United States of America
In the Matter of
Applications of Enron Corp. for Exemptions Under the Public Utility Holding Company Act of 1935, (Nos. 70-9661 and 70-10056)
File No. 3-10909
Enron Corp. ("Enron") respectfully submits this motion in the above-referenced administrative proceeding relating to Enron's exemption applications under the Public Utility Holding Company Act of 1935 ("Act" or "1935 Act"),1 under rule 452 of the Commission's Rules of Practice (17 C.F.R. § 201.452).2
Enron seeks leave to adduce evidence concerning (a) the joint chapter 11 plan filed by Enron on July 11, 2003 ("Plan"), (b) the timing and process for implementation of the Plan, (c) the constituencies protected through the Plan, and (d) the effect of the Plan on Enron's status as a holding company.
Specifically, the purpose of this motion is to seek leave to supplement the record in this matter to describe progress by Enron and its debtor subsidiaries towards a reorganization under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") and to provide evidence that would support Enron's view that the Plan justifies the relief requested in Enron's exemption applications.
Beginning on December 2, 2001, Enron and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under the chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court"). Additional Enron subsidiaries have continued to file since that time. The Debtors continue to manage their businesses as debtors-in-possession in the ordinary course of business. On July 11, 2003, the Debtors submitted the Plan and a proposed disclosure statement.3
As discussed in more detail below, certain of this evidence was previously proffered to Judge Murray, but rejected as speculative. In light of recent developments that have made the circumstances of Enron's bankruptcy reorganization much more certain, Enron now requests that the Commission consider the evidence previously proffered to Judge Murray as well as more recent developments with respect to Enron's bankruptcy reorganization process.
The motion also advises the Commission of Enron's intent to file an application for exemption under section 3(a)(4) of the Act, either on its own behalf or on behalf of a to-be-formed trust or other entity to which Enron would contribute PGE shares after the receipt of the necessary regulatory approvals (the "PGE Trust"). The application for exemption under Section 3(a)(4) will be based on the Plan generally and, in particular, on the Plan's provisions that Enron shall divest its interest in Portland General Electric Company ("PGE") by sale or in connection with the distribution of all of Enron's assets to its creditors. In the event that the Plan is confirmed and becomes effective, Enron will (i) sell PGE, or (ii) distribute PGE shares to creditors. Enron may transfer PGE shares to the PGE Trust as an intermediate step prior to selling PGE or distributing PGE shares to creditors.
Because detailed information about the Plan and the disposition of PGE was not available until last week, it is appropriate for the Commission to grant leave to adduce additional evidence. The Plan represents an unequivocal commitment by the Debtors to divest their assets, and, in particular, by Enron to divest itself of PGE. Pending the disposition of PGE under the Plan, PGE is protected from harm by extensive ring-fencing measures already put in place by the Oregon Public Utility Commission ("OPUC").
The Plan is intended to provide a fair distribution of the Debtors' assets to the creditors of the Debtors' combined bankruptcy estate. The regulation of the OPUC will adequately protect PGE customers until PGE is divested. After PGE is divested, Enron will cease to be a holding company subject to regulation under the Act.
As discussed herein, evidence about the Plan also is material to whether Enron or the PGE Trust may qualify for an exemption as a temporary holding company under section 3(a)(4), or as an incidental or predominantly foreign holding company under sections 3(a)(3) or 3(a)(5) of the Act, and also addresses the question whether it is in the interest of the public, investors and consumers that Enron be denied an exemption under the Act.
Enron recognizes that this motion may raise concerns with the Division of Investment Management ("Division") and that it may object to this motion on the ground that consideration of additional evidence by the Commission may further delay the conclusion of this proceeding. Enron respectfully submits that any concerns that the Division may have in this regard can be effectively mitigated by the Commission. Enron is as anxious as any party to see the proceeding concluded. However, Enron views the evidence that it wishes to submit to the Commission as essential for the Commission to reach a proper and well-informed conclusion with respect to the question of whether or not Enron should be granted an exemption from the registration requirements of the 1935 Act.
The Division has urged the Commission to act in an expedited fashion in this proceeding on the ground that it is essential for the Commission to assert jurisdiction over Enron before the process of reorganization under the Bankruptcy Code has proceeded any further than it has already. The Division has expressed concern that, if the reorganization proceeds much further before Enron is regulated as a holding company, the Commission may miss an opportunity to hold its own proceeding on the question of how Enron should be restructured. Enron believes that the Division's view is misplaced because it ignores important policy concerns that the Commission should take into account. Specifically, Enron believes that, in light of the status of the Plan in the Bankruptcy Court, the interests that the Bankruptcy Court is charged with protecting and the specific terms of Enron's Plan, there is no legitimate interest to be served by the Commission regulating Enron as a registered holding company under the 1935 Act. Indeed, as the evidence that Enron wishes to submit to the Commission will show, Enron will soon cease to be a utility holding company, whether or not it is granted an exemption in this proceeding. Under these circumstances, there is no point in the Commission regulating Enron as a registered holding company under the 1935 Act. Doing so would only waste Commission and creditor resources with absolutely no gain for any of the constituencies that the Commission is charged with protecting.
