By Ross Kerber

(Reuters) – U.S. energy regulators have another opportunity to clarify the role that large 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 (NYSE:BLK) asked the U.S. Federal Energy Regulatory Commission (FERC) 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 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 (NYSE:STT), but nothing formal has come of that inquiry or a similar review by a bank regulator.

Additionally, last week a group of Republican attorneys general filed a suit charging the three firms with violating antitrust law through climate activism, claiming this reduced coal production and increased energy prices.

BlackRock and State Street have called the suit "baseless," while Vanguard declined to comment. Vanguard and State Street also declined to comment on the FERC reviews for this article.

Regarding FERC matters, a BlackRock representative noted that 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 stated.

As reported in March, BlackRock previously told FERC that few regulatory changes are needed, while Vanguard suggested new expectations for passive investors, such as pledging to refrain from nominating corporate directors.

BIG AND CHEAP

The ongoing wrangling highlights the unintended consequences of a clear benefit for investors: the low fees charged by the Big Three. As of 2023, expense ratios of index equity funds stood at 0.05%, compared to 0.65% for actively managed funds, according to the Investment Company Institute.

These low fees have attracted a flood of assets, totaling a collective $26 trillion, granting these firms more influence over corporate decision-making than they likely anticipated.

Studies reveal mixed evidence on whether giant funds harm competition. A 2023 U.S. Federal Reserve Bank of Atlanta review found "relatively little evidence" of such issues. Big utilities appreciate having the funds as long-term owners who often oppose environmental shareholder resolutions.

Now, FERC has an opportunity to contextualize these facts. In a joint protest of BlackRock's application, consumer groups Public Citizen and the Private Equity Stakeholder Project argued that recent transactions like BlackRock's acquisition of Global Infrastructure Partners are shifting the New York asset manager from a passive investor to an active one, prompting calls for hearings to review the waiver application.

Tyson Slocum, Director of Public Citizen's Energy Program, stated, "I think FERC is going to be the first key regulator to say, we've seen enough, BlackRock has gotten too big."

Some of the same Republican attorneys general who sued BlackRock have also requested FERC to conduct a hearing on the firm's application. They have raised questions about BlackRock's participation in investor climate groups and suggested that the firm should explain critical proxy votes it casts at utilities.

Kevin Thompson, a Republican member of the Arizona Corporation Commission, which supported the AGs’ filing, stated that the energy regulator needs to consider ratepayer interests more seriously.

"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 align with the investors' desires," Thompson said.

A BlackRock representative dismissed the claims against it at FERC as "baseless and clearly contradicted by BlackRock's record" and emphasized that its energy holdings are regularly reviewed by federal and state regulators.

"Limiting Americans' ability to invest in the energy sector would hurt consumers when energy affordability and reliability are critical," BlackRock asserted.

FERC Chairman Willie Phillips' spokesperson, a Democrat, stated he would not be available for an interview. Senior Republican commissioner Mark Christie, who has expressed skepticism about asset managers' size, declined to discuss BlackRock's pending application in a recent interview but supported FERC's ongoing industry review to assess whether large asset managers are merely passive investors.

As Christie put it, "The question is, do they influence the actions of the public utility?"