Trou­ble for Warren Buf­fett’s Ne­vada power play

MGM and Wynn move to leave Ne­vada’s Berk­shire-owned util­ity “We are work­ing so hard to be able to com­pete”

Bloomberg Businessweek (Asia) - - NEWS - Mark Che­diak and Noah Buha­yar

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 casi­no­ho­tels 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 bot­tom line Berk­shire Hath­away spent $5.6 bil­lion on Ne­vada’s power util­ity, but casino op­er­a­tors are switch­ing providers.

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