<PAGE> 1
File No. 70-
--------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form U-1
--------------------------
Application Under
The Public Utility Holding Company Act of 1935
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Enron Corp.
1400 Smith Street
Houston, Texas 77002-7361
(Name of company filing this statement and
address of principal executive offices)
------------------------
None
(Name of top registered holding company parent of each applicant or declarant)
------------------------
Kate B. Cole
Assistant Secretary
Enron Corp.
1400 Smith Street
Houston, Texas 77002-7361
(Names and addresses of agents for service)
--------------------------
The Commission is also requested to send copies of any communications in
connection with this matter to:
Robert D. Eickenroht Joanne Rutkowski
Assistant General Counsel LeBoeuf, Lamb, Greene & MacRae,
Enron Corp. L.L.P.
1400 Smith Street, E.B. 4859 1875 Connecticut Avenue, N.W.
Houston, Texas 77002-7361 Washington, D.C 20009-5728
<PAGE> 2
TABLE OF CONTENTS
Item 1. Description of Proposed Transaction
Item 2. Fees, Commissions and Expenses
Item 3. Applicable Statutory Provisions
Item 4. Regulatory Approval
Item 5. Procedure
Item 6. Exhibits and Financial Statements
Item 7. Information as to Environmental Effects
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
(a) Furnish a reasonably detailed and precise description of the
proposed transaction, including a statement of the reasons why it is desired to
consummate the transaction and the anticipated effect thereof. If the
transaction is part of a general program, describe the program and its relation
to the proposed transaction.
Enron Corp. ("Enron"), a public-utility holding company that is
exempt from registration pursuant to Rule 2 under Section 3(a)(1) of the
Public Utility Holding Company Act of 1935 (the "1935 Act" or "Act"), is
seeking an order of the United States Securities and Exchange Commission
("Commission") finding that Enron is exempt from all provisions of the Act,
other than Section 9(a)(2), pursuant to Section 3(a)(3) or, in the alternative,
Section 3(a)(5) of the Act.(1)
A. Background
1. Enron Corp.
Enron is one of the world's leading electricity, natural gas
and communications companies. The company, which owns approximately $34 billion
in energy and communications assets, produces electricity, develops, constructs
and operates energy facilities worldwide, delivers physical commodities and
financial and risk management services to customers around the world and is
developing an intelligent network platform to facilitate online business. Enron
operates through three principal business units: (1) Transportation and
Distribution; (2) Wholesale Energy Operations (including broadband services);
and (3) Retail Energy Services.
Transportation and Distribution - This group includes
Portland General Electric Company ("Portland General") and Enron's Gas Pipeline
Group. The Gas Pipeline Group operates a 32,000-mile interstate natural gas
pipeline network, with access to every major gas supply basin in North America.
The network directly serves customers in 21 states.
Wholesale Energy Operations - Enron's wholesale group
consists of two primary lines of business: Commodity Sales and Services
(marketing energy commodities and services and managing the associated contract
portfolios) and Energy Assets and Investments (investing in, developing,
constructing and operating energy and other assets). Enron is the largest
supplier of electricity and natural gas in North America. Enron also operates
extensively in the wholesale electricity markets in Northern Europe and the
United Kingdom. In Central America, South America, India, China and other parts
of Asia, Enron develops and operates energy infrastructure, including gas
pipelines and power plants. Enron's wholesale energy operations and services
business is conducted principally through Enron North America.
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(1)
Enron, which is currently exempt pursuant to Rule 2 under Section 3(a)(1) of
the Act, will undertake to continue to file a Form U-3A-2 during the pendency
of this application or until Portland General is divested.
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Retail Energy Services - Enron offers comprehensive products
to reduce energy costs for business customers throughout the United States and
Europe. Enron provides energy outsourcing services to industrial and commercial
customers. Enron has built strong sales and implementation teams for the energy
outsource market and now manages over 16,500 facilities worldwide. Enron's
retail energy services are provided principally through Enron Energy Services.
Enron also participates in the water and telecommunications
industries. Through Azurix, Enron owns and operates water companies in the
United Kingdom, Argentina and Mexico. Enron Broadband Services is developing an
intelligent fiber optic network platform to facilitate online business in the
United States.
(2)
The table below provides selected financial data for Enron:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C>
Operating Revenues 40,112 31,260 20,273 13,289 9,189
Net Operating Income 802 1,378 15 690 618
Net Income 893 703 105 584 520
Total Assets 33,381 29,350 22,552 16,137 13,239
</TABLE>
Enron is a public utility holding company within the meaning
of the 1935 Act, by reason of its ownership of all of the outstanding voting
securities of Portland General. As noted above, Enron currently claims
exemption from registration pursuant to Rule 2 under Section 3(a)(1) of the
Act. Enron's stock is listed on the New York, London, Pacific and Chicago Stock
Exchanges, and it is a reporting company under the Securities Exchange Act of
1934, as amended.
