Date et al.;
No 70423). tne defendants. among other things, question the legal existence of the System and its corporate powers with respect to the construction
of muciear reactors, including the aforesaid Nuclear Projects Nos. 4 and 5. We are of the opinion that such claim is without merit.

itis to be understood that the rights of the holders of said bonds under the same and under the Bond Resolution and the enforceability thereof
under the same may be subject to general principles of equily which permit the exercise of judicial discretion and to valid bankruptcy, insolvency,
reorganization, moratorium and other laws for the reilef of debtors

It is also our opinion that the interest on said bonds is exempt from taxation by the Onited States of America under existing laws and
regulations

Very truly yours,
WOOD & DAWSON
HOUGHTON CLUCK COUGHLIN & RILEY

i Ou 90400 o tt *
—- & vz || | >O gu®ZuyZ Oo
= O . | w. qw gVMsa0z7Tt 4» Ww
z w + | . a+ GO yudctu«en = 0.
u 2a a a a coSodaczsu | 229
wea. | 3 OZ3Zq-u4uazy, |+V*
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cw w I >
a , = a oO, oe Puree 6 OO
uw & - @ a O, qazyaetv @ a to 168,720,000
Owner's Contingencies(4)........... 278,200,000
Nuclear Fuel(5)................... 235,975,000

Total Construction and Fuel Costs (6) . $2,387,177,000

(1) Estimated by the Construction Engineer.

(2) Estimated by the Supply System.

(3) Estimated by the Construction Engineer except for sales
tax on Supply System Controlled Costs estimated by the Supply
System.

(4) Estimated by the Supply System. Includes unallocated con-
tingencies together with related net interest during construction,
financing costs and reserves.

(5) Estimated by the Supply System; includes sales tax at
5.0% on the intial core and $113,291,000 for reload fuel.

(6) Based on a commercial operation date of June 1986.

Nuclear Project No. 5

Nuclear project No. 5 will consist of a pressurized-water nu-
clear electric generating plant having a net generating
capability of approximately 1,240,000 kilowatts and associ-
ated facilities. The plant will be located adjacent to Nuclear
Project No. 3 in Grays Harbor County, about three miles
south of Satsop, Washington, and about 16 miles east of
Aberdeen, Washington.

The Supply System has received site certification and a
National Pollutant Discharge Elimination System permit
from the State of Washigton and received a limited work

EES SL

190a

authorization on April 8, 1977 from the NRC. Preliminary
site work for Nuclear Project No. 3 and Nuclear Project No. 5
commenced in April 1977, and major excavation activities
started in June 1977. The Supply System received construc-
tion permits from the NRC for Nuclear Project No. 3 and
Nuclear Project No. 5 on April 11, 1978.

_ The schedule used in the 1981 project construction budget

for Nuclear Project No. 5 is designed to follow the schedule
for Nuclear Project No. 3 by approximately 12 months. The
Nuclear Project No. 3 commercial operation date is currently
scheduled for June 1986. Accordingly, the currently schedul-
ed commercial operation date for Nuclear Project No. 5 is
June 1987. However, it is presently estimated by the Supply
System that the commercial operation date of each project
will be delayed three months because of the labor problems
and crane collapse discussed under the caption “The Supply
System.”

The Supply System has employed Ebasco Services, Incor-
porated as the Construction Engineer for both Nuclear Pro-
ject No. 3 and Nuclear Project No. 5. The Supply System has
entered into contracts for the nuclear steam supply system,
including fuel fabrication for the initial core loading of
nuclear fuel, with Combustion Engineering, Inc., and for the
turbine-generator with the Westinghouse Electric Corpora-
tion. These contracts, plus other contracts already entered
into for Nuclear Project No. 5, provide for the acquisition of
equipment and service with a cost of $936,459,000 as of
February 1, 1981.

