UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION

DIVISION OF INVESTMENT MANAGEMENT'S BRIEF IN OPPOSITION
TO PETITIONS FOR REVIEW OF INITIAL DECISION FILED
BY APPLICANT ENRON CORP., LIMITED PARTICIPANTS
SOUTHERN CALIFORNIA EDISON COMPANY AND
FPL GROUP, INC., AMICI EDISON ELECTRIC INSTITUTE,
NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS,
AND THE PUBLIC UTILITY COMMISSION OF OREGON

Dated: August 20, 2003

TABLE OF CONTENTS

 TABLE OF AUTHORITIES

1. Introduction

2. Summary of the Facts

3. Law Applicable to Enron's Applications

   1. Section 3(a)(1)

   2. Section 3(a)(3)

   3. Section 3(a)(5)

   4. Temporary/Conditional Exemptions

4. Enron Has Not Met Its Burden of Showing That It is Entitled to An Exemption Under Section 3(a)(1)

   1. The Evidence In the Record Compels the Conclusion That Portland General's Utility Operations Do Not Satisfy the Predominantly/Substantially Test

   2. There Is No Reason to Specially Alter The Predominantly/Substantially Test to Accommodate Enron's Application for a Section 3(a)(1) Exemption

      1. Adopting Enron's Novel Financial Arguments Would Conceal The Extent of a Utility's Out-of-State Activities

      2. The Chief ALJ Properly Rejected Enron's Other Arguments for Altering the Predominantly/Substantially Analysis.

         1. Overlapping Regulation

         2. Utility Assets

         3. Trading Hubs

         4. Wholesale Trading Revenues Benefit the Retail Customer

5. Enron Has Not Met its Burden of Showing that It Is Entitled to An Exemption Under Either Section 3(a)(3) or Section 3(a)(5)

   1. Under Existing Precedent, Enron Cannot Qualify For An Exemption Under Either Section

      1. Enron Cannot Satisfy the Reverse-Functional Relationship Test

      2. Enron Is Not Engaged Primarily In Exempt Activities

      3. Portland General Is A Material Utility Subsidiary

   2. Enron Is Not Entitled To A Temporary Exemption

   3. Enron's Proposed New Criteria For 3(a)(3) And 3(a)(5) Exemptions Must Be Rejected

      1. Bankrupt Holding Companies Are Not Exempt From The Act

      2. Enron's Bankruptcy Plan Is Speculative and Irrelevant

      3. The Protected Interests Under the Act Are Served By Enron's Registration

      4. Economic Costs and Benefits Are Not Factors For Exemption

6. Responses to Other Petitioners

   1. OPUC and NARUC

   2. EEI

   3. FPL Group

   4. California Edison

7. Division's Response to Enron's Motion for Oral Argument

8. Conclusion

TABLE OF AUTHORITIES

CASES AND DECISIONS

AES Corp., Holding Co. Act Release No. 27063 ("AES I")(August 20, 1999)

AES Corp., Holding Co. Act Release No. 27363 (AES II)(March 23, 2001)

C&T Enterprises, Inc., Holding Co. Act Release No. 27590 (October 31, 2002)

Consolidated Edison, Holding Co. Act Release No. 27021 (May 13, 1999)

Electric Bond and Share Co., 33 S.E.C. 21, 42 (1952)

Enron, Holding Co. Act Release No. 27574 (October 7, 2002)("Order Scheduling Hearing")

Enron Corp., Initial Decision Release No. 222 (February 6, 2003)("Initial Decision")

Gaz Metropolitain, Holding Co. Act Release No. 26170 (November 23, 1994)

Houston Industries, Inc., Holding Co. Act Release No. 26744 (1997)

Kansas Power and Light Co., 32 S.E.C. 749 (1951)

Kansas Power and Light Co., 50 S.E.C. 852 (1992)

KU Energy Corp., Holding Co. Act Release No. 25409 (November 13, 1991)

Millville Manufacturing Co., Holding Co. Act Release No. 489 (December 21, 1936)

National Grid Transco plc, Holding Co. Act Release No. 27704 (Aug. 1, 2003)

NIPSCO Industries, Holding Co. Act Release No. 26975 (February 10, 1999)

N.W. Electric Power Cooperative, Holding Co. Act Release No. 24497 (Nov. 10, 1987)

Penn Fuel Gas, Holding Co. Act Release No. 26050 (May 9, 1994)

Sierra Pacific Resources, 49 S.E.C. 735 (1988)

Steadman v. Securities and Exchange Commission, 450 U.S. 91 (1981)

Wisconsin Energy Corp., Holding Co. Act Release No. 24267 (Dec. 18, 1986)

STATUTES AND CODES

5 U.S.C. § 556(d)

Section 3(a)(1) (15 U.S.C. § 79c(a)(1))

Section 3(a)(3) (15 U.S.C. § 79c(a)(3))

Section 3(a)(5) (15 U.S.C. § 79c(a)(5))

RULES

Rule of Practice 210(b)(1), 17 C.F.R. § 201.210(b)(1)

Rule of Practice 210(b)(1)(i), 17 C.F.R. § 201.210(b)(1)(i)

Rule of Practice 210(c), 17 C.F.R. § 201.210(c)

OTHER AUTHORITIES

79 Cong. Rec. 8843 (1934)

Report of National Power Policy Committee, H. Doc. No. 137, 74^th Cong., 1^st Sess. 8 (1935)

I. Introduction

Based on the facts adduced at the hearing and the settled law consistently applied by the Commission in its decisions, applicant Enron Corp. ("Enron") fails to qualify for any of the statutory exemptions from registration under the Public Utility Holding Company Act of 1935 ("Act") for which it has applied.

Recognizing that neither the facts nor the law support its applications, Enron essentially asks the Commission to create a special rule exempting Enron from registration in order to spare the company the purported expense and burden of complying with the law. As discussed below, the Commission should refuse Enron's invitation to disregard the record and ignore the law and the Commission's own precedent. There is nothing in this case that justifies the special treatment Enron requests.

The petitions for review filed by limited participants Southern California Edison ("California Edison"), FPL Group, Inc. ("FPL"), Amici Edison Electric Institute ("EEI"), the National Association of Regulatory Utility Commissioners ("NARUC") and the petition of the Oregon Public Utility Commission ("OPUC") raise, for the most part, tangential issues to the core question whether Enron has carried its burden of showing that it is entitled to any of the applied-for exemptions; none of these tangential issues can affect or alter the clear conclusion that Enron has failed to show that it qualifies for exemption from registration under the Act.¹

Consequently, the Division of Investment Management ("Division") urges the Commission to affirm the initial decision issued in this proceeding by the Chief Administrative Law Judge ("Chief ALJ"),² denying Enron's applications for exemption.

II. Summary Of The Facts

The Division concurs with the synopsis of the facts presented in Section I of the Chief ALJ's Initial Decision. For ease of reference, certain relevant facts are summarized below.

