Public Utility Holding Company Act of 1935 – Definition

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Public Utility Holding Company Act of 1935 Definition

The 1935 Public Utility Holding Company Act (PUHCA) was passed by the U.S. Congress because of electric utilities and utility holding companies. Another name for this act is the Wheeler-Rayburn Act. It was passed to facilitate electric utility regulation by either restricting their operations to one state, hence, subjecting them to a state regulation that is effective or forcing divestitures, thereby making each become one integrated system serving a specific area. Also, PUHCA acted to stop utility holding companies engaging in regulated businesses from participating in unregulated ones.

A Little More on What is the Public Utility Holding Company Act

On the 8th of August, 2005, PUHCA was repealed as a result of the Energy Policy Act of 2005 which passed the houses of Congress and was also signed into law.

The United States Congress passed the Public Utility Holding Company Act (PUHCA) of 1935 which is also referred to as the Wheeler-Rayburn Act. It was passed to easily regulate electric utilities by doing one of two things. The first was to limit their activities to one state, thereby compelling them to regulate the state effectively or forcing divestitures, thereby making each become one integrated system serving a specific area. Another reason for PUHCA was for it to stop utility holding companies engaging in regulated businesses from participating in unregulated ones.

This is federal legislation which controls public utility holding companies by demanding that major company decisions, as well as, specific reports follow laws made by the federal government and the Securities and Exchange Commission. The SEC is allowed to control every business transactions that are non-utility related. This act was needed because it was difficult for states to control public utility holding companies, as well as, its affiliates due to the fact that their operations cut across state lines. A pertinent piece of this legislation demands these holding companies to submit reports to the government concerning financial and organizational structure.

Before the Act, holding companies engaged in frequent abuses, with the inclusion of manipulating the securities markets, watered stock, and top-heavy capital structures having massive fixed-debt burdens. In summary:

PUHCA was one of a couple of trust-busting, as well as, securities regulation ideas. They were enacted in reaction to the government investigations of the 1929 Wall Street Crash and also the ensuing Great Depression which comprised the collapse of the public utility holding company empire of Samuel Insull. By 1932, 73% of the electric industry owned by investors was managed by the eight biggest utility holding companies. It was challenging for individual states to regulate their complicated, highly-leveraged corporate structures.

The Act needed the approval of the Securities and Exchange Commission (SEC) on a holding company that was participating in a non-utility business. It also required for such businesses to be separated from regulated businesses of the utility. Holding companies had to register with the SEC. The SEC would then carry out administrative proceedings in a bid to restrict each holding company to owing one integrated electric system (with some exceptions) by divesting the securities of unrelated companies and other public utility.

Furthermore, the Act certified the SEC to level utilities’ corporate structure in order to remove corporate layers that are not needed. Specific business operations could be centralized into central Service Companies by individual operating utility companies. But every Service Company would abide by the regulations of both the SEC and the Federal Power Commission. In 1977, the Federal Energy Regulatory Commission (FERC) replaced the Federal Power Commission (FPC). Hence, when a utility in a specific state was regulated by a state utility commission, the state’s ratepayers would remit only the share of common service companies expenditure associated with the electric company of the state which was allocated to it under SEC-certified formulas. This was done to avoid a holding company that functions in more than one state from recovering its expenses twice.

Because the SEC mandated the PUHCA’s divestiture provision in its procedure and also ordered that every corporate holding is divested with the exception of a single integrated system, voluntary divestiture plans were filed by the holding companies affected. As a result of this development, by 1948, assets worth about $12 billion had been voluntarily divested by holding companies. In addition to this, there was a drastic reduction in the number of subsidiaries which affected holding companies controlled. This reduction was from 1,983 to 303.

A significant provision banned selling goods and services among profitable holding company affiliates. These laws stopped the utilities from raising their cost-based regulated prices by falsely increasing the amount which the utility operating companies paid above the one paid by the central purchasing affiliate.

Electric streetcar was a noticeable effect of this provision. Majority of the electric streetcar companies were private companies and electric utility holding companies owned them. While the streetcar companies were usually unregulated, the electric utilities were. Despite being in the Great Depression, the electric companies were cash cows as a result of having a direct investment in transit firms. Furthermore, the basis of the limited return on investment was increased by these electric companies.

