UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
| Administrative Proceeding|
File No. 3-10909
SOUTHERN CALIFORNIA EDISON COMPANY'S PETITION FOR REVIEW
Pursuant to Rule 410 of the Rules of Practice of the Securities and Exchange Commission ("Commission"), Southern California Edison Company ("Edison") respectfully petitions the Commission for review of the following decisions in the above-captioned proceeding: 1) the Initial Decision issued by the Honorable Brenda P. Murray on February 6, 2003 (the "Initial Decision"); and 2) the November 2002 orders denying Edison's Motion to Intervene.1
Edison seeks review of the Initial Decision because it fails to consider whether Enron's Application No. 70-9661 (the "Application") was filed in good faith within the meaning of Section 3(c) of the Public Utility Holding Company Act of 1935 ("PUHCA" or the "Act"). See Initial Decision at 10. By declining to address the issue of good faith, the Initial Decision effectively sanctions Enron's de facto exemption from the Act for a period of three years even though there is no record support for the exemption during that period. The uncontroverted record evidence establishes that the Application was filed without any colorable basis for the exemption being granted, that the Application was premised on falsified financial statements, and that, even after the nature of the misrepresentations made in the initial filing was revealed, the Application remained uncorrected by Enron.
If Section 3(c) of the Act is to have any meaning at all, the Commission must address the good faith issue. Simply ignoring the issue will establish a dangerous precedent for others who may seek the benefit of the temporary exemption afforded by Section 3(c) without a good faith basis for doing so. This issue is not only an important matter of law that this Commission should review, but also a policy matter of considerable importance as well. See SEC Rule of Practice 411(b)(2)(C).
Edison requests that the Commission grant review of the Initial Decision and find, based on the record before it, that Enron's application was not filed in good faith within the meaning of Section 3(c) of the Act.2 Alternatively, the Commission should remand the proceeding to Chief Judge Murray in part for a determination of whether the Application was filed in good faith.
In addition, Edison appeals the November 5, 2002 order denying Edison's Motion to Intervene as a Party in the above-captioned proceeding, and the November 19, 2002 order denying Edison's Motion for Reconsideration on the issue of Edison's Intervention (collectively, "Orders"). The Orders held that Edison failed to establish any basis to intervene, but authorized Edison to participate on a limited basis pursuant to Commission Rule 210(c). The Orders are clearly erroneous. As demonstrated in Edison's March 26, 2002 Motion to Intervene, Edison represents the interests of millions of "consumers" within the meaning of Section 19 of PUHCA who will be directly impacted by the outcome of this proceeding. No other party represents the interests of Edison's ratepayers in this case. Edison therefore should have been granted full intervention in this proceeding, and the Orders must be reversed.
Edison purchases energy and capacity from certain of Enron's wind energy small power production facilities (the "Enron Wind Facilities") under regulations of the Federal Energy Regulatory Commission ("FERC") and the California Public Utilities Commission that implement the Public Utility Regulatory Policies Act of 1978 ("PURPA"). PURPA allows qualifying small power production and cogeneration facilities ("qualifying facilities" or "QFs") to obtain certain benefits, including the right to interconnect with and make sales of power to public utilities at "avoided cost."
Under PURPA, a QF cannot be owned by a person that is primarily engaged in the generation or sale of electric power. 16 U.S.C. § 796(18)(b). FERC's regulations implementing PURPA provide that a generating facility "shall be considered to be owned by a person primarily engaged in the generation or sale of electric power if more than 50% of the equity interest is held by an electric utility, or utilities, or by an electric utility holding company or companies, or any combination thereof." 18 C.F.R. § 292.206(b). A holding company that is exempt "by rule or order" under Section 3(a)(3) or 3(a)(5) of the Act, however, is also exempt from the 50% ownership restriction under PURPA. 18 C.F.R. § 292.206(c)(1).
