Public Utility Holding Company Act of 1935
Rel. No. 27782 / December 29, 2003

Admin. Proc. File No. 3-10909

In the Matter of the Applications of



On the basis of the Commission's opinion issued this day, it is

ORDERED that Enron's application, filed on April 12, 2000, for an exemption under Sections 3(a)(3) and 3(a)(5) of the Public Utility Holding Company Act of 1935 and its application, filed on February 28, 2002, amended on May 31, 2002, seeking an exemption under Section 3(a)(1) of the Public Utility Holding Company Act of 1935 be, and they hereby are, denied.

By the Commission.

Jonathan G. Katz


1 15 U.S.C. § 79c(a)(3) and 15 U.S.C. § 79c(a)(5). The Act requires that all public utility holding companies must either register under Section 5 of the Act or seek an exemption from the Act's provisions. See 15 U.S.C. §§ 79c and 79e.

2 15 U.S.C. § 79c(a)(1).

3 OPUC takes no position with regard to Enron's application pursuant to Sections 3(a)(3) and 3(a)(5) of the Act. The National Association of Regulatory Utility Commissioners ("NARUC") submitted an amicus brief in support of OPUC's petition for review of the initial decision with respect to Section 3(a)(1). The Edison Electric Institute ("EEI") also filed an amicus brief limited to issues related to Enron's application for an exemption pursuant to Section 3(a)(1). FPL Group, Inc. ("FPL"), which was denied party status but allowed to participate in the hearing on a limited basis, seeks review of the law judge's decision with respect to Enron's application pursuant to Sections 3(a)(3) and 3(a)(5).

4 15 U.S.C. § 79b(a)(7). The Act defines a holding company, in relevant part, as any company that directly or indirectly owns or controls ten percent or more of the outstanding voting securities of a public utility company.

5 Rule 2(a) under the Act provides that the filing of Form U-3A-2 by a holding company shall exempt the applicant from all the provisions of the Act subject to an annual filing on or before March 1 of each year of a statement showing the holding company's entitlement to the exemption. 17 C.F.R. § 250.2(a).

6 Pursuant to Section 3(c) of the Act, the filing of an application in good faith under Sections 3(a)(3) or 3(a)(5) exempts the applicant until the Commission has acted on the application. 15 U.S.C. § 79c(c).

7 See, e.g., 16 U.S.C. §§ 796(17) and (18) (defining qualifying small power producers and qualifying cogenerators).

8 See 18 C.F.R. § 292.206(b).

9 Such holding companies are specifically exempted from the QF ownership limitation set forth in FERC's regulations. See 18 C.F.R. §§ 292.206(c) and 292.202(n).

10 See Enron Corp., United States Bankruptcy Court, Case No. 01-16034 (S.D.N.Y. Dec. 2, 2001).

11 Enron amended this application on May 31, 2002.

12 Order Scheduling Hearing Pursuant to Section 19 of the Public Utility Holding Company Act of 1935, Holding Company Act Rel. No. 27574 (Oct. 7, 2002), 78 SEC Docket 2092.

13 Order Scheduling Hearing Pursuant to Section 19 of the Public Utility Holding Company Act of 1935, 78 SEC Docket at 2093, citing 15 U.S.C. § 79c(a).

Our October 7, Order directed any person seeking either to intervene as a party pursuant to Commission Rule of Practice 210(b), 17 C.F.R. § 201.210(b), or to participate in the hearing on a limited basis pursuant to Rule 210(c), 17 C.F.R. § 201.210(c), to file a motion describing the nature and intent of the movant's interest with respect to each phase of the hearing. Order Scheduling Hearing Pursuant to Section 19 of the Public Utility Holding Company Act of 1935, 78 SEC Docket at 2092. Pursuant to a series of pre-hearing orders, Electric Power Supply Association, FPL Group, Inc. ("FPL"), Sithe/Independence Power Partner, L.P. ("Sithe"), and Southern California Edison ("Edison") weredenied party status but were allowed to participate on a limited basis. FPL and Sithe argued before the law judge that the Commission should grant at least temporarily the application for exemptions pursuant to Sections 3(a)(3) and 3(a)(5) of the Act. Sithe did not file a petition for review of the initial decision. Edison opposed Enron's application under Sections 3(a)(3) and 3(a)(5).

