Berkshire Hathaway founder and CEO Warren Buffett lamented the impact of federal regulations on a pair of his company’s ventures that had disappointing earnings results last year in his annual letter to shareholders.
Buffett, a longtime supporter of the Democratic Party, noted that federal laws allowing the president to intervene in rail negotiations between labor unions and railroads had the effect of raising wage expenses at BNSF – a Berkshire company that is one of the nation’s six largest freight railroads. BNSF was among the railroads involved in a 2022 labor dispute with a dozen unions that escalated when a tentative agreement was rejected by majorities of those unions’ rank-and-file members.
Under the federal Railway Labor Act, the president and Congress can intervene in rail strikes, and after the deal faltered, President Biden convened a Presidential Emergency Board of neutral arbitrators to resolve the dispute. After the board put forward recommendations and some unions rejected those, Congress and the president enacted legislation providing an immediate 14% raise with a 24% salary hike over five years.
“Wage negotiations in the rail industry can end up in the hands of the President and Congress,” Buffett wrote. “Additionally, American railroads are required to carry many dangerous products every day that the industry would much rather avoid. The words ‘common carrier’ define railroad responsibilities.”
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“Last year BNSF’s earnings declined more than I expected, as revenues fell. Though fuel costs also fell, wage increases, promulgated in Washington, were far beyond the country’s inflation goals. This differential may recur in future negotiations,” he added.
Despite the impact of the wage hikes on earnings, Buffett noted the dangerous and thankless work of those in the rail industry and the critical role railroads play in keeping the U.S. economy moving, as well as the immense infrastructure required to operate.
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“Our second and more severe earnings disappointment last year occurred at BHE,” Buffett wrote about Berkshire Hathaway Energy (BHE), a subsidiary of the parent company. “Most of its large electric-utility businesses, as well as its extensive gas pipelines, performed about as expected.”
“But the regulatory climate in a few states has raised the specter of zero profitability or even bankruptcy (an actual outcome at California’s largest utility and a current threat in Hawaii),” Buffett explained. “In such jurisdictions, it is difficult to project both earnings and asset values in what was once regarded as among the most stable industries in America.”
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The billionaire investor went on to note that the business model for both private and public power utilities, which for more than a century relied on a fixed return on equity given the lengthy investment period for utilities’ projects, has been undermined due to rising costs associated with wildfires.
“At Berkshire, we have made a best estimate for the amount of losses that have occurred. These costs arose from forest fires, whose frequency and intensity have increased – and will likely continue to increase – if convective storms become more frequent,” Buffett wrote.
“It will be many years until we know the final tally from BHE’s forest-fire losses and can intelligently make decisions about the desirability of future investments in vulnerable western states. It remains to be seen whether the regulatory environment will change elsewhere,” he added.
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Buffett noted that some utilities serving areas afflicted by severe wildfires have been pushed to the brink of bankruptcy in the wake of blazes caused by downed power lines.
“Other electric utilities may face survival problems resembling those of Pacific Gas and Electric and Hawaiian Electric. A confiscatory resolution of our present problems would obviously be a negative for BHE, but both that company and Berkshire itself are structured to survive negative surprises,” he explained. “Berkshire can sustain financial surprises but we will not knowingly throw good money after bad.”
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Berkshire disclosed that it was facing the risk of a lawsuit against BHE subsidiary PacifiCorp over its alleged failure to cover $356 million in costs associated with the 2020 Slater wildfire in southern Oregon and northern California.
“When the dust settles, America’s power needs and the consequent capital expenditure will be staggering. I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire’s two partners at BHE, I made a costly mistake in not doing so,” Buffett wrote.