One of the biggest climate stories of 2007 never made it to the business pages. It’s about how Warren Buffett, with no fanfare, quietly walked away from coal, cancelling six proposed plants.
Buffett used to love coal. His involvement with it began when Berkshire Hathaway bought MidAmerican Energy Holdings in 1999. MidAmerican was a big operator of coal plants, and with natural gas prices edging toward a huge leap upwards — bringing coal back into favor — it appeared to be a typically savvy Buffett move.
In 2006, Buffett picked up another utility, PacifiCorp, which includes Rocky Mountain Power and operates in Calif., Idaho, Ore., Utah, Wash., and Wyo. Again, it seemed like a smart play, bringing MidAmerican’s expertise with building and running coal plants to a region of the country with lots of coal. Sure enough, in the fall of 2006, PacifiCorp presented regulators with plans [PDF] for six (or, in some scenarios, seven) coal plants in Utah and Wyo. over the next 12-year time period, representing approximately 3,000 megawatts of new capacity.
Today, PacifiCorp is talking about a lot of ways of supplying future electricity demand growth: geothermal, wind, solar thermal trough, compressed air storage, geothermal, demand management programs, and natural gas. But all six new coal plants have vanished from the company’s “preferred scenario.”
What accounts for Buffett’s change of heart on coal? Did the guru have more foresight than colleagues like Duke’s Jim Rogers, Dynegy’s Bruce Williamson, and Dominion’s Thomas Farrell, all of whom persisted in building coal plants? Those three CEOs recently shared the dubious distinction of receiving Fossil Fool awards. Perhaps not coincidentally, all three have seen the stock market value of their companies fall in the past year. (Dynegy, the poorest performer of the lot, is down nearly 17 percent.) In contrast, the stock of Berkshire Hathaway has risen significantly in the same period. Of course, that’s not exactly a measure of whether the company is making the right choices in its energy business, which makes up only 15 percent of the entire company. But at least nobody has nominated Buffett for a Foolie.
In examining the reasons for Buffett’s U-turn on coal, it’s safe to say that neither Buffett’s business partner, Charlie Munger, nor his longtime bridge buddy, fellow richest Earthling, and partner-in-philanthropy Bill Gates, is likely to have done any lobbying of Buffett — at least, not on behalf of Mother Earth. These two associates both made statements last spring that appeared to categorize global warming as a real, but distant, concern. At a forum in Beijing on April 19, 2007, Gates said, “Well, fortunately climate change, although it’s a huge challenge, it’s a challenge that happens over a long period of time. And so [according to] most of the forecasts about by the year 2100 the ocean will have risen perhaps a foot and a half, [so] you know, we have time to work on that.”
(At the Beijing forum, Nobel Prize winner Mohammed Yunas, attempting to inject a note of sanity, responded: “Bill, whatever it is to be done is to be quick for us in Bangladesh. Bangladesh is a country [mostly at] sea level, very little high ground in Bangladesh. If the sea level rises with global warming, climate change, millions of people in Bangladesh will be affected, because part of Bangladesh will go underwater. And the remaining part, which will not go under water, their agriculture, their whole likelihoods will be threatened. So, with 145 million people in this tiny little piece of land, with the global warming shaking it up, it will be a terrible disaster of no going back.”)
Like Gates, Charlie Munger seemed bent on acknowledging climate change but denying its urgency when he told Berkshire Hathaway’s annual meeting on May 3, 2007, “[W]hat we are really talking about with global warming is dislocation. Dislocations could cause agony. The sea level rising would be resolved with enough time and enough capital. I don’t think it’s an utter calamity for mankind, though. You’d have to be a pot-smoking journalism student to think that.”
Nor does the Bill and Melinda Gates Foundation, to which Buffett announced the largest philanthropic gift in history in 2006, appear likely to have pushed Buffett to take environmental concerns into account in his decision-making. Indeed, an article in the L.A. Times in early 2007 pointed out that “hundreds of Gates Foundation investments — totaling at least $8.7 billion, or 41 percent of its assets, not including U.S. and foreign government securities — have been in companies that countered the foundation’s charitable goals or socially concerned philosophy.” The article singled out major polluters ConocoPhillips, Dow Chemical Co., and Tyco International Ltd. as examples of the foundation’s ethical autism.
As if to abolish any question about whether such criticisms had permeated the management suites at the Gates Foundation, co-chair Bill Gates Sr. responded to a question in March of this year about global warming, “The fact of the matter is, we don’t think about it. We haven’t paid a lot of attention to environmental issue[s].”
Whether such blindered attitudes reflect the thinking of Buffett himself is hard to say. What’s perhaps more revealing is the particular circumstances surrounding his exit from coal. In looking into the details, it becomes clear that much of what happened has nothing particularly to do with either his environmental concerns or his business foresight: in large part, Buffett was simply forced to give up his coal-plant buildout. By the luck of the draw (or misfortune, depending on perspective), the company that was to have built the plants, PacifiCorp, happens to occupy a region that straddles both coal-friendly states (Utah and Wyo.) and states moving rapidly toward progressive climate policies (Calif., Idaho, Ore., and Wash.). In the latter group of states, the regulatory framework by 2007 — including rigorous Integrated Resource Plans, renewable portfolio standards, and greenhouse gas emissions performance standards for electricity generated in-state or out-of-state — had gotten strict to the point of hobbling new coal plants even beyond their own boundaries.
