[HN Gopher] Power companies fight Maine's proposed non-profit ut...
___________________________________________________________________
Power companies fight Maine's proposed non-profit utility
Author : PaulHoule
Score : 195 points
Date : 2023-06-19 15:59 UTC (7 hours ago)
(HTM) web link (www.theguardian.com)
(TXT) w3m dump (www.theguardian.com)
| Nifty3929 wrote:
| Why I don't see mentioned is: why?
|
| Is it about reliability? Cost? Both? Why not-for-profit?
|
| What controls will be in place to ensure that this one new
| company will be more responsive to the public than the prior two,
| smaller companies?
| nebulousthree wrote:
| Because not-for-profit at least guarantees that the primary
| incentive is..not profit. Especially not profit over the well-
| being of the consumer.
|
| Now, does that mean that the primary incentive will be the
| well-being of the consumer? Time will tell, and only if this
| initiative even makes it through.
| neverartful wrote:
| I'm surprised that there hasn't been more of a push for not-
| for-profit health insurance. A for-profit health insurance
| company has (IMO) unaligned motives with respect to well-
| being of the patient.
| HWR_14 wrote:
| Not-for-profit doesn't mean the motives magically align. A
| lot of not-for-profit healthcare provided by hospitals in
| the US is Catholic-church affiliated. For reasons that have
| nothing to do with profit, there is a lot of healthcare
| (e.g. abortions, birth control) they refuse to provide.
| hibikir wrote:
| Not for profits are equally unaligned: It's just a matter
| that instead of giving money to shareholders, it's all
| about the whims of whoever controls the non-profit company.
| Those whims can be good, or they can be quite bad.
|
| American insurance company profits are higher than I'd
| like, but ultimately the magic of America's healthcare is
| its inefficiency. When you end up owing $3000 for a very
| minor ER visit, the money didn't just go to the insurance
| company's profits: A lot of people made more money out of
| it than in an equivalent visit in, say, a hospital in
| Spain. And it's not as if the inefficiencies are just due
| to a single part of the healthcare system being worse all
| by itself.
|
| The difficult part is that one person's inefficiency is
| someone else's lunch, or yearly safari to Kenya, so every
| move to cut costs is politically untenable. Non profits
| don't fix this, any more than non-profit colleges make US
| higher education cheap.
| JohnFen wrote:
| > The difficult part is that one person's inefficiency is
| someone else's lunch, or yearly safari to Kenya, so every
| move to cut costs is politically untenable.
|
| I think calling it "inefficiency" whitewashes the real
| problem. That "inefficiency" leads to a much higher rate
| of unnecessary deaths and adverse health outcomes in the
| US than nearly every other advanced nation.
|
| And often, even if you can get good health care, the
| financial consequences are devastating. Even if you have
| insurance.
| NovemberWhiskey wrote:
| > _not-for-profit health insurance_
|
| Aren't there millions upon millions of people covered by
| non-profit Blue Cross/Blue Shield plans? BC/BS of Michigan
| is the largest insurer in the state with over five million
| covered.
| BSEdlMMldESB wrote:
| AFAIK there are for-profit jails and for-profit hospitals
|
| I even think for-profit schools are a shitty idea, but this
| may be less obvious why
| bombcar wrote:
| Non-profit doesn't make the company (and all non-profits
| just are companies) suddenly good. It just removes _one_
| entity group interested in profiting - shareholders.
|
| And it can introduce others who are interested in profiting
| - paying the C-level execs of the non-profit, etc.
|
| Or introduce inefficiencies where the non-profit realizes
| that a "profit" is looming so they waste a bunch of money
| on stupid stuff to continue to not go over reasonable
| guidelines on rainy-day funds.
| Zigurd wrote:
| Profit incentives and free markets work great when both
| sides of a deal can walk away. Most of us reading this work
| in software, which is in many ways an ideal free market
| product. But when one party dies if they don't buy, it's
| time to question market mechanisms.
| [deleted]
| HPsquared wrote:
| I'm sure the for-profit utilities don't use that as their
| argument. What is their argument?
| msla wrote:
| > Because not-for-profit at least guarantees that the primary
| incentive is..not profit.
|
| Look at how much the CEOs of non-profits make and ask
| yourself if you really believe that.
| mcmcmc wrote:
| Primarily cost. Oversight includes a democratically elected
| board and direct oversight by the state public utilities
| commission. Electric co-ops have been a thing since the 1930s
| in the US and they tend to work great.