14 Edison, which had filed a petition for review of the initial decision with respect to Sections 3(a)(3) and 3(a)(5), subsequently withdrew its petition for review.

15 NARUC states that it is a quasi-governmental nonprofit organization whose members include the governmental bodies of the fifty states engaged in the economic and safety regulation of utilities. According to NARUC, its members are charged with regulating the retail rates and services of electric, gas, water, and telephone utilities operating within their respective jurisdictions.

16 EEI states that it is the association of U.S. shareholder-owned electric companies, international affiliates, and industry associates worldwide. According to EEI, its members include most of the electric utility holding companies that are registered under the Act, as well as many holding companies that are exempt under Section 3(a)(1).

17 Bonneville Power Administration and PacifiCorp are the other Intertie owners.

18 The state in which the sale of electricity takes place determines the source of utility revenues. We have determined that, if a sale occurs within the state in question or along that state's borders, it is an intrastate transaction for purposes of Section 3(a)(1). See NIPSCO Indus., Inc., 53 S.E.C. 1296, 1324 (1999) (stating that wholesale sales that take place in a state or at the state border constitute operations within that state); Consolidated Edison, Holding Company Act Rel. No. 27021 (May 13, 1999), 69 SEC Docket 2321, 2333 (same). The parties do not dispute the location where title passes with respect to Enron's electricity sales.

19 15 U.S.C § 79c(a)(1).

20 Enron does not dispute that it derives a material part of its income from Portland General for purposes of Section 3(a)(1). Portland General is Enron's only public utility subsidiary. Enron derives all of its public utility income from Portland General and these amounts are "significant" or "substantial" portions of Enron's total income and revenues.

21 NIPSCO, 53 S.E.C. at 1323. For example, we have found the predominantly/substantially requirement to be satisfied in cases where: (1) less than three percent of a system's service population, number of customers, generating capacity, sales, book value of net plant, and operating income were attributable to out-of-state activities, Wisconsin Energy Corp., Holding Company Act Rel. No. 24267 (Dec. 18, 1986), 37 SEC Docket 387, 399; (2) 3.3% of a subsidiary's gross operating revenues were derived from out-of-state operations, Penn Fuel Gas, Inc., Holding Company Act Rel. No. 26050 (May 9, 1994), 56 SEC Docket 2109, 2110 n.2; (3) a utility's out-of-state operations accounted for 6.8% of an applicant's consolidated operating revenues, 1.3% of consolidated net income, 4.4% of consolidated net utility plant and 4% of consolidated total assets, KU Energy Corp.,50 S.E.C. 789, 793 (1991); and (4) two of 28 counties served and approximately four percent of an electric utility system's 69 KV transmission lines were located, and less than two percent of its energy sales took place, out of state, N.W. Electric Power Cooperative, Inc., Holding Company Act Rel. No. 24497 (Nov. 10, 1987), 39 SEC Docket 1026, 1026-27.

22 See, e.g., C&T Enterprises, Inc., Holding Company Act Rel. No. 27590 (Oct. 31, 2002), 78 SEC Docket 2582, 2592; NIPSCO, 53 S.E.C at 1323-26 (and cases cited therein).

23 C&T Enterprises, 78 SEC Docket at 2597.

24 See, e.g., NIPSCO, 53 S.E.C. at 1325; but see C&T Enterprises, 78 SEC Docket at 2592 n.7 (noting that, while the Commission has traditionally used the most recent three year period in evaluating out-of-state revenues, a 3.5 year average was used in order to demonstrate that the loss in operating margin - sometimes referred to as net operating revenue and defined as gross operating revenues less the cost of gas and cost of fuel for electric generation - that occurred in the last full year for which records were available had not continued).

25 See NIPSCO 53 S.E.C. at 1323 n.58.

26 Division of Investment Management, United States Securities and Exchange Commission, The Regulation of Public-Utility Holding Companies (1995) (hereinafter "1995 Report").

