SOURCE:  Oregonian Newspaper.  This 600 word opinion piece was requested and printed by the Oregonian after Oregon Business Magazine ran an 800 word piece on the same topic in its July 2005 edition. The more substantive Oregon Business Magazine Piece can be seen at  http://www.billparish.com/20050701oregonbuspacificorp.html
Author: Bill Parish

Portland, Oregon, July 01, 2005 -- Risky business: Warren Buffett and PacifiCorp

Billionaire investor Warren Buffett is widely respected, but his Berkshire Hathaway investment fund should be prevented from purchasing Portland-based PacifiCorp. Why? Because of the unique risks associated with the fund's relationship to the insurance industry and the giant retailer Wal-Mart.

Together, these two areas of business represent 75 percent of Berkshire Hathaway's gross annual revenues and net profits. The fund has more than 50 domestic and foreign-based insurance companies, including a highly profitable medical malpractice subsidiary, and it readily acknowledges that the reinsurance business -- in essence, insuring insurance companies against catastrophic losses -- is very risky. Buffett's own analysis states that a "single event could produce a loss of $5 billion." Because of this risk, it's actually PacifiCorp that may be bringing long-term stability to such a deal rather than Berkshire Hathaway.

Buffett now also owns Wal-Mart's distribution company, McLane, which he purchased from Wal-Mart in 2003. Today, McLane represents an amazing one-third of Berkshire Hathaway's entire gross annual revenues. Wal-Mart's predatory practices are controversial here in Oregon because they tend to drive out smaller companies that form the backbone of the tax system and support schools and community services. But more importantly, Berkshire Hathaway is a bad fit for PacifiCorp because the fund has too many of its economic eggs in one basket.

While it's purchase of Wal-Mart's distribution system has dramatically increased Berkshire Hathaway's gross sales and provided more stability to its high-risk insurance operations, it hasn't done much for net profits because of the high-volume, low-margin nature of Wal-Mart's business.

And that is almost certainly why Buffett wants a captive regulated monopoly like PacifiCorp. Specifically, he wants to become PacifiCorp's banker so that he can lend money to the utility while charging high interest rates on the loans.

How can we know this? Well, we need only look at MidAmerican, the Iowa-based utility that Berkshire Hathaway purchased in 2000, to see how the Bank of Buffett works. Since it was acquired, MidAmerican has borrowed $1.5 billion from Berkshire Hathaway to finance growth, and it is now paying 11.5 percent in annual interest on those loans, considerably higher than market rates.

Buffett would be fattening up the profits for his shareholders on the backs of Oregon ratepayers.

Buffett could also use PacifiCorp as a base to later acquire selected assets of Portland General Electric and/or NW Natural, potentially resulting in significant job reductions and a loss of local control. That might please Berkshire Hathaway's shareholders, including Bill Gates, whose philanthropic foundation collaborated with Neil Goldschmidt and the Texas Pacific Group in its attempt to purchase PGE. But such utility consolidation wouldn't benefit the region, and rate relief would be unlikely.

Few would challenge the level of Warren Buffett's success in the insurance industry and in helping Wal-Mart expand. But he has the comfort of knowing that when he reaches for the light each morning back in Omaha, he pays 20 percent less as a customer of the Omaha Public Power District. And when the light goes on, the Sage of Omaha might just be wondering where the Oregonians are who care about maintaining control of their economic crown jewels like what's been done in Omaha.

Bill Parish is an independent investment manager in Portland.

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