An analysis of holding company liability under federal Superfund and parallel state laws.
Environmental cleanup to meet federal and state requirements carries substantial costs that tend to rest disproportionately on public utilities. Looking back at their corporate history, a few utilities have discovered some unique tools to reduce this economic burden.
The federal Superfund and parallel state laws1 authorize the government to issue site study and cleanup orders to private parties, government actions against private parties to recover public funds used in site studies and cleanup, and actions between private parties to recover (or at least share) the costs of studies and cleanup. Although there is no adequate tally of the total cost of these programs, the federal Environmental Protection Agency (EPA) reports that it spends about $1.3 billion yearly and estimates that it secured private party cleanups and payments worth $16 billion over the first 20 years of its program.
Public utilities are easy targets in this process. Being highly visible public citizens, they have a penchant for compliance with the laws. Their facilities, built to last, use solid construction techniques that should minimize environmental mishaps. But utilities are heavily exposed to federal and state Superfunds because these laws impose "no fault" liability for actions of the distant past that were totally acceptable, even state-of-the-art, when taken. Years or decades later, if environmental contamination (or even just threatened contamination) is found, this can trigger liability.
Superfund liability is perpetual. Enterprises that are responsible for long-past activities often cannot be found because they have ceased operations, gone out of business, sold their assets, or otherwise ended. Public utilities rarely disappear, however. Utilities may merge, but in that case the successor carries the liabilities of both its predecessors. Utilities usually do not sell their assets or franchises because of concerns about regulatory and other consequences. Utilities rarely enter bankruptcy. Thus, public utilities become large contributors to the correction of environmental problems that may originally have been created by the actions of many parties.
Height of the Holding Companies
In a few recent instances, public utilities have found relief under Superfund in their own past history. They have secured significant recoveries toward their site study and cleanup costs from corporations that previously owned them 50 or more years ago. Their success arises from the unique and largely forgotten structure of many public utility holding companies of times past.
Until the mid-1950s, holding companies were the most common structure of ownership of "fixed" utilities (electric, gas, telephone, water and sewer companies), as well as a large number of "traction" companies. Individual local utilities, franchised to serve a single town or city, were owned by large, publicly traded holding companies. An investigation by the Federal Trade Commission (FTC) found that 16 very large holding company systems accounted for 76 percent of the electric energy generated in the United States in 1932; 15 holding company systems controlled 80 percent of the gas pipeline mileage; and 44 holding companies produced 66 percent of the manufactured gas in this country.2 In any large or small community, at 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.
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 court explained. However, if they became directly involved in the operation of the subsidiary's facilities-"operation" meaning to control the functioning of a facility-liability will attach to them. In the organizational context, according to the Supreme Court, "operation" also means to conduct the affairs, manage, or operate a business. For Superfund's purposes, the operations should have to do with leakage or disposal of hazardous waste or with compliance with environmental regulations.
Although Bestfoods bars some claims, a special and different case arises when a public utility deals with sites operated in the earlier holding company era. Holding companies in the pre-PUHCA period often required their utility subsidiaries to assign very broad powers to affiliated service companies that actually designed their facilities, managed their operations, and generally ran their significant affairs. Under a typical service agreement, the utility signed over the rights to manage its plants and property, provide local staff, conduct purchasing, secure financing, and report on, and account for, operations. A separate agreement provided engineering and construction services.7 Another major holding company used a service agreement providing general supervision over operations, management and development of the utility's properties, personnel and organization, purchasing, finance, accounting and auditing, corporate matters, legal work, and rate matters.8 A third major holding company used affiliates as financial and operating manager, as well as for procuring capital, employing a clerical staff, keeping the books and records, making reports, purchasing labor and materials, and construction work. The FTC report concluded that the contract "provided for the complete operation of the properties."9
In another instance, the FTC report noted that "78 classes of activities are listed under general management in the contract of Electric Bond & Share Co. The service organization may be made the operating manager of the client companies' properties with the authority to supervise and direct the management and operation of such properties. … There is little that it is not expressly or impliedly authorized to do."10
These broad, forced transfers of management and operational authority from the utility to a holding company or affiliate naturally raise a question: Which party is the "operator"-the utility, or the holding company or service affiliate?