Enron is a company headquartered in Houston, Texas, but incorporated in Oregon. Enron became a "holding company" within the meaning of section 2(a)(7) of the Act in July 1997, when it acquired all of the outstanding common stock of Portland General Electric Company ("Portland General"). After acquiring Portland General and until March 1, 2001, Enron claimed an exemption from registration under the Act pursuant to section 3(a)(1) by filing a statement pursuant to rule 2 under the Act.³

On April 12, 2000, Enron filed for an exemption under sections 3(a)(3) and 3(a)(5) of the Act (the "QF Application"). The purpose of the QF Application was to ensure that Enron's ownership of certain electric generation facilities would not cause the company to lose its "qualifying facility" ("QF") status under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). An electrical generation facility designated under PURPA as a QF can to sell power at advantageous rates under long-term contracts. Ordinarily, QF status ends when a public utility holding company - such as Enron - owns more than a fifty percent interest in the facility. Under applicable regulations, however, this disqualification does not apply to a holding company that has obtained, or applied in good faith for, a section 3(a)(3) or 3(a)(5) exemption. Enron's QF Application was intended to take advantage of this loophole.⁴

On November 8, 2001, in the wake of revelations concerning systematic and long-term misstatements in the company's financial statements, Enron informed the Commission that its consolidated financial statements for the fiscal years ended December 31, 1997, through 2000, and for the first and second quarters of 2001, should not be relied upon.⁵

On December 2, 2001, Enron filed a voluntary petition for reorganization under chapter 11 of the bankruptcy code in the United States Bankruptcy Court for the Southern District of New York. Enron is currently a debtor in possession with respect to the bankruptcy estate.⁶

On February 28, 2002, Enron filed an application for exemption pursuant to section 3(a)(1) of the Act, which it amended on May 31, 2002 (as amended, "Interstate Application"). Enron filed this application because it was unable to provide the financial information required for its annual rule 2 filing. In fact, Enron has not produced financial statements since it filed for bankruptcy protection, nor has it retained an independent auditor. The company has disclaimed any intent to produce audited restated financial statements for any periods prior to its December 2001 bankruptcy filing. Enron has also stated that it will not produce either audited or unaudited financial statements for any periods that have passed since it filed for bankruptcy (including statements for the year ended December 31, 2001).⁷ Enron's financial records are in such a poor state that it admitted in this proceeding it could not accurately describe its current composition in terms of assets and subsidiaries.⁸

In contrast to the black box that is Enron, the facts concerning Portland General are relatively clear. Portland General is an electric utility company incorporated and doing business in the State of Oregon. Portland General generates electricity, buys electricity at wholesale, and sells electricity at both wholesale and retail.⁹ Much of Portland General's wholesale sales of electricity occur outside of Oregon.¹⁰ Although Portland General could execute all of its wholesale sales within the State of Oregon, it has elected not to do so because it believes that it is more profitable to execute these sales outside of the state.¹¹

Portland General's interstate sales of electricity have consistently contributed a large and significant portion to its total operating revenues.¹² The utility's interstate sales of electricity in 1998 constituted approximately 12.25% of Portland General's total operating revenues for that year.¹³ In 1999, Portland General's interstate sales of electricity represented approximately 11.26% of its total operating revenues.¹⁴ This percentage increased to 32.71% in 2000,¹⁵ and further increased to 45.55% in 2001.¹⁶ The most current data in the record reveals that Portland General's interstate sales of electricity constituted 29.10% of the utility's total operating revenues for the first three quarters of 2002.¹⁷ Consequently, over the most recent three-year period (1999 through 2001), Portland General derived approximately 34% of its gross utility operating revenue from out-of-state sales.¹⁸

Portland General is one of Enron's more important assets. Enron admits that it derives all of its utility income from Portland General, and that Portland General currently accounts for a "significant" and "substantial" part of its revenues and income.¹⁹

III. Law Applicable To Enron's Applications

Enron bears the burden of demonstrating that it meets all of the requirements of exemptions for which it has applied.²⁰ The determination of whether a holding company qualifies for exemption under the Act is a two-part process. First, the Commission must determine whether the holding company meets the legal and factual requirements pursuant to the applicable section 3(a) subsections. If it can meet these requirements, the Commission must then determine whether the proposed exemption would be detrimental to the public interest or the interest of investors or consumers.

In recognition of the two-step analysis, the Commission bifurcated the hearing into two phases.²¹ The Commission directed that the first phase should focus on whether Enron satisfies any of the particular statutory criteria for a exemption under section 3(a)(1), section 3(a)(3) or section 3(a)(5) of the Act.²² The Order Scheduling Hearing further provided that if a determination were made that Enron had carried this burden, a second phase of the hearing would commence to determine whether granting such an exemption would be detrimental to the public interest, or the interest of investors or consumers.²³ Because the Chief ALJ determined that Enron had not met the statutory requirements for any of the exemptions, the second phase of the hearing was not held, and evidence was not received into the record on this issue.²⁴

A. Section 3(a)(1)

Under section 3(a)(1) of the Act, the Commission must exempt a holding company and its subsidiaries from any provision or provisions of the Act if:

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

To qualify for the exemption, an applicant holding company must establish that: (1) it is incorporated in the same State as each of its material public utility company subsidiaries; and (2) it and each of its material public utility company subsidiaries is "predominantly intrastate in character and carries on its utility businesses substantially in a single State."²⁵ The Commission has evaluated a number of quantifiable factors to compare a company's out-of-state presence with its in-state presence. Some of the most common indicia have included gross operating revenues, utility operating income, net utility income, and net utility plant.²⁶

The practical effect of section 3(a)(1) is to exempt holding companies from the Act in situations in which a single state can effectively regulate the holding company, and hence adequately protect its consumers through its jurisdiction over a holding company that is incorporated in that state and one or more material utility subsidiaries that operate predominantly in that state. An implicit assumption thus appears to underlie section 3(a)(1): utilities that operate on an interstate basis require an overlay of Commission regulation to achieve the statutory goals of protecting utility customers and investors, whereas holding companies conducting utility operations primarily in one state can generally be effectively regulated by that state.²⁷

In determining whether a utility (or a holding company) operates in a single state or a number of states, the Commission always has looked at factors such as where its utility assets are located and where it derives its revenues from utility operations. In determining the source of utility revenues, the state in which the sale of electricity takes place has always been the fundamental factor: if a sale occurs within the state in question or along that State's borders, it is counted as an intrastate transaction.²⁸ Conversely, if a transaction occurs outside the state in question, it is counted as an interstate transaction. The Commission has never considered relevant the underlying purpose of a transaction (i.e., whether a wholesale sale by a utility lowers the cost of its native load retail customers). Additionally, in analyzing whether a transaction is interstate or intrastate, the Commission has never distinguished between wholesale and retail sales.

