Berkshire Hathaway 2015 Annual Report Download - page 25

‹In its electric utility business, our Berkshire Hathaway Energy (“BHE”) operates within a changing
economic model. Historically, the survival of a local electric company did not depend on its efficiency. In
fact, a “sloppy” operation could do just fine financially.
That’s because utilities were usually the sole supplier of a needed product and were allowed to price at a
level that gave them a prescribed return upon the capital they employed. The joke in the industry was that a
utility was the only business that would automatically earn more money by redecorating the boss’s office.
And some CEOs ran things accordingly.
That’s all changing. Today, society has decided that federally-subsidized wind and solar generation is in
our country’s long-term interest. Federal tax credits are used to implement this policy, support that makes
renewables price-competitive in certain geographies. Those tax credits, or other government-mandated help
for renewables, may eventually erode the economics of the incumbent utility, particularly if it is a high-cost
operator. BHE’s long-established emphasis on efficiency – even when the company didn’t need it to attain
authorized earnings – leaves us particularly competitive in today’s market (and, more important, in
tomorrow’s as well).
BHE acquired its Iowa utility in 1999. In the year before, that utility employed 3,700 people and produced
19 million megawatt-hours of electricity. Now we employ 3,500 people and produce 29 million megawatt-
hours. That major increase in efficiency allowed us to operate without a rate increase for 16 years, a period
during which industry rates increased 44%.
The safety record of our Iowa utility is also outstanding. It had .79 injuries per 100 employees in 2015
compared to the rate of 7.0 experienced by the previous owner in the year before we bought the operation.
In 2006 BHE purchased PacifiCorp, which operated primarily in Oregon and Utah. The year before our
purchase PacifiCorp employed 6,750 people and produced 52.6 million megawatt-hours. Last year the
numbers were 5,700 employees and 56.3 million megawatt-hours. Here, too, safety improved dramatically,
with the accident-rate-per-100-employees falling from 3.4 in 2005 to .85 in 2015. In safety, BHE now
ranks in the industry’s top decile.
Those outstanding performances explain why BHE is welcomed by regulators when it proposes to buy a
utility in their jurisdiction. The regulators know the company will run an efficient, safe and reliable
operation and also arrive with unlimited capital to fund whatever projects make sense. (BHE has never paid
a dividend to Berkshire since we assumed ownership. No investor-owned utility in America comes close to
matching BHE’s enthusiasm for reinvestment.)
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The productivity gains that I’ve just spelled out – and countless others that have been achieved in America
– have delivered awesome benefits to society. That’s the reason our citizens, as a whole, have enjoyed – and will
continue to enjoy – major gains in the goods and services they receive.
To this thought there are offsets. First, the productivity gains achieved in recent years have largely
benefitted the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a
terrible price when innovation or new efficiencies upend their worlds.
We need shed no tears for the capitalists (whether they be private owners or an army of public
shareholders). It’s their job to take care of themselves. When large rewards can flow to investors from good
decisions, these parties should not be spared the losses produced by wrong choices. Moreover, investors who
diversify widely and simply sit tight with their holdings are certain to prosper: In America, gains from winning
investments have always far more than offset the losses from clunkers. (During the 20th Century, the Dow Jones
Industrial Average – an index fund of sorts – soared from 66 to 11,497, with its component companies all the while
paying ever-increasing dividends.)
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