By order, dated October 7, 2002, the Commission scheduled a hearing on the above-referenced applications filed by Enron for exemption under section 3(a)(1), the predominantly intrastate holding company exemption, and sections 3(a)(3) and 3(a)(5), the incidental and predominantly foreign holding company exemptions, respectively. After briefing and the submission of testimony, a hearing on the applications was held by Chief Administrative Law Judge Brenda Murray on December 5, 2002. Judge Murray issued an initial decision denying Enron's applications on February 6, 2003.
Enron, the OPUC, FPL Group, Inc. and Southern California Edison Co. all filed petitions seeking Commission review of Judge Murray's initial decision on February 27, 2003. The National Association of Regulatory Utility Commissioners ("NARUC") subsequently filed a motion to intervene and in support of the OPUC's petition for review and the Edison Electric Institute filed an amicus brief also supporting Commission review of the initial decision. On March 25, 2003, the Division filed an opposition to the petitions for review.
On June 11, 2003, the Commission issued an order granting the petitions for review, denying NARUC's motion and establishing a briefing schedule. On June 18, 2003, the Division filed a motion for expedited consideration of Enron's petition for review. On June 25, 2003, Enron filed an opposition to the Division's motion. On June 30, 2003, the Division filed a reply to Enron's opposition.
Enron and certain of its subsidiaries are debtors and debtors in possession in the process of reorganization under chapter 11 of the Bankruptcy Code. Since the commencement of the chapter 11 cases, the Debtors have worked to formulate the framework for a chapter 11 plan. The Plan, filed on July 11, 2003, represents an understanding among the Debtors, the statutory committee of unsecured creditors appointed by the US Trustee4 in the Enron chapter 11 case ("Creditors' Committee"), and the examiner appointed in the chapter 11 case of Enron North America Corp. The development of the Plan progressed under a very tight timetable that has been set by the Bankruptcy Court after discussions with the Debtors' creditors. Recognizing that coordination between the Debtors, the Bankruptcy Court and the Commission is necessary to carry out the Plan most efficiently, Enron has filed this motion to seek leave to supplement the record to provide the Commission with important relevant information on this topic.
In the early stages of this proceeding, well before the definitive outline of the Plan took shape, Enron had provided testimony about the chapter 11 process and the cost of regulation to the Debtors' estates. Judge Murray, however, excluded consideration of that evidence on the basis that it was speculative and irrelevant to the determination of whether Enron satisfied the objective criteria of the exemptions under sections 3(a)(1), 3(a)(3) and 3(a)(5) of the Act.5 The passage of time has made such evidence no longer speculative. Understanding the treatment of PGE under the Plan is critical to a full consideration of this matter and, while Judge Murray may have been bound to ignore public interest considerations by the manner in which the Commission decided that the hearing should be held, the Commission at this juncture is free to, and under the Act required to, consider the public interest implications of the Debtors' chapter 11 process to find the best way to regulate Enron under the Act.6 At the time of the hearing in this matter, PGE's status was uncertain, but the advent of the Plan has removed those doubts.
Enron is concerned that, if the Commission affirms the initial decision denying Enron's applications for exemption under sections 3(a)(1), 3(a)(3) and 3(a)(5) of the Act, Enron will be required to register as a holding company under the Act on short notice and with a seriously disruptive effect on the chapter 11 process that is already well advanced. If permitted to adduce additional evidence, such evidence would demonstrate that, if Enron were required to register, the registration process will be extremely complicated and will raise a number of novel issues that will have to be considered by the Commission. As just an example, Enron's registration could affect the ability of Enron's only public utility subsidiary, PGE, to borrow under its short-term credit facility and could limit the ability of Enron's profitable, non-debtor subsidiaries, such as its interstate gas pipeline companies to raise funds to finance pipeline acquisitions. The dissolution of many Enron subsidiaries pursuant to Bankruptcy Court order and otherwise also could be put on hold, adversely affecting Enron's ability to simplify its corporate structure and to package assets for distribution to the Debtors' creditors.
Also of great concern is the possibility that the Commission may interpret the Act to require the Plan to be first submitted to and authorized by the Commission, after an opportunity for a hearing, prior to Bankruptcy Court action on the Plan and the solicitation of creditor consents.7 The supplemental evidence would demonstrate that the addition of a second forum for the consideration of the Plan that is separate and apart from the Bankruptcy Court would unavoidably delay the implementation of the Plan and add millions to the current cost of administering the Debtors' estate.8
Additional evidence would demonstrate that separate Commission review of the Plan is unnecessary because the Commission is already able to participate in the development of the Plan in the Bankruptcy Court. The Plan and disclosure statement will be reviewed by the Bankruptcy Court, representatives of the creditors, and this Commission, and hearings will be held in the Bankruptcy Court prior to the solicitation of creditors and prior to Plan confirmation. Separate Commission hearings on the Plan and a separate Commission review of the Plan and disclosure statement are not only not required by the Act, but would be unnecessary, wasteful of the assets of the estate, and would delay confirmation and implementation of the Plan by months.
