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Power profits reasonable?

If you're a hi-tech fan then you know one thing for sure... none of your gadgets and appliances are going to be of any value if you can't afford the power to run them.

Here in NZ, power prices have risen faster in recent times than in almost any other country in the developed world so we have to ask whether we're getting good value for money.

There's plenty of spin that suggests our prices are fair and reasonable but I believe these claims are based on clever miscalculations.

Figures just released show that here in NZ, the rate of power-price increases outpaced the official rate of inflation by a factor of five.

Given that so much of our power comes from renewable resources and the strong Kiwi dollar has brought fossil fuel prices down from their peaks -- how can this increase be explained away?

Then there is the issue of "how much profit is fair".

The companies (and some analysts) are keen to use an ROA (return on assets) figure to prove that their profits are single-digit percentages, far below those returned by many other companies in the economy.

However, the value of their assets is a "fairy-land" figure that is regularly bumped up by bean-counters and in no way indicative of how much was actually paid for them.

It may cost billions to replace a dam that was built 60 years ago for just $100m -- but the company has not paid billions for that asset so they ought not be able to use "replacement value" as a metric for calculating their profit.

If I run a small business selling wares from the back of a van that I buy for $40K today, will I be able to claim that van is really worth $80K in 10 years time -- simply because that may be the cost of replacing it a decade later?

I think not -- and this isn't the way our power companies ought to be calculating their "reasonable" profits either.

This ridiculous practice of valuing assets at their replacement value is just a clever way to make obscene profits look respectable.

Claiming that NZ's power prices have parity with those of other countries is also unreasonable.

Countries such as Australia have to burn huge amounts of fossil fuel -- something that has suffered sustained price rises over recent decades. Huge percentages of NZ's power comes from hydro -- where there is no such 'constantly rising' input cost.

I suspect that if the majority of power generators in NZ were not owned by government then far more attention would have been paid by government to the real levels of profits being generated and whether Kiwis are being rorted.

As we move into an ever-more technology-based world, electricity becomes an increasingly critical resource. To allow companies (SOEs or otherwise) "extort" unreasonable profits from a captive market should not be allowed.

Of course the argument from some is that "if the profits are so unreasonable, why haven't new entrants come in with lower prices?"

And that is *very* easy to answer.

Firstly, the incumbent companies have a huge advantage -- they have already paid for their assets decades ago, when the prices were very low. How can a new entrant, who would have to pay billions to build a dam, possibly compete with a company who built its dams back in the 1960s for a tiny fraction that price?

And also remember that most power generators are government-owned. New entrants would therefore be competing with the same government that is responsible for issuing the resource consents and other "rights" that must be obtained (for a price) before any new entrant can even start building their generation facilities.

So enjoy your hi-tech gadgets, while you can still afford to supply them with the electricity the so heavily rely on.

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