ELECTRICITY RESTRUCTURING BACKGROUND: PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 (PUHCA)

CRS Report for Congress
Electricity Restructuring Background: Public
Utility Holding Company Act of 1935 (PUHCA)
Amy Abel
Specialist in Energy Policy
Environment and Natural Resources Policy Division
Summary
In 1935, the Public Utilities Holding Company Act (PUHCA) was enacted to
eliminate unfair practices and other abuses by electricity and natural gas holding
companies by requiring federal control and regulation of interstate public utility holding
companies. These abuses arose from the inability of individual states to effectively
regulate the financial transactions of multistate and multi-layered utility companies that
evolved in the 1910s and 1920s.
PUHCA remained virtually unchanged for 50 years until the enactment of the
Public Utility Regulatory Policies Act (PURPA). Enactment of PURPA and the Energy
Policy Act of 1992 (EPACT) increased competition in the electric generating sector by
creating new entities that generate and sell electricity at wholesale without being
regulated as utilities under PUHCA. Success of these regulatory entities was made
possible by new technologies, such as gas combined-cycle turbines. As a result of
increasing competition in the industry, some groups are calling for additional PUHCA
reform or repeal. Comprehensive legislation to restructure the electric utility industry,^th
including PUHCA reform, was introduced in the 105 Congress, and the issue is
expected to continue to be active in the 106^th Congress.
This report provides background information on PUHCA, including its history and
impact. It also discusses how PUHCA reform fits into the current electric utility
industry restructuring debate. For related information on electricity restructuring, see^th
CRS Report RL32728, Electric Utility Regulatory Reform: Issues for the 109
Congress.
Creation of the Public Utility Holding Company Act of 1935
From the very beginning of the U.S. electric power industry in the late 1800s,
technology, economics, and regulations have defined the structure of the industry. At the
end of the 1800s, transmission was by direct current (DC), involving large copper
conductors. DC power could be transmitted economically only over short distances,
requiring generation to be built close to its load. Introduction of a reliable alternating

Congressional Research Service ˜ The Library of Congress

current transmission system in 1903, which provided for long distance transmission at less
cost than DC, and the introduction of steam turbine generation technology that was more
efficient than reciprocating engines, produced a change of corporate structure. At the same
time that economies of scale encouraged utility consolidation, utilities were acquiring
increasing numbers of subsidiary companies, some with little or no relation to the
utilities’ primary business.
From 1900 through 1920 the number of private electric systems grew from
approximately 2,800 to 6,500.¹ Starting in 1920, the number of private electric systems
declined dramatically primarily because of consolidation and pyramiding of utilities
through holding companies. Not only did many operating utilities, in diverse parts of the
country, come under the control of a small number of holding companies, but those
holding companies themselves were owned by other holding companies. As many as ten
layers separated the top and bottom of some pyramids. By 1932, three groups controlled

45% of the electricity generated in the United States.

Although more than two-thirds of the states had public utility commissions of
varying powers by 1920, none of these entities had the economic regulatory power of a
modern public utility commission. The state public utility commissions were unable to
control the multistate nature of holding companies. Prior to enactment of the Public
Utilities Holding Company Act of 1935 (PUHCA), electric and gas holding companies
were characterized as having excessive consumer rates, high debt-to-equity ratios,
self-dealing, and increasingly unreliable service. A holding company parent was able to
charge its associated utilities exorbitant amounts for services, such as construction of
facilities, fuel supply, or billing. Excessive fees charged to operating companies were
passed through to consumers as higher rates. Holding companies incurred increasing
amounts of debt to finance their interests in a growing number of subsidiaries. The
economics of generating and transmitting electricity had changed dramatically since 1900.
Economies of scale were not been taken advantage of and the marginal costs (the cost of
each additional unit of generation) were less than average cost. The classic monopoly
situation existed.
Most highly leveraged holding companies that managed to stay solvent during the
prosperous 1920s collapsed after the stock market crash because they could not service
their debt. Lower demand for electricity resulted in inadequate revenue to meet fixed
obligations. As more and more companies went bankrupt, service deteriorated. While
there were advantages to the holding company structure, holding company abuses became
apparent after the stock market crash in 1929 when investors lost millions of dollars.
During the seven-year period between 1929 and 1936, 53 holding companies with
combined securities of $1.7 billion went into bankruptcy or receivership. Twenty-three
others were forced to default on interest payments or to offer extension plans.²

¹ Messing, Marc. Centralized Power: The Politics of Scale in Electricity Generation.
Oelgeschlager, Gunn and Hain. Cambridge, Massachusetts. 1979. p. 45.
² Philips, Charles F. The Regulation of Public Utilities, Theory and Practice. Public Utilities
Reports, Inc. Arlington, VA. 1993. p. 239.

