The Power of Texas Two years into competition in the retail electric market, the Texas economy and, in fact, all Texans are continuing to reap the benefits. Customers have true choice, with multiple retail providers in all areas. According to a recent report by the Public Utility Commission of Texas, more than a million customers have switched suppliers. Many are now taking advantage of price savings between $16 and $36 per month over the Price to Beat (for residential customers with usage of 1000KWH per month). These savings are in addition to mandated rate reductions (adjusted for fuel price changes) among incumbent providers. The proportion of residential customers utilizing a competitive provider continues to grow.
Introducing competition into the retail segment of the electric utility industry has resulted in significant gains in business activity. As competitive market forces have come into play, cost reductions are exceeding the legislative mandate of 6% in many areas. Customers have more freedom to engage in negotiation with power providers, in some cases banding together through aggregation programs to save even more than they could individually. These cost savings have freed up dollars for other purposes—saving, investing, and spending. The Texas economy has benefited; I recently completed a study quantifying those positive effects.
The Perryman Group’s impact assessment system, developed and maintained by the firm and used in hundreds of applications over the past two decades, was employed to estimate the spin-off (or multiplier) activity associated with the direct gains from competition. The results were quite impressive. One source of benefit to the economy is that the opportunity to compete brings a significant stimulus for the construction of new power plants. The economic impact of facility construction since SB7 began includes almost $19.9 billion in Gross State Product and 330,226 Person-Years of Employment. In 2003 alone, construction added $1.7 million to Gross State Product and 28,152 Person-Years of Employment.
A second major source of economic gain from electric competition stems from the cost savings to customers; all categories of users paying lower prices for power will have additional resources to deploy to productive uses. Savings totaled some $1.3 billion in 2003 (up from $815.0 million in 2002). As this money is redirected into the economy, it generates significant business activity. We estimated these gains to include $1.5 billion in annual Gross State Product and 19,499 Permanent Jobs.
We’re also enjoying other benefits from the introduction of competition. Renewable energy capacity continued to grow in the past year, and utilities continued to work to reduce emissions. The number of low-income customers taking advantage of the System Benefit Fund grew to 758,526 in September 2003, up from 597,523 a year before. During the first nine months of 2003, a total of more than $127.3 million in discounts were disbursed.
The economy of Texas is far better off as a result of the introduction of competition to the electric utility industry. The second year of competition demonstrated the innovations and options originally anticipated from freeing the market are indeed occurring. Tens of thousands of jobs have been created thanks to the additional business activity sparked by cost savings, and Texas is in an increasingly favorable position in the competition for quality corporate locations. After two years of competition, it remains clear that opening the retail electric market was a well-conceived and highly effective public policy decision.
posted @ 07:58 AM CST [link]
Friday, January 23, 2004
Being Prepared Anyone who knows me well at all will tell you I can go on for hours about the value of education and training. (Just ask my five children.) It’s a well established dictum that education is a key determinant of income. The relationship is strong—whether for an individual, a neighborhood, a city, a state, a nation or a planet. The greater the average education or skill level, the better the quality of life. In the more than two decades I’ve been doing economic development work, I’ve seen so many communities who have benefited tremendously by improving education and training opportunities. It is also one of the highest priorities for Texas if we are to remain a leader in business expansion in the decades to come.
In today’s economy, it is imperative to acquire higher-level skills in order to obtain and hold a quality job. Businesses are more complex than ever before, with technology rapidly changing. In addition, technology and globalization enabled the automation or export of many lower-level and even high-skilled jobs. While the merits of such trends are a topic for another day, suffice it to say that it’s tough to stay a viable member of the workforce if you don’t have marketable skills.
From the other side of the coin, I’ve long been of the opinion that the only way for the US economy to succeed in the long term is to stay on the leading edge. Just last week in this space, I pointed out that the path to American economic prosperity is through innovation and embracing the technologies and methods that lead to high productivity and high value-added manufacturing. A crucial element of this is that we have a workforce ready, willing, and able to take advantage of the opportunities. (The others are basic research and development, investment, and opening markets for our sophisticated goods and services.)
And now, President Bush is touting a significant new initiative aimed at building skills and education at a national level. I found it to be one of the most important items emerging from this year’s State of the Union address. The potential gains from successfully accomplishing what the President is proposing truly cannot be overstated.
Essentially, the plan is a comprehensive effort to better prepare workers for today’s economy, both by improving high schools and post-secondary training and education. The President called for some $220 million for assistance for those struggling with reading or math in high school. At the post-secondary level, the Plan calls for better access to education to allow workers to get the job training and skills to compete in our dynamic economy and better fill jobs in emerging technologies. From financial aid to help good students stay in school to partnerships between community colleges and employers in high-demand job sectors, there are many elements of the proposal which stand to improve the situation both for individuals and the economy as a whole.
