Legal Brief:
Application of Enron Corp. for Exemptions Under the Public Utility Holding Company Act of 1935 (File Nos. 70-9661 and 70-10056)

United States of America
before the
Securities and Exchange Commission

AMICUS BRIEF IN SUPPORT OF PETITIONS FOR REVIEW OF INITIAL DECISION

Pursuant to Rule 210(d) of the Rules of Practice of the Securities and Exchange Commission ("Commission"), 17 C.F.R. § 201.210(d) (2002), Edison Electric Institute ("EEI") hereby files Amicus Brief in Support of the Petitions for Review of Initial Decision filed by Enron Corp. ("Enron") and the Public Utility Commission of Oregon ("OPUC") in the above-captioned proceeding on February 27, 2003. In the initial decision in this proceeding dated February 6, 2003 ("Initial Decision"), the administrative law judge ("ALJ") denied Enron's separate applications for exemption under Sections 3(a)(1), 3(a)(3) and 3(a)(5) of the Public Utility Holding Company Act of 1935, as amended ("PUHCA" or the "Act"). The written consents of the parties accompany this brief.

EEI is a trade organization whose members serve more than 90 percent of the ultimate customers in the investor-owned segment of the electric utility industry, and nearly 70 percent of all electric utility ultimate customers in the nation. EEI's members include most of the electric utility holding companies that are registered under the Act, as well as many holding companies that are currently exempt under Section 3(a)(1).¹ EEI has previously appeared before the Commission to advocate positions on behalf of its members in rulemakings and other proceedings under the Act.

EEI's interest in this proceeding is limited to those portions of the Initial Decision that address the standards relevant to an application for exemption under Section 3(a)(1). The ALJ, relying on a variety of quantifiable factors, held that Enron is not entitled to the 3(a)(1) exemption because the utility operations of its sole public utility subsidiary, Portland General Electric Company ("Portland General"), are not "predominantly intrastate in character" and carried on "substantially in a single State," namely, Oregon.

EEI's concern is that the Initial Decision, if allowed to stand, will have significant consequences for other exempt intrastate electric utility holding companies. As set forth in greater detail below, EEI believes that the ALJ has adopted several new standards for determining whether the operations of a public utility are "predominantly intrastate in character" and carried on "substantially in a single State," and has not adequately dealt with Commission precedents and with other federal policies in coming to her conclusions.

Specifically, in denying Enron's application for exemption, the ALJ found:

1. The use of Portland General's transmission system, which is located almost entirely in Oregon, to transmit electricity in interstate commerce is indicative of interstate operations.

2. Portland General's purchase of electricity, at wholesale, outside of Oregon in order to serve its Oregon retail load is indicative of interstate operations.

3. The percentage of Portland General's generating assets --rather than net utility plant as a whole — located out-of-state is indicative of an interstate business.

4. The portion of Portland General's retail book trading² transactions taking place at hubs outside of Oregon is part of its out-of-state business even though entered into solely for the benefit of its Oregon retail customers.

5. For purposes of the Section 3(a)(1) test, operating revenues include proceeds from Portland General's merchant trading, notwithstanding Commission precedent characterizing such revenues as "non-utility".

I. INTRODUCTION.

Enron, an Oregon corporation, owns all of the issued and outstanding common stock of Portland General, also an Oregon corporation. Portland General operates as a regulated electric utility company in Oregon. All of its retail utility customers are located in Oregon, and, with the exception of certain generating assets located in Montana and associated transmission lines, all of Portland General's generation, transmission and distribution assets are located in Oregon. Portland General is subject to regulation by the OPUC with respect to retail electric rates and service in Oregon and by the Federal Energy Regulatory Commission ("FERC") with respect to wholesale electric rates and transmission service.

