The Federal Energy Regulatory Commission (FERC) has authority to approve certain utility mergers and acquisitions under Section 203 of the Federal Power Act (FPA). Under that authority, it has granted "blanket authorizations" to investment management companies—like BlackRock and Vanguard—to acquire in their investment funds up to 20% of the voting shares of public utilities across their family of funds. But a motion filed recently by a group of Republican attorneys general (AGs) renews efforts to undo those authorizations and stymie climate-focused investing. If successful, it could have significant implications for investment managers and the utilities they invest in.
In this client alert, we (i) briefly explain FERC's blanket authorizations under Section 203, (ii) discuss how a recent Vanguard proceeding previewed the current controversy, (iii) summarize the AGs' motion criticizing BlackRock, and (iv) analyze potential implications.
Background – Blanket Authorizations Under Section 203 for Investment Management Companies
Section 203 provides that certain mergers and acquisitions related to public utilities cannot proceed unless FERC has found them "consistent with the public interest." Of particular relevance here, subsection (a)(2) states that a "holding company" must seek approval to acquire more than $10 million of utility or holding company securities. A "holding company," under subsection (a)(6), is a company that directly or indirectly owns, controls, or holds, with power to vote, 10% or more of the outstanding voting securities of a public utility or a holding company thereof.
FERC provides several "blanket authorizations" that preapprove transactions that would otherwise need FERC permission under Section 203 (as implemented by Part 33 of FERC's regulations). Under 18 C.F.R. § 33.1(c)(2)(ii), FERC has granted a blanket authorization that allows a holding company to acquire a utility's voting securities so long as it will own less than 10% of those securities.
By order, FERC has granted several investment management companies, such as Vanguard, an expanded blanket authorization for the acquisition of up to 20% of the voting securities of any individual publicly traded utility across a manager's funds, but additional assurances are required. The company may not allow any of its individual funds to acquire more than 10% of a utility's securities without prior FERC approval. The assurances also include that the applicant would be a non-controlling, passive investor and will file with FERC certain Securities and Exchange Commission (SEC) filings that further demonstrate no intention or effect of controlling the relevant issuers of securities. FERC has granted these blanket authorizations, ordinarily for a three-year period, to certain investment management companies based on their demonstrations that their acquisitions of utilities' securities would not have the effect of exercising control and will thus not have an adverse effect on competition, rates, or regulation.
A final note of clarification—Section 203(a)(1) (not (a)(2) discussed above) requires FERC approval before, among other things, a public utility can "sell, lease, or otherwise dispose of the whole of its facilities subject to the jurisdiction of the Commission, or any part thereof" valued over $10 million. FERC has stated that approval under this subsection—or, accordingly, a blanket authorization—is not needed if a transaction will not transfer control of a public utility or jurisdictional facilities. And FERC has further found that a holding company acquiring less than 10% of a utility's voting securities, and making the assurances discussed above, would not result in such a transfer of control. FERC has indicated in prior orders that investment management companies making the representations discussed above, therefore, would not need a blanket authorization under (a)(1).
Brewing Controversy – Vanguard's Reauthorization Application
Vanguard, one of the world's largest providers of mutual funds and exchange-traded funds, has a blanket authorization for acquisitions of securities of publicly traded utilities. In the fall of 2022, Vanguard applied for a reauthorization. A coalition of Republican state AGs protested the application. They attacked Vanguard's claims of "passive" investment, claiming Vanguard engages in "environmental activism" by manipulating the activities of utilities in violation of the blanket authorization. In particular, they criticized Vanguard's membership in the Net Zero Asset Managers initiative (NZAM). Vanguard subsequently pulled out of NZAM.
FERC has 180 days to act on applications under Section 203 or they are deemed granted by operation of law. FERC did not act within that period so the reauthorization went into effect—signaling that the four-person Commission was divided on the result. Republican Commissioners James Danly and Mark Christie also issued statements raising concerns similar to the state AGs. In particular, they wrote that Vanguard's accumulation of trillions of dollars of assets under management allows Vanguard to vote large percentages of publicly traded companies' shares. They expressed concern that Vanguard may be able to exercise control over the utilities whose securities it holds and influence the decisions of utility management in a way that substantially affects electric rates and reliability. Fundamentally, they questioned whether Vanguard is truly "passive."
Republican AGs Accuse BlackRock of Violating Section 203
A group of Republican AGs recently filed a pleading targeting FERC's blanket authorization for BlackRock—the world's largest asset manager. The AGs characterize BlackRock as a proponent of ESG investing (which focuses on environmental, social, and corporate governance issues) and a prominent member of NZAM. BlackRock received a three-year blanket authorization from FERC in 2022, but in their motion the AGs ask FERC to set a hearing to reexamine FERC's findings.
The AGs write: "Maybe BlackRock was a passive investor ten years ago, but today it's an environmental activist." They argue that BlackRock has violated its Section 203 blanket authorization in two ways. First, the AGs contend, BlackRock is not investing passively but is rather seeking to exercise control over utilities—for instance, by voting against the chairman of the board of an electric utility because the company lacked an acceptable "net zero strategy."
Second, the AGs make a bolder argument that groups like NZAM are themselves technically "holding companies" because they are associations with the "express purpose of coordinating shareholder voting power across their members to influence the operations of FPA-covered utilities." The AGs also specifically call out another similar group, Climate Action 100+, and they argue that BlackRock's membership in these organizations constitutes participation in "holding companies." If so, these entities, their members, and the utilities they invest in would all need authorization under the Federal Power Act for relevant purchases and sales of utility securities.
Potentially Broad Implications
While the motion does not require FERC to take action at this time, it does provide a vehicle for FERC to take action, if it so chooses. If FERC were to side with the Republican AGs, a broad set of investors, asset managers, and utilities could be affected. Certain transactions that did not require FERC approval may need to be reevaluated, and it could call into question transactions made under FERC-granted blanket authorizations.
Under the AGs' second, bolder argument, any members of the climate organizations would be deemed "holding companies" as a result of their collective investment in regulated public utilities—including small entities with limited investments. This would subject them to regulation by FERC in certain instances, including under Section 203 of the FPA, and could require FERC approval for further investments in public utilities by any member of the organization.
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