Jim Riccio, a longtime professional Greenpeace activist, has posted a blog on Greenpeace International titled Obama, the Oracle of Omaha & Nuclear Power in which he strongly recommends that President Obama follow the energy investment lead provided by Warren Buffett. Here is a quote.
Time and again, Buffett’s corporation MidAmerican has recognized the risks of investing in new nuclear power.
In 2007, MidAmerican, a subsidiary of Buffett’s Berkshire Hathaway conducted their economic due diligence on the prospects of building a new nuclear reactor; the numbers just didn’t add up. According to MidAmerican’s president, “Consumers expect reasonably priced energy, and the company’s due diligence process has led to the conclusion that it does not make economic sense to pursue the project at this time.” In January 2008, MidAmerican scrapped its plans for a new nuclear reactor in Idaho.
In September 2008, Buffett’s MidAmerican purchased the pro nuclear Constellation Energy. Despite the fact that MidAmerican affirmed Constellation’s plans for new reactors in Maryland, Electricity de France (EdF) was concerned that MidAmerican would eventually reach the same conclusion it did in Idaho and pull the plug on the new reactors proposed for the Calvert Cliffs site. The Financial Times reported that, “The French group’s offer is clearly aimed at scuppering the $4.7bn bid made by Mr. Buffett’s MidAmerican Energy in September, which it fears could threaten Constellation’s future nuclear investment capacity.”
Though I have often been impressed by the financial results that the Oracle of Omaha has been able to produce, I think it is worth sharing a bit of what I learned about his investing philosophy when I read his biography many years ago. The pearl that Buffett is seeking by his famous effort of studying financial reports is not excellent management, superior products or exceptional customer service, it is “pricing power.” Here is the lede of a BusinessWeek article published on February 18, 2011 titled Buffett Says Pricing Power More Important Than Good Management.
Warren Buffett, the billionaire chief executive officer of Berkshire Hathaway Inc., said he rates businesses on their ability to raise prices and sometimes doesn’t even consider the people in charge.
“The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
|Busy coal route along James River near Jefferson National Forest|
That explains why Buffett has determined that he has no interest in investing in nuclear energy, and also explains why he recently spent $34 billion purchasing Burlington Northern, a railroad whose freight volume is dominated by hauling coal. Railroads serving coal mining areas and power plants often have attractive pricing power – their customers have no real choice in transportation modes because there are rarely any alternative rail lines and trucks are notoriously inefficient at hauling heavy cargoes, especially when diesel prices are as high as they are today.
The main threat to the ability of a coal hauling railroad to raise its prices without “holding a prayer session” is the possibility that the utility customers that pay those freight rates will choose to produce their electrical output using a different kind of fuel that can be transported using a different mode of transportation. It only takes about three truckloads of fuel every 18-24 months to keep a 1000 MWe nuclear power plant operating. In contrast, a 1000 MWe coal plant needs a 100 car coal train every single day.
Nuclear energy is an existential threat to the business model of coal hauling railroads. No wonder Buffett has invested in well-publicized efforts aimed at demonstrating that a famous investor has run the numbers on nuclear investments and determined that they are not worth his continued interest. For people who do not do math very well themselves or who do not have a questioning attitude about WHY Buffett would decide to avoid nuclear energy, that makes for a reasonably well aimed arrow fired at an industry that could significantly harm his investment performance record.
I guess Riccio and Greenpeace just like encouraging folks who make money from burning coal better than they like clean air, energy strength, and American prosperity. Buffett has made it very clear that he likes companies that can raise their prices at will. His investment strategy has worked very well over many years for a strictly limited number of investors, but it would be a losing strategy for a country that must develop and sustain a well-distributed base of prosperous companies and individuals.
If all companies and all investors focused on “pricing power” we would be living in a far less comfortable world. We would not have the kinds of marvelous devices that have been enabled by the relentless drive to produce more wonders at ever lower prices from silicon and software. I firmly believe that atomic fission offers a similar potential of rapidly advancing technical marvels that will drive down energy prices and improve energy prosperity.
The business model for the nuclear energy industry should be a relentless effort to improve its products so that prices fall while markets expand. In other words – nuclear energy investors need to understand and support a completely opposite model from the one that has made Buffett so darned rich.