2. Portland General Electric Company
Portland General is Enron's only public-utility subsidiary
company. Portland General is engaged in the generation, purchase, transmission,
distribution and sale of electric energy in Oregon. Portland General's electric
distribution system is located within its service territory in Oregon. Portland
General serves an area of 3,170 square miles, including 54 incorporated cities,
of which Portland and Salem are the largest.
Portland General sells electric energy at wholesale in
interstate commerce to electric utilities located in other states, primarily
California. Portland General purchases electric energy from public utility
districts located in Washington and from nonassociated utilities in Oregon,
Washington, Montana, Idaho, Arizona, New Mexico, California and Canada.
Portland General purchases surplus electric energy from the Bonneville Power
Administration ("BPA"), a federal agency that markets electric energy
generated by federal hydroelectric dams located on the Columbia River in
Oregon and Washington.
- ------------------------
(2)
From Enron's Form 10-K filings.
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Portland General owns wholly or jointly the following
generating facilities:
<TABLE>
<CAPTION>
PERCENT OF
NET CAPABILITY COMPANY'S
NAME LOCATION (MW) INTEREST FUEL
- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sullivan West Linn, OR 16 100.0 Hydro
Faraday Estacada, OR 44 100.0 Hydro
River Mill Estacada, OR 25 100.0 Hydro
Bull Run Bull Run, OR 22 100.0 Hydro
Oak Grove Three Lynx, OR 44 100.0 Hydro
Pelton Madras, OR 108 100.0 Hydro
North Fork Estacada, OR 54 100.0 Hydro
Round Butte Madras, OR 300 100.0 Hydro
Beaver Clatskanie, OR 500 100.0 Gas or Oil
Boardman Boardman, OR 529 65.0 Coal
Colstrip 3&4 Colstrip, MT 1,480 20.0 Coal
Coyote Springs Boardman, OR 241 100.0 Gas or Oil
</TABLE>
Portland General has transmission lines for the delivery of
electricity from its plants located in Oregon to its service territory or to
the Northwest grid. Electric energy from the plants located in other states is
delivered to Portland General over the Northwest grid. Portland General owns
20% of the Pacific Northwest Intertie, a 4,800 MW transmission facility between
John Day, in Northern Oregon, and Malin, in Southern Oregon near the California
border. This line is used primarily for interstate sales and purchases of
electric energy among BPA, utilities in the Pacific Northwest, including
Portland General, and California utilities.
Portland General also has a 90% ownership interest in a 20
inch diameter natural gas pipeline that runs approximately 18 miles from its
Beaver generating plant, located in Clatskanie, Oregon, to Cowlitz County
Washington where it interconnects with the interstate gas distribution system
of Northwest Pipeline Company.
Portland General is subject to regulation of its retail rates
and conditions of service by the Oregon Public Utility Commission ("OPUC"). In
addition, the OPUC regulates the issuance of securities and prescribes the
system of accounts to be kept by Oregon utilities. Portland General is also
subject to the jurisdiction of the FERC with regard to the transmission and
sale of wholesale electric energy, licensing of hydroelectric projects and
certain other matters. Portland General is decommissioning its Trojan nuclear
generating facility, and related activities are subject to regulation by the
Nuclear Regulatory Commission and the Oregon Department of Energy.
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(3)
The table below provides selected financial data for Portland General:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C>
Operating Revenues 1,378 1,176 1,416 1,110 982
Net Operating Income 190 200 208 230 201
Net Income 128 137 126 156 93(4)
Total Assets 3,167 3,162 3,256 3,398 3,246
</TABLE>
Enron acquired Portland General on July 1, 1997 by merger
with its former parent Portland General Corporation. The acquisition
implemented Enron's strategy of participating in the deregulating electric
utility industry. Enron's affiliation with Portland General has given it
insight and access to new business opportunities in the broader energy
industry. For example, Portland General has leveraged its technical
competencies into Enron's worldwide operations through projects such as
generation, consulting, distribution engineering and due diligence for
privatization. As Enron has built a platform for its integrated gas and
electricity business in South America, Portland General has provided valuable
expertise in evaluating regional electric distribution assets that complement
Enron's strategy.
On November 8, 1999, Enron and Sierra Pacific Resources
("Sierra Pacific") announced that they had entered into a purchase and sale
agreement for Portland General. In a press release issued that day, Kenneth L.
Lay, the Chairman and CEO of Enron, explained: "We have been very pleased with
the performance of Portland General. However, the rapidly evolving competitive
electricity market allows us to deliver commodity services and risk management
products to our customers without requiring the ownership of a regulated
electric utility." The pending sale of Portland General is the subject of a
separate application before the Commission, discussed below.