|
| https://ourpowermaine.org/faq/
| bearjaws wrote:
| I get power from a local coop instead of Duke, and to no ones
| surprise its 38% cheaper for the same damn power plant.
|
| They actually just cut their rates, while Duke raised them.
|
| No surprise to me that Duke is publicly traded and more
| expensive.
| elzbardico wrote:
| The problem with for-profit utilities is not even the pursuit of
| normal profits, but when those utilities are listed companies and
| then Wall Street almost requires all kinds of magical stuff from
| said companies because it seems now that every public company
| should aspire to be a disruptive buy-back addicted unicorn.
| HPsquared wrote:
| Ironic, given that interest rates have (until recently) been so
| low. Utilities have always been very capital-intensive but
| stable. They should be low-yield but low risk.
| tarr11 wrote:
| I wish California would consider this for PGE
| zbrozek wrote:
| We squandered the opportunity presented by PG&E's bankruptcy.
| tick_tock_tick wrote:
| The state took it over in all but name already.
| ortusdux wrote:
| After the fires a few years back and PG&E's subsequent
| bankruptcy, Newsom threatened just that if they couldn't get
| their act together.
|
| https://calmatters.org/economy/2020/02/what-happens-if-calif...
| js2 wrote:
| Santa Clara has its own utility. From my time renting there in
| the early 2000s it was reliable and affordable.
|
| https://www.santaclaraca.gov/services/utilities
|
| I can't even imagine what would be involved logistically to
| replace PG&E state-wide.
| smilekzs wrote:
| It still is. City of SC (silicon valley power) charges
| $0.13/kWh vs north of $0.4x/kWh from PGE. It's simply
| impractical to charge EV at home regardless of which plan you
| pick at PGE, due to aggressive tier limits and the
| intentionally crippled "EV plan". PGE is legalized robbery.
| tomohawk wrote:
| This sort of thing can have a really bad failure mode. If the
| government is running the utility who do you go to if service is
| bad?
|
| Where we live, we used to have the trash collection done by the
| government. That did not work. Trash was strewn all over. Trash
| was not picked up on time or at all sometimes. We had a change in
| party controlling things, and they contracted it out. The
| contractor does the work and the government proides oversight.
| It's been several years and this arrangement has been far
| superior during that time.
|
| Already mentioned in the article, the government, depending on
| who is in power, can have motives that are contrary to running a
| utility. To run a utility, you need to be focused on good service
| at least cost. Improving the physical plant costs sums that are
| amortized over decades. If the party in power decides to offload
| the cost of some agenda into the utility, it will have the same
| effect as raising taxes. California has the highest electricity
| prices in the country due to them doing this sort of thing. It
| would be likely much worse if that state also ran the utility
| themselves.
| throwawaaarrgh wrote:
| Not give a few executives hundreds of millions of dollars in
| bonuses for destroying the environment and failing to provide
| adequate power? That's socialist talk! If a few rich people
| aren't bilking the public and providing poor services, it's not
| American.
| bell-cot wrote:
| Background - one of my uncles was the manager of a small (~2,000
| customers) municipal (city-owned) electrical power system in
| Michigan from ~1945 to ~1995.
|
| It can work, and work very well. But electricity is _extremely_
| unforgiving of technical incompetence, and financial incompetence
| can also kill you (generally in the slightly-longer term). If you
| can 't find and keep good managers on both sides (while the big,
| for-profit players are trying to hire them away, for obvious
| reason)...then all the feel-goods and eco-friendly bragging
| rights in the world won't keep your system afloat.
|
| And your system does not need any interference from an actual
| for-profit utility to suffer organizational failure. Well-
| intended idiots and short-sighted politicians can do that
| themselves, in very short order.
| dpc050505 wrote:
| Quebec has the cheapest electricity in North America, Hydro-
| Quebec pays the provincial government a dividend of several
| billions a year (3.4 last year), the expertise they developed
| in hydroelectricity is unrivalled anywhere on the planet.
|
| Any business will fail in the face of technical or financial
| incompetence. Your argument is quite tautological in that
| regard.
| sidewndr46 wrote:
| I'm still perplexed how anyone thinks it is OK for a public
| utility to pay "dividends". If a public utility is paying
| dividends, it must be collecting more income that it's
| expenses. That obviously comes from ratepayers. In any other
| world that'd be a tax.
