Public Utility Holding Company Act of 1935

On August 26, 1935, President Franklin D. Roosevelt signed the bill into law.^[2]


The Energy Policy Act of 2005 repealed the PUHCA.

Context[edit]

The passage of the Public Utilities Holding Company Act was the climax to the thirty-year nationwide fight between public vs. private development of electricity in the United States. Other societal issues like the postal service, public roads, schools, social security, national health insurance, and public ownership of electric generation were part of a global phenomenon with most of Europe and regions of the United States in support of mixed economies. The National Electric Light Association and its member companies organized the largest U.S. Public Relations campaign of the 1920s. The campaign had two goals: to stigmatize public ownership on the one hand while promoting the rapid consolidation of the private sector into a few giant multi-tiered holding companies. The nearly 2,000 cities that had public systems, led by Nebraska Senator George W. Norris, Montana Senator Thomas J. Walsh and Pennsylvania Governor Gifford Pinchot were able to pass the 1928 Senate Resolution 83 which directed the Federal Trade Commission to conduct a detailed investigation of the industry's finances and propaganda war waged against publicly owned utilities. That seven-year investigation took on special meaning following the Wall Street Crash of 1929 as the early phase of the investigation showed large scale corruption hidden within the six to ten layered pyramid holding company structures that concentrated financial power in the hands of a few.


In June 1932, the Middle West Utility empire, one of the largest electric holding companies operating in 39 U.S. states went bankrupt, destroying the life savings of hundreds of thousands of small investors across the east and mid-west.^[3] New York Governor Franklin Delano Roosevelt, who was a public power supporter campaigned on the issue of reforming the electric industry and won election as the country's 32nd president. His initial years in office included large public works projects such as the Tennessee Valley Authority, Bonneville Power Administration and California's Central Valley Project. These were all massive, federally funded water and power projects that put tens of thousands of people to work. The most important of these projects was the Rural Electrification Administration that finally brought electricity to rural America which was shunned by the country's urban-based electric industry as there was no profit to be made.


As the Federal Trade Commission's seven-year investigation was starting to wind up, Roosevelt formed the National Power Policy Committee (NPPC) to make sense of the investigation and its recommendations. The PUHCA was originally requested by Franklin Delano Roosevelt in his Second State of the Union Address and was based on the work done by the NPPC. The committee was made up of federal agencies, led by Robert E. Healy who oversaw the 1928-35 Federal Trade Commission's 63,000-page electric investigation. On February 6, 1935, the Wheeler-Rayburn bill was introduced by Senator Wheeler (S 1725) and Representative Rayburn (HR 5423). It was one of several New Deal trust-busting and securities regulation initiatives that were enacted following the Wall Street Crash of 1929 and the ensuing Great Depression. By 1932, eight of the largest utility holding companies controlled 73 percent of the investor-owned electric industry.^[4] Their complex, highly leveraged, corporate structures were very difficult for individual states to regulate.

Summary[edit]

The Act required the Securities and Exchange Commission (SEC) to approve a holding company engaging in a non-utility business and such businesses to be kept separate from the utility's regulated business. Holding companies were required to register with the SEC, which would then conduct administrative proceedings to limit each holding company to ownership of a single integrated electric system (with certain exceptions) through the divestiture of the securities of other public utility and unrelated companies.^[24]


The Act 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 Power Commission regulation. (In 1977, the Federal Power Commission was replaced by the Federal Energy Regulatory Commission (FERC)).


As a result, when a state utility commission regulated a utility in a particular state, the rate payers of that state would pay only the share of any common service company expenses associated with that state's electric company allocated to it under SEC-approved formulas to prevent a holding company from double recovery of its expenses when it operates in more than one state.


Because the SEC strictly enforced the divestiture provision of PUHCA in its proceedings and ordered divestiture of all corporate holdings except for a single integrated electric system, the affected holding companies filed voluntary divesture plans.^[25] As a result, by 1948, holding companies had voluntarily divested themselves of assets worth approximately $12 billion and the number of subsidiaries controlled by affected holding companies was reduced from 1,983 to 303.^[25]


An important 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 streetcars. Most electric streetcar companies were private companies, owned by electric utility holding companies. The streetcar companies were generally unregulated while the electric utilities were regulated. By investing directly in transit firms, the electric companies were "cash cows" even in the Great Depression and were able to increase the basis of their limited return on investment.


The result of the provision was the divestiture of utility-owned electric streetcar companies, which were then acquired by various parties and very often dismantled to be replaced by buses or trackless trolleys. The largest fallout of the divestiture was the General Motors nationwide streetcar dismantlement.

Legacy[edit]

Through the years, the utility industry and would-be owners of utilities lobbied Congress heavily to repeal PUHCA, claiming that it was outdated. For example, in 1989, Standley H. Hoch, CEO of General Public Utilities (GPU) had two mandates as leader: trim management and lower costs, and fight to repeal the Public Utility Holding Company Act of 1935.^[26]


On August 8, 2005, the Energy Policy Act of 2005 passed both houses of Congress and was signed into law, repealing PUHCA. The repeal became effective on February 8, 2006. It was replaced by a set of laws called the "Public Utility Holding Company Act of 2005", which gave the FERC a limited role in allocating the costs of multi-state electric utility holding companies to individual operating subsidiaries.^[27] There were consumer, environmental, union and credit rating agency objections to the new law.


The 2005 Act had many provisions that applied to just electric subsidiaries 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 cost allocation authority over gas subsidiaries, and greater enforcement authority over gas subsidiaries,^[28] but Congress has not acted on FERC's request.