(John Burnett) – Berkshire Hathaway’s (BRK.A – Get Report) Warren Buffett is famously known as the Oracle of Omaha, a moniker that not only reflects his keen financial instincts but also his standing as an upright sage in the ruthless and sometimes morally blurred world of high finance.
Now, however, the sterling image Buffett has so carefully cultivated is being challenged in a high-stakes business dispute that some critics say could disrupt energy supplies and potentially result in higher energy costs for ratepayers out West.
The dispute stands out because it pits boldface names such as Buffett and Steve Wynn, the baron of the luxury hotel and casino industry and CEO of Wynn Resorts (WYNN – Get Report) , against one another. It is also intriguing because of what is says about the arcane, complex and arguably outdated rules that govern state-sanctioned monopolies like utility companies, as well as the rates that they are permitted to charge customers.
The fight centers around NV Energy, a utility in Nevada owned by Buffett’s Berkshire Hathaway, and its efforts to lay the groundwork for the construction of a massive, natural gas plant to meet with energy demands.
The effort to anticipate demand seems prudent enough, except that critics claim Buffett’s Berkshire Hathaway may be pulling a fast one: actually doing things that would precipitate energy shortages and, in the process, justify the construction of the new power plant.
And why would the Nevada utility go to such great lengths to build a new power plant? The answer, according to the critics, lies in the complex rules regulating utilities and what they can charge.
In general, government regulators permit utility companies to raise rates as long as they make investments into capital improvement projects like, say, a new power plant. The upside for the utility companies and their shareholders is a stream of higher revenues that will continue long after the costs of capital improvement projects are fully paid.
Not surprisingly, utilities around the country are employing this regulatory loophole to guarantee big profits for shareholders, according to an eye-opening report in The Wall Street Journal.
But the results have been terrible for consumers. Utility companies have passed on the costs of capital improvements to consumers in the form of higher rates. And the irony here is that as a result, the price of electricity has risen sharply around the country, even though power plants are increasingly fueled by an abundance of cheap natural gas.
“Capital spending has climbed at utilities nationwide — and so have their customers’ bills,” The Wall Street Journal explained. “It actually boosts their bottom lines-the result of a regulatory system that turns corporate accounting on its head.”
“At the moment, it is common for utilities’ allowable profit to be capped at 10% or so of the shareholders’ equity that they have tied up in transmission lines, power plants and other assets,” the newspaper continued. “So the more they spend, the more profits they earn.”
NV Energy’s justification for a new plant — that it is anticipating electricity demand — has been criticized as nothing more than a sleight of hand.
The case against NV Energy centers in part around its handling of so-called power purchase agreements under which the utility currently buys power from a variety of companies operating power plants.
NV Energy had been soliciting offers from these companies to renew these power agreements. The solicitation of such offers is required under an agreement that Buffett’s Berkshire Hathaway made with regulators to buy NV Energy several years ago.
But here is where things get interesting. Even as NV Energy solicited offers for power agreements from other companies, Buffett’s Berkshire Hathaway was telling its investors about the possible construction of a natural gas plant by NV Energy.
To critics, this raises questions about whether NV Energy was ever serious about pursuing power agreements with its energy partners. More than that, NV Energy is reportedly terminating a power agreement with at least one power supplier, a move that could potentially create energy shortages justifying the construction of the new plant that NV Energy has envisioned.
But if NV Energy has its way, consumers will be saddled with an enormous bill. In fact, the natural gas power plant could cost ratepayers up to $1 billion, according to a request NV Energy recently made in a filing with the Public Utilities Commission in Nevada.
In the filing, the company described the new power plant as its “preferred plan,” according to a report in the Las Vegas Sun. The company also asked permission to spend $2.4 million to do preliminary studies for the construction of a plant, the report said.
Not surprisingly, the move by NV Energy has provoked outrage, not just among consumers but also business leaders, who warn that higher rates could have damaging consequences for economic expansion in the state.
Among the most pointed criticisms have come from Wynn and his lieutenants.
In testimony filed with the state Public Utilities Commission on behalf of MGM, Mark Garrett, a public utility expert, said the move by NV Energy suggested that the utility was “tone deaf” to the economic struggles of the region.
“Again, the company’s efforts appear to be driven by a desire to add to its rate base to increase earnings,” he said.
The criticism has even become quite personal, with the Wynn camp taking direct aim at Buffett.
Matthew Maddox, president of Wynn Resorts, noted that NV Energy made more than $700 million in net operating income last year, according to an article in the Las Vegas Sun. Maddox also pointedly said that money doesn’t stay in Nevada. “It goes to Omaha,” he said.
Personal swipes aside, the fundamental question being raised in this debate is legitimate: Should any utility be allowed to use the regulatory system to make bigger profits at the expense of ratepayers?
This is what the Public Utilities Commission in Nevada will have to decide when it votes on the NV Energy proposal later this year.
(This column was originally published by The Street on September 24, 2015)
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