October 6, 2008

Cruel Irony in Labour’s Outrage at Power Rises

By WEIR, James

COLD houses can kill people and it looks like the Government has been asleep at the heat switch for years.

That is -- till an election is called.

Suddenly, the price of power stirs Labour cabinet ministers to say Contact Energy's 10 per cent to 12 per cent price rise this week is outrageous and there should be a wider inquiry.

Has it been any less outrageous that, nationally, power prices have already risen about 55 per cent since 1999?

Or how about the outrage that it has taken the Government's own monopoly watchdog three years to complete an inquiry into the possible abuse of market power by energy companies after complaints about high profits?

That report, long overdue, is expected by the end of the month, though a bombshell just before the election could be too much to expect. After all, this is just about possible abuse of market power and does not cover the design and structure of the power industry.

There is no outright evidence that old folks or babies have died this winter because people cannot afford their power bills.

But the power bills are financially killing the poorest, and the health costs of cold homes are hidden.

The standard measure of energy poverty is when people pay more than 10 per cent of their income on fuel. A staggering 24 per cent of New Zealanders are in that poverty trap, according to the Domestic Energy Users Network. That's hundreds of thousands of people.

The network reckons that supposed competition in electricity has failed consumers completely. The network argues that Contact's latest price rise is part of Contact's aim to get rid of some customers in Wellington and the South Island who are not close to its own generation. Certainly there is the potential to save hundreds of dollars a year on power bills by checking the powerswitch website for a cheaper option.

The irony of government outrage at Contact's price increase is exquisite when the state-owned power companies announced combined annual profits of $446 million this week. Add to that massive dividends and tax, and you have to wonder if ministers are that unhappy to have such big cash cows to help fill the coffers.

Contact Energy made a $237 million profit last year, despite a severe drought which knocked a $100 million hole in state-owned Meridian's profit. Both have big hydro stations in the South Island, but Contact is not reliant on renewable power and could call on its North Island gas- fired stations.

Massey University accounting professor Paul Dunmore argues that Contact's accounting method makes it easier to justify lifting prices, while appearing only modestly profitable. In fact, Contact has earned rates of return close to 30 per cent, he says.

On the face of it, this year's profit of $237 million on shareholders' equity is only a low 8 per cent return. But Contact has revalued its assets by $1.9 billion since 1999, to $4.4 billion. Depreciation has tripled to close to $150 million.

Based on what Contact paid for the assets, Contact's profits would be about $290 million on equity of $1 billion -- a mighty 29 per cent return. The average in the past five years has been 27 per cent.

The Consumer Coalition on Energy says a broader government power inquiry needs to look at how consumers can get the lowest possible prices and secure power supply. But some government policies are actually pushing prices up.

The government target of 90 per cent renewable power over time and the 10-year ban on new gas-fired power stations are expected to increase prices as generators build more expensive wind farms, rather than cheaper gas-fired plants.

The Emissions Trading Scheme, which hits power companies from 2010, will also increase prices.

It is arguable who is to blame for state-owned Transpower's under- investment in the power grid during the 1990s -- the company or the government of the day.

But certainly the shortage of capacity on the Cook Strait cable this year has been a factor in driving up wholesale prices.

Power companies arguably have been asleep at the switch, not building enough power generation in the past decade.

Plenty of new generation is planned now, a 40 per cent increase in the total, or about 4000 megawatts, though not all of that will happen.

So the Government's record does not look flash. After nine years, Monday's Cabinet meeting, which will discuss a wider power inquiry, has little time to switch on voters.

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