David Sokol: Why Buffett's Possible Successor Is Against Waxman-Markey

When you’re introduced as one of Warren Buffett’s most trusted advisors, and possible successor, your opinions carry a lot of weight. That’s the classic intro for David Sokol, Chairman of the MidAmerican Energy Holdings, and the one that was used at the Fortune Brainstorm Green conference on Tuesday morning, where Sokol weighed in on why he doesn’t support the Waxman Markey climate bill, which cleared the House last summer.

“We think the bill was put together in haste and wasn’t put together with economic ramifications,” said Sokol. The bill would be damaging to consumers because through a cap and trade system consumers would basically pay twice (once through utilities altering plants for renewables, and once for the carbon offsets), he said. In addition to overlooking economics, Sokol, thinks the bill took a “one-size-fits-all,” approach.

Waxman-Markey passed the House last June. In the Senate, a bill drafted by Senators Kerry, Graham and Lieberman is slated for release next week, and it’s expected to place different emission limits on different sectors of the economy — possibly closer to what Sokol seems to favor.

The mistake in Waxman Markey, Sokol said, is that that bill appeased certain sections of the electric sector and kept their shareholders happy, but didn’t take into account for overall economics, or regulators and consumers in each state. The bill would be “throwing the consumers under the bus. And politically if we want to get this done, economics matter.”

Alternatively Sokol says his team has proposed a plan specifically for the utility sector — which he points out has a unique regulated environment — and thinks that individual states should be leaders on driving this regulation. Federal regulation should focus on setting targets for emissions reductions and then the industry will work very hard to get there, said Sokol.

While Sokol’s perspective might lie in contrast to many in Silicon Valley, it comes from decades of leading companies in the power industry. MidAmerican operates six utilities (four in the U.S., two in the UK), two pipelines in the U.S., and a bunch of independent power projects. The company has $45 billion in assets, “moves eight percent of natural gas,” according to Sokol, generates between $12 billion and $13 billion in revenues and has an energy portfolio that’s about 47 percent coal, 24 percent renewables and 20 percent natural gas.

Sokol’s perspective is that it’s not as easy as many think for utilities and power companies to make the decisions to add in renewables, given the regulatory environment. Quoting a comment that Warren Buffett made about a decade ago, Sokol said his company takes the philosophy that “in balance, where we can let’s err on the side of the planet.” That’s why he thinks the electricity sector needs a specific plan tailored just for it.

So how much money is actually in this regulated utility business for a company like MidAmerican? Sokol says average return on investments over a decade have been around 11 percent in overall return on equity. But notes that, “The future decades will be harder than in the past. It will be much more complicated over the next 20 years. Finally, again quoting Buffett, Sokol said, “This is a good business not a great business.” And the underlying tone that I heard in Sokol’s comments: With Waxman Markey, the business will get a whole lot harder.

Image courtesy of mikebaudio’s photostream.

Comments have been disabled for this post