Man Without Qualities

Wednesday, August 13, 2003

Davis Descending XXVII: Warren The Nebraskan

Verily it is written in Conan the Barbarian:

"At first we thought they were just another snake cult, but now their towers are everywhere."

Well, Arnold Schwarzenegger's is not just another star cult, and now his towers are everywhere - even on the lawn of Warren Buffett, billionaire and plutocrat opportunist extraordinaire who was a life-long Republican but changed his nominal political affiliation during the Clintonian era, and who is uproariously described by the Associated Press as "a Democrat" who has been "hired" by the would-be governor.

The able Mr. Buffett always has a new, undisclosed agenda - and this time it's not picking up a few extra bucks as a political "advisor." As I noted in a prior post:

In this year's letter from Mr. Buffett to the Berkshire-Hathaway shareholders ... we find that Berkshire-Hathaway's largest non-insurance source of revenue is a commodity company. A natural gas pipeline company, to be exact - and one which for which Berkshire-Hathaway has little voting control:

Berkshire also made some important acquisitions last year through MidAmerican Energy Holdings (MEHC), a company in which our equity interest is 80.2%. Because the Public Utility Holding Company Act (PUHCA) limits us to 9.9% voting control, however, we are unable to fully consolidate MEHC’s financial statements. Despite the voting-control limitation – and the somewhat strange capital structure at MEHC it has engendered – the company is a key part of Berkshire. Already it has $18 billion of assets and delivers our largest stream of non-insurance earnings. It could well grow to be huge. Last year MEHC acquired two important gas pipelines. The first, Kern River, extends from Southwest Wyoming to Southern California. This line moves about 900 million cubic feet of gas a day and is undergoing a $1.2 billion expansion that will double throughput by this fall. At that point, the line will carry enough gas to generate electricity for ten million homes. ... When 2001 began ... I had no idea that Berkshire would be moving into the pipeline business. But upon completion of the Kern River expansion, MEHC will transport about 8% of all gas used in the U.S.

I noted in that prior post that missing from this benevolent discussion of MEHC's prospects is any discussion of how a company largely in the business of transporting a commodity plans to maintain the kind of profit margin that Mr. Buffet and his shareholders expects. But natural gas pipeline companies are subject to many layers of regulation and service markets in which competition is often low because of political considerations. And there is little dispute among economists that a major source of barriers to entry is regulation.

I also raised the possibility that Mr. Buffet's gas pipeline revenues may depend on Berkshire Hathaway being able to continue to overcharge customers relative to an efficient, competitive market, and therefore on Mr. Buffett's and Berkshire Hathaway’s political influence. Of course, gas pipeline markets can be made efficient, or close to it. But would one expect Mr. Buffett and Berkshire-Hathaway will favor or disfavor regulatory reforms that would tend to make markets efficient? How about in California, for example, a major area served by Mr. Buffett's new pipeline?

I further asked what would a dependency on supra-competitive profits do to one's understanding of what one commentator has called "Warren Buffett's growing network, a formidable collection of corporate heads, financiers, money managers and celebrities, ... profitable connections that have been one key to Mr. Buffett's success."

With all that in the hopper, it really is a lot easier to understand why Mr. Buffett - who until recently held himself out as a serious, if somewhat recently arrived, Democrat - would support an apparent winner like Arnold Schwarzenegger, even as Mr. Buffett's supposed buddies Hillary Clinton and Bill Clinton are reported to be preparing to campaign for Gray Davis.

Hey, it's just business!

Neither Reuters nor AP even mentions that Mr. Buffett has a huge financial stake in California natural gas - even though it is direct and ongoing. But don't the indirect, non-ongoing, non-financial connections some public people have with the Texas oil business just seem to pop up all over the place with these two newswires?

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