Recent weather-related electricity failures in Texas underline the need for investment in America’s power grid. That means the last thing a utility’s boss needs is an activist investor with a relatively short-term horizon. Tough luck for Steven Strah, the new chief executive of $19 billion Ohio-based power company FirstEnergy. Carl Icahn has bought a stake and is seeking board seats, according to Bloomberg. Berkshire Hathaway boss Warren Buffett has an approach that better fits the sector.
It’s true that FirstEnergy could use some spicing up in the short term. This week’s permanent appointment of Strah bookended a bribery scandal that entangled the previous CEO. Covid-19 took its toll and FirstEnergy has underperformed peers, posting a three-year return on shares, including dividends, of under 20% versus, say, NextEra Energy’s more than 100%.
Elliott Management, Paul Singer’s hedge fund, previously owned a stake in 2018. Elliott minted a hefty return after FirstEnergy shares rose more than 50%. Since Elliott’s exit, the stock has given back all its gains and then some.
The problem may, however, be changing shape. NRG Energy, a former Elliott investment, temporarily came under pressure last month after a Texas nuclear plant went offline during a rare cold snap. That episode showed that utility companies need capital and patience to fortify aging grids, let alone develop climate-friendly renewable resources.
Electricity is getting more expensive and less reliable, too. The average U.S. retail price increased 9% in the decade through to 2020, according to the U.S. Energy Information Administration. Yet between 2013 and 2018, outages about doubled. And downtime is worse for private-sector power companies than publicly owned utilities. Activists often clamor for relatively short-term, shareholder-friendly actions, distracting executives and boards from long-term investments that don’t bring quick payoffs.
Buffett uses a different recipe with Berkshire Hathaway Energy, the utility his group has owned for 21 years. It pays no dividends on common stock and Buffett doesn’t expect any because, according to the Sage of Omaha’s letter to investors last month, the business needs a massive makeover involving “staggering” costs. He believes the investment will eventually be “appropriately rewarded.” With so much long-term investment needed, utilities could use more Sage and less spice.