The US economy is poised to generate a large number of jobs in the months to come. The recovery is at the point where this is beginning to happen across many sectors. However, this is not to say that there will be new jobs in every single industry. Many of the positions eliminated over the past few years will never return. Even so, the new opportunities offer the potential for even better outcomes for workers. But only if they are prepared—through education and training—to take advantage of them. The President’s Plan, if implemented, represents a definite move in the direction of lasting economic health for the US economy.
posted @ 08:39 AM CST [link]
Friday, January 16, 2004
A Clearly Positive Direction There are times when I see a potential course of action that represents such a clearly positive direction for the economy that it’s hard to see the downside. Recently, my firm was involved in evaluating the economic impact of just such an opportunity called the “Apollo Project.” This ten-point plan combines a spectrum of efforts aimed at both improving environmental conditions and spurring growth in domestic clean-energy industries. The program involves retooling existing infrastructure as well as new development. In addition, funds to enhance the prospects for success among US firms are a component of the broad-ranging plan.
When the contribution of the Apollo Project initiatives is analyzed from a proper and complete perspective, it is clear that it leads to substantial stimulus for the national economy. The investments outlined in the plan result in gains of $1,353.3 billion in Gross Domestic Product and 19,463,949 Person-Years of Employment (over a 10-year period). Stated alternatively, the project sustains $293.4 billion per year in spending and 1.946 million jobs as a result of its developmental activity alone. The ongoing stream of stimulus surfacing as a direct result of this significant investment program includes another $79.7 billion in annual Gross Domestic Product and 1,392,415 Permanent Jobs.
All of this growth in business activity leads to substantial additional tax receipts to the federal government. In fact, the Apollo Project is essentially self-funding over the course of the initial investment and generates sizable ongoing fiscal benefits thereafter.
The programs embodied in the Apollo Project represent an opportunity to capitalize on multiple markets on the brink of phenomenal growth. Moreover, the research, technologies, products, and methods represent a unique fit in the American economy. They involve higher value-added and, hence, higher paying employment. These top-quality jobs are necessary to offset the inevitable loss of manufacturing jobs in lower technology segments and to create opportunities for a new era of expanding production capacity.
The path to American economic prosperity is through innovation and embracing the technologies and methods that lead to high productivity and high value-added manufacturing. With each wave of discovery, some jobs may be lost in outdated areas; however, the potential gains in other, far superior employment opportunities are substantial.
The initiatives embodied in the Apollo Project represent a unique opportunity to enhance the future prosperity of the United States. Clean energy is inevitable and highly desirable as our resources are depleted, and the environment is polluted. Proper infrastructure and intelligent planning is critical; research and development are the lifeblood of this business complex. Without the necessary positioning, the US stands to fall further behind in the development of the sectors involved in the creation of new forms of energy, as well as the emerging technologies which mandate certain economic characteristics, thereby virtually ensuring the economy’s failure to perform optimally. While this initiative will substantially relieve dependence on foreign oil imports, it does not threaten the domestic industry in any way (in fact, it creates lucrative investment opportunities and a natural avenue for diversification). Given future patterns in global supply and demand, full implementation of the Apollo Project and optimal levels of internal drilling and exploration will only partially close the gap between our needs and our capacity.
In summary, the US needs a new vision that will stimulate high-wage employment, enhance the quality of life and business climate, assure greater security and sustainability, and promote and support the very industries which hold the key to long-term success. The results from this analysis are completely unambiguous. Not only does the plan provide the benefits of an extraordinarily rewarding investment program, it also pays for itself. America needs the Apollo Project!
posted @ 08:29 AM CST [link]
Friday, January 9, 2004
Bovine Bonkers Just when the cattle market was experiencing some of the best prices in history, one cow from one herd tested positive for bovine spongiform encephalopathy (BSE or “mad cow disease”) and the bottom fell out. Futures markets were limit down for days. Cows by the thousands were destroyed. For Texans, this is a particularly alarming development as agriculture is relatively more important to our economy. In the high plains region, for example, it’s the largest industry (measured by output). The fallout from the recent setback will likely hit us all; the question is how hard. One complicating factor is the international dimension.
A significant proportion (somewhere around 10%) of American beef is destined for export; last year, the value of these shipments totaled some $3.2 billion. Moreover, what we send abroad is typically better, higher-margin cuts which provide a sizable return. Immediately upon the announcement that an infected cow had been found, Japan, South Korea, and Mexico stopped all shipments of US beef. (Most of Europe was already importing very little US beef due to concerns about hormone use.) Not only is this a very bad thing for the US cattle industry, it’s also a major blow to consumers in those countries.