3. Sale of Portland General to Sierra Pacific
Enron has entered into a definitive agreement to sell
Portland General to Sierra Pacific for $2.1 billion, comprised of $2.02 billion
in cash and the assumption of Enron's approximately $80 million merger payment
obligation. Sierra Pacific will also assume $1 billion in Portland General debt
and preferred stock. The proposed transaction, which is subject to customary
regulatory approvals, is expected to close in the second half of 2000.
Sierra Pacific is currently an exempt holding company under
Section 3(a)(1) of the Act whose principal subsidiaries are Sierra Pacific
Power Company and Nevada Power Company. Combined, the two public-utility
companies serve 843,000 electric customers in Nevada and the Lake Tahoe area of
California, along with 105,000 natural gas and 67,000 water customers in Reno
and Sparks, Nevada. Upon the acquisition of Portland General, Sierra Pacific
intends to register under the Act.
- ------------------------
(3)
From Portland General's Form 10-K filings
(4)
Includes a loss of $50 million from regulatory disallowances.
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Additional information regarding Enron and its subsidiaries,
including Portland General, is set forth in the following documents, each of
which is incorporated herein by reference:
(a) Enron Form U-3A-2, filed with the Commission on
February 29, 2000;
(b) Enron Form U-3A-2\A, filed with the Commission on
March 31, 2000;
(c) Enron Annual Report on Form 10-K for year ended
December 31, 1999, filed with the Commission on March 30, 2000;
(d) Enron Proxy Statement, dated March 28, 2000, filed
with the Commission on March 21, 2000;
(e) Enron Annual Report to Stockholders for the year
ended December 31, 1999; and
(f) Portland General Annual Report on Form 10-K for year
ended December 31, 1999, filed with the Commission on March 3, 2000.
Additional information regarding the sale of Portland General
to Sierra Pacific is set forth in the following documents, each of which is
incorporated herein by reference:
(a) Form U-1 Application or Declaration of Sierra
Pacific Resources and Portland General Electric Company (Commission File No.
70-9619), filed February 3, 2000 (the "Merger Application");
(b) Form U-1 Application or Declaration of Sierra
Pacific Resources and Portland General Electric Company (Commission File No.
70-9621), filed February 3, 2000 (the Service Company Application);
(c) Joint Application of Sierra Pacific Power Company,
Nevada Power Company and Portland General Electric Company for Authorization
and Approval of Acquisition and Indirect Merger, filed March 3, 2000 (the FERC
Application).
B. Reasons Enron Is Seeking An Alternative Exemption
As noted above, Enron is currently exempt by rule pursuant to
Section 3(a)(1). It is seeking alternative relief under Section 3(a)(3) or
3(a)(5) as a means of obtaining relief from the "qualifying facility" or "QF"
ownership restrictions under the Public Utility Regulatory Policies Act of 1978
("PURPA"). Briefly stated, the regulations under PURPA generally limit
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an electric-utility holding company to no more than 50% equity interest in a
QF.(5) To date, the PURPA ownership restrictions have significantly impaired the
ability of Enron to participate in competitive auctions of U.S. generating
assets. There is, however, an exception (relied upon by AES Corporation) for
holding companies that are exempt "by rule or order" under Section 3(a)(3) or
3(a)(5) of the 1935 Act.(6) For the reasons set forth below, Enron believes it
is entitled to an order of exemption under either or both sections.
It may help to put Enron's concerns in context. Since 1997,
entities controlling more than 5,000 MW of QF capacity -- or almost 10% of the
nation's entire QF infrastructure -- have undergone changes of control, largely
by means of competitive auctions. Enron has been disadvantaged in the great
majority of these auctions, either because more than a 50% interest in a QF was
being sold, or because the QF was already partially owned by electric utility
affiliates. Most auctions to date have involved groups of QFs; although the
ownership restrictions may present problems with only a small portion of the
assets in a group, sellers typically prefer to transfer ownership in a single
transaction, often as a stock sale rather than an asset sale. Thus, Enron has
effectively been precluded from participating in auctions even though the QF
ownership restrictions would present a problem only with respect to a small
part of the assets being sold.
The nation's supply of QF generating assets is not expanding.
PURPA-related new project development declined with the passage of the Energy
Policy Act of 1992, and now has virtually ceased. While there is currently more
than 75,000 MW of new capacity under development or construction, all of it
will be owned by exempt wholesale generators or regulated utilities.
Nonetheless, there is in place today more than 50,000 MW of installed QF
capacity, most placed in service between 1982 and 1992, and most financed by
long-term, often fixed-price power supply contracts with regulated utilities.