Seeking to avoid liability, an ex-holding company will search through the PUHCA simplification process for some indication that it is exempted from future claims arising from its past ownership or operation of utility subsidiaries. Although there has been no ruling squarely on point, where these arguments have been raised, the courts have found them unconvincing.11
A factor reducing the number of claims against restructured prior holding companies or their affiliates may be the difficulty of proving sufficient facts to support operator liability. Each year there are fewer survivors to provide a testimonial basis for such a claim. To make a case, resourceful investigation is needed to locate adequate documentary or live evidence. In some instances, the surviving data may be insufficient to show the managerial and operational practices of the holding company or affiliates.
Experience in the recent cases brought by public utilities has shown the way to locate significant data as to the practices of particular holding companies and their service affiliates. The FTC's Report to the Senate of the United States on Economic, Financial and Corporate Phases of Holding and Operating Companies of Electric and Gas Utilities is a very large collection of pertinent information. Records of the SEC and the courts are also a rich resource, along with utility archives. Sometimes retirees with useful recollections can be located, and there are even a few people still employed in fields such as consulting or law from those earlier times. Persistence is the most significant element in this kind of project.
Thus, even today some entities that used to be holding companies of the old style and their affiliated service companies are exposed to supportable claims of operator liability under Superfund. As a result of the PUHCA "simplification" process, utility companies now facing cleanup costs are often no longer related to their prior parents (although this is not necessarily a requirement for a claim), and several public utilities have filed claims securing reimbursement of cleanup costs under the principle of operator liability. In the field of site cleanups, there is usually only red ink, and achievements such as these are always worthy of examination.
- Superfund is properly titled the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601 et seq. Parallel state laws, typically titled Hazardous Site Cleanup Act, exist in at least three-fourths of the states. For purposes of this article, all will be jointly referred to as "Superfund."
- , Doc. 92 (70th Congress, 1935)(the "FTC Report"), Vol. No. 72-A, pp. 38-46.
- Id. p. 56b.
- Forrest McDonald, Insull (Univ. of Chicago Press, 1962), p. 275
- 15 U.S.C. Section 79k et seq.
- U.S. v. , 524 U.S. 51 (1998).
- The Standard Gas & Electric System contract with its affiliate, Byllesby & Co. FTC Report, Vol. 72-A, p. 622.
- Insull's Middle West Utilities Group service contract. FTC Report, Vol. 72-A, p. 637; also Vol. 38, p. 787.
- Id., Vol. 72-A, pp. 626 et seq. In this instance, the Associated Gas & Electric System, all cash was deposited in bank accounts in the name of the parent (not the operating utilities). FTC Report, Vol. 45, pages 1013-14.
- FTC Report, Vol. 72-A, p. 600.
- See Interstate Power Co. v. Kansas City Power & Light Co., 909 F. Supp. 1241 (N.D. Iowa 1993); North Shore Gas Co. v. Salomon, 152 F.3d 642 (7 Cir. 1998).
Landmark Dates in Superfund History
Sept. 19, 1980: Following EPA estimates of thousands of inactive and uncontrolled hazardous waste sites in the United States, the House of Representatives passes legislation establishing a "superfund" to be used for environmental emergencies. An amended version of the bill eventually would pass in the Senate.
Dec. 11, 1980: Outgoing President Jimmy Carter signs Superfund (the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA) into law. The law gives the federal Environmental Protection Agency the authority to respond to a release, or substantial threat of a release, of a "hazardous substance" or "any pollutant or contaminant which may present an imminent and substantial danger to health or welfare."
1986: Congress passes the Superfund Amendments and Reauthorization Act (SARA), raising the size of the Superfund Trust Fund from $1.6 billion to $8.5 billion. SARA also further empowered the EPA to enforce the Superfund provisions, while also encouraging voluntary settlements instead of litigation.
1998: EPA completes its 5,000th successful removal action under Superfund, at a drum reclamation plant in Missouri.
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