In addition, because the Plan, when confirmed, will require the separation of PGE from Enron and the distribution of all the value in the Debtors' estates to creditors, the Plan is in all respects under the Act a vehicle for the liquidation and dissolution of Enron as a holding company. The elimination of Enron as a holding company, and the protective ring fencing of PGE during the Plan's implementation, are the ultimate remedies under the Act. Enron's registration under the Act would not add to, but would complicate and slow the achievement of this end.
Under such circumstances, the Act provides a clear solution for the exercise of appropriate regulatory control over a holding company that is in the process of distributing its public utility interests in liquidation. Section 3(a)(4) of the Act provides that the Commission shall exempt from any or all provisions of the Act, when consistent with the public interest and the interest of investors and consumers, a holding company that is "temporarily a holding company solely by reason of the acquisition of securities for purposes of liquidation or distribution in connection with a bona fide debt previously contracted or in connection with a bona fide arrangement for the underwriting or distribution of securities."
Enron or the PGE Trust should qualify for exemption under Section 3(a)(4). Enron is preparing an application for exemption under Section 3(a)(4) for itself or the PGE Trust. All activities undertaken by Enron or the PGE Trust with respect to PGE would be for the sole purpose of preserving the value of PGE for the Debtors' estate and either effecting the distribution or the sale of PGE shares under the Plan as soon as possible. The application for exemption under Section 3(a)(4) would demonstrate that, when the Plan is confirmed by the Bankruptcy Court and becomes effective, Enron and the PGE Trust, if formed, would be required to effectuate the Plan which would include the distribution of PGE shares to creditors or effecting the sale of PGE and distributing the proceeds thereof to the creditors. Accordingly, when the Plan is confirmed, Enron and the PGE Trust would become, by operation of the Plan, holding companies for the limited and sole objective of rapidly and efficiently implementing the Plan, which is clearly a bona fide arrangement for the distribution of all of the Debtors' assets, including cash and securities. Because there would be many facts of common relevance between Enron's proposed application under section 3(a)(4) and the applications under consideration in the instant proceeding, Enron expects that the Commission may wish to consider consolidating all the applications in this matter.
In the sections below, Enron describes the information about the Debtors' Plan that Enron seeks leave to enter as additional evidence. In addition, Enron describes the basis under section 3(a)(4) for seeking an exemption as a temporary holding company for Enron and PGE Trust. The Plan and the section 3(a)(4) exemption are appropriate to be addressed in joint fashion by the Commission because the Plan will provide for the distribution or liquidation of Enron's interest in PGE and section 3(a)(4) states that an exemption is available in such circumstances. Given that the Plan is an additional means for the elimination of Enron as a public utility holding company under the Act and would result in Enron ceasing to be a holding company subject to the Act, it is appropriate at this time that the Commission consider the Plan as an integral part of this proceeding.
The Debtors filed the Plan and a draft disclosure statement with the Bankruptcy Court on July 11, 2003. The Debtors envision that changes to each document will be made in the near future in response to comments from creditors and other participants in the bankruptcy proceeding. Notice of the hearing to approve the adequacy of the information contained in the disclosure statement shall be served in mid-August, with the hearing to be held on September 18, 2003. Once approved, the Plan, disclosure statement and related solicitation materials would be served upon impaired creditors for their acceptance or rejection of the Plan. It is expected that a confirmation hearing on the Plan would be held in December, 2003.
The preparation, confirmation and implementation of the Plan are at the heart of the Debtors' chapter 11 cases. The Plan has been prepared by the Debtors' management and advisors in consultation with the Creditors' Committee. The Creditors' Committee, consisting of representatives of the Debtors' unsecured creditors, has been and continues to be consulted with respect to the administration of Enron's affairs during the bankruptcy and participated in the formulation of the Plan. The Creditors' Committee has attorneys and other professionals to assist with these duties and the Creditors' Committee functions under the Bankruptcy Code as an important safeguard to the management of the business of a debtor in possession.
To obtain confirmation of the Plan, the Debtors must submit the Plan and a disclosure statement to the Bankruptcy Court. The disclosure statement must contain information concerning the assets, liabilities, and business affairs of Enron sufficient to allow creditors to make an informed decision as to whether to accept or reject the Plan. The Plan itself includes a classification of claims and specifies how each class of claims will be treated thereunder. The Bankruptcy Court will hold a hearing to determine the adequacy of the information contained in the disclosure statement in accordance with section 1125 of the Bankruptcy Code. Following its typical practice, the Commission may review and comment on the Plan and the disclosure statement under section 1109(a) of the Bankruptcy Code.9 Such section permits the Commission to raise, appear and be heard on any issue in a chapter 11 case.
