Modern investment strategy collides with old-school Oklahoma law over public utility ownership

Apr. 29—The Vanguard Group, one of the world's largest investment funds, wanted to see a change in how it fulfills Oklahoma financial disclosure requirements as it continues to increase its level of investment in publicly-traded utilities that are regulated.

On Wednesday, elected members of the Oklahoma Corporation Commission granted that wish.

The issue at hand came from a collision between modern investment strategy and old-school law when it came to Oklahoma's publicly traded utilities.

Vanguard's desire to add to its investment in public utilities is fueled by share value growth and dividends those utilities provide shareholders, but companies like Vanguard also must show regulators that they don't aim to control a utility's operations through what they own.

In general, the laws in Oklahoma and other states aim to protect ratepayers against business changes a large shareholder could initiate involving utilities that might impact how their customers are served and what those services cost.

Oklahoma law requires an investor who owns at least 10% of a public utility file a case before the Corporation Commission seeking a determination that its ownership doesn't give it control of the utility.

In June 2020, the Vanguard Group — a firm with more than $7.2 trillion of investments under its direct or indirect control — owned more than 10% of the shares issued by OGE Energy, parent of Oklahoma Gas and Electric.

Vanguard followed the law and sought a determination from the Corporation Commission. But as part of the same case, it aimed to avoid having to routinely file future control-related cases by asking commissioners to instead allow for routine investment reports be submitted for regulators to review.

Those reports would mirror what Vanguard already provides the Federal Energy Regulatory Commission (FERC) and regulators in another state, and would place responsibility to file future control-related cases with regulators at the commission and office of Oklahoma's Attorney General.

Vanguard has worked out similar agreements in other states regarding public utility investment.

Commissioners approved the request Wednesday, but kept some safeguards in place for Oklahomans.

Vanguard will be required to make quarterly reports on its in-house funds' ownership in regulated utilities using the FERC format.

The order approved by commissioners also requires Vanguard to include its in-house funds' aggregate investments in ONE Gas (a regulated utility in Oklahoma that doesn't qualify as such under FERC's rules).

The order does not eliminate the need for future presumed control rebuttal hearings. The corporation commission's Public Utility Division or the Oklahoma Attorney General could initiate future cases whenever a perceived need arises.

"We could do that at any time," Commissioner Dana Murphy said during an earlier meeting as a potential order was being discussed.

As of Jan. 31, Vanguard had about $7.2 trillion in assets involving more than 30 million investors under management in 209 U.S. funds and in about 232 other funds in markets outside of the country.

Vanguard offers its individual, corporate and institutional investors a large selection of low-cost mutual and exchange traded funds, some of which are tied to specific indexes like the S&P500.

Owning stock in Oklahoma's utilities and other companies within that sector has been good during the past decade for Vanguard, other investment funds and their customers.

According to the Robert C. Dauffenbach, the senior associate dean in charge of the University of Oklahoma's Economic and Management Research Center at the Price College of Business, the value of invested dollars in the S&P 500's utilities sector was worth about $375 billion at the end of 2010.

At the end of 2020, that value had increased to about $873 billion (an increase of about 240%).

As of early February this year, filings made by the Vanguard Group showed it held 8.9% of the stock issued by American Electric Power, parent of Public Service Co. of Oklahoma.

It held 11.9% of the stock issued by CenterPoint Energy, a natural gas and electricity transmission and distribution company that provides natural gas services to some Oklahomans and both gas and electricity services to other customers in Arkansas, Indiana, Louisiana, Minnesota, Mississippi and Texas.

And it also owned 9.7% of ONE Gas' issued stock. ONE Gas is the parent of Oklahoma Natural Gas, which provides more than 800,000 customers in Oklahoma with that fuel.

For people who invest in the stock market either through individual transactions or through investment firm-managed funds connected to 401-K plans or IRAs, its all about how much money can be made.

Zac Reynolds, the chief investment officer at Full Sail Capital, noted utilities are an attractive place to park money for both individual investors and market funds because of rates of return that are boosted by steady to climbing stock values, dividends and steady business opportunities.

No matter the price of energy, people are always going to need it, he observed.

Investments in those types of companies currently are providing better returns than what Oklahomans could expect to see if their money were deposited in banks or were invested in bonds issued by the U.S. Treasury.

And that, in turn, has helped grow the value of individuals' retirement funds, over time, both Reynolds and Dauffenbach said.

"That is why you are seeing Vanguard owning larger and larger percentages. There is not really a risk there. They just want very broad exposure to the utility industry. That way, if PG&E (Pacific Gas & Electric Co.) goes bankrupt after causing large wildfires, they will still get a decent rate of return on their investors' money if OGE and other Oklahoma utilities are doing OK," Reynolds said.

Dauffenbach said he worries more about returns on investments made through his retirement accounts than he does about Vanguard's potential intent to aggressively manage a company it owns shares in.

"These institutional investors aren't making these decisions with the intent of taking over a business. Broad institutional ownership in these utilities shows the faith they have in those management teams, both to be able to meet the needs of regulators while still providing a good return on investors' money," Dauffenbach said. "And utilities need those investments, because that is what gives them what they need to maintain and grow the physical systems they use to serve their customers."

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