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ERMUSR MISC. ISSUES 01-13-2004 Elk River Municipal Utilities 322 King Avenue phone: 763.441.2020 Elk River,MN 55330 Fax:763.441.8099 January 8, 2004 To: Elk River Municipal Utilities Commission John Dietz Jerry Takle James Tralle From: Bryan Adams Subject: Miscellaneous Issues Enclosed is the packet for Tuesday, January 13, 2004 commission meeting at 4:00 p.m. The following are articles for your review. a) Transmission and Distribution—4th quarter 2003 article titled, "Powerless". A good article about the August blackout. b) The Kiplinger Letter, December 19, 2003 article, "Mending America". Good article about Americas aging infrastructure. c) The Kiplinger Letter Special Report titled, "What's Ahead for 2004". d) Waterworld, November 2003 article, "Associations Debate Water Tax Issue". On January 22, 2004 at 7:00 p.m., Minnesota Municipal Utilities Association (MMUA), is holding a regional meeting at the LFG Environmental Learning Center. They will address at this meeting legislative activities, reliability and regulatory issues, and MMUA activities. Attached is the meeting notice. APPA is hosting the annual legislative rally in Washington DC, February 1-4, 2004. This is a particularly important year for the federal energy legislation will be debated again this year with proposed legislation. Jerry Takle and myself will be attending this rally unless this commission desires otherwise. The city of Manassas, Virginia is also hosting a presentation, showcasing their broadband internet service via power line carrier. This is an exciting new technology we have been watching for a couple of years. Please pay particular attention to the Production Report in the financial section. Electric purchases are up 7.93% from last year with an additional 530 meters. Water production is up 12.15% from last year with 314 additional meters. Very impressive numbers for an economically down year. City Hall construction progress is being made where the city staff will be moving into their new digs in mid February 2004. This will allow our administrative staff to move into our area the last week of March 2004. Your staff is now coordinating the necessary activities to allow this to happen. •1 �r„. :1 .t . . _. ... � Poweri €,,, � -10 �;:►� By James R. Dukart - 7- 1%!j ll A perplexing and still.unresolved question; is whether .1411,11:•,r blackout could have been contained in Ohio,particularly'. ! :is. the right alarms would have been sounded on != ' :„ system. �i-®�•' '� k� fly '• T he size and scope of the 2003 blackout has and will contin ue to garner major media attention. Federal and state regu- . :11 lators have snapped to attention and will continue to probe t C 0 what went wrong, why, when and how. Congressional hearings /`d3/� will keep attention focused on the issue even as investigators plea , %i r`b'z for patience as they sort through an estimated 10,000 pages of B✓” `; ' ;:' -7,g 'i 1 1 s4 data relating to the events of the day. While the immediate aim oft the investigation is to find out what went wrong on August 14, ` moreover, a more important long-term result may be the shedding of light on problems the electric utility industry has faced for r- . decades. ...What a Long,Strange Trip It's Been A final determination of what actually happened on the after- N noon of August 14 will take some time, but early reports place the w; origin of the outage in northern Ohio, just south of Cleveland, ">" where a 680-megawatt coal generation plant owned and operated by FirstEnergy shut down that afternoon for still-unexplained rea- , • sons. Shortly thereafter,three transmission lines in and around the area started "tripping" out. Lines "trip" or shut down briefly for '' _ == " any of a number of reasons, usually related to ebbing voltage • "41 �r i : , caused by a power overload, a tree falling on a line or even a bird hitting the line with sufficient force. = t- What investigators really want to know, though, is how these transmission line outages in Ohio cascaded into a power blackout - that stretched from Toronto to New York City and left tens of mil- F lions of electric customers in the dark. What appears to have hap- pened is that within minutes—sometimes within seconds—succes- sive portions of the interconnected transmission grid of Ohio, . k • ' Michigan, Ontario and New York began shutting down, a - 4 , fi .: N \ _h 'p._` / Lek., ' f F . / i pt . a �„ rte: ph\ l ip th * "�' _.1��I``,. _ F •y..Y 4.s s` +. ►:�,O®4' .sue» -, ' >��'sa.4..� 4 4 Porrer t rnsmissiotr lures are• 1 <'`• it :?