UNITED STATES OF AMERICA
| Administrative Proceeding|
File No. 3-10909
By order dated June 11, 2003 ("June 11 Order"), the Securities and Exchange Commission ("Commission") granted the applicant Enron Corp.'s February 27, 2003 petition for review of the Chief Administrative Law Judge's initial decision denying Enron's applications for exemption from registration under the Public Utility Holding Company Act of 1935 ("Act"). The June 11, 2003 Order establishes a schedule for briefing this matter that extends throughout the summer, concluding with reply briefs to be filed by September 3, 2003. Under this schedule - particularly if the Commission orders oral argument on Enron's appeal - no final decision is likely until near the end of the year at the earliest.
Enron is currently reorganizing pursuant to Chapter 11 of the Bankruptcy Code. The company intends to submit its proposed Plan of Reorganization by the end of this month,1 and is believed to be targeting reorganization plan confirmation hearings, coupled with its emergence from bankruptcy court protection, for the end of this year.
While Enron's applications for exemption are pending final Commission decision, Enron continues to be an unregistered holding company. In the event that the Commission ultimately agrees with the position of the Division of Investment Management ("Division") and with the decision of the Chief Administrative Law Judge, and issues a final decision denying Enron's applications, the delay in deciding this matter will have two consequences.2 First, any actions that Enron or its subsidiaries take that would otherwise be subject to Commission review pursuant to the standards of the Act will, in fact, never be reviewed.3 Second, under sections 11(f) and 11(g) of the Act, the Commission plays a central role in the bankruptcy of a registered holding company and its subsidiaries under the Act - a role that most notably includes the requirement that the Commission approve the bankrupt company's plan of reorganization. Again, however, as long as the Commission has not conclusively determined whether Enron is entitled to an exemption under the Act, it lacks the statutory authority to take on the key role given to it by the Act.
The current briefing schedule thus effectively deprives the Commission of its ability to fulfill its statutory obligations under the Act in a timely fashion. Moreover, even if the Commission ultimately determines to grant the exemptions, delay could be harmful.4 More importantly, there is simply no reason for further delay. No significant facts are in dispute in this matter. Enron's requests for exemption - as well as its petition for review - have already been extensively and exhaustively briefed. The briefs contemplated in the Commission's June 11 order are likely to do little more than repeat arguments that the parties have continuously asserted throughout the proceeding. Hence, no party to this proceeding would be harmed by an expedited briefing schedule. In light of prior extensive briefing of the issues Enron raises on appeal, the current generous briefing schedule is simply not necessary.
Accordingly, as discussed more fully below, in light of Enron's intent to rapidly exit bankruptcy protection, the Division respectfully requests that the Commission set this matter for expedited consideration consistent with the goal of issuing a final Commission decision in this matter as soon as possible, and preferably before the end of August. Expedited consideration would enable the Commission to discharge its statutory obligations in a timely fashion, with minimum disruption to Enron's bankruptcy process, in the event that the Commission affirms the initial decision.
This proceeding to determine Enron's applications for exemption from registration pursuant to sections 3(a)(1), 3(a)(3) and 3(a)(5) of the Act was instituted on October 7, 2002.5 After a short public hearing on December 5, 2002, and following extensive post-hearing briefing by the parties, on February 6, 2003, Chief Administrative Law Judge Brenda Murray issued an initial decision denying both of Enron's applications.
Enron subsequently filed its petition for review with the Commission on February 27, 2003.6 On March 11, 2003, the Commission directed the Division to file a response to the petitions for review. The Division filed its Response on March 25, 2003, urging the Commission to deny all petitions for review.
On June 11, 2003, the Commission granted Enron's petition for review. The June 11, 2003 Order set forth a briefing schedule calling for briefs in support of Enron's appeal to be filed by July 21, 2003, opposition briefs to be filed by August 20, 2003, and any reply briefs to be filed by September 3, 2003.
In connection with the post-hearing briefs and with the petition for review of the initial decision, the parties have already extensively briefed the issues involved in this appeal. Enron's post-hearing brief ran forty-eight pages, and its petition for review weighed in at thirty-nine pages. The Division's own post-hearing submissions and response to Enron's petition for review were similarly weighty.
The Division submits that the briefing schedule set in the Commission's June 11, 2003 Order - which provides eighty-four days until briefing is complete - is both unnecessary and harmful to the Commission's ability to fulfill its statutory obligations under the Act. The facts are not at issue in this case. Indeed, most of the facts involved in this case were stipulated between the parties; the public hearing on December 5, 2003 scarcely lasted one morning. Enron's appeal turns on legal issues: the proper interpretation of the Act and applicable precedent. On this score, the parties' respective legal positions and arguments are well known and well developed, and are unlikely to be improved by the passage of time contemplated in the current briefing schedule.
As noted above, as long as Enron's applications remain pending before the Commission, it effectively remains exempt from regulation under the Act - exempt from the review of the issuance of securities and financing transactions under section 6, exempt from the restrictions placed on the payment of dividends within the system by section 12, exempt from the limitations placed on affiliate transactions by section 13, and, ultimately, exempt from virtually all of the regulatory provisions of the Act.
More specifically, with respect to Enron, section 11(f) of the Act provides that, in any bankruptcy proceeding involving a registered holding company:
a reorganization plan for a registered holding company or any subsidiary company thereof shall not become effective unless such plan shall have been approved by the Commission after opportunity for hearing prior to its submission to the [bankruptcy] court.
