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In his recent letter to shareholders, Warren Buffett said that Berkshire Hathaway, with its size and maturity, should “operate with a materially lower risk of permanent loss of capital.” A few pages later, the Omaha priest seemed to contradict himself.
Berkshire Hathaway Energy is one of America's largest energy utilities. Buffett noted that these infrastructure companies are often operated as natural monopolies whose stock returns are mandated by government regulators. Such a system allows the utility to safely make long-term and costly investments in electricity and gas generation as well as transmission equipment. It's as static and boring as can be.
So far. In a worst-case scenario, Berkshire Energy's Pacific Corp. faces tens of billions of dollars in civil liability for the alleged role its equipment played in multiple wildfires that have raged in California and Oregon in recent years after lightning strikes. Even as Berkshire's overall operating profits rose in 2023, profits at its energy unit fell more than 40 percent, including nearly $2 billion in “estimated potential losses due to wildfires.”
Buffett has ominously hinted at some kind of bailout or regulatory relief, citing the dilemma that America increasingly needs more power while liability from climate change may discourage necessary investment.
Fortunately, 2023 has been a relatively mild year for hurricanes. This helped mitigate any significant losses for Berkshire's very important property and casualty insurance segment. Profits jumped here. Even as insurers benefit from a sharp rise in premiums, the rise of (severe) thunderstorms or hurricanes makes insurance another business facing daily climate risks.
In the same letter, Buffett leaned on his stake in Occidental Petroleum, a stake he expects to hold “indefinitely.” He wrote that oil and gas exploration is essential to America's energy independence. The role that oil and gas exploration and consumption plays at the heart of the climate crisis, as well as the risks that arise from it, have not been recognised.
Two U.S. utilities in the West, PG&E and Hawaiian Electric, have faced severe financial distress due to wildfire liabilities in recent years. PG&E has filed for bankruptcy and may eventually have to do the same in order to settle claims efficiently. It would be unusual if Berkshire Hathaway Energy had to make a similar maneuver.
Buffett warned that the costs of climate change to utilities like his may be so large and uncertain that governments, rather than simply regulating private sector companies, may have to turn to operators to fill the void.
Nebraska has always had a sunny view of the United States, and hence its position of power. Despite the inconsistencies, his concerns about climate storm clouds should be taken as an indicator.
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