UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION

PETITION OF FPL GROUP, INC. FOR REVIEW OF INITIAL DECISION

FPL Group, Inc. ("FPL") hereby submits this petition for review of the Initial Decision ("Initial Decision") issued by the Administrative Law Judge ("ALJ") in this proceeding on February 6, 2003. FPL has taken the position that the Public Utility Holding Company Act of 1935 ("Act") gives the Securities and Exchange Commission ("Commission") the power to craft a remedy in this proceeding that both protects the interests of investors and consumers and avoids adverse impacts on innocent parties such as FPL. FPL has explained its position in detail previously,¹ and it proposes here only to address whether the record contains evidence that Enron Corp.'s ("Enron") exempt status may have resulted in abuses that the Act was intended to prevent. While the ALJ has pointed to certain facts in the record as evidence of such abuses, careful analysis shows that those facts in no way suggest that such abuses have occurred. For this reason, FPL continues to maintain that failure to continue Enron's exemptions under Section 3(a)(3) or 3(a)(5) of the Act for a reasonable period could cause considerable harm both to them and investors without any corresponding benefits to any of the parties the Act was intended to protect.

I. The ALJ Has Recognized the Validity of the Flexible Approach to Interpreting the Act Supported by FPL.

The ALJ acknowledged in the Initial Decision that "the Commission has not established a set of hard and fast rules" for making determinations under Section 3(a) of the Act, but rather that it weighs a number of factors when making these determinations. The ALJ therefore chose to adopt the "flexible" approach to interpreting Section 3(a) supported by FPL.² The ALJ found, however, that even when applying a flexible approach, Enron could not qualify for an exemption. FPL has not sought to assess the validity of Enron's specific claims to an exemption and therefore will not question the ALJ's formal conclusions on whether those claims can, as a matter of law, satisfy the Act's requirements. However, the flexible approach is incompatible with outcomes that create greater harms than available alternatives. One cannot maintain that the resolution recommended by the ALJ is based on the flexible approach unless it can be shown that the harms it will prevent outweigh the harms FPL will suffer as a result of it. The ALJ appears to acknowledge in principle that in applying the flexible approach she should weigh the potential harms that would result from alternative possible outcomes. To justify her denial of the request that Enron's exemptions under Sections 3(a)(3) and 3(a)(5), she maintains that "the record contains evidence of some concerns that PUHCA was designed to prevent."³ However, the specific facts the ALJ identifies have no connection whatsoever with such concerns and to some extent demonstrate that effective protections are in place to prevent them.

II. The Initial Decision Does Not Allege any Concerns that Represent Abuses the Act was Intended to Prevent.

The ALJ maintains that the record in this proceeding contains evidence of the following concerns the Act was intended to prevent: (a) an uncollectible account receivable from Enron and affiliated companies that appears on Portland General Electric Company's ("Portland General") balance sheet, (b) a pledge agreement under which Enron has assigned and pledged certain collateral consisting of interests it holds in Portland General, and (c) and protections created by the Public Utility Commission of Oregon ("OPUC") in connection with Enron's acquisition and ownership of Portland General. While the ALJ notes that these matters have not been subject to cross examination, one must first ask whether they have any relevance at all to the issue presented, i.e., is it reasonable to presume that they might represent evidence of abuses the Act was intended to prevent. The Act addresses a discrete set of issues connected with the ownership of public utility companies by holding companies. Before one can proceed to test specific facts through cross examination, one must first determine whether they might be relevant to these issues. Even if the matters identified by the ALJ represent situations or occurrences that may be disadvantageous to Portland General, this does not mean that they necessarily represent abuses the Act was intended to prevent.

Careful analysis of the evidence in question shows that the ALJ has not identified anything in the record that suggests Enron's current exempt status has produced any of the abuses identified in Section 1 of the Act. For this reason, the concerns pointed to by the ALJ in no way contradict the position taken by FPL on the temporary continuation of Enron's current exemptions under Sections 3(a)(3) and 3(a)(5). FPL will analyze below the relevance to this proceeding of the evidence presented by the ALJ.

a. Account Receivable

The ALJ notes that Portland General's books show "a $48 million after-tax provision for uncollectible accounts receivable from Enron and affiliated companies due to uncertainties surrounding Enron's bankruptcies."⁴ However this account did not arise through an affiliate transaction regulated under the Act. Rather, it is related to conditions the OPUC placed on Enron's acquisition of Portland General. The account's current status as uncollectible does not result from a potentially abusive dealings among affiliates, which would be necessary to make it a concern under the Act. The receivable was created as follows.

On June 4, 1997 the OPUC issued an order authorizing Enron's acquisition of Portland General.⁵ That order was preceded by extensive discussions that culminated in a stipulation among OPUC staff, Enron and other affected parties ("Stipulation").⁶ Among the many requirements agreed to by Enron in the Stipulation as a condition of its acquisition of Portland General was an obligation to provide to Portland General's customers $105 million upon completion of the merger. This amount was deemed to represent full payment to these customers for any entitlement they may have had to the value relating to:

1. the use of Portland General's name, reputation, business relationships, expertise, goodwill or other intangibles;
    
2. wholesale and non-franchise retail activities that Portland General has undertaken that would not take place within Portland General following the merger and wholesale and non-franchise retail activities that Portland General might have undertaken had the merger not occurred; and
    
3. added value of the merged entity that is achievable because of the combination or because of the association of Enron with Portland General.⁷

Of this $105 million payment, $74 million was recorded on Portland General's books as a merger receivable. Following completion of the acquisition, Enron made regular cash payments to Portland General, which reduced the outstanding balance to $48 million at the time that Enron filed for bankruptcy protection. The bankruptcy filing caused Portland General to classify the account as uncollectible.

