Oily Rag - Fixed Price Power and Happily Married

 Read more Oily Rag articles by Frank and Muriel Newman

Oily ragger John from Warkworth has asked an interesting question. "I recently received an offer from Mercury Energy to 'lock in' my power price for the next three years but at a price that is about 9 percent more than I pay now. Should I do that?"
 
Well, we passed that question onto an investment analyst (the sort of people that reside in those flashy office blocks or in the ivory towers of esteemed academic institutions) to come up with an answer. Here is their reply.

“Dear Oily Rag ed. Thank you for your instructions with respect to the question posed by reader John which refers to the Mercury Energy offer as per their fixed energy price alterative as expressed in their communication of 16 June. We have adopted a discounted cash flow methodology to the analysis which quantifies an expected future cost stream and discounts that steam into today’s dollar value at an annual compound rate which represents the point of indifference between the two alternatives. That rate is 4.4 percent.”
 
Let’s translate! Mercury Energy is offering their valued customers a scheme that works a little like a fixed rate mortgage. You pay more now, about 9 percent more as John says, but they undertake not to increase  the daily charges and kilowatt hour rates for the next three years (but your monthly bill will change according to energy use).
 
In their letter Mercury gives an historic example of the power price increases for an “average” residential household, which increased from $1,785 to $2,041 over the last three years. It works out to be an increase of 4.6 percent a year.
 
Whether a person should choose to go with Mercury’s fixed rate offer comes down to what the economists call risk tolerance. Do you want to lock in the certainly of the price or take the risk that prices won’t increase by more than 4.4 percent? There is one other thing to consider – the fine print. In this case the fine print includes the condition that if you terminate the fixed rate contract you will be charged a termination fee of $150. There are also conditions about what happens if you shift house, so make sure you read the fine print before signing up to their scheme.
 
The answer to John’s question involves looking into a crystal ball and asking how much energy costs will rise over the next three years. If the crystal ball gives an answer greater than 4.4 percent then locking in Mercury’s fixed price offer would be the best way to go - otherwise leave things as they are.
 
Now for something completely different. W.G, from Waimauku writes, “My husband and I have been oily raggers for years. When we got married, we had a fabulous, old fashioned country wedding. We got married in the gorgeous garden of one of our local craft stores and walked to the reception at our local hall. When our friends and family asked what we would like as gifts, we asked them to contribute to the day from what they were good at. We put a hangi down in our backyard that was transported to the hall in someone's ute. We were given a lamb, a pig, vegetables and bottled fruit for fruit salad. One friend made our dresses, another was our transport, another made our cake, while yet another iced it. Our parents bought some beer and wine, and my husband’s workmates took photos and presented them to us later in an album. Still another person found a two man band that wanted a gig in the country for little more than the good hangi meal that was cooked by more fabulous friends and relations. We had a brilliant day for one hundred and forty guests that cost considerably less than friends spent the next weekend just on their photographer! P.S I'm still crazy about him after 26 years. It just proves that it does not have to cost a fortune to show that you care about each other.” Nice one W.G.!

If you have a question or favourite tip, share it with others by visiting the oily rag website or write to Living off the Smell of an Oily Rag, PO Box 984, Whangarei. The book Living off the Smell of an Oily Rag by Frank & Muriel Newman is available from all good bookstores or online at www.oilyrag.co.nz.

* Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz. The book is available from bookstores and online at www.oilyrag.co.nz.
 

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