Vanguard Wins Investment Extension in Split Decision at FERC
GOP State AGs Urge FERC, Congress to Focus on ESG Issues
Vanguard’s request for an extension of its authorization to procure utility securities went into effect as FERC’s commissioners apparently split 2-2.

Vanguard’s request for another three-year extension of its blanket authorization to procure utility securities went into effect “by operation of law” May 8 as FERC’s commissioners apparently split 2-2 on the application (EC19-57).

Republican Commissioners James Danly and Mark Christie released a joint statement May 9 expressing concern that Vanguard’s utility holdings, which have grown from $5 trillion in 2019 to $6.7 trillion in late 2022, could undermine competition.

“Horizontal shareholding, or common shareholding between horizontal competitors, could reduce incentives to compete in a given product market. This is especially so in concentrated markets,” Danly and Christie said. They said the commission had not developed a sufficient record to determine whether Vanguard’s advisory subsidiaries and 34 affiliated investment companies were abiding by promises not to exert control over the utilities.

The two had previously objected to a 2022 FERC order, which extended a 2019 ruling allowing Vanguard to acquire up to 20% of the outstanding voting securities of a public utility in aggregate, and up to 10% by a single fund.

FERC Chair Willie Phillips and Commissioner Allison Clements, both Democrats, had not issued a statement on Vanguard’s filing as of late Wednesday.

GOP AGs Protest

While Danly and Christie cited competitive concerns, a group of Republican state attorneys general had challenged Vanguard’s petition on the grounds that the investment manager was seeking to pressure utilities to adopt environmental, social and governance (ESG) investing policies. (See Red State AGs Challenge Vanguard Climate Activism.)

The attorneys general made similar allegations in a filing Wednesday opposing BlackRock’s (NYSE:BLK) request for a similar investment authorization (EC16-77-002). The filing came as the House Oversight and Accountability Committee held a hearing on ESG issues, where Utah Attorney General Sean Reyes said the committee should ensure that FERC is preventing “asset managers who collectively own significant percentages of utilities’ stock [from] improperly influencing the operations of those utilities.”

The state AGs’ BlackRock filing comes after FERC already granted the investment firm an extension last year, but it asks the commission to audit whether the firm continues to be a passive investor. They point to its signing onto “activist crusades” such as Climate Action 100+ and Net Zero Asset Managers Initiative.

CA100+ and NZAM have called for achieving net zero greenhouse gas emissions by 2050. Vanguard left NZAM after the AGs’ protest over its application last year.

“This is yet another example of radical leftists trying to circumvent the will of the American people in order to implement their draconian mandates,” Indiana Attorney General Todd Rokita said in a statement. “The restrictions these elitists are trying to impose on energy companies and utilities would never win approval at the ballot box.”

‘Enormous Accumulation’

Danly and Christie said “the enormous accumulation of such assets enables Vanguard to vote large percentages of publicly traded companies’ shares. The commission has had a long history of scrutinizing corporate structures that allow for the common ownership of, or influence upon, public utilities. Vanguard’s application raises a number of issues that demand commission scrutiny because Vanguard may be able to exercise profound control over the utilities whose securities it holds, including the potential to influence decisions of the utility management that could have serious effects on the reliability of power service and rates for customers.”

FERC should consider whether blanket exemptions for firms with such massive investments in the utility sector are consistent with the public interest, they said.

They noted that Vanguard told the commission that it is abiding by the conditions in the 2022 order and its “own investment guidelines” that preclude it “from acquiring or holding securities with the effect or for the purpose of exercising control or management” of utilities.

“These guidelines, however, do not appear in the record, so their sufficiency in this respect cannot be assessed,” the commissioners wrote. “Further, Vanguard states that each Vanguard advised fund has ‘proxy voting procedures and guidelines adopted by each fund’s board.’ These proxy voting procedures and guidelines are also missing from the record.

“Vanguard’s failure to include material upon which its application is predicated hampers the commission’s ability to assess the independence of the advisors or examine how much control or oversight Vanguard actually retains,” they added.

Public Citizen Energy Program Director Tyson Slocum said in an interview May 10 that the ESG issues were a distraction from the real issue of horizontal market power from firms like BlackRock and Vanguard.

“We raised substantive issues about the commission’s current, ‘check the box’ exercise for blanket waivers for certain fund managers,” Slocum said. “The commission needs to perform some basic analysis given the size of BlackRock, Vanguard and these types of entities. These are no longer small players. They have sort of radically redefined equity ownership in stocks.”

Public Citizen filed a protest last year arguing that BlackRock’s impact on horizontal competition warranted more attention from the commission. That argument convinced Christie and Clements, who both filed comments on the April 2022 order urging more scrutiny going forward. (See BlackRock Decision Unearths FERC Wariness of Investor Influence on Utilities.)

“As these types of entities increasingly emerge as material investors across public utilities, it is important for the commission to consider whether its analysis in considering these blanket authorizations remains sufficient to ensure that transactions made under the blanket authorizations are within the public interest, including that they do not have an adverse effect on wholesale rates,” Clements said then.

Slocum said FERC has an obligation under Section 203 of the Federal Power Act to review investment firms’ impact on horizontal competition. That is especially important given that FERC’s main method of regulating the industry in recent decades has depended on competition, which could be limited due to horizontal market power.

BlackRock, which directly owns energy infrastructure such as oil storage facilities and a natural gas plant in Georgia, is not just investing passively in utilities. The issue is worthy of FERC’s increased attention, but the ESG talk amounts to a “political stunt,” said Slocum.

If anything, it makes sense for utilities, and even companies focused on extracting fossil fuels, to plan around potential climate liabilities going forward, said Slocum.

“This woke capitalism nonsense by these wildly uninformed attorney generals just makes them look silly and stupid,” Slocum said. “There’s nothing woke about BlackRock or Vanguard.”

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