B. Section 3(a)(3)

The plain language of section 3(a)(3) makes clear that its scope is narrow. The exemption is available only if the:

holding company is only incidentally a holding company, being primarily engaged or interested in one or more businesses other than the business of a public-utility company and (A) not deriving, directly or indirectly, any material part of its income from any one or more subsidiary companies, the principal business of which is that of a public-utility company, or (B) deriving a material part of its income from any one or more such subsidiary companies, if substantially all the outstanding securities of such companies are owned, directly or indirectly, by such holding company. . . .

The section 3(a)(3) exemption has traditionally been limited to situations in which the utility operations of an applicant are necessary for, or are a natural, unavoidable by-product of, the nonutility activities:

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 a utility interest required to assure it a source of power supply, or an oil company sells gas derived from its oil operations. In those cases, the utility operations served the operational needs of or constituted a by-product of the non-utility business so that the utility business was in fact no more than incidental to the non-utility operations.

Electric Bond and Share Co., 33 S.E.C. 21, 42 (1952) ("Electric Bond") (emphasis added). This first requirement, that a holding company establish that its utility business is functionally related to its nonutility business, is known as the reverse-functional relationship test.²⁹

In addition, under section 3(a)(3), an applicant must demonstrate that its utility operations are small, in both a relative and an absolute sense.³⁰ A public utility company is small in a relative sense when it does not contribute a material part of the holding company's income.³¹ A public utility company is absolutely small when its size is not significant when compared to other utility companies on a state, regional and national basis.³²

An applicant that satisfies the reverse-functional relationship test and both tests of smallness can generally be assumed to own its utility operations for reasons related to its other business activities rather than to invest or participate in the utility business. Because this type of company was assumed not to pose the types of problems that prompted passage of the Act, Congress directed the Commission to exempt these holding companies from regulation under the Act.

C. Section 3(a)(5)

Under section 3(a)(5) of the Act, the Commission may exempt a holding company and its subsidiaries from any provision or provisions of the Act if the

holding company is not, and derives no material part of its income, directly or indirectly, from any one or more subsidiary companies which are, a company or companies the principal business of which within the United States is that of a public-utility company.

Traditionally, the Commission has granted section 3(a)(5) exemptions to holding companies that have essentially foreign utility operations, but also a small, non-material United States utility subsidiary.³³

Recently, in AES I, the Commission expanded this requirement when it exempted an American holding company whose operations, with the exception of a small U.S. utility, consisted of a combination of substantial foreign utility operations (that qualified as foreign utility companies or "FUCOs") and some U.S. operations that, but for specific exemptions provided by Congress, would be utility operations under the Act. Specifically, the exempt U.S. utility operations consisted of exempt wholesale generators ("EWGs") under section 32 of the Act and QFs under PURPA. The Commission reasoned that, just as Congress determined that the public interest does not require regulation of holding companies whose utility operations are essentially foreign, except for a small domestic utility, the public interest does not require regulation of a U.S. holding company whose utility operations, apart from ownership of a small domestic utility, are exempt from the Act.

To obtain exemption under section 3(a)(5), an applicant must also establish that its material public utility company subsidiaries are small in both relative and absolute terms. Again, these tests of smallness assure that the applicant holding company is not the type of utility conglomerate that raise the risk of the problems that the Act is designed to prevent.

D. Temporary/Conditional Exemptions

No provision of the Act expressly authorizes the Commission to grant temporary exemptions, but the Commission has done so on very rare occasions in the past.³⁴ Most recently, under unique circumstances, the Commission granted AES Corporation ("AES") a very narrow temporary section 3(a)(5) exemption from the Act. Prior to that grant, the Commission had granted AES a permanent exemption under section 3(a)(5), having found that the character of AES' business was consistent with the legislative intent underlying the section. See AES I. AES subsequently acquired another public utility company. This threatened the viability of its section 3(a)(5) exemption because, although AES was still "engaged essentially in the `exempt utility' business - i.e., the business of EWGs, QFs and power marketers in the United States, and EWGs and FUCOs outside of the United States" (AES II at 6), if it retained both public utility companies, it would have derived too much of its income from utility operations and failed to satisfy the relative size requirement. In AES II, the Commission permitted AES to remain exempt on the condition that it divest its Illinois utility within two years.

IV. Enron Has Not Met Its Burden of Showing That It Is Entitled To An Exemption Under Section 3(a)(1)

A. The Evidence In The Record Compels The Conclusion That Portland General's Utility Operations Do Not Satisfy The "Predominantly/Substantially" Test.

Despite the large amount of verbiage Enron expends on its section 3(a)(1) argument in its Opening Brief, the legal issue presented here is straightforward: did Enron meet its burden of showing that it is a public utility holding company whose material utility subsidiary (i.e., Portland General) is predominantly intrastate in character and carries on its business substantially in a single state (the "predominantly/substantially test")?³⁵

As discussed above, the Commission traditionally has looked to a number of quantifiable factors in determining whether a material utility subsidiary is intrastate in character and conducts its business substantially in a single state, the most important of which has been an examination of the sources of the utility's operating revenue to determine the extent of the utility's out-of-state activity. As emphasized recently in C&T Enterprises, "[t]he Commission has generally assigned the most weight to a comparison of gross utility operating revenues as a measure of the relative size of in-state and out-of-state operations."³⁶ The Commission typically looks at the most recent three year average. Although the Commission has found utility operations to meet the predominantly/substantially test when the proportion has averaged as much as 13.2%, it has never suggested percentages in excess of that figure would satisfy the requirement.³⁷ Portland General's three-year average of 34% of its operating revenues from out-of-state sales shows that it is far in excess of those utilities the Commission has found to have met the predominantly/substantially test.³⁸

Recognizing that Portland General's substantial interstate electric power sales effectively precluded it from meeting the Commission's predominantly/substantially standards, Enron urged the Chief ALJ not to apply a "mechanical" "bright-line" approach in her section 3(a)(1) analysis and to consider a wide range of facts in making her decision.³⁹ The Chief ALJ adopted the "flexible" approach Enron advocated, and followed the Commission's lead in weighing "individual factors in reaching a conclusion."⁴⁰ Yet, as the Initial Decision clearly shows, even where Enron's favored "flexible" approach is used, and a wide variety of factors bearing on Portland General's in-state and out-of-state utility activities are considered in addition to revenues, the conclusion is inevitable and unavoidable: Portland General simply is not a utility company that is predominantly intrastate in nature and which carries on its business substantially in a single state.

