Public Utility Holding Company Act of 1935 - The Act

The Act

PUHCA required that Securities and Exchange Commission (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 utility's regulated business. Holding companies were required to register with the SEC, which would then conduct administrative proceedings to limit each holding company to ownership of a single integrated electric system (with certain exceptions) through the divestiture of the securities of other public utility and unrelated companies. PUHCA 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 Power Commission regulation. (In 1977, the Federal Power Commission was replaced by the Federal Energy Regulatory Commission (FERC)). 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 any common service company expenses associated with that state's electric company 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.

Because the SEC strictly enforced the divestiture provision of PUHCA in its proceedings and ordered divestiture of all corporate holdings except for a single integrated electric system, the affected holding companies filed voluntary divesture plans. As a result, by 1948 holding companies had voluntarily divested themselves of assets worth approximately $12 billion and the number of subsidiaries controlled by affected holding companies was reduced from 1,983 to 303.

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 streetcars. 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.