FERC on Dec. 19 opened an inquiry into whether it should continue to grant blanket authorizations for holding companies — particularly large investment management companies — to purchase public electric utility securities (AD24-6).

Under Federal Power Act Section 203, companies must seek FERC approval for purchases of utility securities that are worth more than $10 million. Under Order 669, issued in response to the Energy Policy Act of 2005, the commission grants companies three-year blanket authorization to do so — rather than require them to return for each such purchase — subject to certain conditions, including that it cannot use that ownership to direct utilities’ management.

FERC said at the time its goal was to ensure the rules did “not impede day-to-day business transactions or stifle timely investment in transmission and generation infrastructure.”

In a Notice of Inquiry issued at its monthly open meeting, FERC is seeking comment on “whether, and if so how, the commission should revise that policy given the significant changes in the financial services sector in recent years and their investments in and effects on wholesale electric power markets.”

The notice asks commenters to respond to 17 questions, with five devoted to large investment companies. “The three largest index fund investment companies currently vote over 20% of the stock in the largest U.S. public companies, a number that may soon rise to 40%,” the commission noted. “Some have argued that the size of these investment companies creates issues related to competition and gives the investment companies unique leverage over the utilities whose voting securities they control.”

“It simply is no longer a credible assertion that investment managers, like BlackRock, State Street Corp. and The Vanguard Group Inc., are always or should be assumed to be merely passive investors,” Commissioner Mark Christie said in a concurrence to the NOI. “These investment managers are often the three biggest investors in publicly traded companies across the U.S. economy, including the utility industry, and wield significant financial power by virtue of their investments.”

Christie and his colleagues indicated last year they were wary of granting blanket authorizations for the so-called “Big Three” investment companies he cited. Though they approved BlackRock’s reauthorization, he and Commissioner Allison Clements called on the commission to reconsider its regulations (EC16-77-002). (See BlackRock Decision Unearths FERC Wariness of Investor Influence on Utilities.) Consumer advocacy group Public Citizen protested, arguing it was impossible for BlackRock to remain passive, given its size.

This year, Vanguard’s request went into effect automatically after the commission split 2-2 along party lines (EC19-57). (See Vanguard Wins Investment Extension in Split Decision at FERC.)

Christie and fellow Republican Commissioner James Danly cited competition concerns, while a group of Republican state attorneys general challenged Vanguard’s petition on the grounds the investment manager was seeking to pressure utilities to adopt environmental, social and governance (ESG) investing policies.

“I think it’s important to note that we’ve had a pretty broad call from a lot of stakeholders — from members of Congress; from state attorneys general,” FERC Chair Willie Phillips told reporters at a press conference after the commission’s meeting. “What I agree with is that it’s time to revisit our authority regarding these financial institutions, and how we address their blanket authority.”

Initial comments are due within 90 days of the NOI’s publication in the Federal Register, with reply comments due 30 days after that.

Along with questions regarding the size of companies seeking blanket authorizations, the commission also asks whether the current conditions and restrictions it imposes are enough to ensure the companies lack control over the utilities, and whether there should be additional ones. “It has been argued that by holding voting securities in a large number of public utilities, investment companies are able to influence utility behavior in ways that are not captured by the commission’s current analysis of control,” FERC said.

“The subject that I think would be most helpful to the commission is for people to file comments regarding what types of control should get the commission’s scrutiny,” Danly said during the meeting. “There’s good reason to believe that, in fact, this control question has not been perfectly adhered to, or at least not adhered to in the way that the commission would have thought of when we originally implemented this program.”

“Let us be clear — ‘ESG’ investor activity is simply a symptom of a larger, more pernicious threat that has always existed in the utility industry: improper investor influence and control over public utilities,” Christie wrote. “Large investors can and do force utilities to make decisions that are contrary to their public service obligations to their retail customers.”

In an article published in the Energy Law Journal in November, authors Hugh Hilliard and Caileen Gamache found that FERC has denied blanket authorization only three times. “In each case, FERC denied approval because the applicants ‘failed to demonstrate that the proposed transaction will not have an adverse effect on rates,’” they wrote.

But to Hilliard and Gamache — retired senior counsel with O’Melveny & Myers, and a partner in the Projects Group of Norton Rose Fulbright, respectively — “this means the vast majority of proposed transactions are consistent with the public interest.”

“It would save a lot of time and resources if the rules more effectively resulted in applications for transactions that actually have potential to raise public interest concerns. This will facilitate ‘greater industry investment and market liquidity,’ which FERC has agreed ‘are important goals,’” they wrote, citing a supplemental policy statement to Order 669 the commission issued in 2007.

The authors also argued that this policy statement, intended to clarify the order, “has been insufficient for determining whether each of the veto and consent rights … in many equity investment documents are consistent with a finding that the investment is passive.”