In July 1996, Enron and Portland General Corporation ("Portland General") announced their agreement to merge.3 While the merger application was pending at FERC,4 Enron acquired Zond Corporation ("Zond"), a "leading developer of wind energy power."5 Through subsidiaries, Zond owned and operated wind energy small power production facilities in California and had contracts with Edison for the sale of QF power from those facilities. After its merger with Portland General on July 1, 1997, Enron became the owner of Portland General's electric utility subsidiary, PGE, and claimed to be an exempt public utility holding company under Section 3(a)(1) of PUHCA. As a result of its acquisition of Portland General, however, Enron's interests in the small power production facilities acquired from Zond would be considered ownership by an "electric utility holding company" for purposes of FERC's regulations. Therefore, unless Enron divested some or all of its ownership interests so as to bring itself within the 50% equity limitation applicable to utility holding companies, the Enron Wind Facilities would not be QFs and would lose the benefits of QF status, including, among other things, the right to receive payments at avoided cost rates under the contracts with Edison.
In order to avoid having to divest its interest in projects and losing the benefits of these lucrative contracts, Enron devised a scheme to hide its continuing ownership interest in the Enron Wind Facilities. Specifically, Enron used a special purpose entity ("SPE") known as RADR ZWS and other devices to cloak the extent of Enron's ownership and control of the Enron Wind Facilities. Enron represented to both Edison and FERC that RADR ZWS was an independent entity when, in fact, it was controlled by Enron and Enron executives.
In furtherance of its scheme to avoid the ownership restrictions of PURPA and FERC's implementing regulations, Enron filed its Application for exemption under PUHCA Sections 3(a)(3) and 3(a)(5) on April 14, 2000. As Enron advised FERC shortly after filing its Application, the mere filing of the Application at this Commission resulted in the Enron Wind Facilities becoming exempt from the ownership restrictions of FERC's regulations because of the effect of Section 3(c) of the Act, which provides that an applicant is deemed exempt from PUHCA during the pendency of an application filed in "good faith." In short, the de facto exemption afforded by Section 3(c) permitted Enron to maintain control over the Enron Wind Facilities while having an ownership interest (or combined utility ownership interest) that demonstrably exceeded the permitted level under PURPA. The filing of the Application also permitted Enron to unwind the highly questionable RADR ZWS transaction.
The record in the proceeding before Judge Murray unequivocally establishes that the Application was not filed in "good faith." Even if one were to accept as true the representations made in the Application concerning the relative and absolute size of Portland General at the time of filing, a good faith basis did not exist for seeking the exemption based on those representations. Further, it is now known that even the facts provided in the Application were not true. In fact, given what is known today, the relative size of Enron's utility operation (PGE) compared to Enron's total operation clearly would not have passed muster under Sections 3(a)(3) and 3(a)(5). Given the actual income of PGE as a percentage of Enron's in light of massive accounting adjustments now proposed for the period 1997-2000, Enron could not have qualified for an exemption under Sections 3(a)(3) and 3(a)(5) of the Act at the time it filed the Application on April 14, 2000. Further, separate and apart from the merits of Enron's Application, an application that 1) contains false and misleading statements or omissions, and 2) is filed for the sole purpose of avoiding the lawful regulation of another agency, cannot have been made in good faith.
Enron's success in avoiding the QF ownership regulations of FERC through the ruse of its Application before this Commission caused Edison and its ratepayers to overpay the Enron Wind Facilities at avoided cost rates for several years. Edison estimates that payments to the Enron Wind Facilities between April 14, 2000 and January 1, 2003 exceeded the market value of the energy provided by tens of millions.
Basis for Appeal of Initial Decision
I. The Good Faith Issue Is Properly Within The Scope Of This Proceeding
The Commission's October 7, 2002 order initiating this proceeding vested the Presiding Commissioner with the authority to "decide that additional factual or legal issues should be considered as part of the hearing in this matter." Applications of Enron Corp. for Exemptions Under PUHCA (Nos. 70-9661 and 70-10056), Holding Co. Release No. 27574 (Oct. 7, 2002). Although the October 7 order did not expressly include the issue of "good faith" within the scope of this proceeding, the October 7 order clearly did not foreclose the Presiding Officer from considering and deciding that issue.
Edison argued below that the Commission should consider whether Enron's Application was filed in good faith as part of this proceeding in order to prevent Enron from benefiting from a de facto exemption for which it was never qualified. In its briefs, Edison requested that the Commission make a specific finding that the Application was not submitted in good faith. In the alternative, Edison requested that the Commission determine that the Application ceased to comply with the good faith standard after it was filed given Enron's continuing failure to advise the Commission of material changes in Enron's circumstances. The good faith issue was fully briefed by the parties and participants below, and testimony was submitted on the issue.6
On November 19, 2002, Commissioner Campos issued an order denying Edison's Motion for Reconsideration on the issue of Edison's Intervention in the Proceeding.7 In that order, the Commissioner stated "I find that judicial efficiencies are best served to defer the presentation of evidence or consideration of any motion regarding `good faith' until after a determination of whether there exists an exemption." Commissioner Campos' November 19 order does not eliminate the issue of good faith from this proceeding, but, rather, indicates that consideration of that issue should be taken up after a determination of whether there exists an exemption. Such a determination has now been made. Therefore it was appropriate for the Initial Decision to address the issue of good faith.
