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About that Buffett deal
I like entrepreneurs.
Entrepreneurs are, more than anything, what make our economy work. They build businesses, create jobs and can accumulate wealth for themselves by improving the lives of countless people they’ll never even meet.
But entrepreneurship requires more than just a businessman or woman investing in a company. True entrepreneurship only exists when businesses compete for customers. Consumers then have the power to choose the winners and losers in the market place. That system is what we call free-market capitalism.
Unfortunately, that system, which is responsible for more prosperity than anything else ever conceived by mankind, often gets perverted. And what may look like free-market capitalism on its face is really something much different — and often destructive.
Enter Warren Buffett.
As the Las Vegas Review-Journal reports, the Buffett-owned MidAmerican Energy Holdings Co. has announced its plan to purchase NV Energy, the Nevada utility company, in a deal worth $10 billion. The move, quite predictably, is being hailed as a huge boost to the Silver State business climate.
Few business leaders are as admired as Buffett, and his decision to invest here puts Nevada’s corporate world on the map, said Robert Lind, managing partner of local investment brokerage Berkshire Bridge Capital, which is unrelated to Buffett’s Berkshire Hathaway conglomerate.
“Anytime we get someone like Warren Buffett to acquire a Nevada company and not get rid of management, it raises the level of perceived sophistication that there are well-managed companies here,” Lind said. “This will shine a flashlight on Nevada for sure.”
Let’s consider for a moment that “decision to invest” in Nevada. In a free-market system, an investment entails both an opportunity to profit and a risk of loss. Warren Buffett has made many such investments over the course of his business career, and as his net worth suggests, he’s pretty skilled at differentiating the good investments from the bad ones.
But the NV Energy deal required no such talent. That’s because NV Energy is a government-protected monopoly, and as such is legally insulated from competition and enjoys a guaranteed customer base. If it is unable to satisfy those customers, or if it increases rates beyond what some would choose to pay, it’s at no risk of losing business, because the government has made competing with it illegal.
In other words, its risk of failure has been outlawed. That’s not how a free market works, and this deal is anything but an “investment” in the free market.
To be clear, this problem isn’t Warren Buffett’s fault. He’s not responsible for NV Energy’s monopoly status, and I’m not going to begrudge him for recognizing a no-risk, all-reward opportunity and pouncing on it. And if his association with Nevada ends up improving the state’s image, then that’s great.
But before we all start reacting to this news by behaving like teenyboppers at a Justin Bieber concert — Kelvin Atkinson, I’m looking at you — will we at least think this through?
Buffett wouldn’t have made this deal if he didn’t think he could make money off of it. Money comes to utility companies from the rates that consumers pay. And if you’re a government-protected monopoly, with profits guaranteed as a percentage of your costs, the way to make more money is to increase production costs.
Literally, utilities receive higher earnings by becoming less efficient — such as by constructing power plants that aren’t even needed. It’s true that this requires regulatory or legislative approval, but NV Energy has proven itself very adept when it comes to lobbying lawmakers to give the firm what it wants.
Indeed, the latest effort — in the form of Senate Bill 123 — is unfolding even as we speak. The bill allows NV Energy to stop using power plants that still have years of life on them just so the company has an excuse to build new ones. Similar legislation passed in Colorado is expected to increase electric rates there by 11 to 50 percent.
Does anyone think Warren Buffett will have more trouble than previous ownership in getting Nevada’s politicians to bend to his will? And does anyone think he’ll be less inclined to try?
When Buffett’s profits go up, we’ll all pay for them with higher rates. And unlike in a free market, we’ll have nowhere else to go.
If this deal really does, as Robert Lind predicts, “shine a flashlight on Nevada,” let’s hope people aren’t so starry-eyed that they miss what’s most important to see: the fundamental flaws in Nevada’s approach to energy policy.
Until next time,
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