|
| But when it is a public utility doing it is "dividends".
| selectodude wrote:
| Quebec sells a huge amount of electricity to New York at
| market rates. They then take that money and give it back as
| a dividend.
| sidewndr46 wrote:
| "give it back" - to whom?
| [deleted]
| eganist wrote:
| Sounds like a tax, then.
|
| Except it's a tax that's functionally invisible because an
| equivalent public company would've distributed that same
| profit to shareholders. So the end result is that the local
| government charges less taxes because some of their funding
| comes from utility profits.
| nick__m wrote:
| The public utility in question also export to other
| markets, do you expect them to subsidies electricity
| consumption in Ontario and New-York ?
|
| As a Quebecois I prefer it that way, even if a small part
| of my electricity bill is used as a disguised tax on energy
| consumption.
| sidewndr46 wrote:
| In the case of New York it's a foreign country, so I
| could care less. But if the government sets up from what
| I understand is a monopoly and then uses that monopoly to
| sell to another country, of course it should be used to
| subsidize that same service that the citizens utilize.
| Otherwise the government is just capturing part of the
| economy and using it for whatever purposes they desire.
| Which is in fact, the definition of a tax.
| lmm wrote:
| > I'm still perplexed how anyone thinks it is OK for a
| public utility to pay "dividends". If a public utility is
| paying dividends, it must be collecting more income that
| it's expenses. That obviously comes from ratepayers. In any
| other world that'd be a tax.
|
| If it's ok for a utility to be publicly subsidised (and I
| think it is) then by the same token it's ok for it to
| contribute to the public purse. Setting rates as a matter
| of public policy means rate revenue might end up being more
| or less than the cost of supply. So what?
| sokoloff wrote:
| I think it's okay and even desirable for a public utility
| to charge more than today's costs and build up a surplus to
| cover the inevitable investments and expenses that will hit
| in the future.
|
| When that accumulated surplus gets too large, paying a
| dividend feels like obviously the right thing to do as
| well.
| Johnny555 wrote:
| Why wouldn't the right thing to do be giving it back to
| the ratepayers through reduced rates or credits?
|
| If the utility underestimated the cost of providing
| service, they'll petition the PUC to raise rates, so if
| they overestimated the cost of providing service, why
| shouldn't they give it back rather than treating it as a
| windfall to be distributed to investors?
|
| I'm fine with a public utility getting a reasonable
| regulated profit, but if they collect more money than
| they needed to cover expenses, it should go back to the
| ratepayers. Otherwise the company is just being rewarded
| for overestimating expenses.
| sokoloff wrote:
| > reasonable regulated profit, but if they collect more
| money than they needed to cover expenses
|
| I'm not seeing a categorical difference between these two
| things, assuming the utility tariffs are subject to
| approval. The money they receive that is more than their
| expenses is their profit.
|
| Over time, you tweak the rate increases to get the same
| outcome as "reasonable profit"
| Johnny555 wrote:
| What's why I said "regulated profit" -- if they get to
| keep all money received above expenses, then they'll do
| what PG&E did and ask the PUC to set rates to include
| money for pipeline improvements or tree trimming, but
| then not actually spend the money and instead return it
| to investors.
| mistrial9 wrote:
| when Enron took advantage of California market
| deregulation, and the consumer power market actually
| failed.. a scramble ensued in Sacramento and elsewhere..
| many rocks were turned over in short order. It was
| discovered that, despite countless regulations, full-time
| oversight and public review, the upper management at PG&E
| had found a way to transfer real assets to the books of a
| second groups of companies, and expanded that to purchase
| power generation facilities across the US. It was
| expressly forbidden at every step, and it was discovered
| because the de-regulation failures had made an actual
| panic situation. The "left" press in San Francisco had
| run accusatory media stories for thirty years, but yet
| management was able to do this.
|
| source- attorney involved in private hearings in
| Sacramento on the PG&E company structure
| avgcorrection wrote:
| I hope someone relays the message that they need to not be
| incompetent. Thanks for the concern.
| cool_dude85 wrote:
| There are plenty of public employees in the US who know how to
| run distribution systems. The second biggest city in the
| country has municipal electricity by way of LADWP.
| sporadicallyjoe wrote:
| All basic human necessities should be not for profit.
|
| We all lose when corporate greed meets basic necessities.