Under Commission precedent, the Commission's review of a holding company's plan of reorganization is guided by the standards prescribed in the Act. Most importantly, this means that the Commission would be required to determine whether the plan was in the interests of utility consumers and investors7 - the two protected interests under the Act. In addition, pursuant to precedent in this area, other areas that the Commission may look at in reviewing a plan of reorganization include whether the corporate structure is "unduly or unnecessarily complex;" whether the voting power in the reorganized company is "fairly and equitably distributed," and whether the plan is "fair and equitable to the persons affected by such plan." See United Telephone and Electric Co., 3 S.E.C. 653, 655 (1938).
Review of such a plan can obviously be complex, particularly in situations involving a company as large and complex as Enron. Enron intends to submit its plan of reorganization to the bankruptcy court by the end of June. Under the current schedule set in the Commission's June 11, 2003 Order, briefing will not be completed until September 3, 2003. Reasonably assuming the passage of at least two more months after briefing is complete to schedule oral argument and to prepare and issue a final Commission decision, the earliest a final decision might be expected under the current schedule would be early November 2003, approximately one month before Enron's targeted date for the effective date of its Plan of Reorganization. Should the Commission concur with the Division and with the Chief Administrative Law Judge that Enron should be registered under the Act, such a schedule leaves little time for the Commission to discharge its statutory oversight responsibilities with regard to the plan of reorganization. Moreover, Commission involvement in Enron's bankruptcy reorganization plan at such a late stage in the process is bound to be more disruptive to Enron (and its creditors and investors) than Commission involvement at an earlier stage is likely to be.
Accordingly, for the benefit of both the Commission and of the parties involved in the bankruptcy process, the Division respectfully suggests that the Commission consider Enron's petition on an expedited basis, with a view towards issuing its final decision by the end of August 2003. A final decision at the end of the August would, in the Division's view, afford the Division and the Commission sufficient time to consider Enron's proposed plan of reorganization.
In the event that the Commission decides that Enron's applications for exemption should be denied, it will be imperative that the Commission become familiar with and involved in Enron's proposed Plan of Reorganization as soon as possible. The Division believes that meaningful review by the Commission, in a manner designed to minimize disruption to the ongoing bankruptcy process, requires direct Commission involvement in Enron's bankruptcy proceeding commencing at least by the first week of September 2003. Even if the Commission is inclined to grant one or more of the requested exemptions, it should do so, and eliminate the uncertainty that currently exists, as soon as possible. Accordingly, the Division respectfully requests that the Commission give expedited consideration to Enron's appeal, and establish a new schedule for briefing (and oral argument, if desired by the Commission) designed to allow for the issuance of a final Commission decision on Enron's applications for exemption no later than the end of August.
The Division argued below and the Chief Administrative Law Judge agreed that none of Enron's requested exemptions from registration should be granted; consequently, the Division continues to believe that Enron must register with the Commission and comply with the Act. Registration and compliance requires Commission review and approval of Enron's pending bankruptcy reorganization plan.
Enron's rapid timetable for its exit from bankruptcy protection provides the exigent circumstances supporting expedited Commission consideration of its appeal. In the event that the Commission finally denies Enron's applications for exemption, the Commission would be hard pressed to fulfill its statutory obligations to conduct a proper review of Enron's reorganization plan and its effects on the interests protected by the Act in a meaningful way if the Commission's decision is rendered in accordance with the briefing schedule set out in the June 11, 2003 Order.
The legal issues involved here have already been extensively briefed. No party will be harmed by expediting the process. The eighty-four day briefing schedule contemplated by the June 11 order is simply not necessary in this case, and would affirmatively harm the Commission's ability to discharge its statutory responsibilities under the Act if the exemptions are ultimately denied.
Accordingly, the Division urges that the Commission consider Enron's appeal on an expedited basis, and to set a new schedule for briefing (and oral argument, if desired) that will permit the Commission to issue its final decision by August 29, 2003.
Dated: June 18, 2003
Paul F. Roye
David B. Smith, Jr.
Catherine A. Fisher
Martha Cathey Baker
David G. LaRoche
Deborah D. Skeens
Alberto H. Zapata
Christopher W. Chow
Arthur S. Lowry
Counsel for the Division of Investment Management
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
|1||See, e.g., Enron Reorganization Plan due June 30, Fort-Worth Star Telegram (May 14, 2003), at http://www.dfw.com/mld/startelegram/news/state/5858036.htm.|
|2||Both of these consequences result from the fact that, under the exemptive provisions of the Act, "[t]he filing of an application in good faith . . . shall exempt the applicant from any obligation, duty or liability imposed in this title upon the applicant as a holding company until the Commission has acted upon such application." See section 3(c). Since Enron has not registered under the Act, it must be operating pursuant to the relief granted by this language.|
|3||Actions that would otherwise be subject to Commission approval during the pendency of Enron's bankruptcy proceeding potentially include (but are certainly not limited to) Enron's financing transactions and certain financing transactions of Portland General Electric Company ("Portland General"). Among other things, any affiliate transactions, as defined in section 13 of the Act, between Portland General and other Enron-controlled companies will not be subject to the at-cost standard imposed by the Act.|
|4||See Business Briefs, Houston Chronicle (February 7, 2003) [2003 WL 3236030].|
|5||This matter has been pending, in one form or another, for over three years. Enron's first application for exemptions under the Act was filed April 12, 2000. On February 28, 2002, Enron filed its second application for exemption, which it subsequently amended on May 31, 2002.|
|6||The Public Utility Commission of Oregon, Southern California Edison, and FPL Group, Inc. also filed petitions for review of the initial determination on February 27, 2003. These petitions were also granted in the Commission's June 11, 2003 Order.|
|7||In this matter, the protected investors would include Enron's shareholders, the holders of all debt issued by Enron, the holders of debt securities issued by Portland General and Enron itself, as the holder of Portland General's equity securities.|
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