Public Utility Holding Company Act of 1935

Major landmark in legislation regulating the securities industry, which reorganized the financial structures of Holding Companies in the gas and electric utility industries and regulated their debt and dividend policies. Prior to the Act, abuses by holding companies were rampant, including Watered Stock top-heavy capital structures with excessive fixed-debt burdens, and manipulation of the securities markets. In summary:

1. It requires holding companies operating interstate and persons exercising a controlling influence on utilities and holding companies to register with the Securities and Exchange Commission (SEC) and to provide information on the organizational structure, finances, and means of control.

2. It provides for SEC control of the operation and performance of registered holding companies and SEC approval of all new securities offerings, resulting in such reforms as the elimination of Nonvoting Stock the prevention of the milking of subsidiaries, and the outlawing of the upstreaming of dividends (payment of dividends by operating companies to holding companies).

3. It provides for uniform accounting standards, periodic administrative and financial reports, and reports on holdings by officers and directors, and for the end of interlocking directorates with banks or investment bankers.

4. It began the elimination of complex organizational structures by allowing only one intermediate company between the top holding company and its operating companies (the Grandfather Clause).

The Public Utility Holding Company Act of 1935 (PUHCA) (P.L. 74-333) reorganized the electric and gas industries and is one of the strongest congressional legislative responses to corporate abuse in American history. Congress declared in PUHCA its policy to "eliminate the evils" of interstate "public utility holding companies," to "compel" simplification of the pyramid system of public utility holding companies, and, with certain exceptions, to provide for "the elimination of public utility holding companies."

The Structure of Early Holding Companies

In the 1920s and 1930s, electric and natural gas utilities increasingly consolidated their business operations into pyramid-like structures with a holding company at the top which owned or controlled a number of other subsidiary companies. This holding company structure helped utilities to reduce construction and operation costs by taking advantage of economies of scale. That structure helped to increase energy sales, lessen financing costs, lower costs of capital, and reduce costs of materials and equipment through bulk purchasing at discounted prices. For example, large central station electric power plants and interconnected electric service were made possible under the holding company structure. However, the holding company structure was not regulated as a public utility by the states or the federal government. The absence of either state or federal regulation led to holding company abuses like stock manipulation, excessive financial charges, promotion of price speculation, extraction of exorbitant profits and fees from subsidiaries, deceptive accounting, distorted earnings reports, and control by non-utilities like banks. By the early 1930s, just sixteen such holding companies controlled more than 75 percent of the electricity generated in the United States. In addition, during the Great Depression certain electric systems collapsed altogether. Those abuses and market failures provoked federal government intervention in the form of the PUHCA.

The Legislative Response to Market Problems

The PUHCA requires public utility holding companies to register with the Securities and Exchange Commission (SEC). An interstate holding company, under PUHCA, is any company that holds ten percent or more of the voting stock of another company (public utility or holding company) or that has a controlling "influence" over another company's "management or policies." The SEC is given substantial and wide-ranging authority over public utility holding companies. If it is "necessary" and "in the public interest," the SEC may control new stock issues of a PUHCA-registered holding company, may prevent the buying and selling of holding company assets, and may, to a large extent, determine the terms of the acquisition of holding company property and stock. The SEC will approve holding company stock and property purchases if they are "economical and efficient" and protect consumers and investors. The SEC also is authorized under the PUHCA to regulate inter-state holding company loans, the payment of dividends, utility service contracts, and accounting methods.

The SEC may order the breakup of holding companies to avoid financial abuses. The PUHCA, as implemented by the SEC, and with some exceptions, limits holding company operations to integrated, one system, one state (or at most its immediate neighboring state) operations and, for the most part, forbids holding companies from engaging in non-utility businesses. The PUHCA requires that all holding companies thrice removed or more from operating subsidiary companies must be abolished. Other holding companies that cannot comply with PUHCA also must be broken-up or restructured.

Puhca's Effects and Proposals for Repeal

The PUHCA resulted eventually in the reduction of public utility holding company influence. For example, holding company control of electricity generation was reduced from 75 percent of all generation to just 15 percent or so. The PUHCA, by effectively reorganizing the electric and gas industries, facilitated greater federal and state regulation of utility wholesale and retail prices and conditions of service.

For the past three decades, there have been calls to repeal PUHCA on grounds that it has successfully fulfilled its task and is no longer necessary. Among those that have supported the repeal of the PUHCA is the SEC itself. The reasons given for repeal include the desire to permit public utility holding companies to buy utilities in different parts of the country and to allow nonutilities to buy utility assets and property. Supporters of repeal argue that consolidation of utilities into holding company structures would provide economies of scale and thus lower utility rates to customers. To reduce the potential for holding company abuse, most advocates of repeal would increase the regulatory powers of the Federal Energy Regulatory Commission (FERC) and state public utility commissions that regulate electric prices and conditions of service to assure that non-utility business is not paid for by utility consumers. In 1992 PUHCA was amended by the Energy Policy Act to exempt from PUHCA's ownership restrictions firms engaged exclusively in wholesale sales of electricity. Even in this cycle of government deregulation, the PUHCA has withstood every attempt to repeal it. Perhaps, the persistence of PUHCA may be explained on several counts. First, regulation under PUHCA is of an essential public service, especially electric and gas service. Second, the availability of reliable and affordable energy is necessary for a healthy and growing American economy. Third, electric utilities are once again beginning to favor the formation of holding companies as they did in the pre-Depression days. Finally, notorius corporate scandals (fraud, mismanagement and the like) in energy companies and utilities like Enron and Worldcom remind many of the potential for precisely the sort of abuses PUHCA was enacted long ago to prevent.

