Public Utility Holding Company Act of 1935
Encyclopedia
The Public Utility Holding Company Act of 1935 (PUHCA), , also known as the Wheeler-Rayburn Act, was a law that was passed by the United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....

 to facilitate regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...

 of electric utilities, by either limiting their operations to a single state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...

, and thus subjecting them to effective state regulation, or forcing divestitures so that each became a single integrated system serving a limited geographic area. Another purpose of PUHCA was to keep utility holding companies engaged in regulated businesses
Regulated market
A regulated market or controlled market, is the provision of goods or services that is regulated by a government appointed body. The regulation may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged and/or to whom they are distributed...

 from engaging in unregulated businesses.

Context

PUHCA was one of a number of trust-busting and securities regulation
Securities regulation in the United States
Securities regulation in the United States is the field of U.S. law that covers various aspects of transactions and other dealings with securities...

 initiatives that were enacted in response to the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...

 and ensuing Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

, including the collapse of Samuel Insull
Samuel Insull
Samuel Insull was an Anglo-American innovator and investor based in Chicago who greatly contributed to creating an integrated electrical infrastructure in the United States. Insull was notable for purchasing utilities and railroads using holding companies, as well as the abuse of them...

's public utility
Public utility
A public utility is an organization that maintains the infrastructure for a public service . Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies...

 holding companies. By 1932, the eight largest utility holding companies controlled 73 percent of the investor-owned electric industry. Their complex, highly leveraged
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...

, corporate structures were very difficult for individual states to regulate.

The Act

PUHCA required that Securities and Exchange Commission
United States Securities and Exchange Commission
The U.S. Securities and Exchange Commission is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States...

 (SEC) approval be obtained by a holding company prior to engaging in a non-utility business and that such businesses be kept separate from the regulated business(es). It also authorized the SEC to flatten the corporate structure of utilities to remove unnecessary corporate layers. Individual operating utility companies could centralize certain business operations into central Service Companies, but all Service Companies would be subject to SEC and Federal Energy Regulatory Commission
Federal Power Commission
The Federal Power Commission was an independent commission of the United States government, originally organized on June 23, 1930, with five members nominated by the president and confirmed by the Senate...

 regulation. As a result, when a state utility commission regulated a utility located in a particular state, the rate payers of that state would pay only the share of common Service Company expenses allocated to it under SEC-approved formulas. This would prevent a Holding Company from double-recovery of its expenses when it operates in more than one state.

An important PUHCA provision prohibited sales of goods or services between Holding Company affiliates at a profit. These rules prevented the utilities from increasing their cost-based regulated rates by artificially marking-up the prices paid by the utility operating companies above what the central purchasing affiliate paid.

One noticeable impact of this provision was on electric streetcar
Tram
A tram is a passenger rail vehicle which runs on tracks along public urban streets and also sometimes on separate rights of way. It may also run between cities and/or towns , and/or partially grade separated even in the cities...

s. Most electric streetcar companies were private companies owned by electric utility holding companies. These streetcar companies were generally unregulated, while the electric utilities were regulated. The electric utility company would sell electricity to the streetcar affiliate company and artificially mark up the price in order to affect the accounting costs of the regulated utility. This allowed the utility company to subsidize the streetcar system while at the same time being able to raise their electric rates for other customers. The result of the provision was the divestiture of utility-owned electric streetcar companies, which were then acquired by various parties and very often dismantled in what became known as the Great American Streetcar Scandal.

Legacy

The utility industry and would-be owners of utilities lobbied Congress heavily to repeal PUHCA, claiming that it was outdated. On August 8, 2005, the Energy Policy Act of 2005
Energy Policy Act of 2005
The Energy Policy Act of 2005 is a bill passed by the United States Congress on July 29, 2005, and signed into law by President George W. Bush on August 8, 2005, at Sandia National Laboratories in Albuquerque, New Mexico...

 passed both houses of Congress and was signed into law, repealing PUHCA, despite consumer, environmental, union and credit rating agency
Credit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...

 objections. The repeal became effective on February 8, 2006.

It was replaced by a much weaker set of laws called the "Public Utility Holding Company Act of 2005" which gave the Federal Energy Regulatory Commission
Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates, hydroelectric licensing, natural gas pricing, and oil pipeline rates...

 (FERC) a limited role in allocating the costs of multi-state electric utility holding companies to individual operating subsidiaries. et seq. The 2005 Act had many provisions which applied to just electric subsidiary to the exclusion of natural gas subsidiaries of Holding Companies. On December 8, 2005, FERC recommended that Congress amend the 2005 Act to give FERC (1) cost allocation authority over gas subsidiaries, and (2) greater enforcement authority over gas subsidiaries, but Congress has not acted on FERC's request.

External links

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