The Plan and the court-approved disclosure statement are then mailed to creditors to solicit their acceptance of the Plan. Creditors whose claims are "impaired" (i.e., those whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan) vote on the plan by submitting a ballot included with the disclosure statement.10 In the Debtors' cases, it is anticipated that Enron's stockholders will not vote on the plan because Enron's liabilities exceed its assets and the stockholders will be presumed to have rejected the Plan. Once the votes to confirm or reject the Plan are tallied, the court will hold a hearing to consider confirmation of the Plan in accordance with section 1129 of the Bankruptcy Code. A plan may be confirmed by the court, even if creditors vote to reject the plan, if the court finds that the plan treats creditors fairly.11
Implementation of the Plan follows confirmation and effectiveness. Implementing the Plan will involve the Debtors making distributions to creditors required by the Plan, reporting on the status of Plan consummation, and applying for a final decree that closes the cases after they have been fully administered, including, without limitation, reconsideration of claims. Administration of the estates in conjunction with the Bankruptcy Court continues, in some respects, post confirmation. For example, the court will determine objections to claims or resolve adversary proceedings.
Since the commencement of the chapter 11 cases, the Debtors have been consolidating, selling businesses and assets, dissolving entities and simplifying their complex corporate structure. The Debtors are holding cash from prior sales pending distribution under the Plan and are reorganizing their remaining assets to package them into business units that either can be sold for cash or distributed to creditors in kind. In this reorganization process, hundreds of unnecessary corporations will be liquidated. Notably, this is the very same corporate simplification process that the Act would require under section 11 if Enron was a registered holding company.
Two principal aspects of the contemplated restructuring involve the formation and distribution of interests in two holding companies, Prisma Energy International Inc. ("Prisma") and CrossCountry Energy Corp. ("CrossCountry"). Prisma would hold Enron's power and gas distribution projects located outside the U.S. CrossCountry would hold Enron's interests in several gas transportation pipelines located in the U.S. As part of the Plan, creditors would receive shares of Prisma and CrossCountry or a trust or other entity formed to distribute these assets under the Plan.12 The Plan also makes provision for the distribution of other assets of the Debtors' estate, including approximately $5 billion in cash, the proceeds of the liquidation or divestiture of businesses that do not fit into Prisma and CrossCountry, and the value of certain claims that Enron is pursuing against various professional service firms and institutions such as commercial and investment banks.
As previously discussed, the Plan also will involve the divestiture of PGE. Section 28.1(c) of the Plan provides that commencing as soon as practicable after the Effective Date, the PGE common stock shall be distributed to holders of specified claims upon (a) allowance of General Unsecured Claims in an amount which would result in the distribution of 30% of the issued and outstanding shares of PGE common stock and (b) obtaining the requisite consents for the issuance of the PGE common stock. Section 1.72 of the Plan specifies that the Effective Date shall occur on the first business day after the Plan is confirmed after which the conditions to the effectiveness of the Plan have been satisfied or waived, but in no event earlier than December 31, 2004, or such other date following the confirmation of the Plan that the Debtors and the Creditors' Committee, in their joint and absolute discretion, designate. Therefore, Enron would not retain an interest in or control of PGE after the Plan has been fully implemented. The extent to which Enron or the PGE Trust would control PGE pending its divestiture under the Plan are discussed in Part III, below.
The record in this matter clearly indicates that Enron has tried to sell PGE without success over the past several years. The Plan is different from Enron's past efforts to dispose of PGE because, when confirmed, it will constitute a legal requirement that Enron must distribute the value of PGE to the Debtors' creditors in accordance with the Plan. PGE is the only asset held by Enron that gives rise to the Commission's jurisdiction under the Act. Although Enron continues to explore sale transactions with interested parties and the Plan leaves open the possibility that PGE could be sold, such transactions are considered only for the purpose of maximizing PGE's value to the estate. Any proceeds from the sale of PGE would be distributed to creditors. If sale efforts are unsuccessful, however, the Plan will require that PGE shares be distributed to the Debtors' creditors once a requisite amount of claims against the estate have been settled such that a non-de minimis amount of the stock of PGE could be distributed to creditors, as described above. In no event will PGE be retained by the estate for more than a limited period of time following the effective date of the Plan.
There are several reasons beyond the requirements of the Plan itself that explain why Enron's ownership of PGE will be temporary. The Debtors' implementation of the Plan will be subject to Bankruptcy Court review and the Debtors will file periodic reports with the Bankruptcy Court describing their progress in implementing the Plan. Enron and the other Debtors, as well as various classes of creditors and their representatives, are working diligently to move the bankruptcy process forward so that distributions can be made at the earliest possible date. Lastly, Enron understands that the relief the Commission may grant under section 3(a)(4) would be predicated on temporary holding company status, and the absence of adverse effects on PGE and its investors, and that the exemption could be withdrawn under the provisions of section 3(c) of the Act if it appears that it is no longer warranted.13 Below, we describe the exemption under Section 3(a)(4), generally and discuss, in particular, the numerous regulatory provisions already in place that protect PGE from potential abuses by Enron, making an exemption extremely unlikely to have any adverse effect on the interests protected by the Act. If the Commission deems that additional protections are necessary it certainly may condition any exemption granted accordingly.
Section 3(a)(4) of the Act establishes an exemption for a holding company that is:
temporarily a holding company solely by reason of the acquisition of securities for purposes of liquidation or distribution in connection with a bona fide debt previously contracted or in connection with a bona fide arrangement for the underwriting or distribution of securities.