In determining whether Portland General met the predominantly/substantially standard, the ALJ examined numerous facts in the record that could illuminate Portland General's character. These facts included: Portland General's customer location and power supplies, its part ownership of an out-of-state utility plant, Portland General's part ownership of the AC Intertie system and its use of the Intertie and Western Interconnection to facilitate out its interstate transmission of electricity, the locations where Portland General sells electricity, Portland General's pivotal location between the energy generation and consumption markets to the north and south of Oregon, the sources of Portland General's utility operations revenue, and the position of OPUC with respect to its ability to effectively regulate Portland General.⁴¹ The ALJ summarized the evidence bearing on Portland General's in-state character as follows:

Portland General's strong ties to Oregon are not in dispute. However, Portland General earned an average of 34.14 percent of its total operating revenues from interstate sales from 1999 through 2001; approximately fourteen percent of its owned generation is located out of state; Portland General depends to a "significant" or "substantial" degree on power purchased out of state to serve its retail customers and in 2001, thirty-six percent of the electricity needed to meet peak load came from short-term purchases; from 2000 through the first nine months of 2002, Portland General earned between nine and nineteen percent of its gross revenues from marketing power out of state, a business activity that has no relation to serving its retail customers; and Portland General owns a substantial interest in the Intertie, which is used primarily for interstate purchases and sales of electricity among the BPA, the Pacific Northwest utilities, including Portland General, and the California Utilities . . . In addition, Portland General's transmission system is part of the WSCC, and, according to Portland General, during the last few years, the area covered by the WSCC has become a dynamic marketplace for trading of electricity.⁴²

Each of the above facts summarized by the ALJ - which Enron does not dispute - reveal Portland General's true character as a regional utility company actively engaged in significant utility operations that extend outside of Oregon. It is true that the "flexible approach" adopted by the ALJ in her Initial Decision took into consideration a wide range of facts, including factors that have not previously been directly relied upon by the Commission in its previous decisions involving the predominantly/substantially test.⁴³ The ALJ apparently did so in response to Enron's invitation to apply a "flexible" "totality of the circumstances" analysis to its section 3(a)(1) application, not limited solely to the Commission's usual focus on the proportion of out-of-state to in-state gross revenues, as that factor so clearly weighed against granting the application. Despite adopting the flexible analysis advocated by Enron, after the ALJ canvassed the record to take into account additional facts and circumstances that might potentially bear on the analysis, she was constrained to conclude:

Even with the application of a most forgiving flexible approach, an electric utility with these business characteristics cannot by any reasonable measure be considered "predominantly intrastate in character" and carrying on "business substantially in a single state." To grant this application, the Commission would have to ignore the language of the statute and stretch the precedents established by over sixty years of case law beyond reasonable limits.⁴⁴

The evidence in the record - regardless of whether it is evaluated using an approach that focuses primarily on gross revenues or one that uses a flexible "facts and circumstances" as approach applied by the Chief ALJ in her Initial Decision - clearly supports the Chief ALJ's conclusion that Portland General's utility activities fall well outside the ambit of the predominantly/substantially test.

B. There Is No Reason To Specially Alter The Predominantly/ Substantially Test To Accommodate Enron's Application For A Section 3(a)(1) Exemption.

1. Adopting Enron's Novel Financial Arguments Would Conceal The Extent Of A Utility's Out-of-State Activities.

Recognizing that even the "flexible" test it advocated during and after the hearing compels the conclusion that Portland General, as it conducts its business, is unable to meet the predominantly/substantially test, Enron argues that the Commission should now change its traditional approach to facilitate granting its section 3(a)(1) application. Specifically, Enron suggests, without providing a complete analysis of the data, that if the Commission were to net out Portland General's purchased power costs from its total revenues for both in-state and out-of-state activities, it would find that Portland General is "predominantly intrastate in character."⁴⁵ This assertion apparently flows from Enron's assumption that if a utility company is a net purchaser of electric power for its residential customer base, it cannot a priori engage in significant out-of-state utility activity, and is supported by Enron's misreading of C&T Enterprises Inc. as requiring a net revenue analysis in all section 3(a)(1) applications.⁴⁶

Using Enron's analysis, Portland General's total out-of-state sales of electricity could dwarf its Oregon retail sales by any conceivable factor, and yet be effectively excluded from consideration under the predominantly/substantially test.⁴⁷ Moreover, the fact that Portland General must purchase electric power to serve its residential customers in Oregon does not preclude the company from engaging in significant utility activities outside of Oregon. In fact, the record reveals, and Enron does not contest, that Portland General engages in substantial and continuing utility activity in the interstate wholesale power trading market. Enron's proposed alteration to the Commission's preferred gross revenue analysis is intended to conceal the true scope of Portland General's extensive out-of-state power sales activity, by netting out the cost of the power sold in the interstate wholesale market before this figure is compared to Portland General's total net revenues from all utility operations. This alteration of the predominantly/substantially test would under-represent the importance of Portland General's out-of-state operations, particularly in periods where the trading returned little or no profit.⁴⁸ The Chief ALJ, in her Initial Decision rejected this analysis, noting that the net return from Portland General's principle out-of-state activity - power trading - "is irrelevant to the extent of Portland General's actual interstate trading activities."⁴⁹

As the Division has previously pointed out, the net revenue analysis in C&T Enterprises is applied to cases involving comparisons of material gas and electric utility subsidiaries to prevent a distorted picture of the combination utility's out-of-state activities that may arise by virtue of the fact that the gross revenues contributed by the natural gas component will likely be larger than the gross revenues contributed by the electric power component.⁵⁰ By netting out the costs of the fixed costs of gas power and electric power, the net revenue analysis attempts to filter out the distortion that would be caused when comparing a gas utility, which has a greater proportion of its gross revenues attributable to the pass-through costs of the commodity, natural gas, when compared to the electric utility business.

This case does not involve a combination gas-electric system, which would warrant using the "net revenue" gloss to further filter the data generated from the Commission's preferred gross revenue comparison, as there is no concern that differing types of commodities involved might provide an inaccurate picture of the utility's true character. In this case, we are comparing apples sold within Oregon (electric power) to apples sold outside of Oregon (electric power). The effect of using a net revenue analysis here would be to obscure the large volume of Portland General's interstate power sales from the Commission's view due only to the fact that these sales recently have not been as profitable in comparison to the guaranteed revenues Portland General receives from its rate-regulated customers.

2. The Chief ALJ Properly Rejected Enron's Other Arguments For Altering The Predominantly/Substantially Analysis.

a. Overlapping Regulation

Contrary to Enron's assertions, the oversight of Portland General's activities exercised by the FERC, OPUC, and to some degree by the bankruptcy court, does not demonstrate that regulation under the Act is unnecessary. None of those entities are charged with the same responsibilities that Congress gave the Commission under the Act. Indeed, every holding company currently subject to the Act has its retail activities regulated by state commissions and its wholesale activities regulated by the FERC. Enron is no different in this respect, and should not be exempted from the Act, even temporarily, on this basis.

Enron essentially argues that the Chief ALJ did not reach the correct result because she failed to employ the Act's legislative history in a manner that gave the state utility commission, OPUC, exclusive jurisdiction over Portland General. Under Enron's "reverse pre-emption" regime, when a state public utility commission can assert jurisdiction over a utility there is no room for the Commission to exercise its role under the Act. Even granting the proposition that a major purpose of the Act was to control public utility holding companies that escaped effective state regulation due to their interstate activities, does not compel the conclusion that the Commission has no role under the Act when a state regulator asserts it ability to adequately regulate the utility. After all, the Commission is not only charged with protection of utility consumers in Oregon, but also with the national public interest and the interests of investors in Enron's and its affiliates', including Portland General's, securities. OPUC may concern itself with Portland General, but federal oversight becomes even more essential when the holding company system is a vast sprawling one such as Enron's - a system Enron admits it cannot even accurately describe. It is telling that OPUC did not assert it could adequately regulate Enron, and it is Enron after all that is applying for the exemption.