The following table shows the Supply System's 1981 pro-
ject construction budget estimate of construction costs for
Nuclear Project No. 5 but does not reflect the cost increases
discussed under the caption “The Supply System”:

19la

Nuclear Project No. 5

Supply System's
Total Project 90% Share

Purchased Equipment and

Construction Contracts(1)... $1,608,024,000 — $1,447,221,000
Supply System Controlled
| a ee ae 47,423,000 42,681,000
Total Direct
Construction Costs ...... $1,655,447,000 $1,489,902,000
Operational Spare Parts(2) .. . . 5,561,000 5,005,000
Gs Cee Sh 5. ee 86,027,000 77,424,000
Architect-Engineer(1)........ 113,424,000 102,081,000
Construction Manager(1) ._.. . 101,673,000 91,506,000
Owner's Costs(2)............ 172,984,000 155,686,000
Owner's Contingencies(4) .._. . 247,000,000 222,300,000
Nuclear Fuel ............... 266,214,000 239,593,000(5)
Total Construction and
Fuel Costs(6) ........... $2,648,330,000 $2,383,497,000

(1) Estimated by the Construction Engineer.

(2) Estimated by the Supply System.

(3) Estimated by the Construction Engineer except for sales tax
on Supply System Controlled Costs estimated by the Supply
System.

(4) Estimated by the Supply System. Includes unallocated con-
tingencies together with related net interest during construction,
financing costs and reserves.

(5) Estimated by the Supply System; includes sales tax at 5.2%
on the initial core and $128,500,000 for reload fuel.

(6) Based on a commercial operation date of June 1987.

* * * * *

Ee

192a

FINANCING AND ANNUAL COSTS
Financing Program

The present financing program is based on the issuance of
Bonds in several series to finance the construction of the Pro-
jects and placing them in commercial operation. The Supply
System’s 1981 Projects’ construction budgets indicate that
the total financing requirements for the Projects, including
an allowance of $16,162,000 for the Energy and Uranium
Bearing Lands Acquisition Programs, are estimated to be
$7,231,000,000. These financing requirements are based on
assumed commercial operation dates of June 1986 for
Nuclear Project No. 4 and June 1987 for Nuclear Project No.
5. However, as discussed above, the Supply System has iden-
tified schedule extensions of eight and three months for
Nuclear Projects Nos. 4 and 5, respectively, and additional
financing requirements of approximately $593,000,000 The
Supply System estimates that the proceeds from the 1981A
and B Bonds together with monies currently available and in-
vestment income thereon will be sufficient to pay the costs of
construction until July 1981 prior to which time additional
Bonds are plan ed to be issued.

The estimated financing requirements for the Projects as
developed by the Supply System for the 1981 Projecis con-
struction budgets are shown in the following tabulation:

193a

. * * - * * * * * *

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195a

Assumptions

In the preparation of this report and in the opinions which
follow, it has been necessary to make certain assumptions with
respect to conditions which may occur in the future. While
we believe these assumptions are reasonable for the purpose
of this report we make no representation that they will in fact
occur. To the extent that actual future conditions differ from
the assumptions contained herein, the results obtained from
use of the assumptions will vary from actual resuits. Certain
major assumptions used in this report include:

1. The Projects will be completed within the cost estimate
in the Supply System’s 1981 Projects’ construction buc
gets of $7,231,000,000 plus an estimated increase of
$593,000,000 identified since the 1981 Projects’ construc-
tion budgets were prepared.

2. Nuclear Project No. 4 will begin commercial opera-
tion in February 1987 and Nuclear Project No. 5 will begin
commercial operation in Septemer 1987.

3. Under Scenarios A and B Bonneville will acquire suf-
ficient resources to meet its requirements under the Re-
gional Power Act.

4. Annual costs of the Projects are based on actual in-
terest rates on outstanding Bonds issued through the 1980A
Bonds and assumed interest rates on additional Bonds rang-
ing from 9.25% to 7.75% and actual investment income to
March 1, 1980 and estimated future income at interest rates
ranging from 9.0% to 7.5% on the proceeds of the Bonds.

5). The Bonds will be issued to yield approximately level
debt service based on 30 year amortization beginning July
1, 1988.

