The method Contact Energy uses to do its accounting makes it easier to justify increasing power bills to consumers, says accountancy professor Paul Dunmore.

Commenting on this week's announcement from Contact that customers in Wellington and the South Island face 10 per cent increases in their power bills, Professor Dunmore says accepted accounting rules allow Contact to appear only modestly profitable.

Professor Dunmore, from the College of Business' School of Accountancy, says that in fact, Contact Energy has consistently earned rates of return of close to 30 per cent but the profit figures are greatly reduced by the accounting practices used.

"In Contact's latest financial year it reported a profit of $237 million on shareholders' equity of $2.9 billion, an 8 per cent return on equity. This is a very low rate of profit, given the risk shareholders bear."

He says Contact Energy chooses to revalue its major assets using the optimised deprival valuation method, which in practice means the value reflects the future cash flows to be expected from using these assets.

Using this method, its property, plant and equipment assets have been re-valued by $1.9 billion since 1999 to about $4.4 billion, he says, and he estimates this has increased the reported depreciation expense by some $50 to $60 million to $148 million.

"Based on what Contact's shareholders paid for the assets when they were acquired, Contact's profits would be around $290 million on shareholders' equity of $1 billion," Professor Dunmore says. "This is a return on equity of 29 per cent. The average over the last five years has been 27 per cent.

"If Contact increases its prices for any reason, that increases its operating cash flows, and so the optimised deprival value of its assets automatically increases. Under the accounting policies that Contact follows, this offsets what otherwise would have been an increase in reported profits and return on equity, providing justification for further price increases.

"In this way, accepted accounting practice provides cover for Contact and other energy companies to increase prices. Since there is no real profit figure against which the reported numbers can be verified, the choice of accounting methods has important effects on how much consumers are expected to pay for their energy."