Public Utility Holding Company Act of 1935 (PUHCA)

Summary: The Public Utility Holding Company Act of 1935 allowed states to regulate financial transactions from utility companies operating across states. Previously, control of the electric and gas markets was in the hands of a few companies and pricing was uncontrolled.

By the late 1800s into the mid-1900s, utility companies began to operate across scores of states; these multistate corporations could shift expenses and revenues across states, making it difficult for states to receive their just share of utility revenues. In addition, these same companies oftentimes were purchased and sold into other companies, creating massive holding companies whose principal reporting requirements were to the Securities and Exchange Commission.

The Securities and Exchange Commission (SEC) was responsible for overseeing these holding companies in the electric and gas utility industries, primarily because of the stock, investor, and public financial transactions involved in these businesses. The SEC was challenged in its ability to regulate these issues adequately, and these issues were the basis for the creation of the Public UtilitiesHolding Company Act of 1935 (PUHCA 1935).

In particular, Samuel Insull was an innovator and major driver in the use of holding companies in developing the electric industry infrastructure within the United States. Insull rose to the position of vice president of Edison General Electric. By 1907, Insull controlled and then merged several electric companies. He then created the Commonwealth Edison Electric Company. In later years, Insull switched his support within the industry from direct-current electricity production to alternating-current electricity production. This occurred as the debate involving the generic use of alternating current (invented by Nikola Tesla) as opposed to direct current (invented by Thomas Alva Edison) was coming to a close. The principle mechanism that Insull used to push the electricity industry forward was creating holding companies, through which he was able to leverage much power and money over many different infrastructure entities. Insull left the United States in a cloud after the collapse of his multibillion- dollar energy empire. Insulls actions were one of the driving industrial events that led to the creation of the creation of the PUHCA 1935.

Need for Regulation

From 1900 to 1920, the number of private electric systems grew from approximately 2,800 to 6,500. As many as 10 layers separated the top and bottom of some holding companies. By the early 1930s, approximately 47 percent of all electricity, either generated or investor-owned, was controlled by three groups. This was in deference to the fact that a majority of states had public utility commissions.

By the 1920s, approximately 66 percent of all states had public utility commissions. The Public utility commissions were incapable of controlling transactions of these multistate holding companies. Prior to the enactment of the PUHCA 1935, utilities had historically been driven by company self-interest. The result of this behavior was poor or unreliable service and excessive cost to the consumer. Utilities that were holding companies were able to charge their subsidiary companies exorbitant fees for services, and excessive fees were passed on to consumers as higher rates. A company could finance new construction or repairs and pass these charges along to consumers along with any additional handling charges they incurred.

The stock market crash of 1929 revealed that many utility holding companies had serious financial problems, and investors lost millions. During the seven-year period between 1929 and 1936, 53 holding companies with combined securities of $1.7 billion went into bankruptcy or receivership. In 1928, the Federal Trade Commission issued a report detailing the abusive practices of holding companies. It concluded that the holding company structure was unsound and “frequently a menace to the investor or the consumer or both.” The Public Utility Holding Company Act of 1935 and the Federal Power Act were established at the same time and were intended to work in tandem. It was determined that with federal regulatory control of interstate public utility holding companies, unfair and abusive practices of utility companies could be controlled and eliminated. Utilities were given proprietary territory choices, and in exchange, the firms had to provide reliable and consistent power to consumers at an affordable or regulated rate. The PUHCA eliminated holding companies that were more than two levels removed from the subsidiaries they owned. On August 8, 2005, the Energy Policy Act of 2005 was signed into law, effectively replacing and repealing the PUHCA, effective as of February 8, 2006.

Positive Results

There were several problems eliminated by the introduction of the PUHCA 1935. Investors were better able to understand the financial positions and earnings powers of issuers. Securities issued by companies are now issued with consent of the states in which they are issued. Securities are also issued based upon sound asset value and not fictitious values, and are not based upon intercompany transactions. The PUHCA eliminated or restricted the ability of utilities to charge excessive charges for services, or arms-length transactions where market competition is absent or restricted. The PUHCA helped control accounting practices, rates, dividends, and other policies so that states could more effectively regulate utilities and the industry within their jurisdiction. The PUHCA also aided the economics of fund-raising and capital structure evolution.

The main goal of the PUHCA was to regulate holding companies that had electric utility companies subsidiaries or that engaged in the retail distribution of natural gas or manufactured gas. The statute defined a holding company as (1) a company that controls 10 percent or more of the outstanding voting securities of a public utility company (or of another holding company); or (2) a person whom the SEC determines to be exercising a controlling influence over the management of policies of any public utility or holding company, so as to make it necessary or appropriate in the public interest to subject that person to the requirements of the statute. The PUHCA was, for its time, a response to the need to protect consumers and states from the predatory business practices instituted by a small number of power trust companies in the early part of the 20th century.

Bibliography

Abel, Amy. “RS20015: Electricity Restructuring Background: Public Utility Holding Company Act of 1935 (PUHCA).” CRS Report for Congress, 1999. https://wiki.umn.edu/pub/ESPM3241W/S11TopicSummaryTeamTwentyfour/CRS‗Report‗‗RS20015‗-‗Electricity‗Restructuring‗Background‗‗Public‗Utility‗H.pdf.

Cudahay, Richard D. “From Insull to Enron: Corporate (Re)Regulation.” Energy Law Journal 26, no. 1 (January 2005).

U.S. Department of Energy. “A Primer on Electric Utilities, Deregulation, and Restructuring of U.S. Electricity Markets” (2002). http://www1.eere.energy.gov/femp/pdfs/primer.pdf.