As the electricity industry has evolved competitively, these assets have tended
to move -- as assets do in deregulation -- to lower-cost, more efficient
managers. This process has often involved the restructuring or termination of
fixed-price contracts, allowing the assets to be operated in an economical,
market-responsive manner. Increasingly, smaller QF operators are selling their
projects through auctions to larger companies (including, potentially, Enron)
that have the financial capability to accomplish the contract restructurings
and to operate the QFs as merchant plants. Enron's goal, in seeking to
participate more fully in the auction of QF assets, is to restructure the
contracts, thereby reducing the total number of above-market QF contracts and
the total stranded costs to be borne by the public as a result of competition.
- -------------------
(5)
A QF cannot be owned by a person that is primarily engaged in the generation
or sale of electric power. 16 U.S.C. Section 796(18)(B). The PURPA regulations
provide that a facility "shall be considered to be owned by a person primarily
engaged in the generation or sale of electric power, if more than 50 percent of
the equity interest is held by an electric utility, or utilities, or by an
electric utility holding company or companies, or any combination thereof." 18
C.F.R. Section 292.206(b).
(6)
18 C.F.R. Sections 292.206(c)(1) and (c)(2).
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Enron either has not participated in these auctions or else
withdrew relatively early in the auction process, due in large part to the
company's regulatory disadvantages. In the few cases in which Enron has
purchased QF interests -- which, to date, has occurred only through negotiated
transactions, rather than the competitive auctions that have become the
industry's primary method of asset transfer -- Enron has been required to limit
its ultimate ownership interest. While Enron has successfully structured some
QF purchases using nonutility financial partners, this approach has materially
increased the cost of the transactions and accordingly has reduced the degree
of cost mitigation that Enron can offer to the utilities and to the public.
(b) Describe briefly, and where practicable state the approximate
amount of, any material interest in the proposed transaction, direct or
indirect, of any associate or affiliate of the applicant or declarant company
or any affiliate of any such associate company.
See Item 1.
(c) If the proposed transaction involves the acquisition of securities
not issued by a registered holding company or subsidiary thereof, describe
briefly the business and property, present or proposed, of the issuer of such
securities.
Not applicable.
(d) If the proposed transaction involves the acquisition or
disposition of assets, describe briefly such assets, setting forth original
cost, vendor's book cost (including the basis of determination) and applicable
valuation and qualifying reserves.
Not applicable.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
(a) State (1) the fees, commissions and expenses paid or incurred, or
to be paid or incurred, directly or indirectly, in connection with the proposed
transaction by the applicant or declarant or any associate company thereof, and
(2) if the proposed transaction involves the sale of securities at competitive
bidding, the fees and expenses to be paid to counsel selected by applicant or
declarant to act for the successful bidder.
Legal fees in connection with the preparation of the
Application (to be filed by amendment)
(b) If any person to whom fees or commissions have been or are to be
paid in connection with the proposed transaction is an associate company or an
affiliate of the applicant or declarant, or is an affiliate of an associate
company, set forth the facts with respect thereto.
Not applicable.
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ITEM 3. APPLICABLE STATUTORY PROVISIONS
(a) State the section of the Act and the rules thereunder believed to
be applicable to the proposed transaction. If any section or rule would be
applicable in the absence of a specific exemption, state the basis of
exemption.
Section 3 of the Act provides that the Commission upon
application shall by order exempt any person from the provisions of the Act if
such person meets the requirements for any exemption contained in Sections
3(a)(1) through 3(a)(5) and if the exemption is not detrimental to the public
interest or the interest of investors or consumers. Section 3(a)(3) of the Act
is applicable to Enron because Enron is "only incidentally" a holding company,
as it currently is, and will remain, primarily engaged and interested in
non-utility businesses, and will not derive a material part of its income from
a public-utility company. Accordingly, Enron is entitled to an exemption from
all the provisions of the Act, except Section 9(a)(2), pursuant to Section
3(a)(3). In the alternative, Enron is also entitled to an exemption under
Section 3(a)(5) of the Act.
During the pendency of this application, Enron is entitled to
an exemption pursuant to Section 3(c) of the Act. That section, in pertinent
part, provides that: "The filing of an application in good faith under [Section
3(a)] by a person other than a registered holding company shall exempt the
applicant from any obligation, duty, or liability imposed in this title upon
the applicant as a holding company until the Commission has acted upon the
application."
A. Section 3(a)(3)
Enron satisfies the requirements for an exemption under
Section 3(a)(3) of the Act. That section directs the Commission:
[to] exempt any holding company, and every subsidiary company
thereof as such, from any provision or provisions of [the
Act], unless and except insofar as it finds the exemption
detrimental to the public interest or the interest of
investors and consumers, if such 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.
Of interest here, Section 3(a)(3)(A) provides an exemption for a holding
company that 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," where the holding company does not derive, "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."