It is impossible to characterize this sequence of events as evidencing concerns of the type the Act was intended to prevent. The account receivable was not the product of a abusive affiliate transaction of the type described in Section 1(b)(2) of the Act or of any other potentially improper practice mentioned in Section 1. It arose out of the common practice of state utility commissions requiring merger parties to give back to retail customers in the form of reduced rates some amount of the value a merger is projected to create. Moreover, the outstanding balance of $48 million did not become uncollectible because of some abuse relating to the control of public utility companies by holding companies. It became uncollectible because Enron declared bankruptcy due to events entirely unrelated to its dealings with Portland General. More importantly, regardless of the origin of this uncollectible account, its existence in no way suggests that granting the relief FPL seeks will in any way threaten the interests of investors or consumers. Enron currently operates under the supervision of the bankruptcy court, and Enron's immediate registration under the Act will provide no additional protections. On the other hand, it would have a substantial negative impact on the value of Enron's assets and would cause substantial harm to FPL. The result simply cannot be viewed as consistent with long-standing Commission policy on mitigating the effects of its administration of the Act.

b. Pledge Agreement

The ALJ notes in the Initial Decision that Portland General's Chief Financial Officer ("CFO") and Treasurer has stated that "Portland General is operationally and legally separate from Enron, and its assets and liabilities will not become part of the Enron estate" in bankruptcy.⁸ The ALJ suggests that this statement is contradicted by a Pledge Agreement dated December 3, 2001, and approved by the Bankruptcy Court on July 2, 2002, in which Enron assigned and pledged to certain financial institutions certain collateral, including "a security interest in the common stock of Portland General and all income, profits, distributions, proceeds or payments related thereto." However, this pledge agreement in no way suggests that Portland General's assets and liabilities will become part of the Enron bankruptcy estate.

Section 541 of the Bankruptcy Code defines the bankruptcy estate exclusively in terms of property interests of the debtor on bankruptcy.⁹ For Portland General's assets and liabilities to become part of the Enron bankruptcy estate, it would have to be viewed as one with Enron. This, of course, is why Portland General's CFO emphasized Portland General's separate operational and legal existence. Enron and Portland General are separate entities. Enron is in bankruptcy and Portland General is not, and Enron's declaration of bankruptcy does not have the effect of putting Portland General into bankruptcy or pushing it in the direction of bankruptcy.

Enron's interests include, of course, its interests in Portland General, and those interests therefore are included in the Enron bankruptcy estate. The fact that Enron has pledged certain of those interests to financial institutions in no way suggests that Portland General's assets and liabilities have become or are likely to become part of the Enron bankruptcy estate. The assets Enron pledged in the pledge agreement are its own assets and are entirely distinct from Portland General's assets. The existence of the pledge agreement in no way suggests that Portland General's assets and liabilities may become part of the Enron bankruptcy estate.

c. OPUC Actions

It is difficult to see how the actions of the OPUC cited by the ALJ in the Initial Decision can be characterized as evidence of the concerns the Act was designed to prevent. The ALJ notes that Portland General's CFO has represented that the OPUC has required that Portland General may not, without OPUC approval, make an equity distribution to Enron which would cause Portland General's common equity capital to fall below forty-eight percent of total capital and that Enron "generally" cannot unilaterally place Portland General in bankruptcy. The ALJ also notes that the OPUC issued an order on November 20, 2002 requiring Portland General to seek OPUC approval of a transfer in 1999 of approximately $20 million from a corporate-owned life insurance asset account to Portland General Holding and then to Enron.

The 48 percent common equity capital requirement is considerably more rigorous than the 30 percent common equity requirement that the Commission normally imposes on public utility company subsidiaries in registered holding company systems. That the OPUC imposed this requirement demonstrates that Enron's status as an exempt holding company in no way hampered the OPUC's ability to protect, as it saw fit, Portland General's capital structure from Enron's actions. Commitments not to place Portland General in bankruptcy and assertions of OPUC jurisdiction over the transfer of assets from Portland General to Enron are, if anything, further evidence of the effectiveness of state regulation. The Act was intended to supplement state regulation in instances where holding companies were able to evade that regulation. The evidence cited by the ALJ suggests Enron's exempt status has in no way diminished the OPUC's ability to regulate the relations between Enron and Portland General. These facts provide support for, rather than arguments against, relief sought by FPL.

III. Conclusion

For the foregoing reasons, FPL requests review of the Initial Decision and also request that the Commission grant Enron a reasonable extension of its current exemptions under Sections 3(a)(3) and 3(a)(5) of the Act for the purpose of mitigating the impact that denial of the exemptions could have on FPL.

Respectfully submitted,

Dated: February 27, 2003

Endnotes

¹ See FPL's Motion to Intervene submitted on October 21, 2002; the testimony of Dean R. Gosselin on behalf FPL and James J. Hoecker on behalf of FPL and Sithe/Independence Power Partners, L.P. ("Sithe"), all submitted on November 15, 2002; the Brief Supporting Position of FPL and Sithe submitted on January 7,2003, and the Reply Brief submitted by FPL and Sithe on January 14, 2003.

² Initial Decision at 14.

³ Id. at 24.

⁴ Id.

⁵ This order is attached as Exhibit JP-1 attached to the Prepared Direct Testimony of James J. Piro filed in this proceeding on November 15, 2002.

⁶ The Stipulation is attached to the OPUC's order attached as Exhibit JP-1 to the testimony of James J. Piro.

⁷ See Section 20.A of the Stipulation.

⁸ Initial Decision at 24.

⁹ 11 U.S.C. § 541.