27 NIPSCO, 53 S.E.C. at 1325-26. In NIPSCO, the 13.2% represented interstate sales as a percentage of net operating revenue. We found it necessary to use net operating revenue in that case because the intrastate utility operation was primarily electric and the out-of-state utility operation was gas. As discussed infra in the text accompanying note 30, differences between electric and gas utilities' pass through costs would have produced a distortion in the gross revenues that would have made comparisons of these numbers not meaningful. It is not necessary to use net operating revenue here because Portland General is purely an electric power utility and sells only electrical power inside and outside of Oregon.

28 NIPSCO, 53 S.E.C. at 1326 n.61.

29 In its petition for review, Enron argued that the law judge erred when she applied a general Commerce Clause analysis todetermine whether Portland General was predominantly intrastate in character and carried on its business substantially within a single state. Although the law judge characterized her analysis using the terms "interstate commerce" and "intrastate commerce," she nevertheless focused on the appropriate factors applicable under the Act - most significantly Portland General's large volume of out-of-state sales - in her determination as to whether Portland General was predominantly intrastate or interstate in character.

30 See NIPSCO, 53 S.E.C. at 1320-21.

31 See NIPSCO, 53 S.E.C. at 1321.

32 In AES Corp., Holding Company Act Rel. No. 27063 (Aug. 20,1999), 70 SEC Docket 1279 (AES I), we employed a flexible approach in determining that a public utility subsidiary did not contribute a material part of its parent's income for purposes of an application for exemption pursuant to Section 3(a)(5). Citing NIPSCO, we relied more heavily on net revenues than gross revenues in making our materiality determination because of the distortion that resulted from comparing gross revenues of an electric utility with those of a combination gas and electric utility. AES I, 70 SEC Docket at 1308. We also found significant a downward progression in the amount of net revenue contributed each year by the utility subsidiary to the parent suggesting that the utility subsidiary would not contribute a material part of its parent's income in the future. Id. at 1310.

33 C&T Enterprises, 78 SEC Docket at 2598.

34 Id.

35 We incorporated the most recent six months of data in C&T Enterprises resulting in a calculation of a 3.5 year average, rather than the three-year average we have used traditionally. We did so in order to demonstrate that an operating margin loss occurring at the end of the three-year period did not represent a trend but rather was an aberration in the utility's revenues.

36 C&T Enterprises, 78 SEC Docket at 2600.

37 Id. at 2599.

38 Id.

39 In NIPSCO, this distortion resulted from a comparison of the operation of gas and electric utilities. In C&T Enterprises, the distortion resulted from the fact that Valley's New York gross revenues included predominantly theprice of the commodity and its transportation, while Valley's Pennsylvania gross revenue included predominantly transportation costs but not the cost of the commodity.

40 Enron's argument that the flexible approach employed in NIPSCO and C&T Enterprises requires that we give the greatest weight to Portland General's net revenues is without merit for another reason. Unlike the applicants in NIPSCO and C&T Enterprises, whose out-of-state gross revenues were only somewhat greater than we had previously allowed for an exemption, Portland General generates 34% of its gross revenue from out-of-state sales, a significantly greater amount of out-of-state revenue than we previously have allowed to justify an exemption.

41 The Act defines an electric utility company as:

any company which owns or operates facilities used for the generation, transmission, or distribution of electric energy for sale, other than sale to tenants or employees of the company operating such facilities for their own use and not for resale.

15 U.S.C. § 79b(a)(3).

42 The Act defines a gas utility company as:

any company which owns or operates facilities used for the distribution at retail . . . of natural or manufactured gas for heat, light, or power.

15 U.S.C. §79b(a)(4) (emphasis added).

43 Enron also points to a laundry list of factors that it contends the law judge failed to consider and that it contends establish that Portland General is predominantly intrastate in character. Enron states that (1) all of Portland General's retail customers are located in Oregon, (2) substantially all of Portland General's utility assets are located in Oregon, (3) Portland General is a net purchaser of power, (4) all of Portland General's offices are located in Oregon, (5) all of Portland General's employees work in Oregon, (6) substantially all of Portland General's taxes and franchise fees were paid to Oregon, and (7) Portland General's charitable contributions have been made substantially to organizations located in Oregon. We do not dispute that Portland General has a substantial presence in Oregon but, for the reasons discussed above, we find that these factors do not establish that Portland General is predominantly intrastate in character and carries on business substantially in a single state.

