Creation of Monopoly Utilities
After George Westinghouse and his alternating current won the Electric Current War electric companies began providing service from central station power plants and networks of transmission and distribution facilities. But well financed electric companies who built the biggest facilities produced electricity at the lowest operating costs. These companies undercut the prices of their smaller competitors. Those smaller companies either went out of business or submitted to mergers.
Eventually the large electric companies became monopoly electric suppliers in their local areas. States passed laws implementing regulatory control over the electric utilities to prevent them from from charging exorbitant rates.
Development of the Power Trusts
State regulation did not, however, prevent the monopoly electric utilities from merging with each other to become even larger regional and national electric suppliers. These growing companies purchased many of their goods and services from affiliated coal companies, engineering services companies and administrative services companies.
Each conglomerate, consisting of multiple local electric utility companies and their suppliers, was referred to as a Power Trust. By the early 1920s eight Power Trusts provided 73% of the country’s electric service.
Use of the Holding Company Structure
The Power Trusts all utilized the Holding Company structure. The Holding Company structure enabled a small group of rich men use investments from many small investors to build a large business empire. The men who controlled the Power Trusts made sure that they grew rich while the Power Trusts made money. But if there ever came a time when the Power Trusts did not make money it was the small investors who were likely to lose their investment.
The potential risk to small investors was not the only problem with the Power Trusts. The local electric utilities in the Power Trusts paid inflated prices for the goods and services they purchased from supplying companies within the corporate family. State regulatory agencies had difficulty regulating these inter-affiliate transactions. They resulted in increased rates for electric ratepayers.
The potential risk for small investors came to fruition in the Depression of 1929. The electric utility companies within the Holding Company structures did not generate enough revenues to pay down Holding Company debt. So the small investors lost their investments. The Power Trusts were weakened. But they were not dead. The small group of men that controlled the Power Trusts were just waiting for the economy to improve so that they could rebuild their empires.
President Roosevelt Opposes the Holding Companies
When Franklin Roosevelt was elected President in 1932 he promised that he would prevent the Power Trusts from regaining their power. He would have liked to have outlawed the Holding Company structure with legislation that prevented outside ownership of local electric utilities. But he recognized that there were some benefits to some common ownership of utilities. He, therefore, supported legislation that regulated, rather than eliminated, Holding Companies.
The men that controlled the Power Trusts did everything they could to oppose the legislation. They hired a team of 600 lobbyists to try to convince congressmen to vote against the legislation; they sent forged letters opposing the legislation to congressmen allegedly from their constituents; and they even started rumors about President Roosevelt’s sanity. Thomas McCarter, President of the Edison Electric Institute, referring to Roosevelt’s opposition to Holding Companies said
The President has an obsession on this subject. It is a condition of mind that even his closest associates in Washington do not understand.
The Public Utility Holding Comany Act of 1935
Notwithstanding all of this opposition President Roosevelt got his legislation regulated the Holding Companies. It was called the Public Utility Holding Company Act of 1935 (PUCHA). PUHCA made the Security and Exchange Commission (SEC) responsible for implementing its regulatory requirements. For a more detailed description of the passage of PUHCA see the linked entry in encyclopedia.com.
PUHCA imposed numerous requirements on Public Utility Holding Companies. For example, it limited the breadth of Holding Company ownership by prohibiting ownership of utilities in non-adjoining states absent an economic justification. It prevented the controllers of Holding Companies from taking advantage of small investors by requiring full disclosure of the ownership structure. And it required any sales from non-utility affiliates to utilities to be at cost without inclusion of any profit.
Immediately after passage of PUHCA 759 utilities were separated from their Holding Company structures and began to operate as stand alone companies responsible solely for serving their customers rather than generating profits for the Holding Company controllers. By 1952 virtually all Public Utility Holding Companies had ceased to exist.
The utilities long sought to have the PUHCA repealed. In 2005 they were successful with the repeal contained in the Energy Policy Act of 2005 (EPAct 2005). However, EPAct 2005 did not eliminate all of the consumer and investor protections contained in PUHCA. Many of such protections were retained and transferred to the regulatory oversight of the Federal Energy Regulatory Commission.
I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry.