Who is Berkshire Hathaway Energy?
- Aug 3, 2020 2:06 pm GMT
When the words "Berkshire Hathaway" are mentioned, investors immediately think of the mighty multinational conglomerate led by billionaire Warren Buffett, nicknamed the "Sage of Omaha."
Less well known to casual observers is that Berkshire's list of subsidiaries, which range from GEICO insurance to BNSF railroads to Dairy Queen, also includes a holdings company involved in the power and utilities business — Berkshire Hathaway Energy, or BHE for short.
The activities of a company like BHE that has no holdings in San Diego would not normally generate much curiosity locally. But BHE has expressed interest in competing to win the city's new "franchise agreement," long in the possession of San Diego Gas & Electric, and the prospect of a new utility in town has focused attention on just who and what BHE is.
The winner of a municipal franchise agreement is granted the exclusive right to use the public right-of-ways for transmission and distribution, as well as the right to install and maintain wires, poles, power lines and underground gas and electric lines.
The city of San Diego's franchise agreement expires in January and will be up for bid for the first time in 50 years. Keen to work out a new deal on more favorable terms, the city hopes multiple companies will compete with SDG&E to win the bid.
So why would BHE be interested in crafting a pitch to enter the San Diego market?
The company declined multiple requests by the Union-Tribune for interviews with BHE officials about the company in general and its possible bid in particular. Instead, a BHE spokeswoman recommended looking at "our website and corporate brochure for detail on our strategy, vision, culture and the like."
While BHE may share the Berkshire Hathaway name, it is not based in Omaha.
Instead, its headquarters are in Des Moines, Iowa because in 1999 Berkshire bought a controlling stake in MidAmerican Energy Company, which serves customers covering about two-thirds of Iowa, as well as portions of nearby states. In 2014, MidAmerican Holdings changed its name to Berkshire Hathaway Energy.
Though BHE may not be well known in San Diego, the company's assorted businesses serve 8.8 million customers. BHE has companies across 18 states and also owns a utility in England and an electricity transmission company in Alberta, Canada.
BHE's subsidiaries have a significant presence in states across the West. Fourteen years ago, what is now BHE acquired the electric power company PacifiCorp for $5.1 billion.
Some 47 percent of PacifiCorp's service territory is located in Utah and 31 percent in Oregon. Wyoming makes up 8 percent, Washington 7 percent and Idaho 4 percent. The remaining 3 percent is found at the top of Northern California, with Pacific Power serving a territory that includes the cities of Yreka and Crescent City.
Based in Portland, Oregon, PacifiCorp's service territory covers 141,400 square miles through its Pacific Power and Rocky Mountain Power divisions that combine to serve 1.9 million customers. As a means of comparison, SDG&E's service territory is 4,100 square miles and serves 3.6 million customers.
BHE also is the parent company of NV Energy, the power company that serves 2.4 million electric customers across Nevada.
What are they like?
"They control quite a bit of the assets around California," said Gary Ackerman, a utilities and energy consultant with more than four decades of experience in power issues affecting states in the West. "They know how to play the game."
According to a PowerPoint presentation delivered last November by BHE's chief financial officer, the company's strategy looks to "invest in internal growth," acquire companies and then reinvest in their assets. In 2018, BHE boasted $19.8 billion in revenue and net income of $2.6 billion.
"These people have very sharp pencils and they know how to use them," Ackerman said. "They are no one's fool. They don't do bad deals and they don't willingly take on hopeful deals with a prayer that it might work. They're lean, mean and sharp."
PacifiCorp and NV Energy also played hardball on an energy initiative in the Silver State. Some of the major casinos — large users of electricity — pushed for a measure to transition from a monopoly model to a competitive retail electric market by 2023.
The initiative passed in 2016 with support of more than two-thirds of voters. But in order to amend the Nevada Constitution, the measure had to go before voters a second time. In the subsequent 2018 vote, NV Energy poured in $63 million to oppose it and voters reversed themselves and rejected the initiative by a wide margin.
"They spent tens of millions of dollars advertising, promoting the idea that if you allow retail competition in Nevada, your rates are going to go up, bad things are going to happen and children will fall off their tricycles," said Ackerman, who has a home in Northern Nevada. "They just took the old utility line."