196a

6. The Project will operate at an assumed 68% annual
plant factor after the first two years of operation of each unit.

7. Annual operating costs of the Projects including In-
surance, Operation and Maintennace, Administrative and
General, and Renewals and Replacements are estimated by
the Supply System in 1981 dollars and will escalate at ap-
proximately 8% per year. Nuclear Fuel costs are estimated
by the Supply System based on enrichment plant tails assay
of 0.20% and no recycle of uranium and plutonium.

8. Short term investments will earn 7.5% annual interest
rate. Long term investments will earn 8.0% annual interest
rate.

9. Bonneville will increase its current wholesale power
rates to the Participants by 53% on July 1, 1981 and future
rates will reflect the projections made in August 1980 by
Bonneville in its analysis of possible future wholesale power
rates under the Regional Power Act.

10. The load forecast and projected customer data con-
tained herein are as provided by each Participant. Projected
expenses and capital additions for each Participant’s system
are based on historical and current financial data of the in-
dividual utility. Projected debt service for each utility in-
cludes principal and interest payments on existing debt plus
estimated debt service on future borrowings to pay the costs
of a specified portion of planned capital additions. Debt was
assumed to be issued at 8% interest for all Participants ex-
cept for borrowers from the Rural Electrification Administra-
tion where a combination of -% and 9% interest was used.

11. Projected operating revenues are calculated to be suf-
ficient to meet all projected costs including provisions for
capital additions from revenues and payments to the Sup-

197a

ply System for the capability of the Projects in accordance
with the Participants’ Agreements if it is not disposed of
in some other manner.

12. A general inflation factor of 8% per year was assum-
ed for all appropriate costs and expenses of the Participants’
systems.

13. All Participants and Bonneville will execute new net
requirements power sales contracts under which Bonneville
will be required to meet each Participant’s firm power loads
in excess of such Participant’s committed own resources
and Bonneville will provide services related to transmission,
forced outage reserves, scheduling, load factoring and peak
Capacity as needed.

_14. Power costs from, and output of, the Participants’
own generating resources are based on data received from
the Participants.

15. Bonneville will enter into contracts to deliver the out-
put of the Projects to the Participants’ systems if it is not
disposed of in some other manner. Wheeling charges for
delivery of the output of the Projects and of the Participants’
own generating resources over Bonneville transmission lines
are based on the Bonneville Transmission Rate Filing with
the Federal Power Commission, July 1, 1976. These rates
are currently in effect but are subject to revocation. Bon-
neville has recently announced proposed new transmission
rates which have not been included in our analyses.
Transmission losses are based on information supplied by
Bonneville.

198a

Conclusions

Based upon our studies, investigations and analyses and
the assumptions set forth in this letter with respect to the
Supply System's proposal to acquire and construct the Pro-
jects, we are of the opinion that:

1. Exclusive of the Projects, the resources currently
estimated to be available to Bonneville and the Participants
are not adequate to enable Bonneville to serve the estimated
firm power and energy requirements which it is expected
Bonneville will be required to meet under the provivions
of the Regional Power Act.

2. The estimated cost of power from the Projects is com-
parable to other long-term power supply resources that may
be available to serve increasing regional load requirements,
including a portion of the Participants’ increasing require-
ments.

3. The Assignment Agreements and the Short Term
Sales Agreement provide a method of marketing a portion
of the capability of the Projects that may be surplus to the
individual needs of Participants during the early years of
operation of the Projects.

4. The provisions of the Participants’ Agreements, the
Assignment Agreements and the Short Term Sales Agree-
ment provide a sound basis on which to proceed with the
Supply System’s program for the Projects.

5. The estimated revenue requirements of each of the
Participants analyzed herein are within reason. Assuming
the load growth estimates of the Participants are realized,
the revenues of the Participants should be adequate to pay
their operating and maintenance expenses, including pay-
ments to the Supply System under the Participants’ Agree-
ments.

199a

We have furnished to you the information under the cap-
tions ‘‘Power Supply in the Pacific Northwest’’ and ‘‘The Par-
ticipants’’, and in ‘‘Estimated Annual Cost of Power’’ and
‘Extraordinary Reserve Fund’’ under the caption ‘‘Nuclear
Projects Nos. 4 and 5’’ in the Official Statement and Exhibit
A thereto. In our opinion, the information contained therein
which was furnished by us Is correct.

