Column: Funds wait on US energy regulator to answer a $26 trillion question: Ross Kerber
04/12/2024 13:00
(The opinions expressed here are those of the author, a
columnist for Reuters. This column is part of the weekly Reuters
Sustainable Finance newsletter, which you can sign up for here)
By Ross Kerber
Dec 4 (Reuters) - U.S. energy regulators have another
window of opportunity to clarify the role that giant fund firms
should play in corporate ownership.
It's a good chance to resolve a nagging question for
investors and stock issuers alike.
In October BlackRock BLK.N asked the U.S. Federal Energy
Regulatory Commission to extend for another three years its
permission to own up to 20% of the shares of publicly-traded
U.S. utilities.
BlackRock hopes for quick approval, but it faces concerns
about its size and its record on environmental issues. A year
ago, FERC began a separate review of the impact of financial
companies like BlackRock and passive-fund rivals Vanguard and
State Street, STT.N but nothing formal has come of that
inquiry or a similar review by a bank regulator.
In addition, last week a group of Republican attorneys
general filed a suit charging the three firms with violating
antitrust law through climate activism. They said this reduced
coal production and boosted energy prices.
BlackRock and State Street call the suit "baseless."
Vanguard declined to comment on it. Vanguard and State Street
declined to comment on the FERC reviews for this article.
Asked about FERC matters, a BlackRock representative
said it provides $52 billion in capital to 54 regulated
companies above the 10% threshold for which it needs regulators'
permission.
The investments are made "on behalf of our clients, and
our focus is on delivering them financial returns," the company
said in a statement sent by the representative.
As I reported in March, BlackRock previously told FERC that
few regulatory changes are needed. Vanguard suggested FERC adopt
new expectations for passive investors like having them pledge
to refrain from nominating corporate directors.
BIG AND CHEAP
Together the wrangling points to unintended consequences
of a clear good for investors: the low fees charged by the Big
Three. The expense ratios of index equity funds stood at 0.05%
as of 2023, compared to 0.65% for actively managed funds,
according to trade group the Investment Company Institute.
The cheap fees have brought the three firms a flood of
assets - currently a collective $26 trillion - giving them more
clout over corporate decision-making than they likely ever
anticipated.
Studies paint a mixed picture of whether giant funds harm
competition. A 2023 U.S. Federal Reserve Bank of Atlanta review
found "relatively little evidence" of such problems. Big
utilities like having the funds as long-term owners who in
practice side against environmental shareholder resolutions.
Now FERC will have a chance to put those facts in context.
In a joint protest of BlackRock's application, consumer groups
Public Citizen and the Private Equity Stakeholder Project wrote
that recent deals like BlackRock's purchase of Global
Infrastructure Partners are transforming the New York asset
manager from a hands-off passive investor to an active one, and
called for hearings to review the waiver application.
"I think FERC is going to be the first key regulator to say,
we've seen enough, BlackRock has gotten too big," Public Citizen
Energy Program Director Tyson Slocum said in an interview.
Some of the same Republican attorneys general that sued
BlackRock also have asked FERC to hold a hearing on the firm's
application. Among other things, they questioned BlackRock's
involvement in investor climate groups and suggested the firm
should have to explain critical proxy vote it casts at
utilities.
Kevin Thompson, a Republican who is a member of the Arizona
Corporation Commission, which joined the AGs on their FERC
filing, said in an interview the energy regulator needs to do
more to consider the interests of ratepayers.
"The public shouldn't have to worry about the investors'
thumb being on the scale of decisions of the operating companies
if they don't do exactly what the investors want," Thompson
said.
The BlackRock representative said the claims made
against it at FERC "are baseless and clearly contradicted by
BlackRock's record," and noted its energy holdings are regularly
reviewed by federal and state regulators.
"Limiting Americans’ ability to invest in the energy
sector would hurt consumers at a time when energy affordability
and reliability are more important than ever," BlackRock said.
A spokesman for FERC Chairman Willie Phillips, a
Democrat, said he would not be available for an interview. Mark
Christie, the senior Republican commissioner who has been
skeptical of asset managers' size, in an interview declined to
discuss BlackRock's pending application.
Christie said he supported FERC's ongoing industry review as
a way to scrub whether big asset managers do more than passively
hold stocks.
Or as he put it, "The question is, do they influence the
actions of the public utility?"
(Reporting by Ross Kerber; Editing by David Gregorio)
((ross.kerber@thomsonreuters.com; (617) 412 0093;))