Sustainable Finance Newsletter - Ratepayers tell utility investors: clam up
By Ross Kerber
April 3 (Reuters) -New filings at the U.S. Federal Energy Regulatory Commission question whether index funds have gotten too big, an issue that other oversight bodies have yet to resolve.
In last week's newsletter I wrote about Vanguard's offer to give up some stewardship powers in order to assuage concerns about the "blanket authorizations" that it and rivals were obtaining to assemble big chunks of utility ownership.
But some utility ratepayer representatives have floated putting tougher limits on investment firms like doing away with proxyvoting power overall.
See this week's main story below for more details. You'll also see links to stories such as on the challenges facing shipping firms that want to decarbonize, and a grimreport on African cocoaproduction with some great photos.
Please connect with me on LinkedIn. If you have a news tip, potential content, or general thoughts you can also email me at ross.kerber@thomsonreuters.com
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Ratepayers tell utility investors: clam up
Public advocates for utility ratepayers say investors should swear off casting proxy votes and communicating with executives if they want permission to keep buying big shares of public utilities. The advocateswant to rein in the influence of passive fund firms.
The comment letter filed to the U.S. Federal Energy Regulatory Commission (FERC) on March 26 is part of a debate about the role of BlackRock, BLK.N Vanguard and State Street STT.N. The agency began a review of investment companies in December and banking regulators are also scrubbing the subject.
Known for low-cost index products, the three asset managers together run some $23 trillion. They face scrutiny from academics, consumer advocates and conservative Republican politicians who question if the firms have too much clout over companies in their portfolios.
In a FERC comment letter officials representing ratepayers in Maryland, New Jersey and the District of Columbia cited research showing how the "Big Three" fund firms hold about 25% of all votes cast at S&P 500 .SPX corporate annual meetings, and often have big stakes in competing firms.
That shared common ownership leads to "anti-competitive outcomes and consumer harms, such as price increases," they wrote, citing some, though not all, academic studies on the issue.
Investment funds need special permission to buy more than $10 million of a utility. FERC grants some "blanket authorizations" with limits like not owning more than 20% of a utility's voting shares.
FERC's terms are too lax, the advocates wrote, urging changes like limiting ownership at 10%, barring voting and communications with utility executives. "In short, blanket authorization recipients should be required to put their shares in a drawer," the filing states.
David Lapp, the Maryland People's Counsel, told me it would be hard to prove specific cases to FERC where common ownership left rates too high. But in general, he said, "These markets don't have a lot of competition, and when you have common ownership across index funds, it potentially reduces competition and harms utility customers through price increases."
None of the three investment companies commented for this article. As I wrote last week, BlackRock defended the status quo in its own comment letter and has previously argued concerns about "common ownership" are overblown. In its comment letter Vanguard suggested dialing back some investor powers but keeping their voting rights.
Experts I spoke with offered a mixed take on the ideas of the ratepayer advocates. Harvard law professor John Coates said ending certain shareholder rightswould distort incentives. But another idea of the advocates, to cap ownership by individual funds at 5%, might be a better reform since "at least it does not distort incentives or create misalignment between ownership and rights," Coates said.
The U.S. Federal Trade Commission held a hearing on the role of index funds in 2018 but little has happened since. Georgetown University law professor Jonathon Zytnick said the research about whether index funds harm competition has come to different conclusions.
"The whole thing has gotten bogged down in an academic battle which is perhaps why there hasn’t been a policy outcome," Zytnick told me.
Company News
Walt Disney DIS.N and appointees of Florida Gov. Ron DeSantis settled a suit over control of the special district that includes the company's largest theme park. DeSantis attacked "woke Disney" ahead of and during his presidential campaign.
The polarizing persona of Tesla TSLA.O CEO Elon Musk has helpedthin the ranks of potential buyers of the electric cars, according to a survey by market intelligence firm Caliber.
Executives at McDonald's MCD.N and Wendy's WEN.O worry they could lose business from low-income consumers as fast-food restaurants raise prices to cover higher food costs.
On my radar
Wisconsin Governor Tony Evers, a Democrat, on March 29 vetoed a Republican-backed bill that would have blocked the use of a new payment code for firearms retailers, the latest exampleof the split on the issue among states that has developed along party lines.
The California Public Employees' Retirement System, the largest U.S. pension fund with $494 billion under management, and a frequent ally of sustainability-minded investors, on Tuesday named Stephen Gilmore its chief investment officer. Gilmore held the same post with New Zealand's $73 billion sovereign wealth fund.
Passive funds top utility investor rolls https://reut.rs/3vByRfB
Reporting by Ross Kerber; Editing by David Gregorio
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