Public Power Magazine

What Warren Buffett Wants

From the March-April 2014 issue (Vol. 72, No. 2) of Public Power

Originally published January 27, 2014

By Alice Clamp
January 27, 2014

Warren BuffetWarren Buffett, Chairman, President & CEO of Berkshire Hathaway, is a big player in the energy landscape of the West. AP Photo/The Star, Matt Kryger

Change is afoot in the Western Interconnection.

“There’s a new sheriff in town,” said Jim Pope, general manager of the Northern California Power Agency.

The sheriff, who hails from Omaha, controls a large and growing share of transmission in the West as well as the Midwest. Some of that transmission network is owned by MidAmerican Energy Holdings Co., which Warren Buffett acquired in 2000. And even more is owned by PacifiCorp, the largest power provider in the Northwest, which MidAmerican bought in 2006.

MidAmerican Energy has cornered the market for wind energy in Iowa, with some 2,300 MW of capacity in the state. To deliver that energy to customers in Iowa and beyond, MidAmerican Energy joined MISO―the Midcontinent Independent Transmission System Operator―in 2009 as a transmission owner.

“If [MidAmerican] wants to truly be a national player in the new wind-based transmission system, it needs to be part of a regional transmission organization like MISO,” said Robert Latham, chairman and president of Latham & Associates in Cedar Rapids, Iowa..

Membership in MISO has enabled MidAmerican to send wind energy from the Great Plains to the East. With its purchase of PacifiCorp and, most recently, NV Energy, MidAmerican will have the means to move wind energy in the West.

PacifiCorp owns and operates one of the largest privately held transmission systems in the country, with more than 16,000 miles of lines. The utility’s Energy Gateway project between Idaho and Utah will add roughly 2,000 miles to its system in the West.

“Warren Buffett is moving into the market in the West,” Pope said. “Buying NV Energy gives him a transmission network that spans seven states. When Buffett buys assets, he takes control over how they function, their business plans and how they grow.” It enables him to make a high rate of return for stockholders.

Follow the money, said David Dockham, Northern California Power Agency's assistant general manager for power management. “The muni model is cost minimization. The IOU model is profit maximization. Transmission connects those two.”

MidAmerican’s reach creates opportunities for it to influence the development, cost and use of transmission across the West, said John DiStasio, general manager of the Sacramento Municipal Utility District.

The network gives MidAmerican―through PacifiCorp and NV Energy―an “incredible capacity for trading energy” into and out of California, Pope said.

And therein lies the motive for an energy imbalance market.

In April 2012, the Southwest Power Pool presented its proposal on an EIM to the Public Utility Commission EIM Group. A month later, the California ISO did the same, announcing that it and PacifiCorp had agreed to create an EIM.

“PacifiCorp decided that it had enough information on the benefits of an EIM to enter into an agreement with CAISO,” said John DiStasio, general manager of the Sacramento Municipal Utility District. The aim of the proposed EIM: To expand the real-time portion of the California ISO market to include PacifiCorp’s footprint.

“We were surprised by this pre-emptive move, but acknowledged PacifiCorp’s right to make that decision,” DiStasio said. And, he added, it has a low- risk, high-reward potential for the utility. “But we were dismayed by the timing.”

There was surprise about the California ISO agreement with PacifiCorp in other quarters, too. “The SPP’s EIM proposal was taken seriously, and looked like a front runner,” said Dave Crowell, principal analyst in Salt River Project’s transmission services. “Some people were concerned about being connected with CAISO.”

In the view of the Balancing Authority of Northern California’s James Feider, there is time―between three and five years―to deal with the incremental issues. “The Northwest Power Pool initiative has to run its course.”

Why Warren Buffett Wants It

In looking for the impetus for PacifiCorp EIM, Feider points to MidAmerican. “I get the impression that MidAmerican has been successful in the Eastern Interconnection and thinks this is the way to go in the Western Interconnection.”

Doug Hunter, general manager of Utah Associated Municipal Power Systems, agreed that the push is coming from Iowa. “I have the impression that both the Portland and Salt Lake City offices of PacifiCorp were caught gap-jawed by this.”

But it is Buffett who is driving the agenda, NCPA’s Pope said. “Even though the [public power utilities] in the Northwest are trying to develop an alternative to an EIM, our sense is that whoever gets to the party first with a functioning market design will win.”

It looks as though MidAmerican is “conveniently positioning itself around California,” DiStasio said. One reason is the extensive renewable and transmission development in the state. “The rates of return provided by FERC are attractive.”

Federal Energy Regulatory Commission incentives are one factor behind MidAmerican’s push for a market. Another reason: the resource mix of the companies acquired by Buffett―coal as well as wind―could benefit from a market. And through an EIM with the California ISO, PacifiCorp and NV Energy could comply with California’s out-of-state renewable portfolio standard restrictions, which make it difficult for non-CAISO participants to send power into the state. The utilities could thus develop renewables―and transmission―for the California market.

There could be another driver, too, suggested Stephen Hollabaugh, assistant general manager at Truckee Donner Public Utility District in California. “MISO is pushing to expand its footprint and this is one way to meet that goal. It’s found a partner in MidAmerican.”

As Mark Gabriel, administrator of the Western Area Power Administration, told Public Power magazine, “[T]here is just a significant amount of pressure, as we know from the proposals we have seen between the California Independent System Operator and PacifiCorp.”

Gabriel got it right, said David Dockham, Northern California Power Agency’s assistant general manager for power management. “There is incredible pressure to change the way the electric utility model is structured. It’s not consumers looking for change, but those looking for access to the transmission grid to sell their services.”

Follow the money, Dockham said. “The muni model is cost minimization. The IOU model is profit maximization. Transmission connects those two.”

This article is a sidebar to The Headlong Rush Into Energy Imbalance Markets and accompanies another sidebar, Alternatives to an EIM.


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