\ shown in Lansing, Mich., against - _ ` a shr of gathering storm clouds Thnrsdar, August 21, 2003. State egulator officials lost much of �>r , .. - - their ahrlr7i to force upgrades in Kf ° the power grid when the trans- ., mission lures that carry that electridh for areas served by - the state's two major utilities, Detroit-based DTE Energy and t Jachsou-based Consumers Energy IF Co., mere bought by private companies. T 2>r , . i:<�L"�..! - (AP PhotolA( Goldisl s r Al talk •�® d �I COL • t . . ., t I response to imbalances of sup- overflow from lines that are down. nowhere else to send its power, ply and demand on the grid. Early reports of the events of started exporting to New York, Essentially the grid must always August 14 cite ar least one line that another neighboring state similarly remain in balance — supply of was so overloaded it overheated unprepared to accept incoming electricity must equal demand, and and sagged into a nearby tree, thus power flows. New York's system when a line or power plant loses knocking it out and passing its may or may not have tried to shut load or faces a power surge, it dis- overload to the next line. Before itself off from Ontario - investiga- connects from the grid so as not to long, this type of cascading effect tors are still debating this - but ioverheat or overload. knocked out lines throughout what is known is that by just after "The fail-safes are like circuit northeastern Ohio. 4:00 pm,a mere hour or more after breakers in your house," explains the first signs of trouble Philip Mihlmester, a consultant appeared in Ohio, New l' with ICF Consulting, a firm that Exne'-ts who .t;lil speak on the York power plants started I. has studied the nation's electrical sav One :s snould lde going dark. Within seconds, transmiss:o_; systems :, r years. c blackout. the New York ISO lost some "It's like if you plug 1 t appliances and more sonead and 80 percent of its load as its into one circuit and try to run them all. Either the circuit is going to eventual scope. plants began shutting down. Thus within a hour- accord- blow or your house is going to • ing to the earliest published I burn down, because that one cir- Once enough lines are down, reports - line failures in Ohio had cuit cannot handle all that power moreover, power flows may start rippled through the grid to knock demand." to reverse on the system. Thus as out more than 100 power plants in The national electric grid, northern Ohio lost power, the nor- at least four states and the province though, is not quite the same as mat Ohio-to-Michigan-to-Ontario of Ontario. household wiring. Once a 'circuit" flow was reversed, with electrons - a transmission line or power charging down from Ontario into ...Alarming Trends plant - goes off-line, power that Michigan in an attempt to fill the A perplexing and still-unresolved 1 formerly rode that corridor now vacuum left by lack of outgoing question is whether the blackout tries to find the path of least resis- tance power from Ohio. This unexpect- could have been contained to Ohio, to get to where it needs to go. ed power surge (reversal) into particularly if the right alarms This boosts current on neighboring Michigan knocked out several would have been sounded on lines, which must not only carry Michigan plants and lines, and FirstEnergy's system. At least one their native load, but accept the soon Ontario's system, with class-action lawsuit has already — been filed claiming that it was the ■ — e r= s -rm lack of functioning alarms that �-..aT L1/- yf• turned a what should have been + ,s � contained spot outages into the . biggest electrical outage in North ( American history. FirstEnergy offi- " f cials won't comment, citing the r ongoing investigation into what went wrong. Other utilities or inde- pendent systems operators (ISOs) ` that were part of the event are sim- ilarly mum - no one wants to say _ what went wrong until the facts have been reviewed. Experts who will speak on the a 4'7-- subject, though, say the focus wr should be less on the origin of the 1 ' blackout and more on its spread and eventual scope. "Everyone should be more con- The New York State Power Authority's Robert Moses Niagra Power Plant, left, cerned with why a series of events and Ontario Hydro Energy's Sir Adam Beck Power Plant, right, are shown along that should have been contained the Niagra River. A sudden blackout robbed electricity from millions of people cascaded in this way," says Hoff across a vast swath of the Northern United States and Southern Canada on Thursday, Aug 14, 2003, exposing them to stifling heat and jammed rush hour Stauffer, a a senior cons Resc.t at streets then darkness. (AP Photo/David Duprey) _ Cambridge Energy esesrtreh 24 I 4th Quarter 2003 Associates. "We won't be able to _ Don't Mess With Texas? design systems that are not going to ' have the problems that FirstEnergy had on August 14. But what we can The Great Blackout of 2003 hit the northeastern U.S.and Great Lak avoid is where one area's problems region.California had its own electric crisis in early 2001,and man feed into another area and another still worried about congestion on key transmission lines through area and another area." California. In both cases,a fair amount of blame for the crises has be Early blame for that cascading placed at the feet of electric industry deregulation. effect has focused on a number of Yet Texas has moved to the forefront of electric deregulation,and h interrelated issues. First, too many done so without any of the negative publicity associated with Califorr transmission lines in too many parts and now the northeast.How has Texas done it? of the country are overloaded and "We have a couple of advantages;'says Jess Totten,director of the de lack sufficient marginal capacity to tric program at the Texas Public Utilities Commission (PUC)."One is th handle excess load if a neighboring we are physically isolated from both the East and the West so if probler line goes down. That, in turn, is start in those areas,they won't propagate into Texas."Another,Totten sad directly related to the fact that is that the