On February 28, 2002, Enron filed with the Commission under the Act an application requesting an order under Section 3(a)(1) exempting it and its subsidiary companies as such from all provisions of PUHCA, except Section 9(a)(2) (the "Section 3(a)(1) Application"). By Order dated October 7, 2002, the Commission ordered a hearing before the ALJ for initial decision on the Section 3(a)(1) Application as well as on another exemption application filed by Enron under other provisions of Section 3. On February 6, 2003, the ALJ issued the Initial Decision, which denied Enron's request for exemption under Section 3(a)(1) of the Act.³ On February 27, 2003, Enron and the OPUC filed separate Petitions for Review of the Initial Decision ("Petitions"). EEI, on behalf of its member utilities, supports these Petitions insofar as they relate to the standards used by the ALJ to deny the Section 3(a)(1) Application.

Section 3(a)(1) of the Act provides that "unless and except insofar as it finds the exemption detrimental to the public interest or the interests of investors or consumers" the Commission shall exempt from registration any holding company and every subsidiary thereof, if:

such holding company, and every subsidiary company thereof which is a public-utility company from which such holding company derives, directly, or indirectly, any material part of its income, are predominantly intrastate in character and carry on their business substantially in a single State in which such holding company and every such subsidiary company thereof are organized.

The Commission has considered — under the "unless and except clause 11 of Section 3 — a holding company system's interstate activities that give rise to the kinds of abuse enumerated in Section 1 of the Act to be grounds for denying or revoking exemptions, as "detrimental to the public interest and the interest of investors and consumers." But it has not viewed the totality of a holding company's activities in interstate commerce as relevant to the question whether its utility operations are "predominantly intrastate in character." ⁴

Thus, even though a holding company meets the requirements of Section 3(a)(1), the Commission may find its registration to be in the public interest. ⁵ The Commission in its October 7, 2002 order for a hearing specifically left to a Phase II hearing in this proceeding the issue of whether granting Enron an exemption would be "detrimental to the public interest or the interest of investors or consumers".

In determining whether a company is "predominantly intrastate in character" and operates "substantially in a single State," the Commission has historically considered various numerical factors, including gross operating revenues, net operating revenues, net income, number of customers served, location of utility assets, and net utility plant, in order to quantify the relative size of a company's out-of-state utility operations, or "presence."⁶ As the ALJ noted, the Commission observed in a recent case that, in practice, it has given the greatest deference to revenues.⁷

In finding that Portland General's public utility operations are not "predominantly intrastate in character" and carried on "substantially in a single State," the ALJ has given substantial weight to certain numerical and non-numerical factors that the Commission has not previously held relevant to the "predominantly/substantially" test under Section 3(a)(1). These include (a) the extensive use of certain high voltage transmission lines owned by Portland General in Oregon in connection with interstate transmission of power, (b) Portland General's wholesale purchases of electricity from non-Oregon sources in order to meet the requirements of its Oregon retail load, and (c) the percentage of Portland General's owned generation (measured by megawatt capacity) that is located outside Oregon.

Furthermore, in applying the traditional revenues test to Portland General, the ALJ included gross revenues (a) from Portland General's retail trading book sales, which were entered into to support the providing of energy to its Oregon retail customers, as well as (b) from merchant trading sales, notwithstanding the Commission's characterization of such trading as "non-utility" operations.

The ALJ's choice of numerical and non-numerical factors to measure the extent of Portland General's presence outside of Oregon has broken new ground in several respects. The ALJ also fails to deal with the policy implications of treating Enron's retail book trading revenues as an interstate business, and with the Commission's prior characterization of unregulated merchant trading revenues as "non-utility".

II. ARGUMENT.

The Commission should grant the Petitions (a) to provide clarification of the numerical standards or tests that will be applied in future Section 3(a)(1) cases to measure an applicant's out-of-state utility operations, (b) to determine the wisdom of a policy inconsistent with that of the FERC in this area, and (c) to reconcile its own determination of merchant trading as a non-utility operation with the characterization here.