| josephcsible wrote:
| Since food is a basic human necessity, should farms and grocery
| stores all have to be nonprofit?
| rodgerd wrote:
| If food production operated as, say co-operatives between
| farmers and customers, what do you think would be worse or
| better than the current model.
|
| (Note: I get my insurance through a co-op, and the difference
| between my experience and people who don't is pretty eye-
| opening.)
| danaris wrote:
| Yes?
|
| Why not?
|
| You seem to think that those proposing this don't recognize
| we're pushing for a massive shift in how things work, that
| will disrupt many areas significantly.
|
| We recognize that just fine. There are ways to mitigate the
| harm from that disruption.
|
| It's absolutely clear to us that even if we _don 't_ mitigate
| that harm, the system afterward will be much more just and
| much more _kind_ and _humane_ than the system we have now.
| forgetfreeman wrote:
| Literally yes.
| ryan93 wrote:
| Why don't you provide that service profit free then. People
| on this stuff are always all talk. Id be interested in
| people demonstrating a world with no profit on a smaller
| scale first. Why not run a company where every one gets
| paid the same and demonstrate your competence.
| plagiarist wrote:
| Sounds good to me. I sure am subsidizing farms with my taxes,
| not sure why I need giant corporate owners back there making
| millions off of it all.
| kevingadd wrote:
| We need farms and some sort of food distribution system for
| everyone to survive, so that doesn't sound like a bad idea.
|
| You could always decide that grocery stores are allowed to be
| for-profit, or perhaps only things like co-ops or benefit
| corporations.
|
| We eventually came to accept the reality that our society
| works better if we ensure universal access to things like
| mail, so we should be willing to evaluate whether the list of
| universal goods needs to be expanded
| ars wrote:
| You're going to have a very very very hard time defining "basic
| necessity".
|
| Electricity isn't a necessity, neither is internet access. Or
| maybe it is? Does that mean a phone is a basic necessity?
|
| Is an x-ray machine a basic necessity?
| sensanaty wrote:
| In what universe is electricity in the year 2023 not a
| necessity? It's been a necessity for going on a century now
| blindhippo wrote:
| I'd argue it's not as hard as you seem to insinuate.
|
| If a person wants to be able to live in their own
| accommodation there are some very key things they require.
| One of the most basic is a bank account (how do you pay rent
| without that?). Work backwards from just that one basic
| concept and you'll quickly see how easy it is to figure out
| what "basic necessities" are.
|
| Granted, these will vary between economic regions, but it's
| quite simple to do so.
| mynameisash wrote:
| I'm not sure if there's a legal definition, but what I
| found[0] says that
|
| > Essential services are the services and functions that are
| absolutely necessary, even during a pandemic. They maintain
| the health and welfare of the municipality. Without these
| services, sickness, poverty, violence, and chaos would likely
| result.
|
| The listed examples of essential services include things not
| _absolutely, positively necessary_ to protect life and limb:
|
| * Maintenance of communication infrastructure (e.g.,
| telephone system, radio, internet)
|
| * Maintenance of utilities (e.g., gas and electricity)
|
| * Transportation
|
| * Road maintenance/repair
|
| * Banking
|
| * Payroll departments
|
| * Tax collection
|
| [0] https://www.paho.org/disasters/dmdocuments/RespToolKit_24
| _To...
| Y_Y wrote:
| I'm sure you're being rhetorical, but to some extent the
| answer is yes.
|
| At least where I live, light and heat are basic rights and
| those are often most easily and cheaply provided by
| electrical means. X-ray machines, considered as part of
| adequate medical care, are similarly guaranteed.
|
| I don't know that the internet is considered a "basic"
| necessity anywhere, but again we're entitled to education and
| to engage with the society in which we live, and the internet
| is a common and effective means for doing those. That said,
| I'm not aware of state-provided internet outside of libraries
| and schools.
| forgetfreeman wrote:
| The UN has strongly implied that internet access should be
| considered a basic human right, but haven't quite crossed
| the line to actually stating it plainly.
| cool_dude85 wrote:
| >The US's first state-run public power company could be created
| when Maine votes later this year
|
| Salt River Project is a state run public power company.
| rodgerd wrote:
| Isn't TVA? Or that federal? Or just a generator?
| tocs3 wrote:
| We get our electricity from Pedernales Electric Cooperative (PEC)
| here in central Texas. The do a good job. We pay about $0.09
| kw/h.