44 Nor are we persuaded by Enron's claim that the use of net revenues is consistent with the Financial Accounting Standards Board's accounting standards. Accounting standards are meant to provide a company's current and potential investors with an accurate picture of the company's financial condition. Our focus in an analysis under Section 3(a)(1) is directed at where a utility company conducts its business. Although using net revenue from power trading activities may present a more accurate picture of the financial condition of the company, it is not necessarily relevant to a determination of where the company conducts its business.

45 As Enron concedes, the goal of the non-retail power trading business "is to maximize the margin that can be gained between one side of a trade and the other." In other words, Portland General's objective is to maximize profits from its wholesale trading, which, if achieved, would result in an upward trend in the net revenues of this out-of-state activity. Cf. C&T Enterprises, 78 SEC Docket at 2599, where we noted that, where size of out-of-state revenues were acceptable although somewhat high for purposes of Section 3(a)(1), an expected downward trend in those numbers supported the grant of an application.

46 Enron takes exception to the law judge's finding, in support of her conclusion that Portland General does not meet the predominantly/substantially test, that Portland General depends to a "significant" or "substantial" degree on power purchased out of state to serve its retail customers. EEI makes a similar objection. Enron and EEI are correct that our cases generally do not consider out-of-state purchases of electricity in a Section 3(a)(1) analysis because the Act defines a statutory utility company as a company which owns or operates facilities "used for generation, transmission,or distribution of electric energy for sale." 15 U.S.C. §79b(a)(3). Exclusion of Portland General's purchases of electricity from consideration, however, does not alter our determination that Enron fails to meet the qualifications for an exemption under Section 3(a)(1) as a result of the large amount of power it sells outside of Oregon.

47 Although the record contains some discrepancies in this regard, it shows that, at a minimum, Portland General received 0% of its gross revenue from interstate power brokerage sales in 1999, 9% in 2000, 19% in 2001, and 17% in the first nine months of 2002.

48 See, e.g., Pacific Lighting Corp., 45 S.E.C. 152, 161 (1973) (noting, in a case in which the four commissioners participating were evenly divided on the ultimate issue of the extent to which holding companies may engage in non-utility activities without violating the "unless and except" clause, that "in order to insulate the utility business to the extent possible from being adversely affected by losses in non-utility operations and to prevent the diversion of utility resources for non-utility purposes, all non-utilityactivities should be segregated from utility activities through separate corporate subsidiaries").

49 For example, Section 11(b)(1) directs the Commission to take action to limit the operations of each registered holding company system to a single integrated public-utility system. 15 U.S.C. § 79k(b)(1). Section 11(b)(2) requires the Commission to eliminate needless complications from the corporate structures of registered holding companies and to ensure the equitable distribution of voting power among security holders. 15 U.S.C. § 79k(b)(2).

50 Enron relies on two no-action letters to support its argument that its wholesale trading activity should not be considered as interstate. See Enron Power Mktg., Inc., SEC No-Action Letter (Jan. 4, 1994); AIG Trading Corp., SEC No Action Letter (Jan. 20, 1995). No-action letters are staff determinations not to recommend enforcement action. They do not necessarily reflect the views of the Commission nor do they have the force of law. See Chicago Board of Trade v. SEC, 883 F.2d 525, 530-31 (7th Cir. 1989); Lowell H. Listrom, 50 S.E.C. 883, 886 n.3 (1992). Moreover, these letters recognize that, because the Act defines an electric utility in terms of whether it uses generating, transmission or distribution facilities that it owns or operates for the sale of electricity, a power marketer who uses others' facilities to trade power at wholesale is not a utility for purposes of the Act. It does not follow that, when a utility engages in wholesale power trading, we should ignore that trading for purposes of Section 3(a)(1).

51 NARUC and EEI make similar arguments. NARUC claims that most state commissions view participation in the wholesale market as intrastate activity because "the sole purpose of the activity is to provide service to the native intrastate load of the utility at the least cost." EEI argues that revenue from Portland General's retail book should not be considered as evidence of out-of-state operations because this revenue results from the sale of power that Portland General purchased to serve its Oregon retail customers.

