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Reuters Breakingviews) – The Oracle of Omaha’s crystal ball failed him. Warren Buffett conceded in his latest annual letter to Berkshire Hathaway shareholders released over the weekend that he made a “costly mistake” about electricity. The error was thinking that investing huge sums to supply it to American homes and businesses would generate a steady return. Instead, it is turning into a gigantic problem.
Buffett’s $840 billion conglomerate built one of the biggest U.S. utilities, with more than 5 million customers across multiple states, on the basis that it would be as reliable as selling peanut brittle or car insurance. Just a few years ago, Buffett touted Berkshire Hathaway Energy, saying earnings had risen nearly 30-fold over roughly two decades, and that the cost of upgrading the grid would absorb the division’s earnings for “decades to come.”
The historical compact with regulators has been that privately owned utilities would plow the necessary funds into running and improving the system on the promise of a fixed return on equity. Climate change has raised the risk of fire and flood for utilities and, at least according to Buffett, the rules of the game are increasingly up for debate.
Wildfires have torched BHE’s profit. The unit suffered a $1.6 billion hit from conflagrations in California and Oregon in 2020 and 2022, respectively, which led to a 40% decline in earnings last year. The toll may yet rise from these events, and future ones. Buffett ominously points out that bankruptcy has already engulfed California’s largest utility and threatens to do the same in Hawaii. If authorities and courts decide the companies are on the hook for fire damages in states beyond California, it would saddle investors with big losses.
Berkshire has the requisite firepower, with more than $160 billion of cash and equivalents. The company estimates capital expenditures in its rail and utility businesses combined will be about $14 billion this year. Buffett’s comments indicate, however, that he is rethinking the whole premise. After all, his first rule of investing is to not lose money, with the second rule being to never forget the first rule.
As Berkshire gets skittish, other utilities and their backers might, too. The industry probably requires more than $1 trillion by 2050 to harden and expand electric transmission, according to consultancy Marsh McLennan. If private owners won’t deploy it, the public will be on the hook. After all, government data indicates the system is already becoming less reliable and blackouts impose tremendous costs on society. Everyone wants a reliable grid, but who will pay for it keeps getting cloudier.
Berkshire Hathaway CEO Warren Buffett said he made a “costly mistake” in not anticipating or considering adverse developments in utility regulation in his annual letter to the company’s shareholders, released on Feb. 24. Berkshire Hathaway Energy earned $2.3 billion for its parent company in 2023, compared to $3.9 billion the previous year.
The division increased its estimated pre-tax loss for wildfires in 2020 and 2022 in Oregon and California, respectively, net of expected insurance recoveries, by $1.6 billion.
Buffett said the costs from forest fires will likely keep increasing if thunderstorms become more frequent. But the regulatory climate in some states has made it difficult to project earnings and asset values in “what was once regarded as among the most stable industries in America,” he wrote.
Berkshire Hathaway Energy has more than 5 million retail customers and operates electric and gas distribution networks across multiple states.
Editing by Jeffrey Goldfarb and Aditya Sriwatsav
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