RS20015: Electricity Restructuring Background:
Public Utility Holding Company Act of 1935 (PUHCA)
Specialist in Energy Policy
Environment and Natural Resources Policy Division
January 7, 1999
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, including PUHCA
reform, was introduced in the 105th Congress, and the issue is expected to
continue to be active in the 106th 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. This report will be updated as events warrant. For related
information on electricity restructuring, see the CRS Electronic Briefing Book.
Creation of the Public Utility Holding Company Act of
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
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)
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 1935(4); 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
- 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.
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 (7)
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 being
regulated as utilities under PUHCA.(8)
Success of these regulatory entities was made 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 106th
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
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.(10)
Opponents of PUHCA repeal, including some consumer groups, state regulators, the
American Public Power Association(11),
and small business groups, argue that until the industry completes its transition to a
competitive market, PUHCA's regulations are needed to protect consumers.(12) Arguments against stand-alone PUHCA repeal include:
- concerns over market power (large utilities with numerous market advantages could
- 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
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.
1. (back) Messing, Marc. Centralized
Power: The Politics of Scale in Electricity Generation. Oelgeschlager, Gunn and Hain.
Cambridge, Massachusetts. 1979. p. 45.
2. (back) Philips, Charles F. The
Regulation of Public Utilities, Theory and Practice. Public Utilities Reports, Inc.
Arlington, VA. 1993. p. 239.
3. (back) FTC, Utility Corporation,
Senate Document No. 92, 70th Congress, 1st session. (1928).
4. (back) 49 Stat. 803 (1935), 15
U.S. Code §§79 et seq.
5. (back) Phillips. p. 634.
6. (back) 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. (back) For comprehensive
discussion on electricity restructuring, see CRS Electronic
8. (back) 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. 98-419 ENR. May 4, 1998.
9. (back) The Regulation of
Public-Utility Holding Companies. Division of Investment Management, Securities and
Exchange Commission. Washington, D.C. June 1995. p 7. http://www.sec.gov/news/studies/puhc.txt
10. (back) For the views of Edison
Electric Institute, an Association representing investor-owned utilities, see http://www.eei.org/issues/comp_reg;
11. (back) http://www.appanet.org/ppeui/3-6statement.html#Intro
12. (back) For a set of views
against PUHCA repeal, see http://www.citizen.org/cmep/restructuring/puhca/otherssay.htm.