In 1928, the Federal Trade Commission issued a report that listed the abusive
practices of holding companies.³ It concluded that the holding company structure was
unsound and “frequently a menace to the investor or the consumer or both.” As noted
earlier, holding companies operated with no federal and little state regulation. The state
utility commissions lacked sufficient authority and resources to control holding
companies because companies operated generally in many states and had extremely
complex structures. The federal government decided regulatory action was required. The
Federal Power Act, which established a federal utility regulatory system, was enacted at
the same time as the Public Utility Act of 1935⁴; these two Acts were intended to work
in tandem. Title I of the Public Utility Act of 1935 is known as the Public Utilities
Holding Company Act of 1935 (PUHCA).
PUHCA was enacted to eliminate unfair practices and other abuses by electricity and
gas holding companies by requiring federal control and regulation of interstate public
utility holding companies. A regulatory bargain was created between utilities and the
government. In exchange for an exclusive service territory, utilities are required to
provide reliable electric service to all customers at a regulated rate. A holding company
under PUHCA is an enterprise that directly or indirectly owns 10% or more of stock in
a public utility company. To eliminate the complex and confusing structure of holding
companies that had made them almost impossible to regulate, Section 11b of Title I (the
“Death Sentence Clause”) of PUHCA abolishes all holding companies that were more
than twice removed from their operating subsidiaries. All electric and natural gas holding
companies are required to register with the Securities and Exchange Commission (SEC).
Under PUHCA, the SEC regulates mergers and diversification proposals of holding
companies whose subsidiaries engage in retail electricity or natural gas distribution. In
addition, PUHCA requires that before purchasing securities or property from another
company, a holding company must file for approval with the SEC.
Other major sections of PUHCA provide that:
^! registered holding companies and their subsidiaries must have SEC
approval prior to issuing securities;
^!operating utilities are forbidden from making loans to their parent
holding company; all loans and intercompany financial transactions are
regulated by the SEC;
^!the operations of non-exempt holding companies are limited to single and
integrated public utility systems and to such businesses that are
reasonably incidental or economically necessary or appropriate to the
operations of such integrated systems; and,
^!non-exempt holding companies that are subject to SEC regulation must
maintain certain accounts and records, which are subject to SEC review.
The SEC does allow companies to operate in several areas if this preserves the economy
of operation, or if the areas are located in a single state, adjoining states, or contiguous
foreign country, and providing that the creation of such a holding company does not
inhibit efficient operation or effective regulation.

³ FTC, Utility Corporation, Senate Document No. 92, 70^th Congress, 1^st session. (1928).
⁴ 49 Stat. 803 (1935), 15 U.S. Code §§79 et seq.

Effectiveness of PUHCA
After enactment of PUHCA, the SEC simplified and reorganized the complex
financial and corporate structures of holding company systems, primarily by splitting
electricity and gas operations. Between 1938 and 1962, 2,419 electric and gas distribution
utilities came under the jurisdiction of the Securities and Exchange Commission, either
as registered holding companies or as subsidiaries. Of these companies, 928 were subject
to divestiture.⁵
Currently, most holding companies are exempt from PUHCA because they operate
intrastate. Under section 3(a)(1), a holding company may be exempt from PUHCA if its
business operations and those of its subsidiaries occur within one state. Exemption under
section 3(a)(2) can be granted when the holding company is a public utility that operates
within the state in which it is organized or within contiguous states. Holding companies
can gain exemption from PUHCA under Section 3(a)(1) or 3(a)(2) unless the SEC
determines that such an exemption would be “detrimental to the public interest or the
interest of investors or consumers.” An exemption can also be revoked by the SEC for
the same reason. Companies that are considered exempt from PUHCA are still subject
to state regulation. Holding companies that are registered under PUHCA engage in
interstate activity and/or they are diversified into industries other than electricity and gas.
As of November 1, 1997, 151 holding companies, with total assets of $444 billion,
are exempt by rule or order from PUHCA. As of September 30, 1996, 12 non-exempt
electric holding companies had combined consolidated assets of $125 billion (18% of
entire electric systems assets). As the electric utility industry has become more
concentrated through merger and acquisition activity, the number of non-exempt
(registered) holding companies has increased. By December 31, 1997, 19 electric and gas
holding companies with combined assets of $180 billion were registered under PUHCA,

26% of the electric industry assets and 24% of the gas industry assets.⁶

PUHCA and Restructuring
Enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA) and the
Energy Policy Act of 1992 (EPACT) increased competition in the electric generating
sector by creating new entities that generate and sell electricity at wholesale without being⁷
regulated as utilities under PUHCA. Success of these regulatory entities was made

⁵ Phillips. p. 634.
⁶ According to the SEC, the 19 registered electric(E) and gas (G) holding companies are:
Allegheny Energy (E), Ameren (E & G), American Electric Power Company (E), Central and
Southwest Corporation (E), Cinergy Corporation (E & G), Columbia Energy Group (G), Conectiv
(E & G), Consolidated Natural Gas Company (G), Eastern Utilities Associates (E), Entergy
Corporation (E), GPU Corporation (E), Interstate Energy Corporation (E & G), National Fuel Gas
Company (G), New Century Energies (E & G), New England Electric System (E), Northeast
Utilities (E), PECO Energy Power Company (E), Southern Company (E), Unitil Company (E &
G).
⁷ For a discussion on EPACT and PURPA, see Abel, Amy. Electricity Restructuring
Background: the Public Utility Regulatory Policies Act 1978 and the Energy Policy Act of 1992.
(continued...)