Consequently, the Division believes that the Chief ALJ correctly assessed OPUC's assertions as "significant, but not controlling." The Division is not aware of any order issued by the Commission, and none has been cited by the parties, that suggests that assertions of effective state oversight of its utility customers dictates how the Commission applies the predominantly/substantially test under section 3(a)(1) of the Act.

b. Utility Assets

Enron's high level of interstate utility sales of electricity was not the only quantifiable factor the Chief ALJ considered in determining that the intrastate exemption was inapplicable to Enron. Portland General's out-of-state generating assets located in Colstrip, Montana and associated transmission lines ("Montana Assets") constitute further evidence of interstate utility activity. The ALJ found that the Montana Assets represented 13.1 percent of the undepreciated book value of Portland General's total physical plant of $3.5 billion.⁵¹ This level of non-Oregon utility assets when combined with the high level of out-of-state sales activity properly factored into the ALJ's ultimate decision that Enron failed to meet its burden to qualify for the intrastate exemption.

The discussions by the Chief ALJ of the Pacific Northwest AC Intertie ("AC Intertie") and other facilities used in interstate commerce have caused Enron much consternation. Enron considers the ALJ's statements regarding the AC Intertie and Portland General's interstate transmission connections as warranting a revisitation of the Initial Decision. However, the Commission specifically directed that the hearing resolve questions the Commission had concerning, among other things, the impact of the Montana Assets and the AC Intertie on the applications.⁵² Analysis of how Portland General deploys these assets in its utility operations is illustrative of the fact that it has structured its utility business to take advantage of its position in the middle of an extremely active interstate power trading market.

Additionally, Enron claims the Chief ALJ made "critical errors" in reviewing Portland General's purchases of interstate power in her discussion of the intrastate exemption. Out-of-state purchases of electricity are not part of a section 3(a)(1) analysis given that the statutory definition of electric utility company under the Act speaks to distribution of electric energy for sale.⁵³ Nevertheless, the Chief ALJ, in applying the "flexible" approach Enron advocated, cast a wide net to develop all the facts that could potentially bear on the predominantly/substantially test. Even were the Commission inclined to disregard this particular fact in its analysis, the conclusion that Enron has failed to meet its burden of showing that Portland General's utility activities meet the predominantly/substantially test would be unaffected.⁵⁴

c. Trading Hubs

Enron does not dispute that the Commission has looked to where title to power passes in its determination whether utility carries on its business "substantially" in one state. Portland General has admittedly elected to structure its business to extensively use power trading hubs located outside of Oregon. As noted above Portland General could have conducted all of its power sales inside the state, but chose not to do so because it believes that such in-state sales would be less profitable. Location matters in a section 3(a)(1) analysis: electricity sales where title passes outside the border of the state of incorporation of the holding company and its material public utility subsidiaries cannot qualify as intrastate under the Act.⁵⁵

d. Wholesale Trading Revenues Benefit The Retail Customer

The Chief ALJ correctly rejected Enron's proposed exception to the Commission's section 3(a)(1) analysis, namely that interstate sales made for the benefit of Oregon consumers should be deemed intrastate. Such a subjective approach would swallow the objective rule (analysis of quantifiable facts). Enron urges the Commission to turn a blind eye to the accepted benchmarks for exempt intrastate activity and implement a non-statutory intent-based approach to assist it in its quest to avoid registration. Enron essentially argues that because Oregon electricity consumers are the ultimate beneficiaries of interstate electric sales activity, its high volume of interstate electric sales should be ignored. As the Division has emphasized in prior pleadings, nothing in the text of section 3(a)(1) or in the Commission's decisions suggest that the disposition of proceeds from a utility's interstate activities is relevant to a section 3(a)(1) analysis.

V. Enron Has Not Met Its Burden of Showing That It Is Entitled To An Exemption Under Either Section 3(a)(3) Or Section 3(a)(5).

Enron does not qualify for exemption under the plain language of sections 3(a)(3) and 3(a)(5). Enron also does not qualify for exemption under the standards developed over the years by the Commission in its precedent. In reality, Enron is asking the Commission to abandon its established standards and adopt new ones so that it will not be burdened economically by registration. This proposed reinterpretation may aid Enron, but it is unrelated to the plain text of the statute and is contrary to the expressed will of Congress.

A. Under Existing Precedent, Enron Cannot Qualify For Exemption Under Either Section.

As the Chief ALJ pointed out, Enron admits that it lacks the financial data to meet the current requirements of sections 3(a)(3) or 3(a)(5).⁵⁶

1. Enron Cannot Satisfy The Reverse-Functional Relationship Test.

In the QF Application, filed April 14, 2000, Enron attempted to satisfy the reverse-functional relationship test by arguing that its ownership of Portland General provides Enron with "insight and access to new business opportunities in the broader energy industry."⁵⁷ The Commission has never upheld such a vague, non-operational relationship as the basis for a section 3(a)(3) exemption. Moreover, Enron failed to establish that this tenuous relationship continued to exist through the close of the evidentiary hearing in December of 2002. Enron filed the QF Application before filing for bankruptcy and, since then (as Enron has admitted), many of its businesses have been sold.

Tellingly, Enron has reversed its course: aborting its charade of a reverse-functional relationship, Enron claims that it is "incidentally a holding company" whose primary business is "being liquidated" and that Portland General is "merely incidental" to its "portfolio of energy related businesses."⁵⁸ Thus, Enron admits that there is no functional relationship at all between Enron and Portland General other than the fact that Enron continues to own Portland General. Enron implores the Commission to ignore the reverse-functional relationship test to reach Enron's desired outcome: "The Commission must consider the Plan and its implications for Enron's status as a holding company to fashion an appropriate resolution for this matter."⁵⁹ However, to accept this argument would be to conclude that the Commission has the power to grant an exemption under section 3(a)(3) for virtually any reason. The Commission should continue to limit section 3(a)(3) to the specific situation to which it is intended to apply: where a holding company's ownership of utility assets is narrowly focused on supporting its industrial activities.

2. Enron Is Not Engaged Primarily In Exempt Activities.

Enron professes to be "principally engaged in holding energy-related businesses of the type that Congress determined should not be regulated under the Act."⁶⁰ Yet the record is devoid of any evidence from which the Commission could draw that conclusion.

The Chief ALJ found and it is undisputed that: (1) "Enron has no reliable financials for fiscal years 1997 through 2000, and the first three quarters of 2001;"⁶¹ (2) "Enron does not intend to produce audited restated financial statements for those periods;"⁶² and (3) "Enron has no financial statements for periods since it filed for bankruptcy on December 2, 2001."⁶³ As a result, the Chief ALJ concluded that Enron "is unable to make the required showing that it is only incidentally a holding company in that it is engaged primarily in a business other than as a public utility or that it does not derive a material part of its revenue from Portland General."⁶⁴ Based upon the record in this proceeding, this conclusion is plainly correct.