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Enron's interest in Portland General fits comfortably within
the exemption provided by Section 3(a)(3)(A). Enron is primarily engaged and
interested in its nonutility energy, water and communications businesses.
Enron's acquisition of Portland General was designed to provide a strategic
foothold in the deregulating utility industry. Its experience with Portland
General has contributed positively to Enron's other nonutility businesses.
Portland General is not a material subsidiary of Enron within the meaning of
the Act and, finally, the proposed exemption will not be detrimental to
investors or consumers.
1. Enron is Only Incidentally a Holding Company.
Section 3(a)(3) was added to the text of the 1935 Act to
accommodate companies such as Alcoa, which were "essentially industrial,
generating power for their own use and selling the excess to the local
community."(7) In this regard, the Commission has interpreted Section 3(a)(3) to
require the showing of a nexus between the utility operations and the holding
company's primary nonutility business. Over the years, the Commission's
interpretation of "incidental" in the context of Section 3(a)(3) has tracked
its then-current interpretation of similar language in Section 11(b)(1). Under
that section, a registered holding company is generally limited to "such other
businesses as are reasonably incidental, or economically necessary or
appropriate" to the system's core utility operations. The Commission has read
this provision to require an operating or "functional relationship" between the
utility operations and the holding company's primary nonutility business.
Over the years, the test of "functional relationship" for
registered holding companies has evolved from a requirement that the nonutility
activity directly serve the needs of the operating utility to a more general
concern that the proposed activity be in some way related, or not unrelated, to
the larger energy business. To that end, the Commission has found that "certain
activities are an integral part of the contemporary utility business."(8) These
activities include the rendering of energy management services and demand-side
management service; the brokering and marketing of energy commodities; the
production, sale and distribution of thermal energy products; the sale of
technical, operational, management and other similar kinds of services and
expertise; the development, ownership and operation of "qualifying facilities"
under PURPA; and, for gas registered companies, any activities involving the
transportation or storage of natural gas and activities such as exploration,
development, production, marketing and manufacture related to the supply of
natural or manufactured gas.(9)
- -----------
(7)
Statement of Sen. Wheeler, 79 Cong. Rec. 8843 (1935); see also Hearings
before the Committee on Interstate and Foreign Commerce, House of
Representatives, on H.R. 5423, 74th Cong., 1st Sess. 2226 (citing the case of an
industrial establishment that has a power plant of its own and distributes the
power as a by-product).
(8)
Exemption of Acquisition by Registered Holding Companies of Securities of
Nonutility Companies Engaged in Certain Energy-Related and Gas-Related
Activities, Holding Co. Act Release No. 26667 (Feb.14, 1997).
(9)
See Rule 58 under the Act.
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Most recently, the Commission has authorized a registered
coal-fired electric utility holding company to invest up to $800 million in
natural gas production, gathering, processing, storage and transportation
facilities and equipment, liquid oil reserves and storage facilities, and
associated facilities, on the theory that such assets are related to the
parent's energy marketing activities, and registered gas utility holding
companies are permitted to acquire a long list of "energy-related companies" --
regardless of whether the acquired nonutility business directly serves the
system's core utility operations.(10)
As noted above, Enron's affiliation with Portland General has
given it insight and access to new business opportunities in the broader energy
industry. For example, Portland General has leveraged its technical
competencies into Enron's worldwide operations through projects such as
generation, consulting, distribution engineering and due diligence for
privatization. As Enron has built a platform for its integrated gas and
electricity business in South America, Portland General has provided valuable
expertise in evaluating regional electric distribution assets that complement
Enron's strategy. The fact that Enron is now seeking to sell Portland General
in response to changes in "the rapidly evolving competitive electricity market"
does not affect the validity of the underlying functional relationship. Against
this background, Enron is "only incidentally" a holding company, within the
meaning of Commission precedent.
2. Enron will Not Derive a Material Part of its Income
from Portland General
The further question, which is common to both Section 3(a)(3)
and 3(a)(5), is the requirement that the holding company not derive "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." Historically, the Commission has required that the utility operations
be both small in a relative sense (i.e., not material), and small in an
"absolute" sense.(11)
Concerning materiality, the Commission can consider a variety
of measures in determining what is a material part of income. In practice,
however, the Commission has generally relied on a comparison of gross revenues
(the "gross-to-gross" test). AES Corporation, Holding Co. Act Release No. 27063
(Aug. 20 1999). Although AES involved an exemption under Section 3(a)(5), the
Commission explained, "Since the same language (`material part of its income')
appears in all three exemptions involving relative size criteria of an
applicant's public-utility subsidiaries, i.e., sections 3(a)(1), 3(a)(3) and
3(a)(5), it obviously makes sense to take a consistent approach to the
interpretation of this language."
