FTC Milestones: Making the case for reform of public utility holding company laws

From its earliest days, the Commission has used its authority under Section 6 of the FTC Act to gain a deep understanding of competitive conditions in a variety of industries. In its first two decades alone, the FTC produced more than 100 studies or responses to general inquiries, most often pursuant to Congressional resolutions or Presidential orders. Information and insight gained in these inquiries generated policy recommendations to tackle the pressing needs of the nation in the face of changing market conditions. As explained in the Commission’s Annual Report for 1936:

“these inquiries have supplied not only valuable information bearing on conditions, developments, and trends in interstate trade and industrial development, but have thrown light on the need for and wisdom of legislation for corrective action. The public need for such fact-finding studies in this increasingly complex economic era grows greater, irrespective of different economic and political philosophies.”

By most measures, the Commission’s most important public hearings during these early days examined the conduct and structure of public utility holding companies. These extensive hearings began in 1928 and concluded seven years later, generating 96 volumes of reports. 

The inquiry focused on abusive conduct by holding companies and their affiliates, such as issuing securities based on inflated asset values, overcharging for services provided by affiliates to the regulated utility, and unsound or unnecessary financial structures or practices that prevented oversight by state regulators. According to the Commission’s annual report (page 120), “the Commission’s reports and recommendations, focusing  congressional attention upon certain unfair financial practices in connection with the organization of holding companies and the sale of securities, were among the influences which brought about enactment of such remedial legislation as the Securities Act (1933), the Public Utility Holding Company Act (1935), the Federal Power Act (1935), and the Natural Gas Act (1938).” 

A couple of interesting historical notes about these hearings. First, they had a curious origin. The hearings were directed by a Senate resolution, which diverted the hearings to the FTC in lieu of hearings in the Senate, the preferred venue for several progressive Senators who were initially skeptical of the FTC’s ability to review financial and securities abuses related to the proliferation of holding companies. To the Senators’ surprise and the agency’s credit, the Commission’s efforts did much to dissipate those concerns. Another unusual feature of the hearings was the direct involvement of an FTC Commissioner, Edgar McCulloch. A former Chief Justice of the Arkansas Supreme Court, McCulloch personally conducted the hearings until his death in 1933. In addition, the lead FTC investigator, Robert Healy, left the FTC to become one of the first Commissioners of the newly-formed Securities and Exchange Commission. (The FTC enforced the Securities Act of 1933 until the SEC was created in 1934.) Finally, the hearings were highly publicized: for instance, in May 1931, the New York Times devoted five page-one headlines to revelations about ties between utilities companies and newspapers. 

The public utilities hearings helped establish the agency’s core competency in analyzing and advocating for regulatory policies in the electric utility sector, a critical task that continues at the FTC today. The Commission shares its expertise in electric power markets to encourage policies that promote the interests of consumers and rely on competition as much as possible. The Commission provides comments to state utility commissions, state legislatures, the Department of Energy, and the Federal Energy Regulatory Commission; issues staff reports on electric power industry restructuring at the wholesale and retail levels; and participates in working groups with other federal agencies, such as the Electric Energy Market Competition Task Force, which issued a Report to Congress in the spring of 2007. To learn more about the FTC’s competition advocacy before federal and state electricity regulatory agencies, here’s a list of comments going back to 1985.

Next FTC Milestone: Consumer protection debuts at the Supreme Court

For further reading:

Federal Trade Commission, Summary Report on Economic, Financial, and Corporate

Phases of Holding and Operating Companies of Electric and Gas Utilities, Washington:

Government Printing Office, 1935.

The development of the FTC’s electricity competition advocacy program is chronicled in "The Federal Trade Commission and Electric Power Industry Restructuring," National Regulatory Research Institute Quarterly Bulletin, 21:1 (Autumn 2000), pp. 1 26, and "Joining the Electric Industry Policy Debate at the State Level," in Amato, G., and L. Laudati, Eds., The Anticompetitive Impact of Regulation, Northhampton, MA., Edward Elgar, 2001, pp. 378 393, both by John Hilke.

On the legislation of the 1930s and the influence of the FTC’s hearings:

Richard Lowett, George Norris: The Persistence of a Progressive 1913-1933 (1971).

Michael E. Parrish, Securities Regulation and the New Deal (1970).

Scott James, Presidents, Parties, and the State: A Party System Perspective on Democratic Regulatory Choice, 1884-1936 (2000).

On press coverage of the Commission’s hearings and other activities: 

Marc Winerman, History through Headlines, 71 Antitrust L.J. 871 (2005).