According to PacifiCorp, it was the combined effect of this growing body of climate regulation that persuaded the company to drop the first four of the six proposed coal plants, a decision revealed with the release of the May 2007 iteration of the company’s Integrated Resource Plan [PDF].
That left two proposed plants, both canceled on November 28, 2007. The evidence for why Buffett chose to nix these final two projects is somewhat murky. In the case of one, Utah’s Intermountain Power Project Unit 3, new climate regulations certainly played a role in PacifiCorp’s decision to bow out of further development. The majority co-sponsors of Intermountain Units 1 and 2 were a group of six California cities: Los Angeles, Pasadena, Anaheim, Burbank, Glendale, and Riverside. Prohibited by California climate laws from using Unit 3’s power, the six cities had decided to actively block the new unit. Initially, PacifiCorp threatened to go to court to force the California cities to cooperate with the expansion, but with its November announcement, PacifiCorp waved the white flag. It’s unclear which side had the stronger case.
As for the cancellation of the final plant, a new unit at the existing Jim Bridger station in Wyoming, Buffett’s decision seems unconnected to any specific regulatory pressure. Rather, the key element here seems to more general concerns about rising environmental opposition, which PacifiCorp acknowledged in its late November notice to Utah and Oregon regulators: “Within the last few months, most of the planned coal plants in the United States have been canceled, denied permits, or been involved in protracted litigation.”
Though they are not acknowledged in that notice as factors in the decision, it would be hard to deny that by the fall of 2007, protests against PacifiCorp itself were starting to become a high-profile public relations issue for the company and its executives. With every passing month, the array of opponents pressing from multiple directions seemed to grow, coming from every point in the political spectrum. At the radical end of things, Cascadia Rising Tide, Stumptown Earth First!, and Convergence for Climate Action had blocked PacifiCorp’s headquarters in August 2007 with a “human dam.” As student-based direct action ramped up, PacifiCorp faced the prospect of more such protests.
Meanwhile, an increasing number of regulation-focused environmental and civic groups were investing hundreds of staff and member hours in state oversight proceedings involving PacifiCorp, especially in Oregon. Among the most active of such groups were the Northwest Energy Coalition, Citizens’ Utility Board of Oregon, Ecumenical Ministries of Oregon, Renewable Northwest Project, Western Resource Advocates, and Sierra Club Utah Chapter. (Northwest Energy Coalition alone represents over 100 organizations, including solar companies, public power agencies, environmental groups, civic groups, and housing authorities.)
Perhaps the single most publicized initiative was an ad hoc petition drive organized by Salt Lake City commercial real estate broker Alexander Lofft and directed at Buffett personally. The 1,600 petitioners, who described themselves in a letter to Buffett as “a collection of citizens, business owners and managers, service professionals, public servants, and organization representatives … your friends and new customers here in Utah,” explained that, in their view, any further expansion of coal generation in Utah would “compromise our health, obscure our viewsheds, shrink and contaminate our watersheds, and thin out our most beloved snowpack,” concluding that “our attractiveness as a place to live and work is also threatened, and so is our economic competitiveness as a major metro area and a state, compromising our recent gains in income and property values.”
Of course, since Buffett is known as a manager who places great reliance on the executives in charge of the various Berkshire Hathaway entities, it is impossible to look at his change of direction on coal without considering the influence of David Sokol, his chief lieutenant on energy matters and a minority owner, along with Greg Abel, in MidAmerican Energy Holdings. According to Buffett’s 2008 annual letter [PDF] to his shareholders, decisions on “major moves” at MidAmerican are made only when he, Abel, and Sokol “are unanimous in thinking them wise.” Sokol, like Buffett, an Omaha native and resident, is a seasoned utility executive whose resume includes time spent both building geothermal facilities (CalEnergy) and coal (the controversial Council Bluffs Unit 4 power plant).
Several weeks ago, Sokol announced that he was stepping down as CEO of MidAmerican Holdings — sometimes described as a “mini Berkshire Hathaway” — while staying on as chairman. The reason for the switch, he said, was to focus more on acquisitions. The move fueled speculation that Sokol was being groomed to eventually replace Buffett himself at the head (or alternatively as one of a troika of leaders) of Berkshire Hathaway.
If Sokol does assume such a role, he will be stepping into the shoes of a man who is widely seen as a de facto statesman of American business. Seen in that light, it’s conceivable that Sokol simply would prefer not to court the image problems that a protracted fight over coal would entail.
A final clue to Buffett’s change of direction on coal comes from looking at his history on other controversial issues, especially his decision in the early 1990s to revise his investment policies regarding tobacco. In 1987, Buffett told John Gutfreund of Salomon, “I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”
By 1994, however, Buffett was ready to drop his tolerance of tobacco lucre, telling Berkshire Hathaway’s annual meeting that tobacco investments are “fraught with questions that relate to societal attitudes and those of the present administration … I would not like to have a significant percentage of my net worth invested in tobacco businesses.”
The upshot: Buffett keeps his finger in the wind and reacts quickly when he feels society shift. For this reason, his reversal on coal, though it may have been largely forced upon him, is significant nevertheless. As usual, Buffett has made the “smart move” a bit faster than some of his colleagues. Let’s hope they take note and follow his lead.