In the Initial Decision, Chief Judge Murray found that Enron did not qualify for an exemption under PUHCA. Yet Chief Judge Murray still denied Edison's request for consideration of the good faith issue, stating that:
Edison has made the same argument to a different presiding officer who denied its request, holding that the request was premature and deferring presentation of evidence before a ruling on whether the exemption should be granted. See 78 SEC Docket 3383, 3384 (Nov. 19, 2002). Edison's arguments are the same arguments presented to the prior presiding officer, I therefore affirm the prior ruling and DENY Edison's request.
Initial Decision at 10. By declining even to consider whether Enron's Application was filed in good faith, Judge Murray committed error. The October 7 order merely indicated that consideration of the good faith issue would be premature until a decision was made as to whether an exemption existed. Judge Murray's reliance on the November 19 order as a basis for declining to consider the good faith issue was erroneous.
II. Merely Denying The Application Without Addressing The Good Faith Issue Will Give Enron The Benefit Of An Exemption To Which It Was Never Entitled
The Initial Decision also errs because it is contrary to the Commission's obligations under PUHCA. PUHCA Section 3(c) provides in pertinent part that: "The filing of an application in good faith under [Section 3(a)] by a person other than a registered holding company shall exempt the applicant from any obligation, duty, or liability imposed in this title upon the applicant as a holding company until the [SEC] has acted upon the application." (Emphasis added.) As set forth more fully in Edison's pleadings before Judge Murray, Enron's Application was not filed in good faith. Even based on the data actually provided in its Application, no legitimate basis for exemption existed under Commission precedent. Moreover, Enron has publicly acknowledged that the financial information provided in the Application was false.8 Finally, Enron failed to withdraw or correct the Application even after it publicly admitted the information was false and when other circumstances changed materially. Under these undisputed facts, the Application cannot be deemed to have been filed in good faith.
If the Commission simply denies the Application without making a finding on the good faith issue, Enron may continue to be shielded from FERC scrutiny by the de facto PUHCA exemption for the period from April 14, 2000 until a final decision denying the Application is issued. Therefore, this is an important matter of law that this Commission should review. See SEC Rule of Practice 411(b)(2)(C).
The Commission is the agency responsible for implementing PUHCA, and for ensuring that the good faith requirement of Section 3(c) is enforced. A failure to do so in this case may have the effect of rewarding Enron's fraudulent conduct and encouraging others to file meritless applications to take advantage of the de facto exemption afforded by Section 3(c). The Commission should therefore make a specific finding, based on the record before it, that Enron's Application was not filed in good faith. In the alternative, the Commission should remand with instructions to determine whether the 2000 Application had been filed in good faith.
