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Enron's End Run

Fortnightly Magazine - October 1 1996

will find themselves under pressure to develop hedging strategies of their own to protect and stabilize supplies and in dealing with customers to respond to this challenge.

This potential opportunity appears even more dramatic considering that Enron will also acquire PGC's relatively low-cost coal and hydroelectric generating facilities. The inexpensive hydroelectric power resources (which can to some extent be "stored" through the management of water flows), in particular, offer the potential for the combined Enron/PGC to customize pricing on electricity flows. Enron has indicated that it intends to experiment and learn in Oregon, and profits may be secondary in the near term.

PUHCA Concerns

Antitrust issues related to the transfer of market power, effective circumvention of regulatory frameworks, and the potential for aggressive and complex pricing strategies may arise.

Enron currently has no operations that fall within the jurisdiction of the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, as amended (PUHCA). Public announcements by the companies indicate that Enron will reincorporate in Oregon in connection with the merger transaction and become an exempt holding company under section 3(a)(1) of PUHCA. Because Enron does not have any jurisdictional operations and PGC carries on its electric utility business "substantially in a single state," the parties believe the section 3(a)(1) exemption should apply to this merger.

Enron and PGC likely informally precleared their proposed combination with the PUHCA staff at the SEC. Based on the recent expanded scope of both registered and unregistered holding company activities, the SEC is unlikely to take a proactive approach to any PUHCA challenge any third party might make to the exempt status of the combined company.

Enron has entered into a multiplicity of businesses that are exempt from regulation under PUHCA: foreign utility company operations, interstate wholesale power and gas marketing, and interstate gas transportation. Thus, the combined company would look like an atypical exempt electric utility holding company system, with a wide array of nonregulated operations that may be national and international in scope. PP&L Resources (the parent of Pennsylvania Power & Light Co.) and Public Service Enterprise Group (the parent of New Jersey's Public Service Electric & Gas) exemplify this type of exempt holding company structure, but the combined Enron/PGC will be much larger in size and scope, as well as immune from regulation.

Future Plans

The resulting company may represent the unregulated slant on a broadly held vision of the future. Registered holding company systems (em such as CINergy, Southern, Entergy, Eastern Utilities, and Consolidated Natural Gas (em have also entered the power marketing and brokering businesses, alone or in joint ventures with nonregulated entities. Enron's aggressiveness in this area is clear in its transaction with the Oglethorpe Co-op earlier this year: Enron purchased all of the co-op's power output from the numerous undivided interests in plants Oglethorpe owns, and agreed to sell the co-op enough power to satisfy all of its customer demand. The Co-op's 10-K represented this transaction as a savings in power costs and pledged to continue the practice, but Enron managed to capture all of