52 For example, Section 11(b)(1) of the Act generally confines the utility properties of a registered holding company to a "single integrated public-utility system." 15 U.S.C. § 79k(b)(1). Section 10(c)(2) of the Act requires the Commission to find that a proposed utility acquisition "will serve the public interest by tending towards the economical and efficient development of an integrated public-utility system." 15 U.S.C. § 79j(c)(2).

53 See 1995 Report at 2.

54 See 1995 Report at 115.

55 See, e.g., C&T Enterprises, 78 SEC Docket at 2601.

56 15 U.S.C. § 79(a).

57 We also reject Enron's claim that FERC regulation of Portland General's activities makes Commission regulation unnecessary. FERC's regulation is not duplicative of Commission regulation because FERC has been directed by Congress to administer different statutes, such as PURPA, with different goals than those embodied in the Act.

58 The FERC determined that Enron's market manipulation was one of the causes of this atypical market. See Order Revoking Market-Based Rate Authorities and Terminating Blanket Marketing Certificates, 103 FERC ¶ 61,343 (June 25, 2003) (revoking the electric market-based rate authority of twoEnron subsidiaries and finding that "Enron management invented numerous market manipulation schemes . . . and used various Enron companies to execute these schemes" and that "Enron routinely disregarded the corporate separation of the various Enron affiliates, and used one or another to facilitate misconduct").

59 We need not reach whether EEI's characterization of FERC's actions with respect to RTOs is accurate for purposes of our consideration of Enron's application.

60 Moreover, EEI's claims are not supported by the record evidence in this case. While EEI claims that Portland General is not unique and that other utilities participate in the joint ownership of generating facilities and the use of in-state transmission facilities to transmit energy in interstate commerce, the record is lacking in any evidence to support this assertion. Even assuming that the assertion is correct, it does not follow that these utilities are affiliated with any public utility holding company currently exempt from registration under Section 3(a)(1) of the Act or that their exemptions would be revoked after consideration of all of the factors.

61 See, e.g., Wisconsin Energy Corp., Holding Company Act Rel. No. 24267 (Dec. 18, 1986), 37 SEC Docket 387, 399 (granting exemption where, among other factors, Wisconsin Electric Power Company's out-of-state operations accounted for less than three percent of its generating capacity).

62 Electric Bond and Share Co., 33 S.E.C. 21, 42 (1952). In Electric Bond we stated that:

We have in the past granted exemptions under Section 3(a)(3) where the holding company status was no more than an incidental derivation of the company's principal activities, as where, for example, a company owns utility interests required to assure it a source of power supply, or an oil company sells gas derived from its oil operations.

63 AES I, 70 SEC Docket at 1286. Consideration of absolute size is intended primarily to ensure that the exemption isnot available to a company with a large utility business and a total business that is predominantly non utility in nature only because the non utility holdings dwarf the utility operations. Id. at 1295 (citing Electric Bond, 33 S.E.C. at 52 n.45).

64 AES I, 70 SEC Docket at 1286 (citing Electric Bond, 33 S.E.C. at 46-52; Cities Service Co., 8 S.E.C. 318 (1940)).

65 AES I, 70 SEC Docket at 1301-02. In AES I, we granted an exemption to a United States holding company whose operations consisted of (1) substantial foreign utility operations, (2) significant domestic utility operations that consisted of exempt wholesale generators under Section 32 of the Act and QFs under PURPA, and (3) a small United States utility. As much as seventeen percent of the holding company's total gross revenues were domestic. We concluded that, just as Congress determined that the public interest does not require regulation of public utility holding companies whose utility operations, except for a small domestic utility, are exclusively foreign the public interest does not require the regulation of a U.S. holding company whose domestic utility operations, apart from ownership of a small domestic utility, are exempt from the Act. Id. at 1301.

66 AES I, 70 SEC Docket at 1286.

67 Enron's own expert witness admitted that Enron does not qualify for an exemption under either Section 3(a)(3) or 3(a)(5).

68 See AES I, 70 SEC Docket at 1295; GAZ Metropolitain, Inc., 52 S.E.C. 56, 62 (1994).

69 Despite its occasional reference to a "temporary" exemption, Enron is seeking a conditional exemption pursuant to Sections 3(a)(3) and 3(a)(5) of the Act. Enron has not filed an application pursuant to Section 3(a)(4), which requires the applicant to establish that it is only "temporarily a holding company."