The provision resulted in divesting electric car companies owned by utilities. Different parties acquired them and most times dismantled, as well as, replaced them with trackless trolleys or buses.

It needs holding companies functioning interstate and individuals exerting a controlling influence on holding companies, as well as, utilities to register with the SEC. Furthermore, it requires them to give details on the finances, means of control, and the organizational structure.

It makes the Securities and Exchange Commission to regulate how registered holding companies operate and perform. Also, it allows SEC to approve every new security offering, bringing about reforms such as nonvoting stock elimination, preventing the milking of subsidiaries, and banning dividend upstreaming.

It allows for uniform accounting standards, cyclic financial and administrative reports, and holdings’ reports by officers and directors. Also, for the end of interlocking directorates with investment bankers or with banks.

It started eliminating complicated organizational structures by permitting just a single intermediate company in the midst of the top holding company and its operating companies.

References for Public Utility Holding Company Act

Academic Research on  Public Utility Holding Company Act

•    Public Utility Holding Company Act of 1935–Fossil or Foil, Hawes, D. W. (1977). Vand. L. Rev., 30, 605. This article explicates the Public Utility Holding Company Act of 1935. It views it from the angles of fossil and foil.

•    Conflicts of Interest in Reorganization Proceedings Under the Public Utility Holding Company Act of 1935 and Chapter X of the Bankruptcy Act, Ferber, D. (1959). Geo. Wash. L. Rev., 28, 319. This research work explores conflicts of interest in the PUHCA and Chapter X of the Bankruptcy Act.

•    Regulation of Corporate Finance and Management under the Public Utility Holding Company Act of 1935, Meck, J. F., & Cary, W. L. (1938). Harvard Law Review, 52(2), 216-258. This article examines the PUHCA of 1935 in relation to the regulation of corporate finance and management. The PUHCA of 1935 is seen to be the New Deal’s most dynamic legislation having an impact on corporations. This act tries to realign the legal rules of corporate practice. The SEC already interpreted the letter, as well as, the spirit of the act in order to force standards which go beyond the disclosure principle. The standards are widely significant as they can be applied to every corporate finance and management if proposed legislation is adopted.

•    Requiem for the Public Utility Holding Company Act of 1935: The Old Federalism and State Regulation of Inter-State Holding Companies, Moeller, J. W. (1996). Energy LJ, 17, 343. This article focuses on inter-state holding companies and the Public Utility Holding Company Act of 1935.

•    The public utility holding company act: The easy step in electric utility regulatory reform, Gordon, R. L. (1992). Regulation, 15, 58. This work explains PUHCA and electric utility regulatory reform.

•    Fair and Equitable Distribution of Voting Power under the Public Utility Holding Company Act of 1935, Leary, L. W. (1953). Mich. L. Rev., 52, 71. This research paper analyzes the fairness of voting power under the PUHCA of 1935.

•    Voting Rights in Preferred Stock Issues Under the Public Utility Holding Company Act of 1935, Leary, L. W. (1948). Tex. L. Rev., 27, 749. This work analyzes voting rights in relation to the 1935 Public Utility Holding Company Act.

•    Utility holding companies, Hawes, D. W. (1987). New York, NY, Clark Boardman Company. The gas and electric industries were reorganized by the Public Utility Holding Company Act of 1935. In the history of America, this is one of the most powerful Congress-based legislative responses to corporate abuse. The Congress declared its policy to remove the ills of interstate public utility holding companies and to perform other corrective functions.

•    Capital Structures of Electric Utilities Under the Public Utility Holding Company Act, Cook, D. C., & Cohn, H. B. (1959). Va. L. Rev., 45, 981. This article examines the PHUCA while laying emphasis on the capital structures of electric utilities.

•    Influence of the Federal Trade Commission’s Investigations on Federal Regulation of Interstate Electric and Gas Utilities, Davis, E. L. (1945). Geo. Wash. L. Rev., 14, 21. This research work is based on the Federal Trade Commission’s Investigation and its influence on the Federal Regulation of Interstate Electric and Gas Utilities.

•    Constitutional Powers of the Securities and Exchange Commission over Public Utility Holding Companies, Lesser, L. S. (1939). Geo. Wash. L. Rev., 8, 1128. This article focuses on the Securities and Exchange Commission, Public Utility Holding Companies and constitutional powers.

 

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