Basis for Appeal of Denial of Intervention
Edison also appeals the November 5, 2002 Order denying Edison's Motion to Intervene in the above-captioned proceeding, and the November 19, 2002 Order denying Edison's Motion for Reconsideration on Edison's Intervention (collectively, "Orders"). The Orders held that Edison failed to establish any basis to intervene in this proceeding pursuant to Commission Rule 210(b),9 but authorized Edison to participate on a limited basis pursuant to Commission Rule 210(c).10 Edison appeals the Orders because they are based on an apparent misunderstanding of the nature and extent of Edison's interest in this proceeding.11
As demonstrated in Edison's March 26, 2002 Motion to Intervene and Opposition ("March 26 Motion"), Edison represents the interests of millions of "consumers" within the meaning of Section 19 of PUHCA.12 Section 19 provides that "[i]n any proceeding before the Commission, the Commission, in accordance with such rules and regulations as it may prescribe . . . may admit as a party any representative of interested consumers . . . whose participation may be . . . for the protection of . . . consumers."13
As set forth in Edison's March 26 Motion, Edison is the seventh largest investor-owned electric utility in the nation and serves almost 4.5 million retail customers. Each of these customers will likely be affected by the outcome of this proceeding. The reason is straightforward. Edison is now, and for many years has been, a party to 20 power purchase agreements in which a wholly-owned subsidiary of Enron holds a controlling interest. Pursuant to these agreements, Edison purchases electric power on behalf of its customers, commonly referred to as "ratepayers." These ratepayers are the ultimate consumers of the product sold to Edison by Enron's subsidiary wind projects and ultimately bear the costs associated with the Enron contracts. As demonstrated in Edison's March 26 Motion, Edison's ratepayers i.e., consumers have paid, many millions of dollars more for the power purchased from the Enron controlled wind projects than they would otherwise have paid had the projects not been deemed to be QFs within the meaning of PURPA. The above-market payments to Enron that only QFs were eligible to receive are in the tens of millions. Moreover, insofar as the outcome of this proceeding results in a FERC determination that Enron's wind projects have not been QFs at any time since the filing of Enron's April 2000 exemption application, it is Edison's ratepayers and not Edison itself that will ultimately benefit from any refunds or reductions in payments that accompany such determination. This would occur because applicable California Public Utilities Commission ("CPUC") tariffs would require that any refunds ordered by FERC of above-market payments to the projects (as well as any resulting reductions in future overpayments) be passed through to ratepayers.14
Since April 2000, when Enron filed its Application, the generating facilities in which Enron holds greater than a 50% ownership interest have been deemed to be QFs by FERC solely by virtue of the pendency of Enron's application before this Commission.15 Thus, Edison's ratepayers have a direct interest in the Commission's determination of whether the application was filed by Enron in good faith as required by Section 3(c) of the Act. No other party in this proceeding is advocating this interest or seeking resolution of the issue which most vitally concerns these consumers: whether the application was filed in "good faith" within the meaning of Section 3(c) of the Act.
In addition, Edison's ratepayers have an interest in whether this Commission grants Enron's application going forward and, in particular, whether the Commission grants the "temporary" exemption that Enron has requested. As demonstrated in Edison's March 26 filing, the continued status of the Enron projects as qualifying facilities by virtue of actions taken (or not taken) by this Commission will directly affect the amount that consumers pay for electricity produced by these projects going forward. The November 5 order describes this interest as speculative.16 However, there is nothing uncertain about the above-market cost of these contracts today; nor is there anything speculative about a comparison of the going-forward cost of the contracts to the market-forward price of energy.
Edison also notes that the interests of the consumers that it represents in this proceeding is markedly different from that of other entities which have sought and been denied party status. For example, FPL and Sithe both claim an interest in this proceeding because they are Enron's partners in various projects whose QF status may be affected by the outcome of this proceeding.17 Like Edison's ratepayers, such parties may have a direct economic interest in the outcome of this proceeding, but FPL and Sithe clearly are neither consumers nor investors within the meaning of Section 19 of the Act, nor do they purport to be representing such interests in this proceeding. Ironically, however, these entities will effectively enjoy the benefits of party status (notwithstanding orders limiting their participation) because their interests are perfectly aligned with that of the applicant, Enron, which does have full party status. By contrast, no party other than Edison represents in this proceeding the interests of the end users of Enron's product, Edison's retail customers. Edison is uniquely qualified and situated to represent the interests of such consumers, and therefore the Orders denying Edison full party status were clearly erroneous.
For the reasons stated above, Chief Judge Murray's decision not to review whether Enron's Application was filed in good faith was clear error and should be reviewed by the Commission. Based on the record before it, the Commission should find that Enron's Application was not filed in good faith within the meaning of Section 3(c) of the Act. In the alternative, the Commission should remand the proceeding to Judge Murray in part for a determination of whether the Application was filed in good faith.
In addition, Edison seeks review of the Orders denying Edison full intervention in the proceeding. For the reasons outlined above, those Orders should be reversed.
James B. Woodruff
J. Eric Isken
Southern California Edison Company
2244 Walnut Grove Avenue
Rosemead, CA 91770
(626) 302-1904 (facsimile)
J.A. Bouknight, Jr.