possible by new technologies, such as gas combined-cycle turbines. These generators are
smaller than typical baseload facilities, allowing them to compete economically in the
power market. Once again, marginal costs were below average costs. However, the
economies of scale argument, which was once used as a rationale for a monopoly
situation, no longer exists.
Comprehensive legislation to restructure the electric utility industry was introduced
in the 105th Congress and is expected to continue to be an active issue in the 106^th
Congress. Proposals to increase competition in the electric utility industry involve
segmenting the industry into three functions-- generation, transmission and distribution.
Generation would be subject to competition, while transmission and distribution would
be subject to federal and state regulation, respectively. This type of restructuring would
permit retail consumers to choose their electricity generators. In addition, most
comprehensive electric utility restructuring legislation addresses PURPA’s mandatory
purchase requirements, and retail competition, as well as PUHCA reform (see CRS Issue
Brief IB10006, Electricity: The Road Toward Restructuring).
As the restructuring debate has evolved, utilities and the SEC have called for reform
or repeal of PUHCA, asserting that PUHCA has achieved what it was designed to do and,
it is argued, PUHCA discourages competition. Calls for PUHCA reform are not new. In
the 1980s, utilities sought to diversify in order to exploit the benefits of independent
power producers under PURPA. In 1982, the SEC recommended to Congress that
PUHCA be repealed. Repeal legislation was not passed in the 1980s in part due to
concerns about consumer protection. In 1995, the SEC concluded a study of the
regulation of public utility holding companies. The SEC called for a conditional repeal
of the Public Utility Holding Company Act, with a transition period. The SEC:
...believes that the Act [PUHCA] continues to play a role in protecting energy
consumers. Most importantly, the SEC can obtain, audit and oversee a
multistate holding company system’s books and records, particularly in regard
to affiliate transactions.... Past efforts to repeal the Act were unsuccessful
largely because they failed to account for the continuing importance of this
aspect of the regulatory scheme.
In following the [repeal] option preferred by the Division [SEC], Congress
would repeal the Holding Company Act, including its limits on financing and
geographic and business diversification. At the same time, Congress would
enact new provisions to ensure access to books and records required for the
effective discharge of a state’s regulatory responsibilities and to establish
federal audit authority and oversight of intrasystem transactions. The task of
carrying out these provisions logically should be given to the federal agency
that most directly protects energy consumers, the Federal Energy Regulatory
Commission.⁸

⁷ (...continued)

98-419 ENR. May 4, 1998.

⁸ The Regulation of Public-Utility Holding Companies. Division of Investment Management,
Securities and Exchange Commission. Washington, D.C. June 1995. p 7.
(continued...)

The main argument for PUHCA reform has been that its provisions are antiquated
and PUHCA has already achieved its goal by making holding companies manageable.
Moreover, it is argued that various other regulations since PUHCA’s enactment have been
instituted to prevent holding company abuse. An additional argument for PUHCA reform
has been made by electric utilities that want to further diversify their assets. Electric
utilities contend that reform would allow utilities to improve their risk profiles through
diversification in much the same way as in other businesses: the risk of any one
investment is diluted by the risk associated with all investments. Utility holding
companies that have been exempt from SEC regulation argue that PUHCA discourages
diversification because the SEC could repeal exempt status if the exemption would be
“detrimental to the public interest.” Also, it is argued that PUHCA places consumers at
a disadvantage by inhibiting competition in the electric utility industry.⁹
Opponents of PUHCA repeal, including some consumer groups, state regulators, the
American Public Power Association¹⁰, and small business groups, argue that until the
industry completes its transition to a competitive market, PUHCA’s regulations are
needed to protect consumers.¹¹ Arguments against stand-alone PUHCA repeal include:
^!concerns over market power (large utilities with numerous market
advantages could inhibit competition);
^!PUHCA guards against monopolies and anti-competitive behavior;
^!possible increased risk of cross-subsidization between a regulated portion
of utility holding company business and their unregulated business
activities; and,
^!concern that states will lack authority or resources to monitor interstate
holding company activities.
In addition to being proposed in stand-alone legislation, PUHCA reform has been
included in comprehensive electric restructuring legislation. Some argue that if
comprehensive legislation adequately deals with possible market power abuses that could
arise under a new system, as well as transitional issues that may be created in moving
from a regulated generating sector to a competitive deregulated generation sector,
PUHCA could be eliminated for electric utilities. However, if Congress chooses a less
comprehensive approach, decisions will have to be made as to how much of the current
PUHCA might be needed to protect consumers in a more competitive environment, and
whether a conditional repeal is appropriate.

⁸ (...continued)
[ ht t p: / / www.sec.gov/ news/ s t udi es/ puhc.t xt ]
⁹ For the views of Edison Electric Institute, an Association representing investor-owned utilities,
see [http://www.eei.org/Industry/structure/9puhca.htm].
¹⁰ [http://www.appanet.org/ppeui/3-6statement.html#Intro]
¹¹ For a set of views against PUHCA repeal, see
[http:// www.citizen.org/ cmep/restructuring/puhca/otherssay.htm] .