Public Utilities Holding Company Act
PUBLIC UTILITIES HOLDING COMPANY ACT
The Public Utilities Holding Company Act of 1935 (PUHCA) was New Deal legislation that broke the grip that a few holding companies had exerted over the nation's natural gas electric power production. The law aimed to simplify the utilities' corporate structure, eliminate absentee management, protect consumer interests, and foster an orderly and efficient national utility system through state and federal regulation. It required any company that generated or sold electricity or gas in interstate commerce to register with the Securities and Exchange Commission (SEC) and to publicly disclose information relating to its finances, operations, and management structure. Purely intrastate utilities were exempt from federal regulation.
The number of private electric companies in the United States more than doubled between 1900 and 1920, reaching 6,500. That trend reversed sharply during the 1920s as holding companies consolidated local electric and gas companies into vast utility empires. Holding companies obtained controlling interest in local power-producing companies and could themselves be owned by other holding companies, creating a pyramid structure in which the top companies could be several layers removed from the actual utility operations. By 1930, a handful of holding-company groups commanded most of the energy generated and sold within the country. Most conspicuously, Samuel Insull chaired multiple boards of directors that controlled utilities in thirty-two states, combinations that made state regulation ineffective. These utility empires freely employed their concentrations of wealth to exert influence over state and local governments and newspapers in order to shape public opinion and policy.
Monopoly status in their localities made gas and electric utilities seem safe investments. They grew even more profitable in the 1920s as technological advancements increased production while the economic boom increased demand for electricity. Despite reductions in the cost of production, however, utility rates rose as holding companies charged their subsidiaries excessively high fees, drained the more profitable utilities to finance their acquisition of additional subsidiaries, and ran up dangerously high debts. The economic downturn following the 1929 stock market crash caused many holding company pyramids to collapse when they could not meet their debts, and their bankruptcies cost investors hundreds of millions of dollars. When Samuel Insull's house of cards collapsed in 1932, he fled the country to avoid arrest.
As early as 1928 the Federal Trade Commission had declared the holding company structure unsound and dangerous for both investors and consumers, but not until the New Deal did the federal government move to regulate utilities. Franklin Roosevelt supported such public power programs as the Tennessee Valley Authority, where government-run operations could serve as "national yardsticks" to measure private power rates. But the Roosevelt administration chose federal regulation instead of nationalization of private power production. Rather than concentrate power in federal hands, the federal government adopted an approach that resembled the antitrust and "antibigness" philosophy of Supreme Court Justice Louis Brandeis. Federal regulation would simplify the utilities' structure and decentralize their management to facilitate state regulation.
Neither the Securities Act of 1933 nor the Securities Exchange Act of 1934 specifically addressed the regulation of public utilities. In 1934, Roosevelt appointed a National Power Policy Committee, chaired by Secretary of the Interior Harold Ickes, with Benjamin Cohen as its chief counsel. Cohen and Thomas G. Corcoran, who had drafted the earlier securities act, were assigned to draft a public utilities bill. Sponsored by Senator Burton K. Wheeler (Democrat-Montana) and Representative Sam Rayburn (Democrat-Texas), the Cohen-Corcoran draft authorized the Federal Power Commission and the Securities and Exchange Commission to regulate power companies to make them geographically and economically integrated. Since President Roosevelt favored abolishing the holding companies, Cohen and Corcoran added a provision by which the SEC could force holding companies to divest themselves of utilities subsidiaries within five years. This "death sentence" provision triggered intense opposition. On June 11, 1935, the Senate narrowly passed the administration's bill, but twice, on July 2 and August 1, the House defeated the "death sentence" by wide margins. In place of the geographically contiguous utility operations envisioned by the Senate bill, the House substituted a broader concept of "integrated public-utility systems" that might operate over broader regions.
Congress was deluged with so many thousands of telegrams protesting the "death sentence" that supporters of the bill suspected an organized lobbying campaign rather than a grass-roots movement. Alabama Senator Hugo Black chaired a special investigating committee that subpoenaed the records of the telegraph office and proved that the more than 14,000 telegrams had come from only eleven locations. Lobbyists for the utility companies had paid for practically all of them, randomly signing citizens' names without their knowledge. Black's investigation led to the first law requiring lobbyists to register their expenses and objectives publicly, and also contributed to passage of a compromise version of the holding company act.
Harvard law professor Felix Frankfurter and Senator Alben Barkley (Democrat-Kentucky) provided the compromise that allowed holding companies to control two geographically-related systems unless the SEC found them contrary to efficient operations. This shifted the burden of the proof from the companies to the regulatory commission. Both houses accepted the compromise on August 24, and on August 26 President Roosevelt signed the bill into law. PUHCA required all holding companies to register with the SEC and gave the regulatory commission power to force divestiture of any operating subsidiary more than twice removed from a holding company, unless those operations could be demonstrated to serve the public interest. Utilities continued to operate as local monopolies so long as they provided their customers with reliable service at regulated rates. The SEC had the power to regulate any proposed utility merger or holding company effort to purchase utilities' securities or property from another company. The law further prohibited utilities from lending money to their parent holding company.
Even before the SEC could draft regulations, its chairman, James M. Landis, urged utility holding companies to begin voluntarily divesting themselves of their "non-integrated" affiliates. But the companies planned to challenge the new law in the courts, and few holding companies bothered to register with the SEC or comply with its call for selfregulation. As a test case, the bankrupt American Public Service Company petitioned the federal court in Baltimore to review the entire act's constitutionality. One bondholder entered the case to protect his holdings and secured the prestigious Wall Street lawyer John W. Davis as his counsel. Another creditor entered the case in favor of the act's constitutionality and employed a utility company lawyer well known for his opposition to the act. The SEC could enter the case only as a "friend of the court" rather than a participant. In November 1935 a federal judge in Baltimore found the PUHCA "unconstitutional and invalid in its entirety." The SEC responded by selecting the world's largest utility holding company, the Electric Bond & Share Company, as a test of the act's least controversial provisions. After Electric Bond failed to register voluntarily, the SEC filed suit in a more sympathetic court in New York. In January 1937 Judge Julian Mack ruled that holding companies must register with the SEC. The Supreme Court, in Electric Bond & Share v. SEC (1938) unanimously upheld the constitutionality of the act.
Assured of sweeping powers, the SEC redesigned the nation's utility systems by ordering divestitures and by splitting electricity and gas operations. PUHCA functioned without major alteration for a half century, but increasingly came under fire from free-market critics who charged that its provisions discouraged competition. Supporters insisted that PUHCA had maintained the public interest by protecting consumers. Congress resisted outright repeal, but the Public Utility Regulatory Policies Act of 1992 significantly loosened federal regulation by exempting wholesale power production and allowing utilities to operate wholesale plants out of their service territories.
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