Finally, the ALJ's new tests for exemption under Section 3(a)(1) are likely to conflict with important FERC policy initiatives to encourage the economic and efficient use of transmission facilities on a regional basis, and to increase the reliance of retail electric service providers on power purchased from non-affiliated generators, whether located within or without their service territories. Specifically, in Order No. 2000, the FERC has encouraged jurisdictional utilities to transfer operational control over their transmission facilities to large regional transmission organizations ("RTOs") that are independent of any market participants in order to "(1) improve efficiencies in transmission grid management; (2) improve grid reliability; (3) remove remaining opportunities for discriminatory transmission practices; (4) improve market performance; and (5) facilitate lighter handed regulation."⁸ Such RTOs are expected to expand the efficiency and geographic scope of electricity markets by providing transmission service throughout the region in which a participating utility's transmission facilities are located.⁹

More recently, the FERC has issued its proposed Standard Market Design rules that, if adopted, would require all jurisdictional utilities to transfer operational control over their transmission facilities to an RTO or other Independent Transmission Provider.¹⁰ As envisioned by the FERC, each Independent Transmission Provider would be responsible for operation of region-wide day-ahead and real-time energy markets.¹¹ Such markets would encourage liquid regional trading hubs and would provide additional supply options that would enable load-serving entities to balance loads and resources in an economical manner on short notice. Each Independent Transmission Provider would also be responsible for developing and implementing a market-monitoring program designed to assure the efficiency of the market place.¹²

Conversely, the FERC has actively sought to mitigate the potential for any single supplier to exercise generation market power by owning or controlling an excessive share of generation in a relevant geographic market.¹³ The effect of this policy is to discourage utilities from relying solely on their own generation within their control areas for the purpose of providing retail electric service. Additionally, because many utilities have divested their own generating resources as part of state restructuring programs and purchase all of their electricity in the wholesale market from marketers, independent power producers and other utilities, they are necessarily dependent on wholesale power purchases from suppliers either within or outside of their service territories in order to provide retail electric service.

In light of these issues, the Initial Decision raises the following questions:

A. Why are purchases of electricity from out-of-state sources for the use of in-state retail customers and the making available of in-state transmission facilities to transmit power in interstate commerce treated as indicia of out-of-state business?

It is clear that the operations of even the most insular electric utility affect interstate commerce in many ways, including purchasing power, fuel, equipment and supplies from out-of-state sources as well as the transmission of electricity and selling securities. But operating in interstate commerce is not synonymous with out-of-state activity for purposes of Section 3(a)(1). By resorting to a classic Commerce Clause analysis, the ALJ has ignored the policy and purpose of Section 3(a)(1).

Although virtually all transmission of electricity in the lower 48 states (except portions of Texas) is considered to be the transmission of electricity in interstate commerce,¹⁴ the Commission has never considered the use of in-state transmission facilities to transmit electricity in interstate commerce to be a relevant factor under the "predominantly/substantially" test of Section 3(a)(1). Moreover, as RTOs evolve in furtherance of FERC's Order 2000, the transmission assets owned by a participating utility, even though located entirely within a single state, will become part of a much larger multi-state transmission network under the control of an independent third party. To the extent that voluntary membership in an RTO could jeopardize a utility holding company's intrastate exemption under PUHCA — an inference one could reasonably draw from the Initial Decision — such a sea change in the standards for exemption under Section 3(a)(1) would be inconsistent with FERC policy to encourage regional transmission organizations.

The Commission has also not treated the purchase of power from out-of-state sources for resale to in-state retail customers as an indicium of out-of-state utility operations any more than it has so treated out-of-state purchases of fuel, turbines, transmission cables and towers and supplies. If the source of purchases were relevant to the character of intrastate business, Section 3(a)(1) would have little if any applicability.

Indeed, if its source of supply were determinative for purposes of Section 3(a)(1), few gas holding companies would qualify for exemption.

