In response to calls from industry stakeholders, the Federal Energy Regulatory Commission on Dec. 19 launched a review of its policies governing the sale of shares in public utilities to institutional investors.
The notice of inquiry (NOI) follows concerns raised by Commissioners Mark Christie and Allison Clements about the market influence of powerful investment managers such as BlackRock Inc., Vanguard Group Inc. and State Street Advisors Inc. on the US electric utility sector.
Public Citizen, a consumer watchdog group, has repeatedly urged FERC to take a harder look at whether utility stock acquisitions by private equity firms raise market power concerns. And Republican attorneys general have argued that some investment firms' participation in environmental, social and governance (ESG) initiatives makes them active, rather than passive, investors.
Institutional investors such as pension funds, large asset managers and private equity interests routinely seek blanket authorizations from FERC to acquire shares in public utilities. Section 203 of the Federal Power Act authorizes investment firms and their subsidiaries to acquire up to 20% of the voting securities of any individual US utility. Investors who own 10% or more of the outstanding voting securities in a utility must be designated as affiliates under the statute.
"There are stakeholders who would like for FERC to take a look at the rules of the road related to blanket authorizations, and I agree that we should examine them," FERC Chairman Willie Phillips said during the agency's Dec. 19 monthly open meeting.
However, Phillips cautioned that the NOI "is not about making immediate changes."
"It's about understanding whether our current framework still fits the dynamic nature of the financial investment sector and its effects on the energy markets," Phillips said. "I welcome everyone's input and feedback on where we need to go in this proceeding."
FERC's inquiry (AD24-6) includes questions on whether the commission's blanket authorization policies should be revised to account for the size of an investment company, according to a Dec. 19 news release. The NOI also seeks comment on the factors to be considered when evaluating an investment company's control over public utilities as part of blanket authorizations.
In November 2022, for example, 13 Republican attorneys general protested a Section 203 application filed by Vanguard, arguing that the firm should be considered an active investor due to its participation in the Net Zero Asset Managers initiative and Ceres Investor Network. Vanguard withdrew from the Net Zero Asset Managers in December 2022, and FERC approved the application in May without addressing the attorneys general's concerns.
Public Citizen also argued in a November protest that Elliott Management Corp.'s use of cash-settled derivatives to accumulate a 13% economic interest in power generator and retailer NRG Energy Inc. — which led to four new board members and a cooperation agreement with NRG — makes Elliott an affiliate of NRG.
Christie, who has previously argued that the issue "merits the attention of Congress itself," said the inquiry "is about looking at whether FERC's practices are appropriate."
During the meeting, Christie outlined three ways in which institutional investments in public utilities can go wrong.
Private equity firms can invest with short-term profit goals that are inconsistent with a public utility's long-term goals, Christie noted. He also expressed concern over interlocking ownership of generation assets that compete with other assets owned by the same firm.
"And then, of course, there's the ESG issue," Christie said. "Are the asset managers pushing policies that aren't necessarily in the best interest of the utility?"
Such conflicts can still be resolved under Section 203 "because capital has to be raised," Christie said.
The final text for the NOI was not immediately available on Dec. 19. Comments on the inquiry are due 90 days after its publication in the Federal Register.
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