Mr. Warren Buffett
Chief Executive Officer
Berkshire Hathaway Inc.
1440 Kiewit Plaza
Omaha, NE 68131
Dear Mr. Buffett:
From reports in the media, I have learned that you are keenly interested in investing up to $15 billion in this country’s troubled electric utility sector and that, as a prerequisite to this investment, you and your surrogates advocate quite forcefully that Congress repeal the Public Utility Holding Company Act (PUHCA).
As someone named by Fortune magazine recently as “the most powerful businessperson in America” as well as the second-richest person in the world, your opinion in these matters carries great weight. At the same time, as the “Oracle of Omaha,” you are uniquely situated to be an agent for sorely needed, positive change in the culture and governance of American corporations. I note that you have taken progressive positions on such issues as expensing stock options and opposing dividend tax cuts for the rich.
That’s why I am writing to ask that you seriously ponder the negative consequences to utility ratepayers, investors and the U.S. economy from repealing PUHCA and that you reconsider your position. As a cornerstone of protection for both electricity consumers and utility investors, PUHCA has brought stability to an industry for more than six decades and has helped bring a better life to millions by establishing conditions that foster reliable, universally available and affordable electricity service.
Proponents of repealing this law argue that it will promote competition in the electricity sector and unleash billions of dollars in private investments needed to upgrade the electricity grid in the wake of the recent blackout. Never mind that prior to deregulation, utilities had both the financial incentive and the responsibility to maintain the grid. It is the advent of wholesale deregulation that has orphaned the transmission system and increased traffic and stress on the grid to accommodate power marketers who desire to sell electricity over longer distances to the highest bidders.
While the repeal of PUHCA might initially make the electricity sector more attractive to investors such as yourself, it surely will result in the use of utility revenues to finance other businesses, ensuring the flow of capital away from the sector. California public utility commissioner Carl Wood, in a Sept. 14 article in the Los Angeles Times, said repeal would make it easier for companies to siphon off utility revenues to subsidize other businesses. “Once you get these far-flung multistate mergers, then the ability to oversee these things effectively slips away from state regulators,” Wood told the Times.
Competition is a canard, and industry insiders know it. In a Sept. 10 article in Restructuring Today newsletter, MidAmerican Energy CEO David Sokol not only admitted that there will be “a fair bit of consolidation” in the electric utility industry once PUHCA is repealed, but argued that this is a good thing. I assume Mr. Sokol, who is vigorously lobbying Congress in favor of repeal, speaks with your blessing, since Berkshire Hathaway Inc. owns about 90 percent of this Iowa utility.
Industry insiders believe that if PUHCA is repealed, only about six holding companies will own all electric utilities a decade from now. Indeed, there could be short-term profits to be made by Berkshire Hathaway, ExxonMobil, ChevronTexaco, Bechtel, Halliburton, foreign utilities such as Electricite de France, and other currently regulated utility holding companies like the Southern Company, Entergy and AEP. But at what ultimate cost to Americans? Why should consumers pay increased rates to cover the debt these companies will incur to purchase power plants and transmission systems that have already been bought and paid for with ratepayer revenues? While some grid upgrades are needed, in many cases new infrastructure will simply facilitate the trading of electricity over longer distances to provide increased profits to these trading companies.
In fact, the repeal of PUHCA will do harm to the economy. Given the recent corporate crime wave, there is no reason to believe that executives of energy companies today will behave any more ethically or act more in the interest of their shareholders than they did in the pre-PUHCA era of the 1920s and 1930s. During that period, huge, multilayered utility parent companies used secure utility revenues to engage in risky business ventures around the globe. These highly leveraged companies collapsed after the stock market crash of 1929, wiping out investors while deepening and prolonging the Great Depression. There is an eerie similarity to the sordid story of Enron and other companies that got legislative and regulatory exemptions from PUHCA in the 1990s. Promoters of PUHCA repeal seem to be suggesting that given more rope — and less government oversight — perhaps, this time, energy executives won’t hang themselves. This is blind corporate boosterism at its worst. Given this mile of extra rope, they will not only hang themselves, but others as well.