Respectfully submitted,

R.W. Beck and Associates

* *x * * *

200a

EXHIBIT B

UNITED ENGINEERS & CONSTRUCTORS INC.
30 South 17th Street, Philadelphia, Pa. 19101

March 17, 1981

Board of Directors

WASHINGTON PuBLic Power Supp_y SysTEM
3000 George Washington Way

Richland, Washington 99352

Subject: WASHINGTON PuBLic PoweER Suppty SySTEM
NucCLEAR Progect No. 4

Gentlemen:

United Engineers & Constructors Inc. (“UE&C’) was
selected and retained by Washington Public Power Supply
System (“Supply System”) as Construction Engineer to pro-
vide engineering and construction management services for
Washington Public Power Supply System Nuclear Project
No. 4 (the “Project”) being constructed on the Hanford Reser-
vation of the United States Department of Energy, near
Richland, Washington. UE&C was also selected and retained
to perform similar functions for Washington Public Power
Supply System Nuclear Project No. 1 (“WNP-1”) of similar
design and located adjacent to the Project.

Prior to June 1978 UE&C performed, as an independent
contractor, those functions necessary for the design and con-
struction of WNP 4 and as Containment Constructor under
the provisions of the ASME Pressure Vessel Code, Section
III, Division 2. In June 1978, UE&C’s responsibilities at the
Project site, other than as design engineer and as contain-
ment constructor, were modified as a result of the consolida-
tion of UE&C’s and the Supply System’s staffs into a merged
site organization headed by the Supply System's Project

20la

Manager. UE&C’s construction management personnel were
integrated with the Supply System’s to form the merged site
organization. The merged site organization has performed at
the direction of and under the control of the Supply System
the functions of project management, construction manage-
ment, contract administration, planning scheduling, cost
estimating, quality assurance, cost accounting, and cost con-
trol.

In September 1980, the Supply System announced its in-
tention to dissolve the merged site organization and to hire
Bechtel Power Corporation (“Bechtel”) to perform construc-
tion management functions. During the transition from the
merged site organization to Bechtel’s assumption of con-
struction management duties, UE&C will continue to provide
site construction management manpower and will perform as
Engineer and UE&C will continue to provide site construc-
tion management manpower and will perform as Engineer
and Construction Manager for both WNP | and 4. The transi-
tion from UE&C to Bechtel is expected to occur around June
1, 1981. UE&C had earlier expected that Bechtel would
become Construction Engineer on or about January 1, 1981.
UE&C expects that the functions of project management,
construction management, contract administration, plann-
ing, scheduling, cost estimating, quality assurance, cost ac-
counting, and cost control will be turned over to Bechtel on or
before June 1, 1981. After the transition UE&C expects to
perform, as an independent engineer, the functions necessary
for the design of the Project and the duties of Containment
Constructor under the provisions of ASME Pressure Vessel
Code, Section III, Division 2. After June 1, 1981, VE&C will
continue to be directly responsible for performance of the
duties of Construction Engineer set out in Resoution No. 890
of the Board of Director of the Supply System which relate to
the design of the Project and the duties of Containment Con-

Ee

202a

structor under the provisions of ASME Pressure Vessel
Code, Section III, Division 2, which will be performed by
UE&C. The other duties of the Construction Engineer will
then be performed by Bechtel.

The agreement between UE&C and the Supply System
provides for the compensation of UE&C on a cost plus fixed
fee basis as determined by the contract. UE&C will receive
its compensation solely from the proceeds of bonds or other
evidences of indebtedness issued by the Supply System for
the Project

The Project

The Project is located on the Hanford Reservation, approx-
imately 3 miles west of the Columbia River and 12 miles
north of the City of Richland. It is planned to consist of a
pressurized-water reactor electric generating plant having a
nominal capacity of 1,250,000 kilowatts together with related
transformation and switching facilities. Current plans call for
five basic structures comprising the power plant. These are
the reactor containment building, general services building,
turbine-generator building, cooling towers and circulating
water pumpt house, and river makeup water plant. The river
makeup water plant will be shared between the Project and
WNP-1.