3. Portland General Is A Material Utility Subsidiary.

The Chief ALJ found that "Enron's evidence is not persuasive that Portland General, the largest investor owned public utility in Oregon, is small in a relative or absolute sense."⁶⁵ Enron did not submit any financial data that demonstrated, as required by the plain language of the statute, that the holding company does not derive a material portion of its income from Portland General. To the contrary, Enron conceded that Portland General accounts for a "significant" and "substantial" part of Enron's revenues and income.⁶⁶

Enron has also failed to demonstrate that Portland General is absolutely small. To establish that a utility operation is absolutely small, the Commission has required an applicant to show that its subsidiary's utility operations are small in comparison to other utility companies on a state, regional and national basis. Portland General is the largest investor-owned utility in the State of Oregon, belying a finding that the utility is absolutely small at the state level. Additionally, Enron has put forth scant evidence regarding Portland General's size as compared with other utilities in the northwest United States or the nation as a whole, and the information that is in the record is not up-to-date.⁶⁷ In sum, the record on this issue is clearly incomplete and the data that is in the record tends to show that Portland General is too large.

B. Enron Is Not Entitled To A Temporary Exemption.

At its heart, Enron's arguments for temporary exemptions under sections 3(a)(3) and 3(a)(5) amount only to an emotive story of hardship. This tale of woe goes as follows: (1) Enron is seeking only "the same sensible, flexible relief" that the Commission made available to AES;⁶⁸ (2) as a matter of course, the Commission grants temporary exemptions whenever a holding company intends to eventually comply with the requirements of the Act;⁶⁹ and (3) new Enron is being singled out because of "the turbulence surrounding Enron's name in other forums."⁷⁰ These arguments simply ignore the fact that Enron's situation is very different from any other company that has been granted a temporary exemption.

This case can be readily distinguished from AES II. At the time AES was granted a temporary exemption, its character was known: previously, the Commission had granted the holding company a permanent exemption and, before granting a temporary exemption, the Commission found that AES was still primarily engaged in the "exempt utility" business. The temporary exemption allowed AES time to comply with the size requirement while it "traded" its Illinois public utility company for an Indiana public utility company.

By contrast, as discussed above, Enron does not now meet and never has met any of the requirements of sections 3(a)(3) or 3(a)(5). The basic character of Enron, the holding company, is unknown. Enron has not shown that it is only "incidentally a holding company": no functional relationship exists between Portland General and another Enron subsidiary. Enron, because it was unable to comprehensively identify or describe its assets or subsidiaries, did not show that it is primarily engaged in exempt utility businesses (or any other type of operating business, for that matter). Further, having provided so little information regarding the absolute and relative size of Portland General, Enron failed to establish that Portland General is not a material subsidiary.

The Commission rarely grants temporary exemptions. In recent years, the Commission has done so only when a holding company almost qualifies for exemption, and when the temporary exemption is closely related to achieving the purposes of the Act. As discussed below, by contrast, Enron is seeking a temporary exemption to achieve goals under other laws and regulatory schemes and because it finds it inconvenient and potentially expensive to be subject to the Act. These reasons cannot be sufficient to warrant the grant of a temporary exemption.

Lastly, contrary to Enron's protests, the Chief ALJ did not consider any of Enron's allegedly bad acts in her Initial Decision. As stated above, the Commission set Phase I of the hearing to determine only whether Enron meets the objective criteria for exemption. Alleged bad acts by Enron, if any, may be relevant only if it were determined necessary to proceed to Phase II of the hearing to determine whether granting an exemption would be detrimental to the public interest or the interest of investors or consumers.⁷¹

C. Enron's Proposed New Criteria For Sections 3(a)(3) And 3(a)(5) Exemptions Must Be Rejected.

According to Enron, the Commission should disregard requirements for exemption, derived from both the plain language of sections 3(a)(3) and 3(a)(5) and precedent, because: (1) Enron is being monitored by the Bankruptcy Court; (2) Enron has said that it plans to cease to be a holding company; (3) the Division has not shown that the registration of Enron will advance the interests protected by the Act⁷²; and (4) regulation as a registered holding company will be costly to Enron. Enron's approach conflicts with the expressed will of Congress.

1. Bankrupt Holding Companies Are Not Exempt From The Act.

The mere pendency of a bankruptcy proceeding and the associated supervision of the debtor by the bankruptcy court neither renders regulation under the Act unnecessary nor provides a basis for granting a temporary exemption under the Act. Congress could have easily exempted all bankrupt holding companies from the Act, but it did not.

In fact, Congress did just the opposite: the Act prescribes more -- not less -- Commission oversight when holding companies required to register file for bankruptcy. For example, sections 11(f) and 11(g) of the Act, which deal with bankrupt holding companies, assigns the Commission a unique and central role in the bankruptcy reorganization of a registered holding company.⁷³

2. Enron's Bankruptcy Plan Is Speculative And Irrelevant.

On July 15, 2003, Enron filed a motion ("Motion") seeking leave to adduce additional evidence, including its joint chapter 11 plan filed on July 11, 2003 ("Plan"). Although the Commission has not yet ruled on the Motion, Enron argues in the Brief that the Plan provides a rationale for exemption. Enron points out that the Plan calls for the eventual sale of Portland General, suggests that the Plan (as filed) describes its ultimate fate, and then argues that because it will cease to be a holding company (after the sale of Portland General), the Commission should grant it an exemption. This analysis is fatally flawed.

The Plan is speculative in at least two respects. First, the Plan provides no certainty as to when Portland General may be sold, which is the key event from the perspective of the Act. No purchaser or sale date is identified in the Plan. Moreover, Enron has stated that it has not determined how to handle the disposition (if any) of Portland General under the Plan.⁷⁴

Second, the Plan provides little assurance that Portland General will in fact be sold, or otherwise disposed of by Enron. The Plan describes nothing more than one possible ending to the bankruptcy process. As discussed in the Division's Opposition to Enron's Motion (filed July 22, 2003), the Plan -- like all bankruptcy plans -- can change or be rejected outright.⁷⁵ At this point, the Plan has not been sent out to Enron's creditors for a vote, an event that will not happen at least until September 8, 2003, and the Bankruptcy Court has not approved the disclosure statement that must accompany the Plan when it is distributed.

Enron's submission of the Plan to the Bankruptcy Court, then, does not make Enron's or Portland General's future any more certain than it was during the hearing; the proposals in the Plan are just as speculative as they were during the hearing. Enron has owned Portland General for six years at this point, and has been trying to sell the utility for much of that time, both before and after institution of the bankruptcy proceeding.