The section 3(a)(4) exemption has been used historically in two types of situations: (1) where utility stock was held as collateral for debt and the debtor defaulted, and (2) where in the course of the major restructuring of the utility industry brought about by section 11 of the Act, an entity acquired stock of a utility which it agreed to distribute within a relatively short period.14 Several of the precedents for the use of section 3(a)(4) under the Act support the use of the exemption in the current Enron reorganization.
In its 1995 report, the Division stated that, "[a]lthough the legislative history does not reveal the specific rationale underlying section 3(a)(4), it appears that the exemption was intended to address a narrow set of circumstances in which holding company status was temporary, inadvertent, and unaccompanied by the intent to exercise control, so that abuses were unlikely to occur."15 A review of the section 3(a)(4) precedent casts some light on questions such as how long is "temporary", what is meant by "inadvertent" and what level of "control" would be inconsistent with the exemption.
In a recent case, a subsidiary of Coastal States Gas Corp., with gas public utility, producing and transportation operations established a settlement trust, with a bank as trustee, for the purpose of resolving certain claims of its major natural gas customers. The trust was funded with various securities of Coastal and approximately 19% of the voting securities of Valero Energy Corp., a newly organized subsidiary, that would hold the gas utility operations as a division and certain gas extraction and transportation facilities. Under the settlement plan, the trustee of the settlement trust would use its "best efforts" to sell the securities held by the settlement trust by public or private sale for cash within seven years and to distribute the proceeds to the settling customers.16
Coastal stated in support of its application that the settlement trust would hold the securities only temporarily until disposition could be appropriately accomplished in accordance with the terms of the settlement plan. Based on these facts, the Commission found that the settlement trust and the trustee were "temporary holding companies organized or serving solely for the purpose of distributing securities in connection with a settlement of legal claims" and that granting the exemption would not be detrimental to the public interest or the interest of investors or consumers. The Commission required annual reports indicating the securities sold or otherwise disposed of during the year and the amount remaining at the end of the year.
The Coastal case is notable both for the length of time provided for the disposition of the securities by the trust and the minimal showing that the Commission required to satisfy the standards of section 3(a)(4). Since the settlement trust was intentionally created to resolve certain litigation claims, there was apparently no requirement that the trust's holding company status must have occurred "inadvertently."17 The fairly low (19%) interest in a public utility company (i.e., Valero) held by the trust apparently assisted the Commission's determination that the trust would not exercise control over the utility of a nature that would be detrimental to the public interest or the interest of investors or consumers.
In Fidelity Management & Research Co., the most recent precedent under section 3(a)(4), the Commission considered an exemption request by an investment adviser and an affiliated bank related to their ownership of the voting equity of El Paso Electric Company to be acquired as a result of El Paso's reorganization under chapter 11 of the Bankruptcy Code.18 As part of its distressed investment business, Fidelity had purchased certain of El Paso's outstanding bonds and unsecured debt prior to El Paso's bankruptcy filing. Under the reorganization plan, Fidelity was to acquire up to 30% of the common stock of reorganized El Paso in exchange for the debt securities of El Paso now held by Fidelity's various funds and accounts.
Fidelity stated in its application that it planned to hold the voting securities for investment purposes only, and that it would reduce its interests to less than ten percent of the outstanding voting securities of the reorganized El Paso as soon as would be financially reasonable, consistent with Fidelity's fiduciary obligations to its investors. Accordingly, Fidelity requested an exemption for three years.
The Commission found the three year period consistent with the requirement of section 3(a)(4) that an applicant for exemption hold the utility securities temporarily and for purposes of liquidation.
Fidelity states that a period of up to three years would be appropriate to enable the Fidelity Funds and Accounts to reduce their aggregate El Paso holdings to less than ten percent of the utility's voting securities. Fidelity believes that this amount of time would provide "an opportunity [for the reorganization of El Paso] to be reflected in increased earnings and improved market prices." The Commission has noted that the language of section 3(a)(4) "clearly denotes a desire to give an applicant thereunder a reasonable time in which it might dispose of its public utility or holding company securities without being subject to the Act."19
In its role as one of the co-chairs of the El Paso creditors' committee, Fidelity served on a five-member committee to nominate nine new members of the reorganized El Paso board, and recommend one of those new members for the position of El Paso's chief executive officer. Fidelity's participation in establishing the management of El Paso during the bankruptcy was distinguished by the Commission from Fidelity's role after the reorganization which would not involve any representation by Fidelity's directors, officers, or other employees on the board of El Paso. In addition, although as a large shareholder Fidelity was invited to attend meetings of reorganized El Paso's board, it participated as an observer only, on a nonvoting basis.
The Commission stated in Fidelity that it has generally relied upon the temporary nature of the exemption under section 3(a)(4) to prevent the entrenchment of control that would require regulation under the Act. The Commission indicated that Fidelity's intent to refrain from entering into any stand-alone transactions with the reorganized El Paso and Fidelity's statement that none of its funds or accounts has as its objective the ownership of large percentages of public utility companies supported its determination. In addition, Fidelity represented to the New Mexico Commission that it would not directly or indirectly cause any change in the policies or operations of the reorganized El Paso, and that the funds' and accounts' ownership of the common stock of the reorganized El Paso would not obstruct, diminish, hinder, impair or unduly complicate the regulation and supervision of the utility.
