In a decision that could prove to be a significant setback in Enron Corp.’s efforts to sell its Portland General Electric (PGE) subsidiary, a Securities and Exchange Commission (SEC) judge last week rejected a bid by the former energy trading giant to procure exemption status for itself and PGE from the Public Utilities Holding Company Act (PUHCA).

In an initial decision, SEC Chief Administrative Law Judge (ALJ) Brenda Murray ruled that Enron failed to prove by a preponderance of evidence that the bankrupt company and PGE meet the statutory criteria for such an exemption.

In making the case for exemption from PUHCA, Enron had argued that PGE is predominantly intrastate in character. Specifically, Enron noted that PGE is a net importer of power into Oregon and that a substantial majority of wholesale revenues and wholesale MWh sales by the company are related to providing power to Oregon retail customers.

Enron further argued that the company and PGE deserve a PUHCA exemption because the “singular focus” of PGE’s utility business is serving customers in Oregon and that this is the appropriate test of whether a utility is intrastate in character.

But in her ruling, Murray pointed out that from 1999 through 2001, PGE earned an average of 34.14% of its total revenues from interstate sales. Also, the ALJ cited the fact that approximately 14% of PGE’s owned generation is located out of state.

Murray also said that PGE depends to a “significant” or “substantial” degree on power purchased out of state to serve its retail customers. She said that in 2001, 36% of the electricity needed to meet peak load for PGE came from short-term purchases. And from 2000 through the first nine months of 2002, PGE earned 9-19% of its gross revenues from marketing power out of state, “a business activity that has no relation to serving its retail customers.”

In addition, Murray said that PGE owns a “substantial interest” in Pacific Northwest Intertie, which is used primarily for interstate purchases and sales of electricity among the Bonneville Power Administration (BPA), Pacific Northwest and California utilities.

According to the initial decision, PGE makes “extensive use” of the intertie and the Western Interconnection in connection with the interstate transmission of power.

PGE owns 20% of the intertie, a 4,800 MW transmission facility that runs between the John Day substation in northern Oregon and the substation at Malin in southern Oregon, near the California border. BPA and PacifiCorp are the other intertie owners.

“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,'” wrote Murray. “To grant this application, the Commission would have to ignore the language of the statute and stretch the precedents established by over 60 years of case law beyond reasonable limits.”

Murray also rejected a proposal by Enron under which the company would have received a temporary exemption from PUHCA so that it could have time to sell certain qualifying facilities (QFs) and PGE.

Among other things, the ALJ disagreed with an Enron expert that a refusal to grant Enron an exemption under certain sections of PUHCA on the condition that it divests either PGE or the QFs within two years reverses an SEC policy of accommodating industry changes in applying PUHCA.

Last week’s decision could complicate Enron’s bid to sell PGE, its largest asset. “We can’t sell Portland General with a cloud over us,” Enron attorney Charles Moore told Reuters news service in December at an SEC hearing.

Enron, as part of its ongoing Chapter 11 bankruptcy proceeding in a New York City federal court, hopes to have a winning bidder for PGE identified sometime this month. The city of Portland, in which PGE is headquartered, is one of a dozen bidders in the utility auction, according to recent general news reports.

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