Public Utility Holding Company Act (PUHCA)

What is PUHCA?

The Public Utility Holding Company Act (PUHCA) of 1935 is the only law that prevents utility holding companies from subsidizing unregulated business activities from profits obtained from their regulated business activities and captive customers. PUHCA requires that all side businesses be kept separate from the regulated business. Some large utilities want PUHCA repealed, arguing that the law is obsolete and is restricting competition and diversification in the electric industry. But simply repealing PUHCA would most likely result in a wave of mergers that would create a few disproportionately large and influential companies, rendering competition meaningless and harming consumers and the environment.

UCS, along with a diverse coalition of consumer and environmental groups, regulators, small businesses, and utilities, believes that PUHCA reform should only be addressed in the context of comprehensive electric utility restructuring that includes very strong consumer and environmental protections and allows all competitors to compete fairly.

Why was PUHCA enacted?

Congress enacted PUHCA as a response to the shady business practices of huge utility holding companies during the 1920s and 30s. These holding companies controlled utilities in complicated pyramid structures, where a few investors at the top held controlling shares of many subsidiary companies. In the early 1930s, three holding companies controlled almost half the utility industry, with one owning 130 utilities.

This pyramid structure led to a variety of problems. For example, subsidiaries of the holding company could charge each other inflated rates for service, and hide the charges in their regulated rates. Also, since the holding company was legally separate from the subsidiary, it was not liable for debts. Some analysts believe that utility holding company abuses greatly contributed to the Stock Market Crash of 1929 and the ensuing Depression. Due to their shaky finances, holding companies were "fair weather" corporations, and when the Depression came, many went under.

Traditionally, utilities have been monopolies, free from competition, but regulated by state and federal governments. Regulators try to keep the utilities operating efficiently, to keep electricity prices low, and to protect captive and small customers from being gouged. Important parts of this authority come from PUHCA, allowing regulators to limit business practices that could undermine the stability of the utility, increase rates, and harm the environment.

How could PUHCA repeal harm consumers and the environment?

Repealing PUHCA without enacting other consumer and environment protections would allow utility holding companies to:

• Create huge multinational corporations beyond the reach of state and federal regulators.
• Undertake risky unregulated and foreign business ventures that could threaten their core business and increase rates without providing any services or benefits in return.
• Drive out small business competitors by using regulated business profits to subsidize unregulated business activities.
• Merge more easily, reducing the number of competitors in the power market. One leading Wall Street analyst recently predicted that 80 percent of electric utilities will disappear in less than 10 years.

With an unfair share of market power, large companies that own and operate highly polluting fossil fuel plants would have an interest in squeezing out renewable energy, energy efficiency and other clean, high value energy options. This trend, in turn, would increase U.S. dependence on fossil fuels, further damaging human health and the environment. Fossil fuel power plants already contribute about two-thirds of the emissions that cause acid rain, one-third of the global warming gases, and more than a quarter of the main precursor to urban smog.