Industry trade groups warned FERC this week against passing more stringent restrictions on investment funds’ shares in the power industry, but consumer advocates and Republican state attorneys general urged it to move forward with rule changes (AD24-6). 

FERC launched a Notice of Inquiry at its December open meeting after consumer advocates had argued that large asset managers such as BlackRock and the Vanguard Group — both of which urged FERC this week to keep its current rules in place — could have market power in the industry. (See FERC Reconsidering Blanket Authorizations for Investment Companies.) 

The commission’s current policy allows investors to acquire up to 10% of public utilities’ shares and up to 20% if they are truly passive, as Vanguard and BlackRock told the commission they were. The commission usually grants companies three-year blanket authorizations to do so. 

The American Council on Renewable Energy warned FERC against changing its rules, arguing the NOI lacks any concrete evidence that they are falling short. 

“The opposite is true, as altering this policy creates a risk of impeding financial investment in much-needed energy infrastructure,” ACORE said. “Moreover, much of the rationale for this notice appears to be based only on speculative concerns that are outside the scope of the public interest consideration.” 

Many financial institutions pursue investments in renewable energy for myriad reasons, including their declining costs and their lower risks and higher returns compared to other technologies, ACORE said. 

The Edison Electric Institute also argued against any changes, saying they could threaten investments at a time the industry needs to be making them because of growing demand and the ongoing turnover in the generation fleet. 

“Given the capital investments required to expand and upgrade existing infrastructure, facilitate a lower-carbon future, reliably serve growing demand and withstand extreme weather, any action by the commission that creates new regulatory friction for those investments or discourages capital investments would not be helpful for the economy, utilities charged with providing reliable service and their customers,” EEI said. 

EEI appreciates that FERC is collecting information at this stage, but it said there is no compelling reason to revisit its blanket authorization policy at this time. 

“It is not clear from the NOI that the growth in index funds the commission highlights is concentrated in investments in public utilities,” EEI said. “In other words, it is not clear that the growth is completely attributable to the U.S. utility industry; quite to the contrary, the electric industry is competing with all publicly traded companies for investment by investment companies.” 

Consumer Advocates

The D.C. Office of the People’s Counsel, Maryland Office of People’s Counsel and New Jersey Division of Rate Counsel encouraged FERC to expand the reach of its regulations so they can adequately protect ratepayers against the abuse of market power. 

“Change is needed because the world of diffuse ownership of utility and utility-holding company stock no longer exists,” they said. “Academic analyses confirm the extent of the shift: ‘[By] 2017, institutional investors held 80% of the stock in S&P 500 firms and cast 93% of the votes at [such] firms.’ The aggregation by institutional investors of vast holdings in the nation’s utilities necessarily implies an ability to influence, if not control, utility behavior.” 

The agencies suggested cutting the thresholds in half to 5% for most investors, and in case-specific instances, investment companies could own under 10% in aggregate and under 5% for each individual fund controlled by the recipient. Even at just 5% of a firm, that could total hundreds of millions, if not billions, which would give investors significant influence on a public utility, they argued. 

Any firm that wants to get up to 10% should be required to effectively “put its stock in a drawer” and not engage in communications with the firm or vote in shareholder meetings, they said. 

The trend in utility investments is mirrored in the stock market generally. The “Big Three” index funds — BlackRock, Vanguard and State Street — collectively at the end of 2021 held a median stake of 21.9% in all S&P 500 companies, representing about 25% of votes cast in those companies’ annual general meetings. 

They are often the largest shareholder in a company, which conveys considerable influence over corporate boards and managers, the consumer advocates said.  

“Because the interactions between institutional investors and the firms they own often take place behind closed doors, there is limited public information on how these investors wield their influence,” they added. “But ample empirical research and public statements by institutional investors themselves confirm the obvious — that they can and regularly do influence corporate behavior.” 

Horizontal ownership of ostensibly competing companies can generate powerful anticompetitive incentives because the owners no longer want to maximize the profits of just one company, but multiple or every competitor in a market, the advocates said. 

“The investor is incentivized to avoid actions that may reduce profits industrywide, even if those actions may be competition-enhancing and economically rational from the perspective of the individual firm,” they added. 

Conservative Arguments

While the ratepayer advocates were focused on anticompetitive behavior ultimately leading to higher rates for consumers, most of those urging updates from FERC were focused on the Big Three’s environmental, social and governance (ESG) policies, which they said could threaten electric reliability. 

A group of 20 Republican state attorneys general, led by those of Utah and Indiana, argued FERC should update its rules to require that asset managers get approved as “holding companies.” 

They also argued that the 20% cap on ownership should also be applied to associations such as the Net Zero Managers Initiative, which more than 300 asset management companies have signed onto, according to its website. 

“Key components of the financial system have been used to impose activist policy preferences on companies that are not required by applicable law and thus have not been approved by the democratic process,” the attorneys general said. “Specifically, activists enlisted asset managers to use their assets under management (AUM) to force utilities to set early targets to decommission fossil fuel-based generating assets and replace them with wind and solar on a scale that has never before been seen and is not technologically feasible.” 

The attorneys general argued that pressure from BlackRock and the California Public Employees Retirement System pushed PacifiCorp to retire some coal plants early, even though a shareholder motion they backed failed. 

“PacifiCorp may have multiple reasons for the closures, but responding to coordinated pressure by asset managers and other owners is not a legitimate one,” they added. “Consumers will be harmed if their costs go up or reliability decreases because of early closures based on activist pressure campaigns.”