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August 21 - 27, 1935
Public Utilities Holding Company Act

August 2011

Franklin Delano Roosevelt.

To those who know the minds of the financial oligarchy, it should be no surprise to realize that, just at the time that deregulation was provably destroying the flow of electric power to the nation, their leading political mouthpieces were demanding the removal of the last regulatory safeguards which are still in place. Specifically, the Bush Administration energy bill, signed into law on August 8, 2005, and shaped by Vice President Dick Cheney's task force, repealed the Public Utilities Holding Company Act (PUHCA), an Act which played an indispensable role in ensuring the provision of cheap electricity throughout the United States from 1935 on.

The PUHCA was signed into law on Aug. 26, 1935. It was supplemented by the Federal Power Act of 1935, which enhanced the regulatory powers of the Federal Power Commission (which is today called the Federal Energy Regulatory Commission.)

The Background

In the 1930s, President Franklin D. Roosevelt faced a situation that in contour and geometry is similar to today's. The largest financial houses of Wall Street, in particular JP Morgan, working through two of its large holding companies, the United Corp. and General Electric Corp., bought up, through a large number of mergers, most of the nation's electric power-generating and transmission-line capacity. One holding company would buy anywhere from 50 to 300 operating companies. Then, upon this one holding company, a second, new holding company would be piggybacked, and then a third holding company would be piggybacked upon that one, taking ownership of the second holding company, and so forth.

Enron and Reliant Energy, two modern public utility holding companies, among the criminal fruits of the emasculation of FDR's Federal Power Comission and the repeal of FDR's PUHCA. Enron was busted while Bush was still in office, but Reliant continues looting to this day with impunity, no doubt aided by Bush's lame replacement for the PUHCA and Obama's love of being a British colonial governor.

A huge financial bubble was built up, and the income stream was looted upward from the electric-power generating companies, up through the layers of holding companies, each of which extracted additional wealth, up finally to the small group of Wall Street families that controlled the process (the particular method by which the looting was done was different than today's, where the holding company is not used in the same way as the 1930s—but the principle is the same). This pillaged existing physical plant and equipment, as there was no money left, after paying the profiteers, for physical investment. The holding companies also charged customers higher prices. Regulation of a serious type was not permitted.

Writing about the Act, Roosevelt said, "Through the device of these pyramided holding companies, small groups of men with a disproportionately small investment were able to dominate and to manage solely in their own interest tremendous capital investment of other people's money." Elsewhere, he accused them of "looting."

The PUHCA Provisions

The PUHCA provided some powerful provisions. Within Title I, it stipulated for the utility industry that the Securities and Exchange Commission should: regulate securities issues and intercompany transactions; lay down the principle that a holding company should not benefit from financial dealings with its own subsidiaries; and demand uniform systems of reporting and accounting (this could be adapted to the conditions of today).

Title II of PUHCA authorized the Federal Power Commission to integrate the utility operating companies into regional systems on the basis of technical efficiency, not of speculative manipulation. Thus, there might exist, for example, a holding company based in Pennsylvania that owned operating companies in Pennsylvania, Texas, and California. This practice was stopped and the holding company was restricted to owning only operating companies based within its region. A good number of holding companies which were speculative and could show "no useful economic function," were forced to dissolve, upon penalty of otherwise being dissolved by the U.S. government.

Supplementing the PUHCA, Roosevelt pushed through Congress the Federal Power Act (FPA) of 1935. The FPA expanded the powers of the Federal Power Commission to "regulate electric utilities' wholesale rates and transactions." Thus, the Federal Power Commission "establishes just and reasonable rates for the transmission and sales of wholesale electric power in interstate commerce. It also regulates permanent interconnections of electric utilities and promotes the adequacy of interstate electric power service."

The Federal Power Commission, which was later transformed into the Federal Energy Regulatory Commission and stripped of many of its powers, could set "rate-making." This is not setting a cap on prices. Rather, the Commission could set prices on the following basis: The electric utility, which had to open its books publicly, could charge a price that enabled it to cover its operating costs, plus a margin of surplus for investment in new and modernized plant and equipment. That's it—nothing more could be charged. Thus, Roosevelt and his allies established a "parity price" which functioned efficiently and well in the electric-generating and transmission industry (on the state level, this mechanism was applied for retail sales of electricity). For the next 60 years, this regulated system produced cheap and abundant energy for America's factories, farms, hospitals, schools, homes, etc.


The original article was published in the EIR Online’s Electronic Intelligence Weekly, as part of an ongoing series on history, with a special emphasis on American history. We are reprinting and updating these articles now to assist our readers in understanding of the American System of Economy.