February 2004

Mad Cow Lock Up

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2004/02/13)
 

In late 2003, after Congress at least temporarily gave up on repealing Public Utility Holding Company Act (“PUHCA”) as part of the Energy Act, the SEC rattled “dem old bones” by denying Enron’s application for exemption from PUHCA. Perhaps to say: unless you make this law for go away we really are going to have enforce it. Certainly to remind us yet again: government has locked another barn door only after Enron got out and showed is had Mad Cow disease. And definitely to leave the utility industry facing the fact: in the land of the blind, the “one off” decision is King of precedents.

Here is basically what its decision (SEC Rel. No. 27782) was about. Enron, the owner of pieces of many “unregulated”PURPA “Qualified Facilities” (QFs) bought Portland General Electric, Inc., an old-fashioned regulated utility under Oregon State jurisdiction. In doing so, it became a “holding company” under PUHCA and, as such, its ownership of QFs along with other utilities would have invalidated their statute . To escape this result, as well as broader PUHCA regulation, Enron reincorporated in Oregon and claimed the right to one of the mandatory exemptions from PUHCA: that it was a holding company which together with every subsidiary of which was predominantly a public utility company “was predominantly intrastate in character and carried on its business in a sirale state. “Perhaps this was literally true. Probably it was not what the PUHCA’s authors had in mind since they sought to prevent national electricity holding companies, and Enron certainly wanted to use Portland General as a pillar of its wholesale trading activities (later made famous in California and throughout the West). Then Enron surprised its top executives and went broke, and wanted to sell Portland General. A difficult trick in bankruptcy made much harder by the fast no one normally wants to buy a registered holding company, with the SEC jurisdiction that entails. Suddenly the SEC sobered up, got “spitzer-ized”, looked hard at the make-up of Portland General’s business — which included a great deal of wholesale trading — and declared no “intrastate” exemption was available, because Portland General was not just an intra-state utility (even though the Oregon State Commission argued that it was, and was doing a fine job of regulation, thank you.)

By doing so, the SEC’s bull (Papal style) threatened to break a lot of china (domestic utility type). The 3(a)(1) PUHCA “intrastate” exemption is the fig leaf for some mighty large conventional utility holding companies. In explaining why Portland General was not an intrastate public utility, the Commission shriveled that fig leaf by citing a wide variety of facts with respect to Portland General which might also be said to obtain for other exempt utilities as well, but as they say around the courthouse – “hard cases made bad law”, or around the Capitol “hard cases are a call for new law” (or at least _______ of an old one). Here are some of the facts about Portland General to which the SEC pointed out in denying the intrastate exemption, which may characterize utilities held by other holding companies claiming 3(a)(1) intrastate exemptions:

• ownership of generation assets out of state;
   

• ownership of transmission out of state (including an __________ used in interstate commerce) (while protecting “our design … cannot fairly be interpreted as holding that an interest in an interstate network, without more, makes a utility interstate in character”); and
   

• purchases of wholesale power as a “brokerage” activity in order to generate revenues, rather than as a means of meeting the needs of retail customers.

In measuring the extent of intrastate activity, the Commission focused not only on quantitative standards measuring relative in and out of state asset ownership and other activities, but also on the policy question of whether state regulators were able to protect effectively the interests of utility customers and investors, given the extent of the utility’s out-of-state power sales(over the prior 3 years, Portland General’s gross operating revenues, out-of-state were almost one-third of its total sales.

In addition to creating current confusion as to the interpretation of when the intrastate exemption properly is involved, the decision highlights two larger policy conclusions:
Ý On the one hand, the applicability of PUHCA to the. half restructured power markets and the shape of the power industry is somewhat questionable. Certainly, the confusion in applying old statutory tests in the fluid trading market environment is evident in the case.
Ý On the other, the repeal of PUHCA (as proposed under the Energy Act) without a clear concept for directly addressing the modern version of potential market power abuses at which PUHCA blatantly ignores the recent history.

The clear conclusion is that instead of striving to lock up mad cows or just ignoring them, attention would better be focused on the true nature of their disease, how to label its carriers and how best to deal with them before they are out the barn door.
 

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.