B. Why has the percentage of owned generation that is located out-of-state been given such great weight?

In applying the "predominantly/substantially" test, the Commission has also considered the percentage of an applicant's utility plant that is located out-of-state, usually in terms of net utility plant.¹⁵ Although the ALJ did take into account the percentage of Portland General's total utility plant located outside Oregon, she also applied an additional numerical test: the percentage of owned generation located out-of-state (expressed in megawatts). The ALJ does not explain her singling out this type of utility plant for special treatment. Her holding, therefore, raises questions about the exemptions of other intrastate holding companies, many of whom own all or portions of generating plants located in other states.

Portland General's situation is not unique. In order to achieve economies of scale associated with the construction and operation of relatively large electric generating units, many utilities participate with others in the joint ownership and operation of generating facilities used to serve their respective retail customers.¹⁶ Typically in such circumstances, each joint owner is entitled to a specified share of the total capacity available in the unit. The standard adopted by the ALJ raises an obstacle to participation by an exempt utility in a joint ownership arrangement involving development of generation in neighboring states, a decision not necessarily in the best interest of investors or consumers.

Although the percentage of Portland General's total utility assets located outside Oregon (13.1% based on undepreciated book value) and the percentage of its owned generating plant located outside Oregon (about 14.5% based on megawatts) are roughly the same, for other companies out-of-state generation may represent a percentage of owned generation higher than out-of-state total utility plant to all utility plant. The test for exemption under Section 3(a)(1) is whether the operations of a utility are carried on "substantially" in a single state. Neither the words of the statute nor the Commission's own decisions under Section 3(a)(1) provide any basis for isolating the generation function of a utility from its transmission and distribution functions.

The Commission should consider whether the percentage of a utility's generation assets located out-of-state is separately relevant for purposes of Section 3(a)(1), or whether, as has generally been believed, the appropriate comparison involves all utility assets.

C. Why, for purposes of the Section 3(a)(1) exemption, should revenues derived from (i) non-utility operations, or (ii) retail book trading activities be considered indicia of out-of-state business?

The term "electric utility company" is defined in Section 2(a)(3) of the Act to mean "any company which owns or operates facilities used for the generation, transmission, or distribution of electric energy for sale . . ." A power marketer, that is, a company that does not own or operate utility facilities but simply purchases and sells electricity produced by others, is not an "electric utility company." It is treated under PUHCA as a non-utility company.¹⁷

For various reasons, Portland General chooses to engage in so-called "merchant" wholesale electricity trading (what it calls "non-retail trading book purchases and sales") directly, rather than through a separate non-utility affiliate. These trades are settled financially and seldom result in a transfer of power.¹⁸ Nevertheless, in applying the "predominantly/substantially" test, the ALJ included the full amount of Portland General's revenues from merchant wholesale trading activities, most of which take place at trading hubs located in states other than Oregon, in applying the "predominantly/substantially" test.

The Commission should review the ALJ's decision to treat revenues from merchant wholesale trading activities as utility revenues for purposes of applying the "predominantly/substantially" test under Section 3(a)(1) on the grounds that these activities were conducted directly through a utility company, and not through a separate non-utility affiliate. In other words, as non-utility revenues, are they relevant to the question of whether a public utility is operating "substantially in a single state"?

Portland General also engages in retail book transactions, both purchases and sales, solely in connection with its providing service to its Oregon retail customers. The ALJ also considered these transactions taking place out of state to be part of Portland General's operations outside Oregon. Nevertheless, it remains unclear why transactions so intimately connected with the provision of service to Portland General's Oregon customers should affect Enron's exemption.

III. CONCLUSION.

Any case involving Enron may be sui generis. Certainly public interest and passion with respect to matters affecting that company are higher than they are with most exempt holding companies. Nevertheless, the Initial Decision, if left to stand, is likely to have widespread, though unintended, consequences to other exempt holding companies.

For these reasons, EEI respectfully requests that the Commission review the Initial Decision to consider the questions it raises and provide guidance for the future administration of the Act.