|
| https://www.pec.coop/
|
| I think there should be more COOPs around. Just having more
| choice is a good thing.
| chadcatlett wrote:
| PEC is amazing. We are on San Marcos's service now, but during
| the nasty winter storm we never lost power with PEC. Where as
| other friends else where dealt with downed lines for ages.
| piperswe wrote:
| I used to be under Bluebonnet Electric Co-op
| (https://bluebonnet.coop/) when I lived outside of my city
| limits, and now that I'm in the city I have the public
| utilities (water, electric, gas, trash; https://www.cityofbrenh
| am.org/city_government/departments/pu...). I've never had
| substantial issues with either, and they're both dirt cheap.
| Though I have heard anecdotes about billing issues with
| Bluebonnet...
| j-bos wrote:
| I'm also quite pleased with the Coserv coop in north Texas.
| Gelob wrote:
| Does oncor still provide delivery in these coops?
| j-bos wrote:
| I'm not familiar with oncor
| chadcatlett wrote:
| Oncor is one of, I think 5 delivery companies.
|
| Several cities and coops are their own delivery providers
| as well, PEC delivers most of their electricity if I
| remember correctly.
| j-bos wrote:
| Ah, I believe Coserv does their own delivery, as they
| were touting their preparedness for and reliability
| during the big freeze.
| AndrewKemendo wrote:
| Thank you for posting this, great news indeed!
|
| I get my electricity from a rural coop (NOVEC) and they are
| honestly the best service, lowest price, efficient, innovative
| and treat the community so well.
|
| It can be done!
| Nifty3929 wrote:
| How long has NOVEC been around? Can you share anything about
| how they came to be?
|
| Do they own the grid and wires and whatnot, or just the power?
| Are there other choices in your area?
| AndrewKemendo wrote:
| Since the 1930s and yes they own the fiber
|
| They do a good job explaining here:
|
| https://www.novec.com/About_NOVEC/index.cfm
| coleca wrote:
| I have a similar experience here in MA. Our town owns the power
| company as a non-profit and we have amazing service. We never
| lose power unless someone crashes into a pole or something, and
| even then it's only out for a short amount of time. When we
| have a big winter storm and all the surrounding communities on
| the large providers tend to be dark for days or longer, whereas
| here any outages are fixed quickly. They actually go around and
| trim trees off the lines to prevent future outages.
| Loughla wrote:
| Flip side - I also get my power from a rural coop in the
| midwest, and the service is terrible. The price is high. We
| lose power at least once a week, but that's better than in the
| past when it was every other day. They have hard limits on what
| power generation we can do (size of solar panels and no battery
| backups) and even wade into the situation if you try to install
| a backup generator - which I understand they want a cut-off to
| keep from juicing the lines and killing someone, but they want
| to regulate how large and what kind of generator you can use on
| your own house.
|
| I know this seems contrary, but I believe people need to
| understand that a coop isn't a magic bullet. It's a tool, one
| of many, that if used properly can be great. But if it's not,
| it's a real pain in the ass.
| dghlsakjg wrote:
| As a member of the CoOp, presumably you have far more control
| over making changes to the parts you don't like...
| roughly wrote:
| The great part about this is that, come November, the citizens of
| Maine can take the total amount of money spent advertising
| against the initiative, divide it by the number of households in
| the state, and figure out how much money they could've saved by
| voting for the initiative.
| willcipriano wrote:
| If that much meat is left on the bone for a commodity like
| electricity that indicates to me the market isn't robust enough
| and we need to lower barriers to entry and increase
| competition.
| forgetfreeman wrote:
| Or we could eliminate profit motive entirely and go back to
| treating power generation like the public good it is.
| lmm wrote:
| Electricity grids are literally a textbook example of a
| natural monopoly.
| willcipriano wrote:
| I question how a public utility can be viable where a
| private one can't. In theory similar market forces should
| apply to both, and commodity prices should be close to the
| cost of production so the prices offered under competition
| should be close. Why can't we let private companies do
| whatever we were going to let the public one do?
|
| Frankly rather than the hack of setting up a public utility
| I'd perfer straight up price controls, no reason to build
| out alternative infrastructure at taxpayer expense, but
| there might be a quicker fix with some modifications to a
| few regulations.
|
| Still this is better than nothing, just feels overly
| complicated.