The Project will use a nuclear steam supply system con-
taining a Babcock & Wilcox pressurized water reactor whic
will deliver superheated steam to the turbine generator. The
turbine generator system, to be furnished by Westinghouse
Electric Corporation, incorporates two stages of steam
reheating and seven stages of feedwater heating. The turbine
generator, an 1,800 rpm unit with a rating of 1,413,000 kVA
at 0.95 power factor, has an output voltage of 25 kV.

Cooling for the turbine condenser will be provided by
means of mechanical draft cooling towers, which will mini-

203a

mize the addition of heat to the Columbia River. A small
amount of river water will be used to replace the evaporation
lost from the cooling towers.

To provide auxiliary power for emergencies, redundant
diesel generators are included in the plant design. Each
diesel generator is sized such that power for all essential
plant loads can be supplied, whenever required, without the
need for any offsite power sources.

The Project output will be stepped up to 500 kV for connec-
tion to the Federal Columbia River Power System by means
of three singlephase main step-up transformers. One spare
single-phase transformer of the same rating is also provided.
The cost of transmission lines for the Project is not included
in the Project cost estimate.

Current Estimated Project Costs and Construction Contracts

The construction cost estimate for the Project was
developed jointly by UE&C and the Supply System on an
equitable cost basis which takes into consideration that both
WNP.-1 and the Project benefit from the economies of dual
unit construction and, therefore, share certain costs on the
basis of the proportion of respective benefit. The estimated
cost of construction of the Project as of May 1979, was
$1,247,030,000, as set forth in Attachment A. The May 1979
estimate included $34,129,000 for certain costs estimated
and controlled by the Supply System. The estimate of May
1980 as set forth in Attachment A was $1,697,784,000 and in-
cluded $41,148,000 for certain costs estimated and controlled
by the Supply System. The May 1980 estimate reflects an in-
crease of $450,754,000 over the estimate of May 1979. The in-
crease results from: (a) the twelve month extension to June
1986 for the commercial operation date as discussed below:
(b) revisions to reflect actual experience for the factors used

204a

to establish the base estimate (such as productivity levels,
manhour requirements, escalation rates and material quan-
tities); (c) changes to plant structures, systems and equip-
ment necessitated by development of the design in certain
areas (including compliance with the designs of vendor fur-
nished equipment and consideration of regulatory changes);
and (d) resultant additional architect-engineer and construc-
tion management services.

Subsequent to the preparation of the May 1980 estimate
set forth in Attachment A, the Supply System has estimated
that the commercial operation date of the Project will be fur-
ther delayed by approximately 8 months on account of labor
problems. The Supply System also estimates that the recent
labor problems will cause increases in the financing re
quirements for the Project of approximately $372,000,000.
This increase includes the effect of the schedule delay, the
higher than anticipated labor costs established by new labor
agreements and the cost of reload nuclear fuel to be paid for
during the schedule extension period.

Bechtel, the Supply System and UE&C have begun to
make a detailed analysis of the construction budget. This
analysis, which will take several months to complete, will be
used in the preparation of the 1982 project construction bud-
gets, and may identify additional adjustments to schedules
and costs.

The estimate excludes (a) land; (b} nuclear fuel; (c) interest
during construction; (d) Supply System administrative costs;
(e) opere..: nal spare parts procured independently by the
Supply System; and (f) the effects of various factors, such as:
regulatory and statutory changes; rising costs of labor and
materials (“escalation”) beyond an 8% rate per year (com-
pounded); abnormal weather; labor productivity and contrac-
tor performance problems (beyond a limited extent); labor
disputes; equipment, material and skilled labor shortages;

205a

financing; changes in Project scope or design as may be re
quired by the Supply System, regulatory authorities or tech-
nological developments, delays in the award of material,
equipment or service contracts; and unforeseeable and ex-
traordinary conditions not included in the usual engineer's
estimate of probable construction cost. Factors such as those
cited above may also result in necessary adjustments to the
scheduled project completion date. In the event of a further
schedule extension, various Project costs will increase be-
cause of the effect on the aggregate cost for escalation, con-
tingency, sales tax, construction facilities and engineering
and construction management.