Enron intends to demonstrate in its application for exemption under section 3(a)(4) that the Plan is concrete evidence of a bona fide arrangement for the distribution of PGE's securities within the meaning of section 3(a)(4). Under the Plan, Enron's custody of PGE shares (either directly or through the PGE Trust) would be only temporary and such custody would be maintained solely for the benefit of Enron's creditors under the guidance of an administrator appointed with creditor and Bankruptcy Court consent.20
The purpose of the PGE Trust would be to hold the PGE interest for the sole benefit of the Debtors' creditors until PGE could be sold or its shares distributed as required by the Plan. Thus, the Debtors' Plan would provide a result superior to both the Coastal and Fidelity cases, which merely promised "best efforts" at reducing their utility holdings (and in Fidelity, a full divestiture of the El Paso interest was not even required), because the Debtors would be subject to a legal commitment under the Plan to divest PGE.
Enron believes that it may need the authorization of the Bankruptcy Court, the OPUC, the Federal Energy Regulatory Commission and the Nuclear Regulatory Commission to contribute PGE shares to the PGE Trust. Accordingly, Enron intends to start the process of putting the PGE Trust in place now so that the structure can be in place at the time the Plan is confirmed. If the PGE Trust cannot be successfully implemented, Enron would seek to qualify itself for exemption under section 3(a)(4) and demonstrate, as Fidelity did, that its control over PGE during the divestiture period should not be of concern to the Commission. Enron's exercise of control over PGE would be significantly restricted under the Plan. First, the management of PGE, comprised of persons that are not Enron officers or directors, would continue to manage the day-to-day operations of the utility. Second, the Debtors' operations, post-Plan confirmation, would be managed by an administrator, appointed by the Bankruptcy Court, that would be responsible for managing the assets of the estate as a fiduciary for the benefit of the Debtors' creditors.21 The administrators' principal motivation with respect to PGE's management would be to prevent a decrease in the value of the PGE equity to the detriment of the Debtors' creditors.
In the end, whether the PGE Trust or Enron, under the control of the administrator, holds PGE is largely academic because under the Plan, Enron's control over PGE will be exercised through the administrator with the objective of divesting PGE as soon as possible. Although Enron acquired PGE's common stock in 1997 and, accordingly, was a holding company prior to the commencement of the chapter 11 reorganization, it is appropriate to view Enron and the PGE Trust after confirmation of the Plan as possessing PGE shares solely for the purpose of distributing them to creditors within the meaning of section 3(a)(4). There is no distinction worth justifying a different regulatory treatment under section 3(a)(4) between having "acquired" securities for purposes of liquidation or distribution or merely "possessing" such securities at the time a bona fide plan for their distribution is adopted. Granting a section 3(a)(4) exemption for a holding company that acquired utility securities prior to the adoption of a bona fide plan of distribution is not an open-ended expansion of the terms of the exemption.
Moreover, the Commission always retains the ability to revoke an exemption if it finds the public interest and the interest of investors and consumers would be adversely affected. If the imposition of protective conditions would adequately address the need to guard the protected interests, the Commission also may grant a conditional exemption. Thus any action taken by the Commission in this matter is fact-specific and should not have broad precedential effect. Given that the end result the distribution of PGE shares to creditors does not differ between ownership of the shares in the PGE Trust or directly by Enron, under the management of a Bankruptcy Court-approved administrator it does not necessarily make any sense to treat the two alternatives differently under section 3(a)(4).
Enron's application under section 3(a)(4) will demonstrate that, under the terms of the Plan, and given the need to avoid delay that would prejudice creditors' interests, that it is appropriate for the Commission to grant relief under section 3(a)(4). The application will propose conditions to the exemption to eliminate any concerns with regard to detriment to PGE's customers and the investors in PGE's debt securities. In the main, however, the Commission will find from a review of the record in this proceeding that PGE is already well insulated from the Enron group. PGE is financially sound, has an investment grade credit rating, and is run by a management team that is separate from Enron. PGE's operations and its separate credit provide sufficient funds to service PGE's obligations, fund its capital expenditures and maintain reliable utility service. The OPUC has effectively ring-fenced PGE through several restrictions that are described in detail in Enron's testimony. See the testimony of Enron's witness James Piro, Chief Financial Officer of PGE, Exhibit JP-1 at Appendix A, which includes a stipulation before the Public Utility Commission of Oregon imposing 22 conditions on Enron and transactions with PGE, including cost allocation and reporting requirements with regard to affiliate interest transactions, accounting matters, dividend restrictions, unrestricted access to all PGE information, and a hold harmless provision for customers should the acquisition of PGE by Enron result in a higher revenue requirement for PGE than if the acquisition had not occurred. All of these safeguards protect the interests of the public, investors and consumers. The rating agencies have fully evaluated the ring-fencing mechanisms and have maintained PGE's investment grade credit ratings, in large part because such mechanisms are in place.
