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PUHCA Companies: Caught By Superfund

An analysis of holding company liability under federal Superfund and parallel state laws.
Fortnightly Magazine - April 15 2003

least one of these major holding companies was usually represented as shown graphically in a map prepared by the FTC. 3

The major holding companies had scores, even hundreds of subsidiaries. The Associated Gas & Electric Co., for example, was reported to own 175 utility subsidiaries through a system of intermediate holding companies. Samuel Insull's Middle West Utilities and Midland Utilities holding companies owned several hundred utility subsidiaries serving 6,000 communities. 4 The holding company system of ownership had several attractions. It offered possible economies of scale as compared with individual "town gas" or single station electric companies. Second, the holding companies were large enough to raise capital in major national markets, whereas an individual subsidiary might have access to capital only from a local bank or small universe of wealthy citizenry. The subsidiary utilities typically were regulated under state laws, but the holding companies were interstate in nature and usually reported to no master.

Managing hundreds of subsidiaries had its own challenges, and giving each utility its independent management was not the usual solution. Many holding companies set up "service companies" with extraordinarily broad powers to run their utility subsidiaries. In a few instances, the parent holding company may have provided the same functions itself. The holding companies discovered that the service companies could be exempt from regulation, yet could charge for their services, and the cost would be recoverable in the local utilities' rates. This opened a second layer of profit opportunities.

Eliminating Complexity

The New Deal legislation contained in the Public Utility Holding Company Act of 1935 (PUHCA) 5 responded to excesses of the holding companies by requiring that electric and gas utility systems be reorganized into geographically compact structures, and that unnecessary layers of corporate and financial complexity be eliminated. Over the next 20 years, the Securities and Exchange Commission (SEC) "simplified" the holding companies, requiring them to sell off subsidiaries, restructure their finances, and eliminate or reform their service companies. The holding companies that exist today are quite different from their predecessors.

How does this relate to environmental liability? Ordinarily, parent corporations are insulated from liability for the acts of their subsidiaries (indeed, this insulation is the very purpose and promise of separate incorporation). If the parent follows the appropriate legal steps and is not engaged in fraudulent or other illegal actions, the parent is usually protected.

The U.S. Supreme Court applied this rule to Superfund in the leading Bestfoods case. 6 EPA spent millions cleaning up a chemical plant site and brought suit to recover the costs against the present owner, its parent and predecessors. The Supreme Court ruled that parent liability would not arise from stock ownership, or such incidental acts of the parent as electing directors and officers, or even the duplication of officers and directors (having the same persons serve as officers of the parent and subsidiary).

Superfund liability extends to both present and past "owners" and "operators" of sites and facilities that threaten the environment, the court explained in Bestfoods. Parent corporations taking minimal precautions will usually not face owner liability, the