The total costs of equipment and construction contracts
awarded to February 1, 1981 for the Project are shown on At-
tachment B. As noted on this attachment, these contracts
totalled $726,766,519. For many of the contracts, escalation
provisions are included and prices are subject to change on
the basis of changes in cost indices published by the Bureau
of Labor Statistics or certain other trade indices. The equip-
ment and construction contracts provide materials, equip-
ment and construction services for both the Project and
WNP-1. Each such contract provides for the allocation of the
costs so incurred between the Project and WNP-1.

The Supply System awarded these contracts by means of a
competitive bidding process which solicited bids for the Pro-
ject and WNP-1, pursuant to the statutory duties of the Sup-
ply System as a joint operating agency of the State of
Washington. Factors considered by the Supply System in-
clude price and the responsiveness of the bid to bidding re
quirements. The Supply System is also authorized to con-
sider each bidder's experience, qualifications, available per-
sonnel and facilities. In our opinion, the vendors and contrac-
tors which have been awarded contracts by the Supply

System are qualified for the particular type of work to be per-

formed by them.

206a

Project Status and Schedule

Construction of the Project started in Augusi . *75 under a
limited work authorization granted by the NRC ad a site
certification agreement entered into with the Svate of
Washington. A construction permit was issued by the NRC
on February 21, 1978.

As of February 1, 1981, the engineering for the Project was
approximately 92% complete, procurement of services and
equipment for the Project was approximately 99% comlete
and construction fo the Project was approximately 16% com-
plete. The Project is in the major civil and structural phase of
work. Two thirds of the steel shell of the reactor containment
building has been erected, the structural steel for the general
services building and the turbine-generator building is near
completion; the structural steel for the circulating water
pumphouse is complete; the turbine pedestal of the turbine-
generator building has been constructed and the cooling
towers are substantially completed. Superstructure concrete
on the containment and general services buildings is being in-
stalled.

In the past the Project schedule was designed to follow the
WNP-1 schedule by 18 months to reduce mampower peaking
and critical craft availability problems. Based upon an
analysis of a lack of anticipated progress by contractors, a
reevaluation of contractor productivity, remaining construc-
tion work and the anticipated impact of regulatory and des-
ign ‘-hanges, the Supply System instructed UE&C to prepare
the May 1980 estimate for WNP-1 based upon an extension
of the commercial operation date ‘vom December 1983 to
June 1985. The Supply System also directed a reduction of
the schedule separation between the Project and WNP-1 to
12 months. Accordingly, the May 1980 estimate was
prepared assuming an extension in the scheduled commercial
operation date for the Project of twelve months from June
1985 to June 1986.

207a

Labor agreements with some craft unions in the Hanford
area expired, and, as a result, critical path work on the Pro-
ject stopped in early June 1980. New agreements have been
reached and construction on the Project has resumed. As a
result of the work stoppage, the Supply System estimates
that commercial operation of the Project will be delayed by
approximately eight months.

The Babcock & Wilcox Nuclear Steam Supply System for
the Project is of a different, more current design as compared
to the Three Mile Island Plant (“TMI-2”) which was involved
in a nuclear incident. However, UE&C and the Supply
System are proceeding with those design changes which are
anticipated to be required by the NRC as a result of the
lessons learned from the TM1-2 incident. To the extent that
these costs are able to be determined, they are included in the
May 1980 estimate.

Conclusions

On the basis of, and subject to, the previous discussion in
this letter, which should be read in conjunction with and as
part of the following conclusions, it is our considered opinion
with respect to the Project that:

1. The present plans and design are suitable for the
site, and the site is suitable for the Project.

2. The program for construction is consistent with
those for other installation of similar size and complexi-
ty. The achievement of commercial operation by
February 1987 for the Project is realistic assuming that
Bechtel provides comparable services to those con:
templated to be pertormed by UE&C as construction
manager until complete transition occurs around June 1,

1981; assuming that no delays occur as the result of

Bechtel’s taking over construction management duties:

208a

and assuming, further, that Bechtel will implement ap-
propriate construction management measures to adhere
to the stated schedule.

