2024: Will BHE leave states with adverse regulatory policies?

Becky Quick:
This next question comes from Stanley Holmes, a Berkshire shareholder from Salt Lake City. He asks: In his 2024 annual letter to shareholders, Chairman Buffett noted the severe earnings disappointment experienced at Berkshire Hathaway Energy last year and expressed concern about earnings and asset values in the utility industry. Recognizing that investors are worried about climate change-related expenses and that new uncertainties cloud the regulatory environment, the chairman suggested that some jurisdictions may adopt the public power model. There are now signs that policymakers in Utah, citing state sovereignty, may already be poised to move in that direction. The Utah legislature recently mandated the state’s right to serve as sole purchaser of energy from an in-state power plant and under some circumstances, purchase the power plant before it can be retired. The state utility regulator will be legally bound to prioritize public purchases of power and facilities that could include assets owned by Berkshire Hathaway Energy's specific core utility, Rocky Mountain Power. Will Berkshire, through BHE, continue to invest resources in jurisdictions where corporate assets may be subject to confiscatory state policies and actions? And how is Berkshire Energy working with officials in Utah to minimize potential corporate losses if and when state control is asserted over its electrical utility sector?

Warren Buffett:
I will let Greg join with me in answering this, but I would say our feeling is that Utah is actually very likely to treat us fairly. Whether the action is in granting appropriate rates that give us the return we expect, or if they decide for some reason to go to public power, I think they would compensate us fairly. In the 1930s, George Norris, a senator from Nebraska, turned Nebraska into a public power state. Our experience in Iowa would indicate that free enterprise has its role, and that we can run a privately owned utility company more efficiently than most states can do with public power.

But what has happened is that there’s going to be enormous amounts of money spent on power. If you’re going to do it with private owners, there’s nobody better situated than Berkshire to satisfy a large portion of the country’s needs. We will do it at a rate of return that is sensible, but we won’t do it if we think we’re not going to get any return. It would be crazy to do so. We’ve seen actions in a few states where some of the costs associated with climate change aren’t regarded as costs that the utility shouldn’t incur. Well, believe me, if it was publicly owned, they would have incurred it too. We’ll do what society tells us, and we have the money and knowledge to participate in this enormously important sector for the country. But we’re not going to throw good money after bad.

I don’t worry about Utah. My understanding is that Utah is not unfriendly to the idea of utilities being treated fairly.

Greg Abel:
That’s a great honor. When we touched on it initially in your letter about the challenges in the industry, you alluded to the significant investment that has to go into the energy industry for many years to come. If we start there, think about our different utilities; it will definitely come to Utah and PacificCorp. If you look at the underlying demand in each of those utilities and the amount of dollars that need to go in to meet that demand, it’s absolutely incredible. The underlying demand is increasing substantially, especially in states like Nevada, where the rate base is expected to grow by billions. We need a regulatory compact that works in concert with the state.

Take Iowa, for example, where we've made substantial investments and had a consistent relationship with both the state and the legislature, which enacted specific laws to encourage investment. That utility has been around for more than 100 years, but the demand is expected to double in the next decade. This requires significant capital from MidAmerican and its shareholders. As we look at Nevada, where we own two utilities, that demand is expected to triple by the later 2030s. Our rate base will increase by $6 to $10 billion. This will require alignment with the state and policies that support proper recovery of both capital and return on capital.

As for the wildfires, it’s been a substantial challenge, and the litigation surrounding them continues. We believe some claims are unfounded and will continue to challenge them. The operations of the assets have had to change as well. Historically, we prioritized keeping the power on, especially during emergencies, but now we’ve recognized that we must prioritize de-energizing the grid in certain conditions. This cultural shift is necessary, and we’ve already changed our operating systems to allow us to turn off the power when necessary and re-energize when safe conditions return.

Warren Buffett:
The return on equity investment in utilities has generally been lower than that of other industries. For example, utilities rarely achieve the kind of return on tangible equity that companies like Coca-Cola or Apple achieve. The trade-off in the electric utility sector has traditionally been a modest return, but climate change and related risks—like wildfires—are just part of the cost of doing business. Whether power is publicly or privately owned, someone is going to invest hundreds of billions, possibly even trillions, to meet the future energy demands. While we are willing to make substantial investments, we won’t continue to invest if we think there’s no return on those investments.

Greg Abel:
Ultimately, there are significant opportunities within Berkshire Hathaway Energy, especially in states like Utah, which recently passed legislation that caps non-economic damages for wildfire claims. This proactive approach has created an environment that’s more conducive to investment. Additionally, Utah has established a Wildfire Fund that will help resolve these issues more efficiently. These legislative measures provide a strong framework for investment, and we’re optimistic about the future in Utah.

Warren Buffett:
We don’t want to risk our shareholders’ capital on bad investments. While some states may offer modest returns, we won’t throw good money after bad. The utility sector, with its challenges, isn’t going to be as profitable as some of our other businesses, but it still presents important opportunities—especially with the large-scale investments required to address the climate change-related needs of the future.