If Warren Buffett’s billions meet Oncor’s wish list, here’s how Texas stands to gain

Source: By Mitchell Schnurman, The Dallas Morning News • Posted: Sunday, July 16, 2017

Staff Photographer
It must be nice to imagine the future when Warren Buffett wants to be your benefactor.

The energy unit of Buffett’s Berkshire Hathaway Inc. recently agreed to buy Oncor Electric Delivery Co. for $18 billion, including debt.

Buffett may be best known for investments in Geico Insurance, BNSF Railway, Coca-Cola and American Express. But his energy unit is also a major player in utilities, serving over 11 million electric and gas customers.

It has made major investments in renewable energy, grid infrastructure and efficiency programs. It has been effective in legislative efforts, even supporting a proposal to wind down coal production and ratchet up green energy.

Berkshire Hathaway Energy has invested $19 billion in renewables and has a goal of $30 billion. It has wind and solar projects in eight states, including Texas. It has two of the largest solar farms in the world in California.

In Iowa, where Berkshire energy started with a single acquisition in 1999, the goal is to provide all power from renewables.

“When it comes to wind energy, Iowa is the Saudi Arabia of America,” Buffett wrote in a letter to investors this year.

That kind of vision, combined with the deep pockets to make it a reality, should reassure Oncor customers, workers and regulators. Oncor serves 3.4 million homes and businesses in Texas and has 3,700 employees, including those at its Dallas headquarters.

Rapid change

The utility business is changing fast. Load growth is slowing, renewable energy is gaining, and there’s strong growth in rooftop solar and microgrids. That’s putting pressure on transmission costs.

The way Berkshire has embraced change — going all-in on renewables, for instance, and experimenting with home storage batteries — is a promising sign for Oncor.

Oncor already has a record of innovation. That includes investing in smart meters and transmission lines to carry wind power, and a proposal to spend $2 billion on storage batteries.

It’s too soon to know how Oncor’s wish list would mesh with Buffett’s billions. But it’s safe to assume that the company will have a lot more room to invest and innovate.

Oncor is different from most Berkshire utilities, which also supply electric power and retailing services. In deregulated Texas, Oncor transmits electricity — and doesn’t generate any power, so it won’t be adding solar farms.

But under Berkshire’s ownership, expect Oncor to be aggressive in making grid investments and getting ahead of emerging trends. When Oncor proposed investing in batteries, the idea went nowhere because of opposition from generators and lawmakers.

For batteries to pay off, changes would be required at the Public Utility Commission and Legislature. That’s a daunting task, but Berkshire utilities have been active in other regulatory pushes, including one that will phase out coal generation in Oregon by 2030.

Buffett’s credibility helps those efforts, along with Berkshire’s financial strength and “forever” timeframe.

“If anybody can bring that kind of long-term vision, it’s Warren Buffett,” said Lillian Federico, research director for Regulatory Research Associates in New Jersey.

Electricity usage isn’t growing as it used to, in part because more people and businesses are adding solar panels. So it may be necessary to change how utilities charge consumers in order to recover what’s already been spent on power lines, she said.

At Berkshire energy last year, 1.2 percent of customers used private generation. That’s almost five times more than in 2013, according to the company.

Utilities, regulators and the public must figure out a path forward without utilities being left holding the bag, Federico said.

“If someone like Buffett could get the legislative and political buy-in, we could bite the bullet and move on to the next step,” she said. “That would be a transformative change.”

New approaches

Oncor would become stronger immediately if regulators and the bankruptcy court approve the Berkshire sale. After the deal was announced, Fitch Ratings put Oncor on a positive ratings watch and said its debt rating was likely to improve by one to two notches.

That would cut the cost of debt for Oncor. And 90 percent of the savings  would go to Texas ratepayers, according to conditions of the sale.

That same benefit helps other Berkshire utilities, Buffett said, and regulators like it, too.

“Low prices are a powerful way to keep these constituencies happy,” Buffett wrote.

Unlike other investor-owned utilities, Berkshire has a policy of reinvesting dividends in major capital projects. While wind and solar farms get the most public attention, Buffett has a big commitment to infrastructure.

PacifiCorp has pledged $6 billion toward building 2,000 miles of transmission lines in Wyoming, Utah, Idaho and Oregon.

Several utilities offer rebates and incentives to cut consumption and better manage peak loads. Last year, PacifiCorp and MidAmerican spent a combined $264 million on the programs, and in the first year, that will save over 1 million MWh of electricity, Berkshire said in an annual filing.

Last year, Rocky Mountain Power created a program for Utah customers who wanted to support solar without investing in their own panels. Subscriber Solar was sold out within six months, Berkshire said.

In Nevada, Berkshire’s NV Energy clashed with solar customers for months over a plan to boost fees and cut rates for excess power sent to the grid. Some solar developers left the state before a deal was struck to reinstate rates for eligible customers.

More solar and wind power are coming to Texas, and Oncor stands to benefit even if it’s not a generator, said Greg Jones, an analyst at CreditSights. Oncor will have the chance to beef up transmission lines, and Berkshire makes the prospects even better.

“They’re one of the best management teams in the utility sector,” Jones said.

Betting on energy

Berkshire Hathaway Energy, which wants to buy Dallas-based Oncor, has a record of major investments and innovation at its utilities. Some examples:

  • MidAmerican Energy pledged to provide 100 percent renewable energy for its customers in Iowa. At the end of 2016, almost half of generation capacity came from wind, up from none in 2004.
  • PacifiCorp plans to spend over $6 billion to build about 2,000 miles of transmission lines in Wyoming, Utah, Idaho and Oregon. About a third of the money had been invested by the end of 2016.
  • Rocky Mountain Power created a program to let Utah customers support solar power without installing rooftop panels. After launching about a year ago, Subscriber Solar was sold out within six months.
  • Pacific Power supported a proposal to phase out coal generation in Oregon and ratchet up renewable energy standards. It worked with stakeholders, utilities and the state legislature to pass the law.
  • Northern Powergrid invested in several smart grid projects in Great Britain. One explores how clusters of home batteries can increase capacity without having to reinforce the network.
  • Several utilities offer rebates and incentives to reduce consumption and better manage peak loads. Last year, PacifiCorp and MidAmerican spent a combined $264 million on so-called demand-side management.
  • Berkshire has invested $19 billion in renewable generation and has a goal of $30 billion. BHE Renewables has wind and solar projects in eight states, including Texas. In California, it owns two of the world’s largest solar farms.