Buffett’s Texas Power Fix Looks Like His Goldman Bailout

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Warren Buffett has a knack for showing up and offering a helping hand just when things seem bleakest. Now it’s Texas’ turn.

Bloomberg News reports Berkshire Hathaway Inc. has proposed a fix for the state’s power grid, reeling from February’s blackouts. Under the plan, Buffett’s firm would build 10 gigawatts of new gas-fired power plants, plus associated gas storage, for $8.3 billion under the aegis of a new thing called the Texas Reliability Corp. Not only is the name something out of utility-marketing 101, it would actually be a utility, with Berkshire reimbursed via a new, ongoing charge added to customers’ bills. This would include a regulated return put at 9.3%. The plants would be controlled by the grid operator, rather than Berkshire itself, ready to be used in an emergency (rather than day-to-day). Berkshire says it could have this up and running in time for the winter of 2023/24 and would guarantee performance.

The most pleasing aspect of all this? It is Buffett’s payday loans to the likes of Goldman Sachs Group Inc. or Occidental Petroleum Corp. reimagined as energy infrastructure. 

As you may recall, Buffett stepped in to tide over Goldman in the aftermath of the 2008 financial crisis in the form of a $5 billion preferred stock investment that carried a dividend of 10% and juicy warrants, reaping him a handsome return. With Oxy, when the oil company was in hot pursuit of Anadarko Petroleum Corp. in 2019, Buffett chipped in $10 billion for 8% preferreds (plus warrants, of course). So far, he’s reaped more than $800 million on those while Oxy has made, well, less than that.

In both cases, Buffett used his formidable liquidity and brand name to help out folks in a tight spot at a commensurate premium. More importantly, those deals were structured to give Berkshire a fixed-income-like return insulated somewhat from the risks of the companies themselves.

Utilities are similar in that regard. The Texas Reliability Corp. is an insurance policy for the grid, but its regulated return would also provide Buffett with some insurance against the vagaries of that grid, paying a coupon-like annual return. As with other regulated infrastructure, Buffett likes utilities; he tried to buy one in Texas four years ago, again pitching it as a way to solve a problem for the regulator (he was ultimately outbid). 

Berkshire has almost $140 billion of cash to deploy and is, as my colleague Tara Lachapelle has written, seemingly reluctant to take stock tips from Reddit. So putting the best part of $10 billion into something earning almost 4x the yield on 30-year Treasuries, and funded by an effective levy on the citizens of Texas, must look pretty compelling in Omaha.

Austin will perhaps be less enthused. Buffett’s proposal has the rather genius element of passing the excess profits made by the proposed plants in any emergency back to consumers; a nice counterpoint to all those recent stories about ordinary Texans being bankrupted by bills even as some generators minted money. In passing cash back to billpayers at the exact time they are most thinking about those bills, it might also obscure the steady payments they would be making during all the months they aren’t so focused on electricity charges.

Yet the reason Texas doesn’t have back-up mechanisms like a capacity market — which Buffett’s proposal says would cost more — or hasn’t invested adequately in winterization is because it has wanted to avoid such line items on bills. Putting power plants into the rate base runs completely counter to the state’s model of deregulation.

The influential Texas Industrial Energy Consumers lobby is unlikely to be thrilled at the idea of embedding a Buffett tariff in its members’ ongoing costs. Homegrown generators would also bridle at an interloper adding a ton of new generation to the market — and with a guaranteed return no less — regardless of whether it was not meant to compete with them directly. Environmentalists wouldn’t like the arrival of another several decades’ worth of fossil-fired facts on the ground.

Indeed, even if the plan was deemed attractive, shouldn’t it be bid competitively rather than just awarded? After all, Berkshire’s experience in Texas’ energy market is pretty minimal; BloombergNEF lists only a handful of power plants it runs there, including just one rather old 230 megawatt gas-fired facility.

None of this is to knock Buffett for making his pitch; he has the cash and, to borrow a phrase from one of his companies, it’s just what he does. Moreover, as much as Austin is likely to politely decline, the proposal does serve one purpose: emphasizing the pressing need for Texas to proof itself against disaster, even if that means taking out a bit more insurance

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

©2021 Bloomberg L.P.

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