Intentions are fine, but they cannot serve as the primary basis for exemption. The Act provides that all holding companies, except for those that qualify for exemption, must register. In the event that a registered holding company ceases to be a holding company, Congress provided a means for relief: the holding company may file an application to de-register with the Commission pursuant to section 5(d). The Commission recently issued an order de-registering four holding companies.⁷⁶ If and when Enron sells Portland General, it can avail itself of this relief.

3. The Protected Interests Under The Act Are Served By Enron's Registration.

As a preliminary matter, the burden is on Enron to demonstrate that it qualifies for exemption. Neither the Act nor the Commission's procedural rules require, as Enron suggests, the Division to prove that the interests protected under the Act would be served by the registration of a holding company.⁷⁷ While Congress directed the Commission to interpret the Act "to meet the problems and eliminate the evils enumerated" in section 1 of the Act, see section 1(c) of the Act, it also provided specific criteria for exemption. Neither section 3(a) nor any other provision of the Act authorizes the Commission to exempt a holding company simply because, at the time the request was made, none of the section 1 concerns were present.

That said, the primary problem identified in section 1(b) of the Act persists in Enron: its investors cannot obtain the information necessary to appraise [the company's] the financial position or earning power...." The controls triggered by registration would address that problem directly. Frankly, under the Act, whether Enron is in the process of remedying the problem on its own is irrelevant. If Congress had trusted holding companies to fix themselves, it would not have passed the Act.

4. Economic Costs And Benefits Are Not Factors For Exemption.

The costs that registration might impose on Enron do not provide a reason for exempting it from the Act. Being regulated does impose some costs on the regulated party. The Commission and the staff have always been sensitive to those costs and have attempted to minimize them whenever possible. If the mere existence of costs resulting from regulation warranted an exemption, all holding companies -- not just Enron -- would be entitled to exemptions. Of course, this would be an absurd result.

Moreover, many of the costs that Enron points to are associated with fulfilling reporting obligations under the Act. Given that one of the goals of the Act was to ensure an adequate flow of information from utility holding companies to the investing public, it would be an odd result indeed if Enron, a holding company that admits its finances and records are in chaos and has been unable to provide any useful information to its investors in the recent past, were granted a temporary exemption based on the costs of rectifying this problem.

The financial benefits that Enron asserts could be obtained from a temporary exemption also do not warrant its grant. Enron may be correct that a temporary exemption would increase the value of certain of its assets (primarily its qualifying facilities). However, that impact is a result of choices that the Congress made in passing PURPA- a statute administered by the FERC - and has nothing to do with the regulatory goals of protecting Enron's utility investors and customers that are set forth under the Act. While Enron's creditors likely are investors in a holding company, and thus a protected interest under the Act, they are not the only investors who receive protection under the Act. For example, the holders of Portland General's debt securities are equally entitled to protection under the Act, and actions that Enron takes with respect to Portland General, even in the context of a bankruptcy proceeding, can have a significant impact on their securities. These investors would not benefit in any apparent way through the maximization of the value of Enron's bankruptcy estate. However, if Enron were granted a temporary exemption to which it is not otherwise entitled, these investors would lose the protections of the Act without any corresponding benefit. The same is true of Portland General's utility customers, another key interest protected by the Act - they have little interest in the value of Enron's bankruptcy estate, yet, if Enron is granted a temporary exemption, they risk being harmed in ways that the Act was designed to prevent.

In summary, Enron's rationales for ignoring statutory and caselaw requirements do not rise to the level of broad public policy concerns. In the words of the Chief ALJ: "The reasons Enron offers in support of the applications are based on speculation as to its future actions, a dislike for the provisions of PUHCA, and self-interest."⁷⁸

VI. Responses To Other Petitioners

A. OPUC And NARUC

The OPUC, in its Brief In Support of the Petition for Review ("OPUC Brief"), and NARUC, in its Amicus Brief in Support of the OPUC's Opening Brief in Support of the Petition (filed July 21, 2003), make the essentially same arguments. They advocate the same "reverse pre-emption" argument that Enron advanced: Enron should be found to be predominantly intrastate because Portland General, its sole utility subsidiary, is effectively regulated by the OPUC and is incorporated in Oregon.⁷⁹ This argument fails for the reasons discussed above.⁸⁰ The OPUC and NARUC, however, also offer two curious policy arguments in favor of disregarding the Commission's established 3(a)(1) criteria.

They urge the Commission not to "adopt a policy that creates an incentive for utilities to sell their excess power within the state, which may not be the most effective location for the utility that needs power (or at prices most beneficial to customers) . . . ."⁸¹ They also suggest that, to avoid registration under the Act, Portland General may decide to serve its native load with its "higher cost thermal resources," which it would otherwise sell out of state, instead of cheaper purchased hydroelectric power.⁸² Neither of these arguments have any merit in light of the facts in the record.

With regard to the first argument, Portland General is free to structure its business as it chooses; if it chooses to sell substantial amounts of power outside of Oregon, it must accept that such interstate activity will subject it to Commission regulation. That said, there is no suggestion in the record that selling power within Oregon would be less "efficient" in any respect other than cost. Moreover, neither Enron, which has the burden of proof, nor the OPUC has endeavored to quantify the alleged savings generated by the execution of trades at hubs located outside of Oregon or the alleged costs of registration. It is impossible to conclude, then, that the Commission's settled view of out-of-state sales as interstate activity creates a significant disincentive for Portland General to sell its excess power at out-of-state hubs. Indeed, it may be telling that Portland General has not changed its practices already.

More fundamentally, however, the OPUC has repeatedly assured the Commission that it effectively regulates Portland General and is capable of doing so in the future.⁸³ The Division has no reason to doubt this claim, and believes that the OPUC (and other state agencies) will ensure that Portland General (and other utilities), to serve its native load, will continue to procure least cost power and execute trades at least cost locations regardless of the outcome of this proceeding.⁸⁴

B. EEI

Throughout this proceeding, Enron has urged the Commission to flexibly interpret the provisions of the Act. With respect to section 3(a)(1), Enron insisted that "Contrary to the Division's use of a simple gross revenues comparison to establish character, the Commission's precedent requires what is essentially a `totality of the circumstances' approach to the evaluation of the character of the subject utility business."<sup>85</sup> The Chief ALJ applied "the `flexible' approach that the Commission has used in reference to PUHCA in considering the factors mentioned in prior cases that are present here,"⁸⁶ considering two new factors present in the record: in-state transmission facilities and out-of-state wholesale purchases.⁸⁷

The Chief ALJ's consideration of the totality of the facts and circumstances precipitated criticism by Enron, which simply does not like the outcome, and by EEI, which claims it is fearful of the policy effects of the Initial Decision. Specifically, EEI worries that the Initial Decision: (1) if allowed to stand, will endanger the exemptions of other exempt intrastate electric utility holding companies;⁸⁸ and (2) is inconsistent with certain FERC policy initiatives.⁸⁹ EEI's policy arguments are not supported by the evidence in this case and, in any case, are irrelevant.