Because the Plan provides for the full divestiture of all of the Debtors' assets, including PGE, to creditors, and a delay in implementing the Plan would harm creditors, it is appropriate that this Commission grant leave to adduce additional evidence in this proceeding about (a) the Plan, (b) the timing and process for implementation of the Plan, (c) the constituencies protected through the Plan, and (d) the effect of the Plan on Enron's status as a holding company, and particularly how an exemption for Enron or PGE Trust under section 3(a)(4) would provide an appropriate regulatory solution to this proceeding. Wherefore, for the foregoing reasons, Enron respectfully requests that the Commission grant this motion, so that the Commission may fully consider the Plan and Enron's proposed application for exemption under section 3(a)(4) before issuing its decision in this proceeding.
William S. Lamb
Charles A. Moore
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street,
New York, New York 10019-5389
Attorneys for Enron Corp.
Dated: July 15, 2003
DC 241785.4 09127 00721 07/15/03 03:59pm
1 15 U.S.C. §§ 79-79z-6 (2000).
2 This motion is additional to and separate from the brief that Enron will submit on or before July 21, 2003 in accordance with the Commission's order issued in this proceeding. Order Granting Petitions for Review, Denying Motion for Leave to Intervene Out of Time, and Scheduling Briefs, Holding Co. Act Rel. No. 27685 (June 11, 2003).
3 In re Enron Corp., et al., Debtors, Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code, Case No. 01-16034 (AJG), US Bankruptcy Court for the Southern District of New York (July 11, 2003). The Plan, the disclosure statement and related documents are available at www.enron.com. If this motion is granted, Enron intends to file a copy of the Plan and disclosure statement in this proceeding.
4 The U.S. Trustee monitors the progress of a chapter 11 case, supervises the administration of the business by the debtor in possession, and reviews the debtor's monthly operating reports and applications for compensation by attorneys and other professionals involved in the case. In Debtors' cases, the U.S. Trustee, upon direction of the Bankruptcy Court, has appointed examiners to conduct investigations into Enron's pre-petition affairs. The U.S. Trustee program is administered by the Department of Justice.
5 Judge Murray (commenting on the Division of Investment Management's motion to exclude certain parts of Enron's witness testimony): "I am granting this motion because it is all speculation. And, as far as I know, or as far as the record goes, according to the summary that Enron submitted at page 1, as of today, the facts that I have to decide this case, Enron owns all of the outstanding Portland General voting I'm sorry. Enron owns all of the outstanding voting common stock of Portland General Electric Company. And that's at the summary at page 1. So what could happen under the bankruptcy, and what may happen, and what might happen, and all the rest of it, I'm not going to get into until somebody tells me they have either sold it, or they are going to do something different. I'm taking the facts as presented in the record. And the summary at page 1 by Enron tells me that as of today, they vote they own all of the voting common stock."
Mr. Moore (Enron's counsel): "I think the point of the relevance here, Judge, is this. Certainly, if we took a snapshot of today, the stock ownership and the position of certain companies own a certain place. However, it is clearly undisputed in this record that we're in a Chapter 11 reorganization. That, of itself, requires certain events to occur. And there will be another side of that Chapter 11 "
Judge Murray: "Right."
Mr. Moore: " that will either liquidate or come out as some other reorganized company. Because of the requirement and this gets to the those public interest considerations that I believe, under the memorandum of law, this Commission must consider, and therefore you as well, that you can't there is a line I'm going to get to in my argument about. Should we do bright line tests for these exceptions, or should we take all of the facts and consider in the context of which they should be considered all together? Mr. Bowen [Enron's Chief Financial Officer], when he asked that question, 'Well, what does Enron look like vis-à-vis PGE today?' and then he says, 'Well, that depends. That depends on the outcome of the Chapter 11 reorganization." It may be that these assets are liquidated and PGE is sold."
Judge Murray: "Right."
Mr. Moore: "The QFs are sold."
Judge Murray: "Right."
Mr. Moore: "Or it may be that they can't get enough value for those, so they have to retain one or more of those assets. What he does in his testimony is simply provide the relevant possibilities of the possible outcomes. And I submit, Your Honor, that under the 1(c) requirement that the Commission consider these exemptive provisions to meet the problems and eliminate the evils enumerated in the Act. It is those it is that requirement this is where the public interest comes in, in protecting the consumers and investors. And, of course, the only investors left are the creditors in that bankruptcy proceeding. The equity holders have all $70 billion are gone. So the only investors left are the creditors, bond holders, and lenders in that proceeding. And so, how that proceeding comes out, and whether or not it results in a reorganized company, or one where you dispose and liquidate the assets, will be will be an event. Now how it exactly comes out, we don't know for sure. But Mr. Bowen endeavors to give you the possible scenarios that that could could how that could transpire."
