No. of Recommendations: 25
I have seen several assessments of Buffett's letter, the Morningstar one above, and also those by Tilson and Rationalwalk, and to my mind, none of them take these things very seriously; they all reassure us that Berkshire's sources of operating income are diverse, and when one is doing badly, like the utilities and railroad last year, others pick up the slack, insurance being the slack picker-upper this year. But Berkshire will not always have such favourable underwriting results, and I think it is legitimate to ask whether the utilities can really still be relied on to pick up the slack in future years, given Buffett's comments.
My theory for why analysts aren't taking those comments so seriously is because they're a combination of over the top and uncharacteristically whiny. He makes utilities and their investors sound like victims of some socialist conspiracy when, in fact, the utilities' infrastructure -- in many cases outdated and poorly maintained -- is generally to blame for the wildfires that bring about their liability.
It's particularly Rip Van Winkle-like to observe that nobody wanted to pay the "staggering costs" of underground transmission lines "a few decades ago." Well, duh. High-voltage transmission lines weren't causing massive wildfires a few decades ago. This might have been a subconscious note of regret about the enormous transmission infrastructure project BHE undertook years ago.
The oddest part is he makes it sound like all this just occurred to him. PG&E went into bankruptcy over its wildfire liabilities five years ago. I'm guessing that Greg Abel has been well aware of these developments all along. He just doesn't get to complain about them publicly. And it is true, of course, that there is more uncertainty, and perhaps more variability, in electric utilities' previously predictable returns in this environment. But that doesn't mean the model is broken. It just means some adjustments are required. Managers may have to turn off the auto-pilot.
The theory that this diatribe was aimed at regulators and/or politicians makes some sense. As a resident of the fire-prone western U.S., I can confirm that utilities are less popular now than usual. Of course there are politicians making confiscatory noises given the rolling blackouts and brownouts in California.
But the reference to Nebraska's public power district reminded me of an effort in Boulder, Colorado a few years ago to municipalize its power infrastructure. It, too, cited a nearly 100-year-old precedent, another Colorado town that established a municipal utility in the 1930s. Needless to say, the power grid has grown somewhat more complex and expensive since then. Boulder discovered that carving a municipality out of Xcel Energy's infrastructure was much more difficult than they had imagined. Various substations would have had to be duplicated to serve one side of the municipal border or the other. Despite city leaders deeply committed to the ideological project, years of legal and regulatory failure forced them to give up and sign a new franchise agreement with Xcel. They won some promises to get greener in the future.
Yes, high-voltage transmission lines in vulnerable areas will have to be buried or otherwise hardened against high winds. PG&E has proposed to bury a couple thousand miles at a cost, if I recall, of about $6 billion, or an additional $40 a month for ratepayers. Politicians and others will certainly grumble about such increases in the rate base, but unless they're willing to settle for a level of unreliability in electricity service that resembles developing countries, it's really the only alternative. Where's the money coming from for a public takeover of hundreds of billions of dollars worth of infrastructure? In fact, the current trend, fueled by public indebtedness, is the opposite -- governments divesting public infrastructure to private equity.
Climate change is going to require lots of adjustments in lots of places. In the western U.S., the electric grid needs to be hardened so it stops causing wildfires. Utility operators can kick and scream, but unless they want to follow in PG&E's footsteps, they will eventually accept it as a new cost of doing business. As will state Public Utility Commissions and ratepayers, grumbling all the way.
This is going to take a long time, but I can't think of a more likely outcome.
