On December 27, 2023, the Federal Energy Regulatory Commission (FERC or Commission) published a notice of inquiry in the Federal Register seeking comment on potential revisions to its policy on providing blanket authorizations for investment companies under section 203(a)(2) of the Federal Power Act (FPA), and what constitutes control of a public utility (and what factors should be considered) in evaluating requests for such authorizations.

Section 203(a)(2) of the FPA states:

No holding company in a holding company system that includes a transmitting utility or an electric utility shall purchase, acquire, or take any security with a value in excess of $10,000,000 of, or, by any means whatsoever, directly or indirectly, merge or consolidate with, a transmitting utility, an electric utility company, or a holding company in a holding company system that includes a transmitting utility, or an electric utility company, with a value in excess of $10,000,000 without first having secured an order of the Commission authorizing it to do so.

In the past, FERC has established in its regulations and granted through case-specific orders blanket authorizations under Section 203(a)(2) for transactions that meet certain criteria. 

However, according to FERC, changes such as “consolidation in the public utility industry as well as the growth of large index funds and asset managers” warrant consideration of whether its blanket authorization policy continues to work as intended and remain consistent with the public interest.

FERC specifically seeks comments with respect to large investment companies that passively manage through index funds an increasingly significant percentage of U.S. publicly traded stock, including in the utility industry. The notice cites concerns that the size of such investments gives these companies unique leverage over the utilities whose voting securities they control.  

The notice also cites allegations that such companies have pressured utilities to meet environmental, social and governance (ESG) goals notwithstanding their passive investment structure. As Commissioner Christie stated in a concurrence to the notice: “[I]t simply is no longer a credible assertion that investment managers, like BlackRock, State Street Corporation, and The Vanguard Group, Inc., are always or should be assumed to be merely passive investors.”

FERC also seeks comments on what factors the Commission should consider when evaluating control over public utilities as part of a request for blanket authorization. In the past, investment companies have argued that their investment in public utilities do not allow for control of the public utility, including control over the day-to-day management and operations of the utility, or holding company thereof. The notice seeks comments on whether there are means of exerting control not captured through the Commission’s current analysis. 

Takeaways

• The notice follows prior statements and concurrences from Commissioners Danly and Christie on the need to reconsider FERC’s blanket authorization policy.
• The notice signals a growing appetite for heightened scrutiny of large investment companies such as BlackRock, State Street Corporation, and The Vanguard Group, Inc., with respect to their horizontal ownership of multiple utilities and alleged promotion of public policies, including ESG.
• Initial comments are due March 26, 2024 and reply comments are due April 25, 2024. This is the first step in a multi-step process that will play out before FERC promulgates new regulations or issues new guidance. Comments submitted in response to the notice will provide a record upon which FERC may act or decline to act.