| conradev wrote:
| Texas and Massachusetts have markets where you can choose
| your own retail electricity provider. The REP is responsible
| for purchasing/providing the power.
|
| Both systems sit on top of regulated monopolies who own the
| underlying wires, though.
|
| This Maine utility fight is primarily over who owns the
| wires, not who owns the generation.
| kristopolous wrote:
| If you're willing to have government intervention and
| regulation to enforce a free market then why not just remove
| the "landlords" here and go with public ownership to take
| them out of the cut entirely?
|
| Remember the established assumption here is regulation and
| intervention is required to enforce the thing. Any argument
| based on the allergy to public sovereignty over public goods
| is not applicable. Public governance is intimately involved
| in either solution
| willcipriano wrote:
| Its probably regulation that is making the market not free
| enough. For power they are often granted explicit
| monopolies. The straightforward solution to "the guys we
| gave a monopoly to are charging too much" is not letting
| them have a monopoly anymore.
| LeifCarrotson wrote:
| They can also go to
| https://s24.q4cdn.com/489945429/files/doc_financials/2022/04...
| and look at the hundreds of millions in dividends being paid to
| shareholders out of their utility bills.
|
| I find it humorous that under their estimated $3.8B in utility
| plant assets they also list $324M "goodwill" assets. GAAP says
| that goodwill is an intangible asset, but it seems they're
| spending it rather aggressively...
| metaphor wrote:
| CMP's latest FY22 annual[1; starting p. 130] and 23Q1
| quarterly[2] financial statements for the habitual numbers
| sleuthers.
|
| In case anyone else was wondering what the provenance of this
| $325MM goodwill line item on CMP's balance sheet is, defer to
| the parent's (Avangrid) latest 10-K filing[3], buried under
| footnote 7 on p. 123:
|
| > _Goodwill for the Maine reporting unit is $325 million from
| the purchase of CMP by Energy East Corporation in 2000._
|
| [1] https://s24.q4cdn.com/489945429/files/doc_downloads/2023/
| 04/...
|
| [2] https://s24.q4cdn.com/489945429/files/doc_financial/Suppl
| eme...
|
| [3] https://www.sec.gov/Archives/edgar/data/1634997/000163499
| 723...
| HWR_14 wrote:
| Goodwill isn't consumer goodwill. It's acquisition goodwill.
| So if Google buys a company for $1 billion, that might be a
| great business decision. But the cashflow and projections may
| only justify an accounting value of 500MM. That doesn't mean
| it's not a great decision because of a lot of valid reasons.
| That extra 500MM has to be added to Google's books somehow
| (they spent $1 billion, and books have to balance), so they
| have an asset of 500MM of "goodwill" and a corporate asset of
| 500MM.
| dylan604 wrote:
| They should just call it a tip, since that's the world we
| live in now.
| HWR_14 wrote:
| Tips are expenses. Goodwill is an asset.
| dylan604 wrote:
| This is why I'd never be a good accountant. The price
| paid was $1m, the thing was valued at $500k, leaving
| $500k in goodwill? How is spending more money on
| something than it is worth an asset?
| icjznhfxvjh wrote:
| No, 500 more than the book value. The issue you are
| taking about is that book value doesn't equal asset value
| perfectly for a variety of reasons.
|
| Goodwill is basically a carrying error.
| dylan604 wrote:
| You can say things like this all day long, but to people
| that think logically and not in the "make-up-numbers"
| accounting world, this is how things like Enron can
| happen.
|
| In supply-demand situations like houses, the seller can
| list a price they are okay with receiving. If it has more
| interested parties, they can make an offer higher than
| the asking price. When selling a company, there's similar
| practices of looking at the current annual income,
| project growth over a few years, and offer a price based
| on that. Explaining in terms that are logical, non-
| accountants can keep up. Making comments of "we value at
| $500, but paid 2x that for goodwill" just makes no sense
| TechBro8615 wrote:
| Goodwill has always struck me as a very suspect accounting
| practice. I'm honestly surprised it's legal.
| rodgerd wrote:
| At heart it's simple enough, as I learned in sixth form
| accounting: you need something in your ledger to account
| for the difference between the asset value of your
| business and the price someone will pay to buy it from
| you.
|
| Obviously the futher you get away from "my business is a
| factory that I own, my cash reserves, and a pile of
| materials that I can turn into product" and more into "my
| business is the smarts of a bunch of people who can leave
| with two weeks notice, a bunch of contracts that can be
| severed with 90 days notice, and an API that people love
| so much they don't want to go elsewhere" it gets very
| difficult to justify.
