Warren Buffett’s Dicey Power Play
When Warren Buffett’s Berkshire Hathaway bought Nevada’s main utility, NV Energy, three years ago, it inherited a lucrative customer base: the neon-lit, air-conditioned casino-hotels on the Las Vegas Strip. Now they’re in the midst of a costly split. Lured by the prospect of cheaper, cleaner energy elsewhere, two of the Strip’s biggest power users, MGM Resorts International and Wynn Resorts, told regulators in May they’re willing to pay millions in fees to ditch NV Energy’s services.
It’s not uncommon for big power consumers to wrangle with utilities. But the situation is unique in Nevada, where a handful of casino-resorts exercises significant leverage. MGM and Wynn together account for more than 5 percent of NV Energy’s sales in its southern territory. While losing existing casino customers is tough enough, even worse for NV Energy may be the precedent their departure sets. “It’s probably going to diminish the likelihood that you could have a new casino go up and guarantee that it’ll be a full-service customer of the utility,” says Timothy Hay, an attorney who served on the State of Nevada Public Utilities Commission and as the state’s consumer advocate.
MGM and Wynn are allowed to leave NV Energy under a 2001 Nevada law designed to attract electricity generation to the state. In December the state regulator gave the casinos the preliminary go-ahead, but the departure will be expensive: Because the regulated utility is guaranteed a rate of return on its investments, the casino operators will be charged exit fees to ensure remaining customers don’t wind up shouldering increased charges.
The Public Utilities Commission determined MGM must pay $86.9 million to NV Energy, based on its usage. The company has entered into a power purchase contract with Nebraska-based Tenaska Power Services, which markets natural gas and electric power. “It is our objective to reduce MGM’s environmental impact by decreasing the use of energy and aggressively pursuing renewable energy sources,” MGM Executive Vice President John McManus wrote in a May 19 letter to regulators.
Wynn will pay a $15.7 million exit fee and plans to buy power from Chicago-based Exelon. Both MGM, which operates 11 hotels along the Strip including the MGM Grand, and Wynn, which runs the Wynn Las Vegas and the neighboring Encore resort, will keep relying on NV Energy wires to deliver the power they buy from Tenaska and Exelon.
NV Energy executives have publicly acknowledged the company will have to vie for customers’ loyalty. “We do have concerns, but that’s why we are working so hard to be able to compete,” Chief Executive Officer Paul Caudill said on May 23 at a regulator conference near Lake Tahoe.
Berkshire paid $5.6 billion for NV Energy in 2013 as part of a multiyear expansion in the western U.S. The move was in part a bet on Nevada’s continued economic growth, Gregory Abel, chief executive of Berkshire’s energy unit, said at the time. Berkshire Hathaway Energy referred requests to NV Energy, which declined to expand on Caudill’s May 23 comments on MGM’s and Wynn’s exit.
Utilities face similar challenges across the U.S. as the cost of solar power and natural gas generation falls. Big corporate energy users such as Amazon. com, Apple, and Google have cut deals over the past two years to buy power directly from solar plants and wind farms.
Like MGM and Wynn, casino operator Las Vegas Sands secured regulatory approval last year to leave NV Energy, but says it intends to stay—for now. Regulators determined Sands would have to pay $23.9 million to leave NV Energy, a sum the company indicated it thought was too high. Instead, Sands, controlled by Republican megadonor Sheldon Adelson, is backing a November ballot measure that would amend the Nevada constitution to deregulate the state’s energy market, doing away with NV Energy’s monopoly.
The casino gave $500,000 to signature-gathering efforts, according to state filings. MGM gave $10,000. “It’s important our employees and all Nevada ratepayers have a voice in this debate,” says Ron Reese, a spokesman for Las Vegas Sands, regarding the casino’s support of the ballot move. “We will absolutely support efforts to help those voices be heard.”
“The initiative petition filing is not at all surprising in light of the dramatic changes in the western energy markets, including lower natural gas and power prices, and the availability of energy,” NV Energy's Caudill says. “We are well-positioned to provide leadership and support to customers and stakeholders as we work through this complex issue and how it may affect jobs and investments in critical power and energy infrastructure.”
The bottom line: Berkshire Hathaway spent $5.6 billion on Nevada’s power utility, but casino operators are switching providers.