Election season is here, and political posturing is inescapable. The inevitable bashing of everything that’s happened on the current watch has begun. Sometimes it’s justified; sometimes it’s just plain wrong.
One of the latter involves something I’ve studied for decades—electric power prices in Texas. Contrary to what you may hear, competition in the electric power industry was a smart move for Texas. Let me set the record straight.
Texas customers enjoy a variety of choices from electric providers. Plans differ in price; energy source (including renewables-only generation); variable, indexed or locked-in rates; and other billing options.
Furthermore, the numbers of retail electric providers (REPs) and plans continue to increase. In 2006, the average consumer had access to about 17 retail electric providers offering around 36 different rate plans. Today, residential customers have approximately 30 REPs offering more than 140 different rate packages.
In terms of another major benefit of competition—better pricing—Texas is also winning. Some point to the fact that average prices are up since competition was introduced. What they fail to mention, though, is that so are prices for most everything else.
In December 2001, the average price of a loaf of white bread in a southern urban city was $0.93 but rose to $1.32 in December 2009. A gallon of milk increased from $2.97 to $3.29. A gallon of unleaded gas climbed from about $1.02 to around $2.50 during the same time.
The point is simple. Things generally cost more today than they did almost a decade ago.
Without competition, there’s plenty of evidence that electric prices would be even higher than they are today. But, because consumers have the power to hire and fire their electric provider, companies are forced to compete and customers are better off than they would be in a price-regulated world.
Understanding the link between electricity prices and the cost of fossil fuels is critical. In Texas, natural gas provides roughly 60% of the state’s generating capacity and nearly half of electricity actually consumed; thus, natural-gas-fired power plants set the market price of wholesale power the majority of the time (in a competitive market, the cost of the last incremental unit determines the price).
The monthly natural gas price in January 2002 was $2.19 per million cubic feet (mcf), and spiked as high as $12.78 during the summer of 2008. Even so, competition mitigated the effect of this dramatic rise in the cost to produce electricity.
Natural gas prices increased a remarkable 148% from 2002 to 2006, but Texas electric prices only rose 36%. After a slight dip in price from 2005 to 2006, the cost of natural gas increased again by 26% through 2008 while Texas electric prices declined slightly.
When the Public Utility Commission of Texas set rates, it did so to reflect fuel costs through a formal rate-setting process. Several reports demonstrate that the traditional rate making mechanism would have resulted in higher prices than those in the competitive framework, and it is readily apparent that competition served as a notable restraint on prices during the past few years. More recently, reductions in fuel prices have brought lower electricity costs in the competition market.
Today, competitive offers in Texas are below the state’s average price. More specifically, the lowest available price in Dallas-Fort Worth is 8.2 cents a kilowatt-hour. In 2001, the regulated rate was 9.7 cents. In Houston, the lowest available price is 8.8 cents a kilowatt-hour. In 2001, the regulated rate in the Houston area was 10.4 cents. Today’s prices are lower than they were before competition was introduced, while the Consumer Price Index in Texas has risen about 19% over the same period.
Customers can now shop around for the best price and the best service. They can use other criteria to pick their electric provider. They also have a growing range of tools to help them use electricity more efficiently so that they can use less and save more. This is precisely the type of innovation that markets foster.
There is no doubt that the prices we paid for many goods and services almost 10 years ago were lower than they are today. However, when it comes to electricity prices, competition has worked to keep prices in Texas lower than they would be otherwise. And in the end, that’s the comparison that matters.
posted @ 08:05 AM CST [link]
Friday, February 12, 2010
Whither Jobs
Headlines do not always tell the whole story, particularly when the information seems to be contradictory. For example, last week the Bureau of Labor Statistics announced that the national unemployment rate dropped from 10.0% (December) to 9.7% (January). At the same time, data was revealed that there was a 20,000 decrease in the number of non-farm payroll workers during the first month of the year.
So, how is that possible? How can there be a reduction in jobs and also a dip in the unemployment rate? An understanding of how employment statistics work might provide some insight.
Employment and unemployment data are widely followed for some very basic reasons. When people have jobs, they produce goods and services vital to the strength of the economy. They also have the financial resources to purchase these items. When there is a drop in employment, there is a corresponding loss in production and purchasing power, major rails upon which the nation’s economy rides. It must also be noted that these numbers are released on the Friday following the end of the month; they are the first major glimpse of how things are going.
Ongoing knowledge about the number of people working and whether the unemployment rate is rising or dropping gives policymakers insights regarding taking actions that might help stabilize and/or influence the future course of the economy. Without this kind of information, decisionmakers would be significantly hindered in their pursuit of solutions. However, the data are not perfect and can easily be misinterpreted.
In a nation the size of the US, it would be impossible for the government to literally count every person unemployed/employed every month. Simply tabulating the number of persons filing claims for unemployment insurance is also problematic, since many people are still jobless when their unemployment insurance runs out; others without jobs are not eligible or never apply. Adding claims would, thus, not be reliable in determining appropriate percentages.
Instead, the government relies on methods such as its monthly Current Population Survey (CPS), an employment/unemployment measurement that has been in place since 1940. Approximately 60,000 households (some 110,000 individuals) form the sample for the CPS. Collected information is analyzed to determine the employment classification of the respondents, which basically fall into three categories: those with jobs are considered employed; the jobless and those looking or available are identified as unemployed; people in neither category are deemed not to be in the labor force. The sum of those with and without jobs constitutes the civilian labor force upon which the unemployment rate is based. The instrument to gather this information is commonly known as the “household survey.”
Individuals counted as unemployed are those without work who have looked for a job over the past four weeks and are currently available to work. Those anticipating to be recalled from a temporary layoff are labeled unemployed whether or not they have actively sought employment. Using this data, the percentage of the labor force that is unemployed is quantified.
Another widely tracked statistic is total civilian nonfarm employment, which is reported as job gains or losses on a monthly basis. In this instance, a sample of employers is surveyed rather than households. This information is compiled into a look at job gains and losses by industry. This process is called the “establishment” survey, and is almost universally used to denote job gains and losses.
With so many constantly changing variables, forming an accurate picture of the employment situation is a rather complicated process. The gains and losses in jobs over a particular period could be offset by changes in the overall size of the available labor force, and a small drop in the number of workers may be negligible from a statistical standpoint and not impact the overall rates at all. While these benchmarks are important, they are by no means perfect. People in households may list themselves as employed if they know what day they will start work or decide to become self-employed; businesses tend to rely on the current head count. Even if the surveys meshed perfectly (which they don’t), it takes about 100,000 jobs a month just to keep up with workforce growth, and many of the discouraged workers will come back into the labor pool as things improve (thus creating the possibility of the unemployment rate going up even as jobs are created).
This month’s release was a mixed bag, with the unemployment rate falling slightly and the number of jobs essentially unchanged (down 20,000). However, in the fine print below the headlines some promising statistics were noted. In particular, the number of persons who were involuntarily part-time fell from 9.2 million to 8.3 million. Many of these people (who were part time because their hours had been cut back or because they could not find full-time jobs) have transitioned back into full-time work. In addition, the average workweek was up slightly by 0.1 hour to 33.9 hours, with even larger gains in manufacturing (up 0.3 hour to 39.9 hours).
Both of these measures signal that slack is being worked out of the system, which is a necessary precursor to significant hiring. As the recovery moves forward and employers gain confidence, jobs are sure to follow. It may be a while, however, before the statistics give us a definitive picture.
posted @ 07:50 AM CST [link]