- ---------------
(10)
American Electric Power Co., Holding Co. Act Release No. 26933 (Nov. 2,
1998).
(11)
AES Corporation, Holding Co. Act Release No. 27063 (Aug. 20, 1999).
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The Commission in AES compared the relative size of the
utility and the holding company post-merger, based on gross revenues, operating
income and net assets (in $millions):
AES & CILCO CILCO PERCENT
----------- ----------- -----------
Gross Revenues 1996 1,676 524 31%
1997 2,603 553 21%
1998 4,199 538 13%
Operating Income 1996 456 96 21%
1997 706 103 15%
1998 1,089 93 9%
Net Assets 1996 5,162 1,036 20%
1997 11,218 1,023 9%
1998 13,164 1,024 8%
In AES, the Commission found a subsidiary that contributed 10.35% of the
holding company's adjusted revenues was not material for purposes of exemption
under Section 3(a)(5).
In comparison, Portland General has contributed less than 4%
of Enron's gross revenues for each of the two past years:
<TABLE>
<CAPTION>
1998 1999
------------------------------------- -------------------------------------
Enron Portland % Enron Portland %
----- General ----- ------ General -----
--------------- ---------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues 31,260 1,176 3.8% 40,112 1,378 3.4%
Operating Income 1,378 200 14.5% 802(12) 190 23.7%
Assets 29,350 3,162 10.8% 33,381 3,167 9.5%
</TABLE>
- ---------------
(12)
The operating income for Enron decreased for the fiscal year ended December
31, 1999 compared to the fiscal year ended December 31, 1998 for two principal
reasons: (a) in 1999, Enron recognized a one-time charge of $441 million
related to the impairment of its methyl tertiary butyl ether (or MTBE)
facilities, in response to changes in market conditions and demand for MTBE and
(b) in 1999, more of Enron's earnings were recorded in "equity in earnings
of unconsolidated equity affiliates" than in 1998 ($309 million compared to
$97 million). These earnings represent similar kinds of activities to those
included in operating income, but they are recorded by entities in which Enron
owns directly or indirectly less than 50%, so Enron records only one line item
for its share of their net income. In AES, the Commission found that a pro rata
consolidation of financial data provided a more appropriate representation of
the size of the system's utility business than the equity accounting required by
generally accepted accounting principles. In this matter, if the $309 million
recorded in "equity in earnings of unconsolidated equity affiliates" were
included in operating income, Portland General's contribution to operating
income would be reduced to 17.1%. Further, but for the MTBE write-off, which
is a one-time event, Portland General would represent only 12.2% of Enron's 1999
operating income.
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Accordingly, Portland General is not a material utility subsidiary within the
meaning of Commission precedent.
3. The Proposed Exemption will Not be Detrimental to
the Protected Interests.
Notwithstanding an applicant's compliance with the language
of the statute, the Commission has discretion to deny an exemption if it finds
the exemption "detrimental to the public interest or the interest of investors
or consumers," the so-called "protected interests" under the Act. In this
regard, the Commission in the past has imposed an additional condition that the
utility operations of Section 3(a)(3)-exempt holding companies be "small in an
absolute as well as a relative sense."(13) The limitation was imposed in early
cases to address the situation in which "any public utility holding company
could insulate itself from the Act by acquiring and holding the stocks of
companies doing some business other than that of a retail utility business."(14)
The Commission in AES stated that: "This approach is intended to ensure that
the exemption is not available to a company with a large utility business and a
total business that is predominantly nonutility in nature just because the
nonutility holdings dwarf the utility operations."
It bears repeating that the Commission developed the absolute
size standards in matters involving ownership of multiple public-utility
companies formed prior to the Act which were sprawled across multiple states,
some not subject to even minimal state regulation, and others which, by their
nature, could not be the subject of effective regulation. In contrast, in the
instant matter, the utility operations are confined to a single state.(15)
Further, Enron currently qualifies for exemption as an intrastate holding
company, an exemption that is premised on the state's ability to effectively
regulate the utility operations within its borders. Accordingly, the
considerations that led the Commission to apply a restrictive gloss to Sections
3(a)(3) and 3(a)(5) do not apply to this Application. Indeed, the intrastate
size and scope of Portland General's utility operations reflect decades of
effective regulation, not an absence of regulation.
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(13)
Electric Bond and Share Co., 33 S.E.C. 21 (1952), quoting Standard Oil Co.,
10 S.E.C. 1122, 1129 (1942)
(14)
Id.
(15)
Cf. AES and Gaz Metropolitain, Inc. Holding Co. Act Release No. 26170 (Nov.
23, 1994) (granting exemptions under Section 3(a)(5) to holding companies with
essentially intrastate operations).
