Enron Rulings May Affect Other Companies

Enron rulings may affect other companies

December 01, 2002

By Lynn Hargis

US securities regulators have started investigations, with fast-track hearings, into the validity of Enron’s exemptions from rules governing public utility holding companies.

Meanwhile, US energy regulators are also looking into whether Enron took unjustified actions to avoid restrictions on utility ownership of so-called “QF” power plants. These are power plants from which utilities are required by law to buy electricity. A utility cannot own more than 50% of such a power plant. Enron is treated for purposes of this ownership restriction as a utility since it owns Portland General Electric, an electric utility in Oregon.

The results of these hearings could set bad precedent or even negatively affect the current holding company exemptions of other companies and the qualifying status of other QFs.


The Securities and Exchange Commission and the Federal Energy Regulatory Commission have, respectively, instigated investigations into alleged Enron Corporation activities affecting Enron’s exempt status under the Public Utility Holding Company Act, known as “PUHCA,” Enron’s consequent ability to own more than 50% of its QFs under the Public Utility Regulatory Policies Act, or “PURPA,” and whether FERC should revoke the qualification of certain QFs of which Enron is at least a part owner.

The SEC has set for hearing the question of whether — particularly in light of Enron’s bankruptcy proceeding and the cessation of its power trading activities — Enron is entitled to certain exemptions from the Holding Company Act. Such exemptions allowed Enron to avoid comprehensive regulation of its financial activities and restrictions on its business activities by the SEC under PUHCA. The SEC has also set for hearing Enron’s section 3(a)(1) PUHCA exemption. This is the so-called “single state” exemption and is the one most frequently claimed by parent companies of US utilities. It requires a holding company to be incorporated and to operate primarily as a utility holding company in the same state in which its utility is incorporated and operates. (The purpose is to aid state utility commissions in regulating state utilities owned by holding companies. The thought was that a state commission ought to be able to regulate a holding company on its own where the company’s operations are limited to a single state, while multistate utilities require help from the federal government to regulate effectively.) Enron’s section 3(a)(1) exemption, which has traditionally simply been claimed under an SEC rule without getting a formal order, is being questioned because part of Enron’s utility business is conducted outside the state of Oregon, which is where Enron and its utility (Portland General Electric) are incorporated.

The SEC hearings will also address Enron’s pending applications for other exemptions under sections 3(a)(3) and 3(a)(5) of PUHCA, which were requested specifically to allow Enron to own 100% of QFs. Section 3(a)(3) applies to a company engaging in another business that is only “incidentally” a utility holding company, and section 3(a)(5) — traditionally known as the “foreign holding company” exemption — applies to a holding company that derives no material part of its income from a public utility company in the United States. FERC rules provide that a holding company with either of these two PUHCA exemptions is not “primarily engaged” in the generation or sale of electricity and, therefore, it may own 100% of a QF.

The Federal Energy Regulatory Commission is investigating whether an alleged transfer of Enron’s interest in certain QFs to special-purpose subsidiaries controlled by individuals was a sham transaction designed to evade QF rules while keeping the QFs under Enron’s control. FERC ordered an investigation into whether the QF certification had misrepresented the facts or otherwise failed to meet FERC rules and whether the QFs’ status as qualifying facilities should be revoked retroactively. The order setting the investigation for hearing noted that FERC might take stronger remedial action than it has in the past in the face of intentional misbehavior. In the past, FERC has ordered retroactive refunds but allowed the QF to keep certain exemptions, such as its exemption from PUHCA and state utility laws.

Political Backdrop

The investigations at both commissions appear to have resulted directly from accusations that the two agencies were “asleep at the switch” in their statutory oversight of Enron as a holding company or as a QF owner. These accusations were made at hearings before the Senate Committee on Government Oversight. The committee has been looking into the Enron scandal generally, but also, in particular, into the admissions of former Enron employee Michael Kopper that he and Andrew Fastow, his former boss at Enron, used special-purpose subsidiaries intentionally to evade the FERC ownership rules for certain QFs and for other personal gains. (Enron’s position in the SEC proceeding is that this was a fraud on the company, not by the company.)

A report issued by the Senate committee in conjunction with the hearings discusses the PUHCA exemption questions and the Enron QF ownership issues at length, as did committee members at the hearing. (Four FERC commissioners and their top staff were present at the hearing, which may raise questions about the fairness of the commission’s ultimate decisions.)

The SEC investigation order, which was issued the same day as the Senate committee report criticizing the SEC’s oversight of Enron, specified the unusual procedures of not only setting the matter for a fast-track hearing, but also providing that an SEC commissioner, rather than an administrative law judge, would preside at the hearing. Moreover, the presiding commissioner is a Democratic commissioner (Roel Campos) in a currently highly-politicized SEC.

Status of Proceedings

The SEC investigation is well underway, with the first hearings scheduled for December 5, 2002. So far, the sitting commissioner has refused to allow other parties to participate fully as intervenors, but only to participate on a limited basis.

The SEC hearing has two phases. The first phase will address whether Enron meets the requirements of any of the three PUHCA exemptions on their faces. Even if it does, the second phase will address whether the public interest dictates that the exemptions should nonetheless be denied. Many holding companies that currently have or plan to obtain section 3(a)(1) exemptions, as well as section 3(a)(3) or 3(a)(5) exemptions, may be affected if the outcome of the proceeding is a change in SEC precedent for the criteria necessary for these exemptions.

Southern California Edison has jumped into the proceedings at both agencies to attack its power contracts with QFs that are traceable to Enron. In addition to submitting filings in the SEC and FERC investigations, Edison has also asked FERC to start another proceeding to broaden its investigation into other Enron-owned QFs and to consolidate the “sham” sale question with the PUHCA exemption question. Edison has further asked FERC to determine for itself that Enron’s PUHCA exemption filings at the SEC under sections 3(a)(3) and 3(a)(5) were not made in “good faith” and, therefore, that the QF certifications should be revoked retroactively. (Under PUHCA, a “good faith” application exempts the applicant until the SEC acts on the application.) A number of parties have filed for intervention to protect their rights as the holders of PUHCA exemptions or as the owners of QFs.

Industry Concerns

The haste with which both agencies are acting and the political backdrop to the proceedings, as well as the notoriety of Enron Corporation itself, may lead the agencies to a rush to judgment that could have unintended consequences for other companies with Holding Company Act exemptions or owning qualifying facilities. The SEC hearing probably constitutes the most investigative attention that the agency has paid to the Holding Company Act in two decades. At the FERC, since QF ownership rules are affected by both PUHCA and PURPA, FERC may be tempted to determine the PUHCA “good faith” issue as Edison is urging it to do, despite FERC’s lack of familiarity with that statute or its far-reaching consequences. The old saying that “bad facts (or bad actors) make bad law” may be applicable here.