Judge Murray: "I hear you. I mean I don't I just I don't disagree with you. But, I mean, there is a whole there is a whole spectrum. This gentleman gives me two. They could sell it. They could use it as a centerpiece of a of building a whole energy scheme of things. I mean, you know, what am I supposed to do? What are you going to do with that kind of evidence? Yeah, there is a whole range of possibilities out there. God knows what's going to happen. I have to deal with what I have, what I know exists today. These things could happen, but I don't know if they are going to happen. They could happen. The [sic] might happen. Something else might happen. It's just too speculative. I shouldn't do you want to answer that?"
Mr. Lowry (the Division's counsel): "Your Honor, I think you have hit again, hit the nail on the head."
Judge Murray: "Oh, no."
Mr. Moore: "That's going to bend the nail."
Judge Murray: "Yeah, right."
Mr. Lowry: "But, really, the Division's view is that Enron cannot apply for an exemption based on contingencies. For all we know, in the future, the state of Oregon could be sold to Canada, and Portland General would become a foreign utility company. . . ." Hearing Transcript at 26-29.
6 See e.g., the Commission's decision in Lykes Bros., in which a Lykes, Florida holding company of a Florida gas utility, Peoples Gas System, Inc., was granted an exemption under section 3(a)(1) in all respects except to the extent of requiring under the "unless and except" clause that Lykes register under the Act for the purpose of filing a plan under section 11(e) of the Act to dispose of its ownership of Peoples. Lykes Bros., Inc., Holding Co. Act Release No. 20487 (April 6, 1978).
7 In its June 18, 2003 motion, the Division takes the position that the Debtors' Plan and disclosure statement would require Commission authorization under sections 11(f) and (g) of the Act, after an opportunity for a hearing, prior to its submission to the Bankruptcy Court and the solicitation of creditor consents to the Plan. At this point, a full discussion of these issues is not required, but Enron wishes to note that it does not concede any aspect of Commission jurisdiction over a Plan if Enron is required to register under the Act and reserves the right to present its position on these issues to the Bankruptcy Court and the Commission at a future date.
8 See, e.g., Flood of Fees Draining Enron Funds, Washington Post, June 28, 2003, at A01 (Fees for lawyers and other professionals working on the Enron bankruptcy have totaled $496 million through May. "[W]ith fees continuing to climb at a rate of $25 million per month, each day drains cash from the pot of funds that remains to pay Enron's debts. 'Time is not the creditors' friend' says Nancy B Rapoport, dean of the University of Houston Law Center.").
9 The Commission has filed a notice of appearance in the Debtors' bankruptcy cases under section 1109(a) of the Bankruptcy Code.
10 Section 1123(a) of the Bankruptcy Code provides that a chapter 11 plan shall designate classes of claims and interests for treatment under the reorganization. Generally, a plan will classify claim holders as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders. There are over 350 classes of claim holders under Enron's Plan, of which two classes are unimpaired. Under section 1126(c) of the Code, an entire class of claims accepts a plan if the plan is accepted by creditors that hold at least two-thirds in amount and more than one-half in number of the allowed claims in the class. Under section 1126(g), a class is deemed not to have accepted a plan if such plan provides that the claims or interests of such class do not entitle the holders of such claims or interests to receive or retain any property under the plan on account of such claims or interests. The Plan does preserve the rights of Enron shareholders to a contingent recovery in the extremely unlikely event that Enron's total assets exceed total allowed claims.
11 In order to confirm a plan, the court must find that (1) the plan is feasible, (2) it is proposed in good faith, and (3) the plan and the proponent of the plan are in compliance with the Bankruptcy Code. In addition, the court must find that confirmation of the plan is not likely to be followed by liquidation or the need for further financial reorganization.
12 In order to take advantage of corporate opportunities, including possibly enlarging existing pipeline relationships, the Debtors have filed a motion with the Bankruptcy Court seeking authorization to formulate CrossCountry in July 2003. In the event that such relief is granted, the stock of CrossCountry will still be distributed pursuant to the Plan.
13 Section 3(c) of the Act provides, in part: "Whenever the Commission, on its own motion, or upon application by the holding company or any subsidiary company thereof exempted by any order issued under subsection (a), or by the subsidiary company exempted by any order issued under subsection (b), finds that the circumstances which gave rise to the issuance of such order no longer exist, the Commission shall by order revoke such order."
14 Hawes, Utility Holding Companies § 3.04[4a] (1987).
15 The Regulation of Public Utility Holding Companies, Division of Investment Management, US Securities and Exchange Commission (June 1995), at 110.
16 Coastal States Lo-Vaca Settlement Trust, Merchantile National Bank At Dallas, Holding Co. Act Release No. 21014 (April 23, 1979).
17 An extensive review of section 3(a)(4) precedent reveals no case where "inadvertent" holding company status was a condition for qualifying for exemption.
18 Fidelity Management & Research Company, et al., Holding Co. Act Release No. 26448 (January 5, 1996).
19 Id., quoting Manufacturers Trust Co., 9 S.E.C. 283, 288 (1941).
20 Under the Plan, the administrator would be Stephen Forbes Cooper, LLC.
21 The Plan administrator would report to a new Enron board of directors. The new board of directors will be comprised of five members, appointed by the Debtor in consultation with the Creditors' Committee (with respect to four directors), and the Enron North America Examiner (with respect to one director).
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