| CamelCaseName wrote:
| Why? What about it is suspect?
| jerf wrote:
| It's a perfectly sensible practice. It is, perhaps, an
| unfortunate name, since as a term of art it makes sense
| but the plain English implies an awful lot of value
| judgments for what is really just a "a recognized and
| intentional mismatch resulting in a fudge factor".
| civilitty wrote:
| "Goodwill" is just the premium the acquirer had to pay
| for the company above the net fair market value of its
| tangible assets.
|
| It starts out as essentially the amount spent to "buy the
| goodwill" of the owners and convince them to sell, not an
| estimate of how much the intangible assets are actually
| worth. That's the first concrete number usable for GAAP.
|
| Afterwards, companies have to annually test goodwill for
| "impairment" and write down the value of its goodwill if
| it's impaired.
| djoldman wrote:
| Wow, just read up on goodwill impairment testing... seems
| sketchy AF.
| civilitty wrote:
| What part seems sketchy? Like HWR_ said, it's mainly used
| to balance the books. The tax basis of goodwill is zero
| and an impairment generally isn't tax deductible. Its
| main purpose is to track the health of the company.
|
| For example, if you acquire a restaurant chain with a
| bunch of retail locations but then announce that you're a
| racist, losing all the customers, you still own the
| retail locations but the premium that you paid for the
| constant restaurant revenue is now worthless. Assuming
| that restaurant revenue was more than you could make from
| leasing the retail space to someone else, there needs to
| be a way to represent that loss of book value.
| TechBro8615 wrote:
| The "controversy" section [0] of its Wikipedia entry
| summarizes it better than I could:
|
| > The accounting treatment for goodwill remains
| controversial, within both the accounting and financial
| industries, because it is, fundamentally, a workaround
| employed by accountants to compensate for the fact that
| businesses, when purchased, are valued based on estimates
| of future cash flows and prices negotiated by the buyer
| and seller, and not on the fair value of assets and
| liabilities to be transferred by the seller. This creates
| a mismatch between the reported assets and net incomes of
| companies that have grown without purchasing other
| companies, and those that have.
|
| [0] https://en.wikipedia.org/wiki/Goodwill_(accounting)#C
| ontrove...
| zdragnar wrote:
| I run a startup. You think it could be worth $x based on
| $y projection. I disagree, optimistically believing I
| will double your projection.
|
| If you make an offer based on your projection, I'll turn
| it down. If you make a better offer (hoping to gain some
| efficiency by combining businesses together, for example)
| I might instead consider the offer worthwhile since it
| removes all of my risk, stress, and opens me up to start
| something different.
|
| At the end of the day, you've paid for my goodwill.
| Nothing nefarious, I (owner being bought out) just
| happened to be stubborn.
|
| The fact that we agreed on a price point that's not
| reflected in your accounting just means that an
| intangible value has been converted into dollars.
| Accountants and economists might not care for intangible
| value, but reality is more complicated than economic and
| financial models can describe.
| 0xbadcafebee wrote:
| So it's waste. Like if you want to sell sandwiches and you
| find out later you have to cut the crusts off for them to
| sell better. The crusts are now "goodwill".
| JohnFen wrote:
| That's what it sounds like to me as well. Either that or
| it sounds like really shady accounting.
|
| My assumption is that I'm not understanding something
| important about it, but I can't figure out what that is
| from the explanations in these comments.
| rodgerd wrote:
| Let's say you own a car yard. You have a chunk of land, a
| building, and some stock. Those might go on the books as
| simple assets of ten million bucks.
|
| You decide to sell the business. You want to retire, you
| entertain offers. The winning offer is fifteen million
| dollars. The purchaser now has something they paid $15m
| for. The actual assets are only $10m. How you you account
| for that in double-ledger accounting? You put $5m down to
| goodwill.
|
| That's the grossly simplified version. It's the
| difference between tangible, obvious assets (cash,
| property, stock, etc), and the intangibles that a buyer
| might pay a premium for.
|
| At heart it's a reasonable enough convention. You can do
| all sorts of too-clever-for-our-own-good stuff with it
| but you know what, that's true of basically every
| accounting construct.
| opportune wrote:
| That's not what goodwill is. It's the premium paid over NAV
| for acquired companies
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