Many of EEI's conclusions are unsupported by the evidence in this case. For example, EEI: (1) claims many utilities participate with others in the joint ownership and operation of generating facilities used to serve their native load; and (2) implies that many holding companies are similarly situated to Enron.⁹⁰ EEI cannot support its claims with evidence in the record. Four jointly owned utility generating facilities (Colstrip 3 & 4, Boardman, Round Butte, and Pelton) are mentioned in the record. The other co-owners of these facilities are not identified in the record,⁹¹ and the evidence does not show whether the other co-owners of those facilities use their share of the output to serve native load. It is therefore impossible for the Commission to conclude that "many utilities" are similarly situated to Enron. Moreover, assuming arguendo that "many utilities" jointly own and operate generating facilities, it does not follow that those utilities are affiliated with any public utility holding company. Many utilities are stand-alone companies. It does not follow, then, that the Initial Decision "raises an obstacle to participation by an exempt holding company system in a joint ownership arrangement involving development of generation in neighboring states . . . ."⁹²

In any case, whether the Initial Decision impacts on particular FERC initiatives is not supported by any evidence in the record. Congress directed the Commission to interpret the Act to address the problems and eliminate the evils enumerated in section 1 of the Act.⁹³ No one participating in or commenting on this proceeding has suggested any alternative criteria to the predominantly/substantially test that more adequately address the problems and evils enumerated in section 1.

C. FPL Group

Limited participant FPL Group, Inc., a co-investor with Enron in certain QFs, has urged the Commission throughout this proceeding to grant Enron a temporary exemption pursuant to section 3(a)(3) or section 3(a)(5) to preserve FPL's investments in facilities that enjoy QF status pursuant to the FERC's regulations. As discussed above, a temporary exemption is inappropriate in Enron's case. Furthermore, FPL states that both it and Enron took steps after the Initial Decision was issued to restructure Enron's ownership interests in the QFs to minimize any potential economic harm to FPL that might arise from the Commission's denial of Enron's applications.⁹⁴

FPL devotes the remainder of its Opening Brief to the argument that the record does not contain evidence of any holding company abuses by Enron. To the extent that FPL is advancing the position that such abuses must be found by the Commission as a pre-requisite to registration under the Act, this argument is completely misplaced. The Act is prophylactic in nature. The Act is designed to prevent potential holding company abuses in those contexts where Congress determined they were most likely to occur.

Contrary to the impression FPL gives in its Opening Brief, the Chief ALJ did not make any findings that Enron had already committed holding company abuses. Instead, she perceptively observed that the record contained evidence "of some of the concerns that PUHCA was designed to prevent."⁹⁵ These concerns included, among others, tens of millions of dollars in unpaid debts owed to Portland General from Enron, Enron's pledge of Portland General's common stock to third parties, and the fact that OPUC felt required to place certain (apparently extraordinary) restrictions on Enron's dealings with Portland General, and its recent involvement in reviewing a $20 million special dividend distribution to Enron originating from Portland General's corporate-owned life insurance asset account, a distribution that occurred in 1999.⁹⁶ While proof of holding company abuses (or the potential of such abuses) has never been a requirement of registration, in light of the concerns highlighted in the Initial Decision, against the background of the breathtaking financial scandal that resulted in Enron's admitted inability to provide an accurate financial picture of its own subsidiaries and ownership interests in other assets, there is no doubt that the record in this case is permeated with evidence that raises concerns of the potential of holding company abuses which the Act is specifically designed to prevent.

D. California Edison

Limited Participant California Edison has consistently sought the Commission's determination of the issue of Enron's good faith in filing its QF applications. As is the case with FPL, California Edison's advocacy in this proceeding is motivated by the consequences the Commission's decision may have under the FERC's regulations for the QF status of certain power generating facilities in which Enron had an ownership interest.

Although the Division did not take a position on this issue at the hearing (and does not do so now) the Division has already responded at length to California Edison's argument in the Division's Response to the petitions for review. In lieu of repeating those arguments, the Division respectfully requests that its previous responses to Edison's arguments be incorporated here by reference.⁹⁷

California Edison also argues that its repeated requests to intervene in this proceeding as party were improperly denied, despite being granted leave to participate as a non-party pursuant to Commission Rule of Practice 210(c). In view of its vigorous advocacy of its position in this proceeding both before the hearing officers and now, before this Commission, it is hard to comprehend any injury California Edison has suffered as a result of being granted leave to participate as a non-party participant, and California Edison's Opening Brief does not directly identify any such injury.⁹⁸

California Edison misapprehends the rules governing participation in Commission proceedings. Commission Rule 210(b)(1), "Intervention as a Party," provides, in pertinent part, that:

"No person, however, 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 rule would be inadequate for the protection of his or her interests."

(Emphasis added). Rule 210(c), "Leave to Participate on a Limited Basis," provides, in part:

"In any proceeding, other than an enforcement proceeding, a disciplinary proceeding or a proceeding to review a self-regulatory organization determination, any person may seek leave to participate on a limited basis as a non-party participant as to any matter affecting the person's interests."

Thus, the rules governing intervention in Commission proceedings clearly state a preference for granting motions to intervene on the basis of non-party participation. California Edison, a purchaser of power from certain QFs which may be affected by the Commission's determination of Enron's applications (albeit indirectly through FERC regulations or decisions), was properly admitted as a non-party participant whose interests may be affected by this proceeding. The presiding officer properly exercised his discretion in applying the Commission's rules governing participation to California Edison, and his decisions should be affirmed.⁹⁹

VII. Division's Response to Enron's Motion For Oral Argument

The Division recommends against granting Enron's motion for oral argument. This is a straightforward case. At a minimum, given a record where, as here, the applicant failed to provide any reliable financial data, it is difficult to conceive that the applicant could have possibly carried its burden of showing that it meets the statutory requirements for the applied-for exemptions. This is a simple case, despite Enron's attempt to complicate it and run out the clock on its de facto exemption from registration while its applications are pending before the Commission. The Division respectfully submits that this appeal can and should be decided on papers.

The Division previously requested expedited consideration of this appeal, partly on basis that delay may adversely affect the Commission's ability to exercise its statutorily mandated role in Enron's bankruptcy should the applications be denied. Accordingly, the Division recommends against granting Enron's motion for oral argument, or, alternatively, should the Commission feel that oral argument is necessary to its consideration of this matter, recommends that oral argument be scheduled as expeditiously as possible.

VIII. Conclusion

The record is clear that Enron failed to carry its burden of showing that it is entitled to any of the exemptions for which it has applied. It is perhaps understandable that Enron finds federal regulation inconvenient and burdensome to its business goals. However, in the absence of an exemption applicable to Enron, its registration under the Act is not optional. The costs associated with complying with the law are not a basis for the granting of exemptions under the Act. Enron's arguments in support of its applications essentially ask the Commission to devise a non-statutory "special exemption" for Enron for which there is simply no support in the law.

Accordingly, the Division urges the Commission to affirm the Chief ALJ's Initial Decision denying Enron's Intrastate and QF Applications.

Dated: August 20, 2003.

http://www.sec.gov/rules/other/secim-brief082003.htm