Bibliography

Hawes, Douglas W. "Public Utility Holding Company, Act of 1935—Fossil or Foil?," Vanderbilt Law Review 30 (1977).

Hawes, Douglas W. Utility Holding Companies. New York: Clark Boardman Co. Ltd., 1984.

Phillips, Charles F. The Regulation of Public Utilities: Theory and Practice. Arlington, VA: Public Utilities Reports, 1993.

The Public Utility Holding Company Act of 1935 (PUHCA) was a law that was passed by the United States Congress to facilitate regulation of electric utilities, by either limiting their operations to a single state, and thus subjecting them to effective state regulation, or forcing divestitures so that each became a single integrated system serving a limited geographic area. Another purpose of PUHCA was to keep utility holding companies engaged in regulated businesses from engaging in unregulated businesses. PUHCA required that Securities and Exchange Commission (SEC) approval be obtained by a holding company prior to engaging in a non-utility business and that such businesses be kept separate from the regulated business(es). It also authorized the SEC to flatten the corporate structure of utilities to remove unnecessary corporate layers. Individual operating utility companies could centralize certain business operations into central Service Companies, but all Service Companies would be subject to SEC and Federal Energy Regulatory Commission regulation. As a result, when a state utility commission regulated a utility located in a particular state, the rate payers of that state would pay only the share of common Service Company expenses allocated to it under SEC-approved formulas. This would prevent a Holding Company from double-recovery of its expenses when it operates in more than one state.

PUHCA was one of a number of trust-busting and securities regulation initiatives that were enacted in response to the Wall Street Crash of 1929 and ensuing Great Depression, including the collapse of Samuel Insull's public utility holding companies. By 1932, the eight largest utility holding companies controlled 73 percent of the investor-owned electric industry.^[1] Their complex, highly-leveraged, corporate structures were very difficult for individual states to regulate.

An important PUHCA provision prohibited sales of goods or services between Holding Company affiliates at a profit. These rules prevented the utilities from increasing their cost-based regulated rates by artificially marking-up the prices paid by the utility operating companies above what the central purchasing affiliate paid. One noticeable impact of this provision was on electric trolleys. Most electric streetcar companies were private companies owned by electric utility holding companies. The trolleys were generally unregulated, while the electric utilities were regulated. The electric utility company would sell electricity to the trolley affiliate company and artificially mark up the price in order to affect the accounting costs of the regulated utility. This allowed the utility company to subsidize the trolley system while at the same time being able to raise their electric rates for other customers. The result of the provision was the divestiture of utility owned electric streetcar companies, which were then acquired by various parties, including in most major cities oil and automobile companies, and, being no longer subsidized, dismantled.

The utility industry and would-be owners of utilities lobbied Congress heavily to repeal PUHCA, claiming that it was outdated. On August 8, 2005, the Energy Policy Act of 2005 passed both houses of Congress and was signed into law, repealing PUHCA, despite consumer, environmental, union and credit rating agency objections. The repeal became effective on February 8, 2006.

It was replaced by a much weaker set of laws called the "Public Utility Holding Company Act of 2005" which gave the Federal Energy Regulatory Commission (FERC) a limited role in allocating the costs of multi-state electric utility holding companies to individual operating subsidiaries. 42 U.S.C. § 16451 et seq. The 2005 Act had many provisions which applied to just electric subsidiary to the exclusion of natural gas subsidiaries of Holding Companies. On December 8, 2005, FERC recommended that Congress amend the 2005 Act to give FERC (1) cost allocation authority over gas subsidiaries, and (2) greater enforcement authority over gas subsidiaries,^[2] but Congress has not acted on FERC's request.

External links

• Public Utility Holding Company Act of 1935: 1935 – 1992 by the United States Department of Energy
• Current Registered Holding Companies Under the Public Utility Holding Company Act of 1935 at the SEC website
• PUHCA @ U.S. Code
• PUHCA for Dummies
• "PUCHA Repeal Thwarts Competition and Puts Consumers at Risk", Kanner, Marty, The Washington Times
• "Electricity Restructuring Background: Public Utility Holding Company Act of 1935 (PUHCA)"
• "Discarding PUHCA"
• PUHCA at Union of Concerned Scientists
• Article about PUHCA at Public Citizen

References

1. ^ LEONARD S. HYMAN, AMERICA’S ELECTRIC UTILITIES: PAST, PRESENT AND FUTURE 74 (Public Utility Reports, Inc. 1988)
2. ^ "[http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=10900380 Recommendations of the Federal Energy Regulatory Commission on Technical and Conforming Amendments to Federal Law Necessary to Carry Out the Public Utility Holding Company Act of 2005 and Related Amendments]". http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=10900380. Retrieved 2008-09-30. 

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