70 In this regard, Enron has filed a motion with the Commission pursuant to Rule 452 of the Rules of Practice (17 C.F.R. § 201.452) seeking leave to adduce additional evidence concerning the joint Chapter 11 bankruptcy plan ("the Plan") filed by Enron on July 11, 2003. Because of the uncertain outcome of the Plan, Enron has failed to establish that the evidence its seeks to introduce is material to its applications as required by Rule 452. Nonetheless, we have determined, as a discretionary matter, to admit the evidence.

71 Enron also claims that evidence about the bankruptcy plan is material to whether Enron, or a trust it may form, qualifiesfor an exemption as a temporary holding company under Section 3(a)(4) of the Act. Neither Enron, nor any entity associated with Enron, has sought an exemption under Section 3(a)(4) of the Act. Thus, we refrain from addressing the alleged impact of the Plan on any application that Enron may file pursuant to Section 3(a)(4) unless and until such application is properly before us for review.

72 At oral argument, counsel for Enron stated that Enron had signed an agreement to sell Portland General to a group sponsored by a company called Texas Pacific Group. This transaction, however, requires the approval of the bankruptcy court. Prior to approving the transaction, the bankruptcy court will conduct an "overbid" process to allow other potential buyers an opportunity to submit superior bids. Should no other potential buyers submit superior bids and should the bankruptcy court approve the transaction, the parties will need to obtain approval from state and federal regulators. The outcome of this process is still uncertain.

73 Enron argues that, given the status and terms of the Plan, the supervision of the Plan by the bankruptcy court, and the interests the bankruptcy process is designed to protect, there is no legitimate interest to be served by Commission regulation under the Act. The mere pendency of a bankruptcy proceeding and the associated supervision of the debtor by the bankruptcy court are not sufficient to render regulation under the Act unnecessary or to provide a basis for granting a conditional exemption. Indeed, the Act prescribes additional Commission oversight when holding companies required to register file for bankruptcy. See Sections 11(f) and 11(g) of the Act, 15 U.S.C. §§ 79k(f) and (g).

74 AES Corp., Holding Company Act Rel. No. 27363 (Mar. 23, 2001), 74 SEC Docket 1728 (AES II).

75 The Commission has, on other occasions, granted a temporary or conditional exemption from the registration provisions of the Act. See Kansas Power and Light Co., 50 S.E.C. 852 (1992); Kansas Power and Light Co., 32 S.E.C. 749 (1951). The justifications for those exemptions, which were granted pursuant to Section 3(a)(2), are not applicable here.

76 AES II, 74 SEC Docket at 1744.

77 AES II, 74 SEC Docket at 1742 (citing AES I, 70 SEC Docket at 1301).

78 Id. at 1742.

79 See National Grid Transco plc, Holding Company Act Rel. No. 27704 (Aug. 1, 2003), 80 SEC Docket 2974 (ordering the de-registration of four holding companies).

80 See Section 1(b) of the Act, 15 U.S.C. §79a(b) (declaring that the national public interest, the interest of investors in the securities of holding companies and their subsidiaries and affiliates, and the interest of consumers of electric energy and natural and manufactured gas are or may be adversely affected when investors cannot obtain information necessary to appraise the financial position or earning power of the issuers).

81 See 15 U.S.C. § 79c; see also 1995 Report at 105.

82 FPL also asserts that "a settlement concerning the QFs in question . . . is pending at the FERC." FPL represents that an administrative law judge "has urged the FERC to reject a consent agreement with FERC staff," but that were the FERC to approve the consent agreement, "FPL would no longer need the relief it seeks from the Commission."

83 Standard Oil Co., 10 S.E.C. 1122, 1129 n.12 (1942), citing Detroit Edison Co. v. SEC, 119 F.2d 730, 739 (1941) ("The statute contemplates action prospectively. It is a preventative measure intended to regulate action before the interests of those concerned are adversely affected.").

84 Therefore, we need not reach the question of whether granting Enron any of the exemptions it seeks would be "detrimental to the public interest or the interest of investors or consumers."

85 We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed in this opinion.