Joint Statement of Commissioner James P. Danly and Commissioner Mark C. Christie
August 11, 2022
EC19-57-001
We write regarding the delegated order issued by the Office of Energy Market Regulation (OEMR) in this docket on August 8, 2022.[1] The Vanguard Group, Inc. (Vanguard), along with its advisory subsidiaries Vanguard Global Advisors, LLC, Vanguard Asset Management, Ltd., Vanguard Investments Australia Ltd., Vanguard Fiduciary Trust Company, its 34 affiliated investment companies, and its affiliated mutual funds and other investment funds (collectively, “Applicants”) filed an application pursuant to Federal Power Act (FPA) section 203(a)(2)[2] for a three-year reauthorization (Reauthorization) of the blanket authorization previously granted in 2019 for certain acquisitions of voting securities[3] and request the Reauthorization subject to a modification to exclude from the 10% and 20% limits on acquisitions of the voting securities of U.S. Traded Utilities (Utilities) the Utility voting securities held in the portfolios of, and managed by, external advisors on behalf of the Externally Advised Funds.
As discussed in more detail in the Application, Applicants request that the blanket authorization granted in the 2019 Order[4] be extended for an additional three-year term for Vanguard and its subsidiaries to acquire the voting securities of any Utility either up to 20% ownership in aggregate by Applicant Funds or up to 10% ownership by any individual Applicant Fund.[5]
Additionally, Applicants request that the blanket authorization granted by the Commission, pursuant to the Application, apply to any newly established Vanguard investment management company not listed in Attachment 1 of the Application and to any newly established investment fund not listed in Attachment 2 of the Application, subject to the same conditions in the 2019 Order.[6]
Applicants also request a modification to the terms and conditions of the blanket authorizations. Specifically, Vanguard seeks approval to exclude from the 10% and 20% limits on acquisitions of Utility voting securities the securities of those Utilities held in portfolios that Vanguard says are managed by unaffiliated external advisors in Externally Advised Funds.[7]
If the Commission declines to grant the proposed modification, Applicants request that the Commission grant the proposed three-year extension of the FPA section 203 blanket authorization on the same terms and conditions contained in the 2019 Order.[8] Applicants explain that, under this scenario, Vanguard would continue to report its aggregate holdings of Utilities, including those held in Externally Advised Funds.[9]
The delegated order extends the current blanket authorization “for a period of nine months, subject to a 20% limit on the acquisition in aggregate by Applicants and a limit of less than 10% of the outstanding voting securities of a public utility in any single fund.”[10]
Since the 2019 Order, Vanguard’s assets under management have increased from about $5 trillion to $8.5 trillion at the time of the applications.[11] The accumulation of such enormous ownership interests enables Vanguard to vote large percentages of publicly traded companies’ shares. The Commission has had a long history of scrutinizing corporate structures which allow for the common ownership of,[12] or influence upon,[13] public utilities. Vanguard’s application raises a number of issues that demand Commission scrutiny because Vanguard could potentially exercise profound control over the Utilities it owns.
Though we agree with Commission staff’s decision not to allow the blanket authorizations to lapse in this proceeding, we write separately to express our view that it is necessary to ensure a sufficient record in order to act on the Applicants’ request for a three-year reauthorization of the blanket authorization previously granted in 2019 for certain acquisitions of voting securities[14] and the Applicants’ request for a modification of the terms and conditions of the blanket authorization. For FPA section 203 applications, the Commission determines whether or not a transaction is in the public interest in light of the transaction’s effects on competition, rates, and regulation,[15] and “whether the proposed transaction will result in cross-subsidization of a non-utility associate company or pledge or encumbrance of utility assets for the benefit of an associate company, unless that cross-subsidization, pledge, or encumbrance will be consistent with the public interest.”[16]
The Commission cannot merely rubber stamp requests for blanket authorizations if it is to carry out its statutory duty to ensure that the accumulation of such substantial equity in Utilities is not contrary to the public interest. Should a company like Vanguard seek to influence the management and operation of Utilities’ generation portfolio, for example, this could have a significant impact on the rates consumers pay for electrical service. The Commission must assure itself that, at the very least, companies seeking this type of authorization are subject to controls designed to ensure that such influence is impossible. Such a determination may be difficult based on the current record.
Vanguard represents in its Application that it is abiding by the conditions in the 2019 Order and its “own investment guidelines” that “preclude[]” Vanguard “from acquiring or holding securities with the effect or for the purpose of exercising control or management of the U.S. Traded Utilities in which investment has been made.”[17] These guidelines, however, do not appear in the record, so their sufficiency in this respect cannot be assessed. Further, Vanguard states that each Vanguard Advised Fund has “Proxy Voting Procedures and Guidelines adopted by each Fund’s Board.”[18] These Voting Procedures and Guidelines are also missing from the record. With respect to the Externally Advised Funds, which Vanguard seeks to exclude from the percentage caps, Vanguard represents that its relationship with the external advisors is contractual and that such external advisors’ “discretion and proxy voting authority . . . is governed by the provisions of Vanguard’s standard fund investment advisory agreements.”[19] Vanguard, however, has not included these contracts or advisory agreements in the Application. Vanguard’s failure to include material upon which its request is predicated makes it very difficult for the Commission to assess the independence of the advisors or scrutinize how much residual control or oversight Vanguard may retain.
For that reason, the Applicants should file the following information in the docket in order to assist the Commission’s decision making when the Applicants apply for reauthorization.
