Congress Should Strengthen — Not Repeal — Law That Protects Electricity Consumers

April 3, 2002

Congress Should Strengthen — Not Repeal — Law That Protects Electricity Consumers

Energy Bill Would Eliminate Public Utility Holding Company Act, Invite More Enron-Like Rip-offs

WASHINGTON, D.C. — Congress should strengthen — not repeal — a 66-year-old law relating to electric utilities that contains key consumer protections, Public Citizen said today.

The Senate energy bill, currently being debated, contains a measure that would repeal the Public Utility Holding Company Act of 1935 (PUHCA), which provides important protections but has been eroded over the past decade through loopholes, many of which were created at the behest of the now-disgraced energy company Enron.

PUHCA prohibits utility holding companies from investing ratepayers? money in areas that will not directly contribute to low bills and reliable service, such as out-of-region power plants or non-electricity industries. PUHCA was enacted in response to the United States? first Enron-style energy crisis in the 1920s, in which a handful of energy companies, employing business strategies strikingly similar to Enron?s, created complex, multi-state corporate pyramiding schemes. Not only were consumers overcharged, but investors were robbed because the holding companies? assets were inflated. The pyramiding holding companies finally collapsed, helping to bring about the stock market crash of 1929 and the Great Depression.

“It is unbelievable that after the California energy crisis and the collapse of Enron, Congress would still consider repealing this law,” said Public Citizen President Joan Claybrook. “This whole energy bill is a treasure trove of giveaways to the energy, oil and nuclear industries. This is yet another section of the bill that leave consumers in the cold.”

PUHCA has lost much of its teeth over the past decade as a result of deregulation, lobbying by energy companies — primarily Enron — and decisions by the Securities and Exchange Commission (SEC) to ignore the law. Congress undermined PUHCA by passing the 1992 Energy Policy Act, which permitted holding companies to invest ratepayer money in foreign power projects and divert resources away from American consumers. And the SEC made things worse when in 1994 it exempted power marketers such as Enron from PUHCA. As a result, power marketers ? creatures of deregulation that don?t own power plants but rather trade electricity contracts ? are trading free from government oversight in deregulated markets across the country.

The combination of deregulated state wholesale electricity markets, federal deregulation of commodity exchanges and the weakening of PUHCA has removed accountability from energy companies and allowed companies like Enron to manipulate energy prices and supplies. The recent California energy crisis and Enron?s collapse would have been impossible under a regulated system.

The solution is to close the loopholes and strengthen PUHCA, Claybrook said. Congress should:

Mandate that the SEC strictly enforce the act, and beef up funding and staff for the SEC so it can do its job;.

Prohibit holding companies from being allowed to invest in foreign countries, and ensure that power marketers are subject to PUHCA; and

Use PUHCA to address issues of market power. For example, Congress should grant federal and state regulators the authority to order holding companies to divest assets, expand anti-trust investigations and enforcement, and create non-profit, consumer-owned regional transmission councils to ensure non-discriminatory access to the grid.

“It is unfortunate that Republicans and Democrats alike propose repealing PUHCA,” said Wenonah Hauter, director of Public Citizen?s Critical Mass Energy and Environment Program. “The Enron disaster and the failure of electricity deregulation across the country illustrate how vulnerable consumers and investors are to impenetrable corporate structures and unaccountable markets. PUHCA?s protections are needed now more than ever.”

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For more information on PUHCA, click here.