Cynthia L. Taub
STEPTOE & JOHNSON LLP
1330 Connecticut Avenue, N.W.
Washington, DC 20036
(202) 429-3902 (facsimile)
SOUTHERN CALIFORNIA EDISON COMPANY
February 27, 2003
1 Although Edison has not previously expressed views on the 3(a)(1) exemption issues raised by Commission Staff, Edison is troubled that the Initial Decision could potentially be read as deviating from established Commission precedent concerning the circumstances under which such an exemption is appropriate. At the very least, the Initial Decision should be modified to make it clear that the resolution of the Section 3(a)(1) issue is limited to the unique factual circumstances presented in this case and is not intended to established an intrastate exemption standard that deviates from prior Commission precedent. Edison reserves the right to comment further on the Section 3(a)(1) issues in connection with Enron's expected petition for review with respect to Section 3(a)(1).
2 Rule 411(a) of the SEC Rules of Procedure provides that the Commission, in reviewing an initial decision, "may make any findings or conclusions that in its judgment are proper and on the basis of the record." Although Chief Judge Murray declined to consider whether Enron's Application was filed in good faith, the issue has been fully briefed by the parties. See cites provided in n. 5, infra. Therefore, the Commission is not limited to remanding to Judge Murray for a finding on the good faith issue, but can itself make such a determination based on the record before it.
3 Enron press release dated July 22, 1996, available at <http://www.enron.com/corp/pressroom/releases/1996/89pge.html>.
4 FERC Docket No. EC96-36-000. The Enron Portland General merger was approved by FERC on February 26, 1997. Enron Corporation et al., 78 FERC ¶ 61,179 (1997).
5 Enron press release dated January 6, 1997, available at <http://www.enron.com/corp/pressroom/releases/1997/1zond.html>. Zond was described as operating over 2,400 wind turbines comprising 260 megawatts.
6 See, e.g., Enron's Response to Edison's Motion to Intervene (April 30, 2002); Edison's Supplement to its Motion to Intervene and Opposition (Oct. 22, 2002); Enron's Response to Edison's Supplement to its Motion to Intervene (Nov. 1, 2002); Sithe/Independence Power Partners' Statement of Position (Nov. 1, 2002); Electric Power Supply Association's Statement of Position (Nov. 1, 2002); Edison's Statement of Position (Nov. 1, 2002); Prepared Direct Testimony of Lars E. Bergmann (Nov. 15, 2002); Prepared Direct Testimony of Dr. Kenneth D. Gartrell (Nov. 15, 2002); Prepared Direct Testimony of Douglas W. Hawes (Nov. 15, 2002).
7 Order Denying Edison's Motion for Reconsideration (Nov. 19, 2002). Although Edison was denied full intervention, Edison was granted limited participant status.
8 See Enron's November 9, 2001 8-K Filing (stating that financial statements for 1997 to 2000 (upon which the Application was based) should not be relied upon, and describing significant adjustments to net income contemplated for those years).
9 17 C.F.R. § 201.210(b)(1)(i). Rule 210(b)(1)(i) provides that "[i]n a proceeding under the Public Utility Holding Company Act of 1935, any representative of interested consumers . . . or any other person whose participation in the proceeding may be in the public interest or for the protection of . . . consumers may be admitted as a party. . . ." In addition, Rule 210(b)(1) provides that "No person . . . shall be admitted as a party to a proceeding by intervention unless it is determined that leave to participate pursuant to paragraph (c) of this section would be inadequate for the protection of his or her interests."
10 17 C.F.R. § 201.210(c).
11 The November 5 Order, at footnote 5, notes that Edison's October 22 supplement to the motion to intervene was untimely. However, the signed copy of the Commission's October 7th Order received by Edison provides that parties would have until October 22 to file supplements. See copy of October 7th Order Scheduling Hearing Pursuant to Section 19 of PUHCA (Holding Co. Release No. 27574) at 5, attached to Edison's Nov. 8, 2002 Motion for Reconsideration. Therefore, the supplement was not untimely.
12 15 U.S.C. § 79s.
14 SCE Tariff Book, Preliminary Statement, Part MM, Procurement Related Obligations Account, Cal. PUC Sheet No. 30279-E; SCE Tariff Book, Preliminary Statement, Part Z, Settlement Rates Balancing Account, Cal. PUC Sheet No. 30269-E.
15 15 U.S.C. § 79c(c).
16 Nov. 5 Order at 2.
17 See FPL Group, Inc. Motion to Intervene (Oct. 22. 2002); Statement of Position of Sithe/Independence Power Partners (Nov. 1, 2002).