3. Assuming a February 1987 completion date, and
making the asumptions contained in paragraph 2 im-
mediately above, the May 1980 cost estimate for the
Project as modified to include the costs estimated by the
Supply System for an eight month schedule delay is
realistic. If delays are experienced, whether as a result of
the replacement of the merged site organization as con-
struction manager or otherwise, the cost will increase.
Bechtel, the Supply System and UE&C have begun to
make a detailed analysis of the construction budget,
which analysis will be used in the preparation of the
1982 budget. The analysis may reveal the need for addi-
tional adjustments to cost and schedule estimates.

4. The pressurized water reactor to be furnished by
the Babcock & Wilcox Company is a reasonable exten-
sion of the design of other reactors furnished by that
company and presently in commercial operation.

5. The remainder of the plant is generally similar in
design to conventional thermal plants except for the
special considerations that are related to using steam
from a pressurized water reactor, and the components
are very similar to those which are now in commercial
operation.

6. The Project is feasible from an engineering and
construction standpoint and can be expected to operate
reliably with normal maintenance.

The Project description and statements and sum-
maries of our estimates contained in this letter and set
forth under “Location’, “Description” and “Status and
Schedule” under the heading “Nuclear Project No. 4°

209a

under the caption “Nuclear Projects Nos. 4 and 5” ap-
pearing in the Official Statement to which this letter is
attached, are correct.

Very truly yours,

THOMAS M. DAHL
Chairman

210a

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EXHIBIT C

EBASCO SERVICES INCORPORATED EBASCO
Two World Trade Center New York NY 10048

March 17, 1981

Board of Directors

Washington Public Power Supply System
3000 George Washington Way

Post Office Box 968

Richland, Washington 99352

Gentlemen:

Re: WASHINGTON PUBLIC POWER SUPPLY SYSTEM
NUCLEAR PROJECT NO. 5
PROJECT STATUS REVIEW AND ANALYSIS

In early 1974, Ebasco Services, Incorporated (“Ebasco’”)
was selected and retained by the Washington Public Power
Supply System (“Supply System”) as Construction Engineer
to provide engineering, construction management and
related services for Washington Public Power Supply
System Nuclear Project No. 5 (the “Project”). The Project is a
duplicate of Washington Public Power Supply System
Nuclear Project No. 3 and will be constructed adjacent to
Nuclear Project No. 3 on a site near Satsop in southeastern
Grays Harbor County, Washington.

As Construction Engineer for the Project and Nuclear Pro-
ject No. 3, Ebasco is responsible for the engineering, design
quality assurance, cost estimating and reporting and con-
struction management of the Project. In addition, Ebasco is
providing related services including expediting, materials ap-
plication engineering, vendor quality assurance, applied
physics and nuclear engineering, licensing, plant operations

213a

and betterment, and assistance in procurement and contract
administration for contracts placed by the Supply System.

In August 1978, the Supply System merged its site
organization with Ebasco’s with the objective to more effec-
tively utilize the personnel available and facilitate decision
making and approvals. In October 1980, the decision was
made by the Supply System for Ebasco to reassume its role
as an independent site organization as described above. This
organization change is in process and is expected to be fully
implemented in early 1981.

The Project

The Project consists of a 1,300 MWe class pressurized
light-water reactor, nuclear power station, together with all
necessary plant facilities including transmission facilities to
interconnect with the proposed 500 kV switchyard to be con-
structed by the Bonneville Power Administration (“BPA”).
The project shares common facilities being designed and in-
stalled for the Supply System.

