Feb. 7, 2003
Public Citizen Applauds SEC Decision to Uphold Crucial Consumer Protection Law
Commission Denies Enron’s Request for Exemption from the Public Utility Holding Company Act
WASHINGTON, D.C. – Public Citizen praised a Securities and Exchange Commission (SEC) decision last night upholding an important law that protects consumers from market manipulation by energy companies.
An SEC judge ruled that Portland General Electric utility, a subsidiary of Enron Corp., is regulated under the Public Utility Holding Company Act (PUHCA), because Portland General’s multi-state presence in the West necessitates PUHCA’s strong consumer protections.
“We are delighted that the SEC has learned the lesson of the California energy crisis and the Enron debacle,” said Wenonah Hauter, director of Public Citizen’s Critical Mass Energy and Environment Program. “The Public Utility Holding Company Act is the most important consumer and shareholder protection the federal government has to protect consumers and stop corporate fraud by energy companies. By telling Enron it cannot be exempted from this crucial law, the SEC is sending a message to the electricity industry that the days of anything-goes deregulation are over.”
PUHCA was enacted in 1935 in response to an Enron-style energy crisis in the 1920s. A handful of energy companies, employing business strategies strikingly similar to Enron’s, held consumers hostage with complex, multi-state pyramiding schemes. Not only were consumers overcharged by these impossible-to-regulate conglomerates, investors were robbed because holding companies used complex webs of subsidiaries to inflate earnings. These holding companies finally collapsed, ringing in the stock market crash of 1929 and the Great Depression.
PUHCA protects consumers by ensuring that multi-state utility companies re-invest ratepayer money into providing affordable and reliable electricity. Consumers benefit from PUHCA’s requirements that holding companies invest only in integrated systems — utilities that are physically interconnected — thereby maximizing economies of scale by operating a single, coordinated system. PUHCA has historically prohibited holding companies from investing in assets that will not directly contribute to low bills and reliable service (out-of-region power plants or non-electricity industries, for example). Had PUHCA been properly enforced, and had Enron’s energy trading not been exempted from the Act in 1994, the company never could have manipulated the West Coast market.
The SEC rejected Enron’s claim that Portland General should be exempt from PUHCA, citing the fact that more than one-third of the subsidiary’s revenues came from interstate sales. Nearly 15 percent of the division’s power plants are outside Oregon, and the subsidiary owns a major transmission line between Oregon and California — all important tools Enron exploited during its manipulation of the West Coast energy market. These interstate features mean that Oregon regulatory officials have limited ability to control the company, requiring federal regulation under PUHCA.
The SEC’s decision is especially important because for decades the Commission ignored its statutory duty to enforce the law. But in January 2002, the U.S. Court of Appeals for the District of Columbia ordered the SEC to revisit its decision to approve a merger between American Electric Power (AEP) and Central & South West (CSW). Public Citizen had maintained that the SEC’s earlier decision to approve this merger between Ohio-based AEP and Texas-based CSW violated PUHCA’s requirements that holding companies have interconnected systems. The SEC had ruled that the merger satisfied PUHCA because the two utilities are connected by a lone, 250-mile transmission line owned by an unrelated company.
“The SEC’s decision yesterday, combined with the January 2002 appeals court ruling and the widespread fraud committed by electricity companies, should remind lawmakers that recent efforts in Congress to repeal PUHCA are misguided,” Hauter said.