The politics of the situation bear watching. In Europe, several countries (including France) continued to ban imports from other countries (such as Britain) long after these actions held little merit. How long the bans are in place will determine some degree of the severity. With supplies running out in countries that have been relying on US beef, such as Japan, exports may resume as soon as we can demonstrate the problem is small and confined.
Without a doubt, BSE is a tragic disease. It is always fatal and causes terrible pain and suffering. In addition, you can have it for years and show no symptoms. While only a small number of Europeans have died from the ailment thus far, estimates of the ultimate toll range from thousands to hundreds of thousands. Years later, the European beef industry continues to struggle to recover from the devastating outbreak.
There is reason to believe we will see a far less dramatic outcome here. For one thing, we have the benefit of their experience. The USDA has been monitoring cattle herds for years and the key culprits in the spread of the disease, certain feeds derived from other infected cattle, have been banned for a significant period of time. In addition, researchers have made important strides in identifying exactly how the disease is spread to humans. For example, muscle beef, such as steaks and roasts, is apparently safe because it’s only specific parts of the brain or spinal cord that are affected.
The discovery of BSE in the US is clearly a bad thing. Many cattle industry participants are already suffering from the market’s movements. Nonetheless, domestic consumers are likely to begin taking advantage of dropping retail prices by buying more beef, a move which will provide some stabilization. In addition, we can hope that a good information campaign—one that delivers facts and puts the danger in perspective—will be forthcoming. We should realize it is a sign the system is working when an infected cow is identified.
Any danger, no matter how remote, can become the source of irrational fear. To keep the mad cow issue in perspective, though, requires that we recognize the dangers inherent in many other foods. It is senseless to go bonkers over BSE. Let’s hope the word gets out in time to stem the flow of losses to one of the cornerstone industries of the Texas economy.
posted @ 08:13 AM CST [link]
Friday, January 2, 2004
Ring in the New Amid the many festivities and celebrations of New Years (on Paradise Island, in my case), we generally find a moment or two hidden between parties and football games to think about the coming year, perhaps even going so far as to venture a resolution or two. As I go through this exercise while wearing my economist’s hat, I see several good things likely to occur in 2004. (As for my personal resolutions, I will keep those to myself; that way, only I will know if I am less than successful.)
First, 2004 will be the year when business investment returns with gusto, thus giving legs and staying power to the current economic expansion. It will also be the year when hiring begins to show up in earnest, thus fueling consumer confidence and spending. Nothing gets the economic juices flowing more than a major dose of new employment.
Interest rates will likely remain moderate, although a modest uptick may well be in the offing. I was something of a chronic Fed-watcher in another life (fortunately, there is a cure), and I can still spot certain dynamics a mile away. Around early summer, although there will be no apparent signs of permanent inflation, the healthy economy will cause Federal Reserve policymakers to begin to think they might need to raise rates sometime near the end of the year. With an election approaching, however, they will not want to pull the trigger later in the year (lest they be accused of playing politics). Thus, they will decide that the summer is their last chance, and they will do it. Let’s hope the Fed makes a New Year’s resolution to “chill,” but I certainly wouldn’t bet on it. In any case, rates should remain low by the standards of history.
We can also expect our miraculous technology machine to keep plowing along in 2004. New medical advances, electronic gadgets, and next-generation products will amaze us and make our lives better.
Another likely benefit in 2004 will be a spate of corporate locations to the Lone Star State. Our new economic development tools will translate into massive investments in the future prosperity of Texas.
The next year should also bring good things to those long-suffering investors in the stock market. The fundamental profitability that comes from opening markets and enhanced efficiency should spur equity values to continue their recent upward movement.
Many of our core sectors in Texas should also see better days. Rising orders and declining inventories should foster increased production of computers, telecommunications equipment, and microelectronic components. At the same time, tourism should see a sharp increase in response to major events and new venues. Retailers should also sustain the momentum of a strong Christmas season well into 2004.
The coming year may see the most sweeping overhaul of our antiquated tax system to occur in decades. Through the difficult task of reforming school finance, we have an opportunity to craft a more fair and business-friendly fiscal environment than at any moment in our storied saga.
That is not to say that everything will be rosy throughout the year. The economy always has its ups and downs, surprises, and general unpredictability. We have challenges to confront in terms of budget deficits, trade deficits, and increasing global competition. When examining all of the available information, however, 2004 is shaping up to be a year of prosperity and promise. I hope that your own resolutions involve taking advantage of the many opportunities that are before us. In any case, I wish you health, happiness, and bounty in 2004. Happy New Year!
posted @ 08:24 AM CST [link]