Dated: March 25, 2003

United States of America
before the
Securities and Exchange Commission

WRITTEN CONSENT OF PARTIES TO FILING OF AMICUS BRIEF IN SUPPORT OF PETITIONS FOR REVIEW OF INITIAL DECISION

Pursuant to Rule 210(d)(ii) of the Commission's Rules of Practice, 17 C.F.R. § 201.210(d)(ii) (2002), the undersigned parties and participants in the above-captioned proceeding hereby consent to the filing by Edison Electric Institute ("EEI") of an Amicus Brief in Support of Petitions for Review of Initial Decision filed by Enron Corp. and Public Utility Commission of Oregon on February 27, 2003. The undersigned understand that (i) EEI's interest in this proceeding is limited to those portions of the Initial Decision that address the standards to be applied to exemption applications under Section 3(a)(1) of the Public Utility Holding Company Act of 1935, as amended, and (ii) the Division of Investment Management (the "Division") reserves the right to respond to arguments raised by EEI in its Amicus Brief, and the parties signing this consent also hereby consent to the filing of any such response to EEI's Amicus Brief by the Division. In giving their written consent, the undersigned in no way endorse the views of or positions taken by EEI in its Amicus Brief.

Dated: March 25, 2003

Endnotes

¹ EEI understands that there are approximately 100 electric and gas utility holding companies that are exempt by order under Section 3(a)(1) or pursuant to Rule 2 under the Act, 17 C.F.R § 250.2.

² Enron describes its retail book trading as the purchase and sale of power to manage supplies and load for the benefit of its retail customers, all of whom are located in Oregon.

³ The Initial Decision also denied a separate application by Enron for exemptions under Section 3(a)(3) and/or Section 3(a)(5) of the Act. As noted above, EEI's interest in this proceeding is limited to the standards found by the Initial Decision to be relevant to the Section 3(a)(1) Application.

⁴ See e.g., Texas Utilities Co., 31 S.E.C. 367, 371 (1950) (granting exemption under Section 3(a)(1) to intrastate holding company "despite its magnitude and the extensive interstate aspects" of its subsidiaries' operations".

⁵ See Niagara Hudson Power Corp., 16 SEC 139, 171 (1944); Long Island Lighting Co., 18 SEC 717, 721 (1945).

⁶ See NIPSCO Indust., Inc., 53 S.E.C. 1296, 1323 (1999) ("NIPSCO").

⁷ See C&T Enter., Inc., Holding Co. Act Rel. No. 27590 (Oct. 31, 2002).

⁸ Regional Transmission Organizations, Order No. 2000, FERC Stats. & Regs., Regulations Preambles ¶31,089 at 30,993 (2000). In the FERC's view, there ideally would be four Regional Transmission Organizations serving markets throughout the United States-one in the Northeast, one in the Southeast, one in the Midwest, and one comprised of all utilities within the Western Interconnection, including Portland General. Regional Transmission Organizations, 96 FERC ¶61,065 (2001); Regional Transmission Organizations, 96 FERC ¶61,066 (2001); Avista Corp., 96 FERC ¶61,058 (2001).

⁹ Order No. 2000 at 31, 173-31, 174.

¹⁰ Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design, FERC Stats. & Regs., Proposed Regulations ¶32,563 (2002) at ¶¶125-131.

¹¹ Id. at ¶¶269-327.

¹² Id. at ¶¶474-508.

¹³ See, e.g., American Elec. Power Co. and Central and South West Corp., 90 FERC ¶61,242 at 61,790-61,792 (2000); AEP Power Marketing, Inc., et al., 97 FERC ¶61,219 (2001).

¹⁴ FPC v. Florida Power & Light Co., 404 U.S. 453 (1972).

¹⁵ See, e.g., NIPSCO, supra (granting exemption to holding company where out-of-state utility plant was about 13.5% of total net book value).

¹⁶ For example, the Colstrip plant is owned jointly by PPL Montana, LLC, and by several utilities located outside of Montana, including Portland General, Puget Sound Energy, Inc., PacifiCorp, and Avista Corp.

¹⁷ See Rule 58(b)(1)(v).

¹⁸ Initial Decision, p. 14.

http://www.sec.gov/litigation/aljdec/eeiamicus.htm