I. Information for Reauthorization of the Existing Blanket Authorization
A. Please provide:
- the Vanguard Investment Guidelines that “preclude[]” Vanguard “from acquiring or holding securities with the effect or for the purpose of exercising control or management of the U.S. Traded Utilities in which investment has been made” referred to in the Application;[20]
- the “Proxy Voting Procedures and Guidelines adopted by each Fund’s Board” referred to in the Application;[21]
- with respect to the Externally Advised Funds, the contracts that govern and structure the Externally Advised Funds’ relationship with Vanguard, including the text of any delegations;
- with respect to the Externally Advised Funds, “Vanguard’s standard fund investment advisory agreements”[22] to which the Application refers; and
- lists of the membership of the boards of directors for each Applicant Fund.
B. Please describe the role of the Investment Stewardship Group and the Investment Stewardship Committee and their governance. Please list their governance structure or membership. Please provide any guidelines, policies, or procedures that they have for their administration and supervision of proxy votes for both Vanguard Advised Funds and Externally Advised Funds.
C. With respect to the Utility Securities listed in Attachment 3, please describe the nature and content of the communications, of any kind, between the Applicants and the boards or management of the Utilities since the issuance of the previous authorization with respect to the operation or retirement of generating or other assets, the future or planned purchase or divestiture of generating or other assets, or the development of integrated resource plans or other similar plans to structure the generation and other resources portfolio of a Utility in order to meet its public service obligations under its state regulatory and other legal requirements.
D. If Vanguard has attempted to direct or influence the utility planning decisions of load-serving utilities as referenced in item C of section I, explain how that is consistent with the terms in the 2019 Order or the averments made in the Application. To the extent to which Applicants have attempted to influence a public utility’s planning decisions, please explain the degree to which that attempted influence is consistent with or informed by the Utility’s state or local franchise requirements and public service obligation to provide reliable power at just and reasonable rates to the Utility’s customers.
E. The Application states that “[t]he Applicants are passive investors and will not acquire control over the day-to-day activities of any utility nor will they have any role in the setting of rates by such entities, or any other actions affecting the prices at which power is transmitted or sold.”[23] What processes or policies do the Applicants have in place to ensure that they do not force or advocate for policies that will have the effect, even indirectly, of changing the manner in which power is generated or transmitted which will necessarily have an effect on rates?
II. Information Relevant to the Proposed Modification to the Blanket Authorization
A. Regarding the Externally Advised Funds, Applicants state that “[a]s part of the delegation process, the Board of each Externally Advised Fund reviewed, approved, and adopted the proxy voting policies and procedures of such Fund’s external advisor(s).”[24] To the extent to which the Applicants have such policies, please provide information regarding the proxy voting policies and procedures.
B. The Application states that “[u]pon execution of the delegations, the external advisors assumed full authority and discretion for voting the proxies of securities held in their respective Externally Advised Funds and neither the Board of the relevant Applicant Fund nor any Vanguard affiliate thereafter provided any further input or exercised any discretion with respect to securities held in those Externally Advised Funds.”[25] To the extent that the Applicants have such information, please describe any process that would occur should there be a desire to change the proxy voting policies and procedures. Have there been any changes made to proxy voting policies and procedures since the execution of the delegations?
C. The Application states that “[a]lthough there have been no revocations of voting authorization to an external advisor in the nearly three years since the delegations were first negotiated, Applicants commit to promptly notify the Commission in the unlikely event the Board of an Applicant Fund was to determine such revocation was required pursuant to its fiduciary obligation to fund investors.”[26] Please describe the circumstances in which the Applicants are permitted to revoke the voting authorization to an external advisor.
For these reasons, we respectfully issue this joint statement.
[1] The Vanguard Group, Inc., 180 FERC ¶ 62,065 (2022) (delegated order). See 18 C.F.R. § 375.307(a)(2)(ii) (delegating to the Director of OEMR, or the Director’s designee, authority to “[t]ake appropriate action on uncontested applications for the sale or lease or other disposition of facilities, merger or consolidation of facilities, purchase or acquisition or taking of securities of a public utility, or purchase or lease or acquisition of an existing generation facility under section 203 of the Federal Power Act”).
[2] 16 U.S.C. § 824b(a)(2).
[3] The Vanguard Group, Inc., 168 FERC ¶ 62,081 (2019) (2019 Order).
[4] Id.
[5] Application at 14.
[6] Id. at 14-15.
[7] Id. at 15.
[8] Id. at 20.
[9] Id.
[10] The Vanguard Group, Inc., 180 FERC ¶ 62,065 at Condition 1.
[11] Compare Application at 4 (“VGI and its affiliates . . . are a global investment company complex with approximately $8.5 trillion in assets under management.”), with February 15, 2019 Application at 5 (“VGI and its affiliates . . . are a leading mutual fund complex with approximately $5 trillion in assets under management . . . .”).
[12] See Public Utility Holding Company Act of 2005, 42 U.S.C. §§ 16451-63.
[13] See Michael R. Niggli, 173 FERC ¶ 61,004 (2020) (granting conditional authorization to hold interlocking positions); Interlocking Officers & Directors; Requirements for Applicants & Holders, 166 FERC ¶ 61,119, order on reh’g, 168 FERC ¶ 61,021 (2019).
[14] See 2019 Order, 168 FERC ¶ 62,081.
[15] 18 C.F.R. § 2.26(b).
[16] Id. § 2.26(f).
[17] Application at 22.
[18] Id. at 9.
[19] Id. at 12.
[20] Id. at 22.
[21] Id. at 9.
[22] Id. at 12.
[23] Id. at 22.
[24] Id. at 10.
[25] Id.
[26] Id. at 18-19 (emphasis in original).