14
<PAGE> 15
Finally, the Commission in AES noted that the utility was
"significantly larger" than the utility considered in the only other modern
decision under Section 3(a)(5) (or 3(a)(3)).(16) The Commission nonetheless
concluded that the utility in AES nonetheless met the "absolute size" standard
because it was "significantly smaller," in terms of its impact (rather than its
absolute size), than the utilities found to be impermissibly large in early
decisions. In this matter, although Portland General is the largest
investor-owned utility in Oregon, this analysis excludes BPA and other public
power agencies and cooperatives. BPA is larger in all relevant respects than
any of the investor-owned utilities in the Portland General region.(17) Further,
Portland General is comparable to the utility at issue in AES in terms of the
relative significance of the utility's revenues, assets and customers.(18)
B. Section 3(a)(5)
Briefly stated, Section 3(a)(5) of the Act provides an
exemption where a 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."
There are only two modern decisions addressing the
application of Section 3(a)(5). In its 1994 Gaz Metropolitain decision, the
Commission granted an exemption to a Quebec corporation that acquired a Vermont
gas utility company. More recently, in last summer's AES decision, the
Commission granted the exemption to a U.S. independent power producer that
acquired an Illinois electric and gas utility company. In that matter, the
Commission stated that a request for exemption under Section 3(a)(5) raised
three issues:
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(16)
See AES, citing Gaz Metropolitain, Inc. (revenues of $38 million). Portland
General is smaller in absolute terms than the utility at issue in the pending
filing by Chevron Corporation for an order under Section 3(a)(3) of the Act. See
Chevron Corporation, Post-Effective Amendment No. 1 to SEC File No. 70-9553.
Illinois Power Company, a combination gas and electric utility company, reported
operating revenues of $1,903.2 million and net operating revenues of $1,125.8
million, for the year ended December 31, 1999. In comparison, Portland General
had operating revenues of $1,378 million and net operating revenues of $740
million of the same period. While we recognize that the Commission has not yet
acted on the Chevron request for exemption, we believe that this information is
germane to our filing.
(17)
BPA, which generates 46% of the electric power consumed in the region, owns
one of the world's largest high-voltage transmission systems. BPA had operating
revenues of $2,313 million in 1998.
(18)
In 1997, for example, Portland General accounted for only 0.6% of total
utility revenues of all utility companies, 0.5% of total assets for the same
group, and 0.5% of total national utility customers. These rankings are slightly
higher than those of CILCO, the utility at issue in AES, which represented
0.2%, 0.2% and 0.3% of national revenues, assets and customers respectively,
but lower than those of Illinois Power Company, the utility at issue in the
Chevron application, which represented 0.7%, 1.1% and 0.7% of the national
totals.
15
<PAGE> 16
First, it is necessary to examine the significance of the
utility operations that AES will acquire to determine if they
are small in a relative sense (i.e., not material). Second,
we must consider whether they are small in an absolute sense.
Finally, we must consider whether a company such as AES, that
is not an essentially foreign public-utility holding company,
can qualify for the exemption. We examine these issues in the
context of the abuses that the Act was intended to address.
The first and second issues, concerning the relative and absolute size of the
utility operations, have been discussed above. What remains is the application
of Section 3(a)(5) to an entity such as Enron that is not "essentially
foreign."
In AES, the Commission departed from earlier cases that had
held that, in order to qualify for an exemption under Section 3(a)(5), an
applicant must be a U.S. holding company with "essentially foreign utility
operations."(19) The Commission explained:
. . . we do not, however, believe that it is necessary to
limit the section 3(a)(5) exemption to a U.S. holding company
whose operations are essentially foreign to achieve the
policy objectives of the Act. On the facts of this matter, a
grant of exemption is consistent with the underlying
rationale of the exemption and the Act's legislative history
(including subsequent amendments to the Act). Following the
acquisition of CILCO, AES will be a U.S. holding company that
is essentially engaged in utility businesses that Congress
has determined should not be subject to regulation under the
Act. Just as Congress determined that the public interest
does not require regulation of public-utility 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 are exclusively exempt, except for a small
domestic utility.
As in the case of AES, Enron is "a U.S. holding company that
is essentially engaged in utility businesses that Congress has determined
should not be subject to regulation under the Act." Although Enron is one of
the world's largest energy providers, the vast majority of its activities,
including energy trading (which does not fall within the definition of an
electric or gas utility company), gas transportation (which is not included in
the definition of a gas utility company) and the development of independent
power projects (which are exempt as "QFs" under PURPA or as "exempt wholesale
generators" or "foreign utility companies" under the Energy Policy Act of
1992), are utility businesses that Congress has determined should not be
subject to regulation under the Act. It is appropriate, therefore, and
consistent with the precedent for the Commission to grant Enron an exemption
under Section 3(a)(5) of the Act.