But Ackerman gives PacifiCorp credit for taking the lead with the California Independent System Operator in November 2014 to launch the Western Energy Imbalance Market, which allows utilities across the West to access the least expensive energy available in real-time. Just this week, the California ISO announced the program has racked up $1 billion in economic benefits to customers since it was established.
"That was a very provocative move," Ackerman said, "and they were the first ones to do so. Everybody else was saying, 'I don't want to be first,' but PacificCorp saw the benefit and they've done very well by doing so."
As a new city of San Diego franchise agreement comes up for negotiations, BHE and SDG&E's parent company, Sempra Energy, have some recent history.
In 2017, it looked like Buffett and Berkshire Hathaway Energy were about to purchase Oncor, the largest utility in Texas, for $9 billion. But Sempra swooped in, offering a higher purchase price. Buffett, as he has done in the past, refused to get into a bidding war and Sempra acquired the Dallas-based company for $9.45 billion.
Finalized in early 2018, the deal was the largest in Sempra's history and drew headlines for the San Diego company and its new CEO, Jeff Martin.
Would Buffett relish the prospect of gaining the San Diego franchise agreement at the expense of Sempra? It makes for an intriguing story line but Roger Lowenstein, author of "Buffett: The Making of an American Capitalist," a best-selling biography of the billionaire, dismisses such talk.
"He doesn't look back," Lowenstein said of Buffett, who turns 90 this month. "He looks at himself as a guardian of Berkshire shareholders who are his family, his friends and many of the investors he has known over the years. He looks at these as business decisions. He just doesn't do personal vendettas."
Environmental groups have criticized Buffett for the use of coal among BHE companies.
Coal made up 43 percent of BHE's power generation last year and accounted for 48 percent of the capacity of assets owned by PacifiCorp. According to PacifiCorp's 2019 integrated resource plan, the company has a 100 percent share of 11 coal-fired power plants and a partial stake in another 13, mostly in Wyoming and Utah.
A 2006 California law blocks most utilities from making long-term investments in coal but an exception in the statute has allows PacifiCorp to keep investing in its coal fleet because the company has a small footprint in the state.
SDG&E has no coal in its power mix.
BHE has pledged to retire many of the plants in the coming years and stepped up investments in renewable energy. It says it has reduced coal in its portfolio from 58 percent in 2006 to 26 percent as of September 2019, and its utilities expect to reduce their coal generation from 10,499 megawatts in 2013 to 4,125 megawatts by 2037.
"This highlights the importance of the franchise agreement and the importance of clean energy requirements that the city (of San Diego) puts into it," said Tyson Siegele, energy analyst for the Protect Our Communities Foundation, a local environmental and consumer group. "If we do go with Berkshire Hathaway, then we need to make sure the energy that Berkshire is providing is hitting our Climate Action Plan target of 100 percent clean energy by 2035, just like any other utility."
Siegele said the city can instruct BHE and/or PacifiCorp to make sure its San Diego franchise portfolio is coal-free.
"Berkshire Hathaway, just like SDG&E, is a for-profit company and they are going to do what makes them money," Siegele said. "And we, as the city of San Diego, need to make sure we hold them accountable and make sure we get what we want from Berkshire Hathaway or SDG&E or another bidder."
A new franchise agreement will be determined by the San Diego City Council. A consultant hired by Mayor Kevin Faulconer's office has proposed a 20-year contract and a minimum bid by potential contenders of $62 million.
The formal bidding process is expected to begin soon.
In 2016, Salt Lake City renegotiated its 25-year franchise agreement with PacifiCorp's Rocky Mountain Power and settled on a five-year deal.
Last month, BHE expanded its reach by acquiring the gas transmission and storage holdings of Virginia-based Dominion Energy for $9.7 billion. Any thoughts the pricey Dominion deal would curb BHE's interest in bidding for the San Diego franchise were quickly erased.
At a city council Environment Committee hearing on July 16, a BHE executive called in during the public comments period to confirm interest in competing for the bid.
"We have operational capabilities that we believe would lend themselves well to successful service to the city of San Diego," said Jonathan Weisgall, vice president for government relations for BHE, "and most important, we are absolutely focused on customers and in this regard we would deliver what the city is looking for, if at all possible, we would want our goals to align with the city's goals."
A recent filing by Berkshire Hathaway Inc. showed BHE's parent company has a record $137 billion in cash and equivalent financial instruments at the end of the first quarter, leaving plenty of room for more acquisitions.
(c)2020 The San Diego Union-Tribune
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