PUHCA was designed, with good reason, to ensure that local utilities “stick to their knitting.” It does not allow holding companies with electricity (or retail natural gas) assets in more than one state to invest in businesses — such as a movie studio or a shopping mall — that have nothing to do with providing reliable service at reasonable rates. It also gives federal regulators broad authority to ensure the financial health of utility holding companies by regulating their corporate structures and finances. This has been extremely good for utilities, which until recently provided conservative investors — many of them elderly — with steady, predictable returns for many years. The credit rating agencies, Standard and Poor’s and Fitch Ratings, have issued recent findings that PUHCA-regulated utilities owned by holding companies are in much better financial health than the unregulated ones that have resulted from the recent partial PUHCA exemptions.
Actions by Congress and the Securities and Exchange Commission in the 1990s significantly limited PUHCA’s scope, with predictably disastrous results. In 1992, Congress exempted wholesale electricity generators and foreign utilities from PUHCA. In 1994, the SEC exempted power marketers (companies that trade electricity but don’t own generation, transmission or distribution facilities) at Enron’s request and extended similar exemptions to other power marketers. Then, in 1996, Congress amended PUHCA to allow utility holding companies to invest in telecommunications. Not only should PUHCA be retained, but these exemptions should be repealed — with good reason.
During the 68 years that PUHCA has been in effect, not a single regulated electric utility holding company has gone bankrupt! Compare that record with the corporate meltdowns we have seen among power traders and other companies that were exempted through the recent shredding of PUHCA.
Just last week, the PUHCA-exempt company NorthWestern Corp., which recently acquired assets from Montana Power Co., filed for Chapter 11 bankruptcy protection. Other examples of companies in trouble include: (1) the bankrupt Mirant, which was spun off from the Southern Company and was no longer subject to PUHCA’s mandatory restraints; (2) NRG, which was spun off from Xcel to hold its PUHCA-exempt utilities and then went bankrupt, almost bringing Xcel down with it; and (3) Allegheny Energy, which has narrowly avoided bankruptcy by begging the SEC to increase its debt levels. Dynegy and others are on the edge.
Utility owners have found it difficult to resist the allure of using guaranteed utility revenues to invest in other high-return (and usually risky) businesses, thus endangering the financial health of the utilities and taking away money needed to maintain the electricity infrastructure. Without PUHCA’s constraints on executives, the inevitable creation of elaborate corporate structures will bedevil both investors and regulators and open new opportunities for accounting fraud and self-enrichment schemes among executives.
I recall your phrase years ago of seeking, for investment purposes, “unregulated toll booths,” like The Washington Post. But the cynical and widespread market manipulation, self-dealing and accounting fraud by Enron and other companies, as well as the recent blackout, demonstrate that electricity service is simply too important to our individual well-being, our economy and our security to be left to the whims of an unfettered “market” and treated merely as investment opportunities that can either earn great profits or go bust. There was a sound reason for the enactment of PUHCA in 1935, and those reasons (as illustrated notoriously by the Enrons of the world) have not changed!
Today, standards to assure the financial health of utilities (and hence reliability of electricity) are needed even more than in the days when PUHCA was conceived, because so much more of our economy and security depend on modern appliances like computers and refrigeration systems that are worthless without power. The economic cost of the recent, relatively short blackout in the Northeast has been estimated at $4 billion to $6 billion.
It is a great irony that Berkshire Hathaway is located in Omaha, Nebraska, the home state of one of the greatest backers of public power in the history of our country. Senator George W. Norris was one of the first to call for (and get) an investigation of the Power Trust, as the utility holding companies of the 1920s were called. He and Nebraska learned well from the 101 volumes of abuses perpetrated by utility holding companies in the 1920s that the Federal Trade Commission uncovered and documented in its investigation. To this day, the state of Nebraska does not have a single public utility holding company, either exempt or registered under PUHCA, but has all public power companies.
Finally, some who favor deregulation insist that the PUHCA framework is “outdated.” The U.S. Constitution is now more than two centuries old. No one is suggesting that this framework for our democracy is too old to be useful.
Under today’s regulatory structure, Berkshire Hathaway can invest in the electricity sector, it just cannot control multistate utilities without divesting its other business holdings. I am not discounting the possibility that, under your guidance and business prudence, Berkshire Hathaway could acquire electricity sector assets and operate them ethically and above reproach. However, eventually you will not be in charge, and the Enron-type entrepreneurs of the world will have us longing with wistful nostalgia for the days when those boring old electric utilities were something you could rely on.