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(19)
AES, citing Cities Service Co., 8 S.E.C. 318 (1940) and Electric Bond and
Share.
16
<PAGE> 17
(b) If an applicant is not a registered holding company or a
subsidiary thereof, state the name of each public utility company of which it
is an affiliate, or of which it will become an affiliate as a result of the
proposed transaction, and the reasons why it is or will become such an
affiliate.
Enron is an affiliate of Portland General.
ITEM 4. REGULATORY APPROVAL
(a) State the nature and extent of the jurisdiction of any State
commission or any Federal commission (other than the U. S. Securities and
Exchange Commission) over the proposed transaction.
Not applicable.
(b) Describe the action taken or proposed to be taken before any
commission named in answer to paragraph (a) of this item in connection with the
proposed transaction.
Not applicable.
ITEM 5. PROCEDURE
(a) State the date when Commission action is requested. If the date is
less than 40 days from the date of the original filing, set forth the reasons
for acceleration.
It is requested that the Commission act on this matter in a
timely manner, provided it is Enron's intention that this filing not delay the
Commission's review of the Merger Application.
(b) State (i) whether there should be a recommended decision by a
hearing officer, (ii) whether there should be a recommended decision by any
other responsible officer of the Commission, (iii) whether the Division of
Investment Management may assist in the preparation of the Commission's
decision, and (iv) whether there should be a 30-day waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
The Applicant states that (i) there should be a recommended
decision by a hearing officer, (ii) there should be a recommended decision by
any other responsible officer of the Commission, (iii) the Division of
Investment Management may assist in the preparation of the Commission's
decision, and (iv) there should be a 30-day waiting period between the issuance
of the Commission's order and the date on which it is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits
A Opinion of Counsel (to be filed by amendment)
B Proposed Notice
17
<PAGE> 18
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
(a) Describe briefly the environmental effects of the proposed
transaction in terms of the standards set forth in Section 102(2)(C) of the
National Environmental Policy Act [42 U.S.C. 4232(2)(C)]. If the response to
this term is a negative statement as to the applicability of Section
102(2)(C)in connection with the proposed transaction, also briefly state the
reasons for that response.
The proposed transactions subject to the jurisdiction of this
Commission have no environmental impact in and of themselves.
(b) State whether any other federal agency has prepared or is
preparing an environmental impact statement ("EIS") with respect to the
proposed transaction. If any other federal agency has prepared or is preparing
an EIS, state which agency or agencies and indicate the status of that EIS
preparation.
No federal agency has prepared or, to Enron's knowledge, is
preparing an EIS with respect to the proposed transaction.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned company has duly caused this
Application-Declaration to be signed on its behalf by the undersigned thereunto
duly authorized. The signature of the applicant and of the person signing on
its behalf is restricted to the information contained in this application which
is pertinent to the application of the respective company.
ENRON CORP.
By: /s/ JAMES V. DERRICK, JR.
-------------------------------------
James V. Derrick, Jr.
Executive Vice President &
General Counsel
Date: April 12, 2000
18
<PAGE> 1
Exhibit B
Before the
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Release No. / , 2000
- --------------------------
In the Matter of:
Enron Corp.
1400 Smith Street
Houston, Texas 77002-7361
(70- )
- --------------------------
Enron Corp. ("Enron"), a public-utility holding company that
is exempt from registration pursuant to Rule 2 under Section 3(a)(1) of the
Public Utility Holding Company Act of 1935 (the "Act"), is seeking an order of
the United States Securities and Exchange Commission ("Commission") finding
that Enron is exempt from all provisions of the Act, other than Section
9(a)(2), pursuant to Section 3(a)(3) or, in the alternative, Section 3(a)(5) of
the Act.
Enron currently owns all of the common stock of Portland
General Electric Company ("Portland General"). Enron has entered into a
definitive agreement to sell Portland General to Sierra Pacific Resources
("Sierra Pacific") for $2.1 billion, comprised of $2.02 billion in cash and the
assumption of Enron's approximately $80 million merger payment obligation.
Sierra Pacific will also assume $1 billion in Portland General debt and
preferred stock. The proposed transaction, which is subject to customary
regulatory approvals, is expected to close in the second half of 2000.
Enron is seeking an exemption under Section 3(a)(3) or, in
the alternative, Section 3(a)(5), as a means of obtaining relief from the
"qualifying facility" or "QF" ownership restrictions under the Public Utility
Regulatory Policies Act of 1978.
The Application and any amendments thereto are available for
public inspection through the Commission's Office of Public Reference.
Interested persons wishing to comment or request a hearing should submit their
views in writing by ______, 2000 to the Secretary, Securities and Exchange
Commission, 450 Fifth St., N.W., Washington, D.C. 20549.