The Project is located adjacent to Nuclear Project No. 3 on
a site near Satsop in the southeastern portion of Grays Har-
bor County, approximately 16 miles east of Aberdeen and 1
mile southeast of the confluence of the Chehalis and Satsop
Rivers. The site is conveniently located with respect to the
main railroad line shared by the Chicago, Milwaukee, St. Paul
and Pacific Railroad and the Union Pacific Railroad; U.S.
Highway 12; the Chehalis River which is navigable to ocean
going barges to a point approximately 5 miles west of the
site; and an existing BPA transmission corridor which is part
of the Federal Columbia River Power System.

The nuclear steam supply system (“NSSS’), including the
fabrication of the initial nuclear fuel core, for the Project will
be supplied by Combustion Engineering, Inc. and will include
the System 80 pressurized water reactor design together

214a

with two U-tube steam generators. The NSSS has a thermal
rating of 3,817 MWt, and will supply approximately
18,000,000 pounds per hour of steam at 1,000 psig and 550
degrees F.

The turbine-generator will be supplied by Westinghouse
Electric Corporation, and will consist of a 6-flow tandem com-
pound steam turbine with a gross electrical output of 1,316
MWe at three and one-half inches Hg backpressure and a net
electrical output of approximately 1,240 MWe. Steam ex-
hausting from the three low-pressure sections of the turbine
will be condensed by circulating water whose heat will be
dissipated in a natural draft cooling tower. A groundwater in-
take system will provide the make-up water to replenish the
evaporative losses in the cooling tower. The generator con-
sists of a three-phase, 60 Hertz, 1,800 rpm unit rated at
1,460.5 MVA at 0.95 power factor and generates at 25 kV.

The main plant structures include the reactor containment
and shield structure, the reactor auxiliary building, the fuel
handling building and the control room area — all supported
on a common foundation mat and referred to collectively as
the Combination Structure—and the turbine-generator
building. The Combination Structure will be founded on fresh
sandstone rock and is designed to withstand a horizontal
seismic ground acceleration of 0.32g. A natural draft hyper-
bolic cooling tower, 500 feet high with a base diameter of 400
feet, is the largest plant structure. In addition, there is plann-
ed an administration and service building.

As a result of the nuclear incident at the Three Mile Island
Plant (“TMI-2”), the design of the NSSS for the Project is be-
ing carefully evaluated by Ebasco, Combustion Engineering
and the Supply System. Although the design and the sup-
plier of the Project NSSS are not the same as TMI-2,
modifications may be required. The effect of such modifica-
tions on the design, licensing, schedule, cost and operation of
the Project cannot be fully determined at this time.

\

215Sa

The Project is being designed to comply with applicable ex-
isting codes, laws, standards and regulations of local, state
and federal agencies; includes components and equipment of
proven design or reasonable extensions of proven design con-
cepts; and is compatible with the comprehensive land-use
plans and zoning requirements of the site region.

Current Estimated Project Costs and Construction Contracts

The construction cost estimate for the Project was
developed on an equitable cost basis which takes into con-
sideration that both Nuclear Project No. 3 and the Project
benefit from the economies of dual unit construction and
therefore share certain costs on the basis of the proportion of
respective benefit. The estimated capital cost of the items
within Ebasco’s scope of responsibility as of July 1980 was
$1,962,132,000 as shown in Attachment A. The estimate is
an estimate of the Ebasco responsible items included in the
Fiscal Year 1981 Project Construction Budget. The estimate
includes the Project schedule extension per Supply System
instructions as discussed below. The schedule assessment of
the impact of the WNP-3 Chicago Bridge and Iron (“CB&I”)
guyed derrick accident and the boilermaker strike is discuss-
ed below. The assessment of the cost impacts of the accident
and the strike have not yet been completed.

A detailed analysis of the construction budgets is under-
way. It will include a cost assessment of the CB&I derrick ac-
cident, the boilermaker strike and the realigning of major
construction contracts. This analysis will be incorporated in
to the Fiscal year 1982 Project Construction Budget. During
the analysis, factors may be identified which may require
schedule and cost adjustments in addition to those stated
above.

The basis for escalation and contingency, which are iden-
tified separately in the estimate, are as follows:

a

216a

Escalation

Labor and material escalation is computed in ac-
cordance with the terms of current labor agreements
and

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_0796%3A2. Public record. Not legal advice.