Berkshire Hathaway's Chairman and CEO Warren Buffett says that $10 billion in his company's cash rides on repeal of the Depression-era Public Utility Holding Company Act (PUHCA). Buffett believes that electric utilities are a great fit for Berkshire, but PUHCA restricts the company, which bought MidAmerican Energy Holdings last year for $1.6 billion, from owning another public utility holding company. Current odds favor repeal, which is a good thing if part of larger-scale utility deregulation.
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Berkshire Hathaway (NYSE: BRK.A and BRK.B) Chairman and CEO Warren Buffett wants to invest $10 billion or more in his company's cash in electric utilities. Buffett, whose holding company owns insurance companies Geico and General Re, as well as consumer product companies including Benjamin Moore Paints and Shaw Industries, told The Wall Street Journal, "We generate lots of capital, and the electric-utility industry requires it in massive doses. It is a natural business for us."
PUHCA stands in the way PUHCA decrees that a company that owns 10% or more of the voting stock of a public utility can own a "single integrated public-utility system," and cannot own a non-utility system unless it is "reasonably incidental or economically necessary" to the public utility's operations. These restrictions place a virtual ban on the acquisition of geographically distant utility assets through holding companies and restrict utilities to simple business structures within one state. Because Berkshire owns all sorts of non-utility businesses it certainly wants to keep, it went through various contortions to buy 76% of MidAmerican's fully-diluted stock but control less than 10% of the voting interest, though Berkshire board member and Buffett friend Walter Scott Jr. owns the majority of MidAmerican's voting stock. Even if it could control more than 10% of MidAmerican, Berkshire couldn't buy any other "distant" retail utility assets. Senator Phil Gramm (R-Texas) is firmly on Buffett's side (Gramm presumably ignores Buffett's support of Senator Clinton's election). Just as Gramm led the successful charge to repeal the 1933 Glass-Steagall Act that separated brokers, bankers, and insurers, the former Texas A&M economics professor is now after PUHCA, which he hopes to see die this year. The chances for repeal are good but there is opposition. The Union of Concerned Scientists opposes repeal, balancing organizations such as the libertarian Cato Institute that support it. Do we need PUHCA today? They also played games that led to higher customer rates. The legally-mandated social contract for public utilities has gone like this: We, the state or other local government, grant you a franchise -- a legal monopoly -- to provide service to certain customers, but our Public Utilities Commission (PUC) or other regulatory body will regulate your prices to prevent price gouging. PUCs typically fixed rates on a cost-plus basis or as a percentage of a "base" -- the value of your installed assets such as power plants (called a "rate base"). Some believe that the holding companies' subsidiaries charged each other high rates for service, adding to costs from which regulators would determine rates, injuring consumers. Today, PUCs try new ways to set prices, such as price caps, which are supposed to provide incentives for more efficient utility operations, and states toy with variations of deregulation to increase competition and supply. And with wholesale power generation growing and unregulated, PUHCA today seems an anachronism. Public utilities can own wholesale generators, which in turn can own all sorts of businesses. And why restrict retail utilities from investing in new sources of power such as cogenerators or small independent power producers? If we want increased supply and competition, why not let capital flow to where it makes sense? Personally, I have reflexively opposed anything Senator Gramm is for. His economic views are often simplistic and unyielding, and he receives more than justified respect and deference in the Senate simply due to his days as a professor (professors, like everyone else, range from good to bad, pie-in-the-sky to practical). But he may be right on this one. Because modern safeguards and a new wholesale power world may have rendered PUHCA an antediluvian impediment to change, it makes sense to support PUHCA's repeal cautiously. Let's just ensure that there is sensible reorganization of utility regulation in the U.S. and proper incentives to increase supply and price competition. And I challenge anyone to find a holding company in the U.S. better positioned than Berkshire Hathaway to serve as an experiment for PUHCA deregulation. Heads up! Next week brings Motley Fool coverage of Saturday's Berkshire Hathaway annual shareholder jamboree -- er, meeting. Four jester cap-wearing shareholders will be in attendance (at their own expense!), trying not to drip free Dairy Queen products while they tour Executive Jets, and planning their discounted shopping sprees at Borsheim's and Nebraska Furniture Mart. A Fool shouldn't have so much fun! Tom Jacobs (TMF Tom9) buys Champion white socks by the dozen at Ross discount stores. At press time, he owned no shares in companies mentioned in this article. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
Berkshire Hathaway hasn't kept its power desires secret, stating last year it would like to add more utility holdings to its $1.6 billion purchase of utility MidAmerican Energy Holdings. But Buffett's comments are timely for tomorrow's Senate Banking Committee vote on whether to repeal Berkshire's main obstacle -- the Public Utility Holding Company Act (PUHCA), passed in 1935.
Congress passed PUHCA in 1935 when three big utility holding companies owned over half the industry, with one company sporting 130 utilities. Accounting abuses and huge debt reportedly were rife, and both sides of repeal agree that investors suffered heavy losses when many utility holding companies failed, after using subsidiaries to shield themselves from liability for the subs' huge debt issuances, encouraging high leverage and shaky finances.
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