state has invested heavily in transmission facilities."We ha' investment in the nation's transmis- spent $1.3 billion on transmission over the past five years,and we mar sion infrastructure has lagged sure we made it easier for new generators to get onto the transmissic demand for years. The Edison system:' Electrical Institute (EEI) reports Texas has also been aggressive at promoting and building new gener that transmission investment in the don within its borders,thus shortening the distances power must travel i U.S. has fallen $115 million per reach customers. "Every morning / year for the past 25 years, from California wakes up they have to / about $5 billion in 1975 to $2 bil- import 30 to 40 percent of their . lion in 2000. During that same time power," says Heather Tindle, com- I period, EEI notes, both the overall munications director for the Texas i * demand for power and the demand PUC. "We don't have to do that 11 for power quality have risen and "There is tons of generation in continue to rise. Texas.We have reserve margins in 1 Transmission owners are also the 30 percent range faced with what is often referred to Mike Greene, president of as the "NIMBY" (Not in My Back Oncor Electric Delivery and chair- Yard) problem, where taxpayers man of ERCOT, says another key lesson is that successful deregulatic vote against any and all electric util- takes both careful planning and time.iry initiatives that come too close to "In 1997 or 1998 we created a transmission adequacy task force home. George Gross, a professor of Greene says."We made sure we had the infrastructure to make a move I . electrical engineering and public competition a reality." Greene says Texas also has the advantage of havii affairs at the University of Illinois, an active and single regulatory body— the Texas PUC — that encourag says the issue is so hot in some transmission and sets rules that let investors recover transmissic states that the acronym needs to investment costs.'We don't end up with long,drawn-out rate cases." I be changed to NANA — Nothing says."Our rules are straightforward and allow for a decent return c Anywhere Near Anyone. investment" In addition, open access provi- Texas regulators and executives,though are not resting on their laure sions enacted over the past decade or claiming the Lone Star State has solved all its electric generation as require transmission owners to transmission issues. offer transmission to competing "We are not invulnerable to bad things happening;'Tindle says,node companies at mandated prices. The that local outages struck Dallas this past spring after a lightning strike ar result is an under-funded,aging and College Stadon,Texas,when relays failed at a substation."We are not o overloaded transmission system thumping our chests saying this cannot happen here;' she says. that was never designed or intended "You are going to have problems in any system,but we have been ab to be used the way it is today. to recover from them:' adds Totten."This blackout on the East Coast "The grid was designed to han- going to focus public attention on reliability.I don't see anything specific v die native loads, native customers," are going to have to change as a result of it,but we will be watching dos says Luther Dow, director of power ly to see what they come up with." delivery and markets for the "You never know what can happen tomorrow;' Greene concludes." Electric Power Research Institute so far we've done a good job,we started early,we took it slow and v (EPRI). "Now we are having utili- seem to have got it right" • ties carry load for others. We are 26 1 th Quarter 2003 i particularly the transmission sector. It has highlighted electric reliability :4-''. 4 7. ' - o j concerns,as witnessed by investiga- tions announced by Congress, the - ' U.S. Department of Energy and -_ _ -- _ _ Canada's Department of Natural .y="'✓� Resources. Stephen Fleishman, "'� global coordinator for power and r gas for Merrill Lynch, says one ^ result could be passage of a _ National Energy Bill before the f 2x,- 7.Y? 2004 elections. At a minimum, Fleishman says, renewed attention to reliability means utilities them- „,- -a;7. - z•aigow selves will plow more money into j transmission- Regulators and the il " aY general public, Fleishman adds, a I -” may be more open to rate increas- �.. es, tax credits or other funding Jerry Hoisington, Senior Central Systems Supervisor, monitors the Detroit Edison mechanisms to help fund transmis- Electrical System Operation Center in Detroit. Mich., Monday, Aug. 18, 2003. sion upgrades. Hoisington was at the controls of DTE Energy's system operations center ' Many also predict the blackout Thursday when the blackout of 2003 occurred. (AP Photo/Paul Sancya) will lead to the passage of national asking the grid to do things it was utilities, regulators and indepen- reliability rules for the transmission not supposed to do. Transmission dent power producers. "All you grid. "The reliability rules need to owners cannot keep up. If we are have to do is look at the number of be mandatory as opposed to volun- going to do this,we need new tools stage-two outage alerts we have tary, and they need to be national I. to help the operators manage the seen over the past five years. rather than based on what each system better." Transmission operators are scram- state does," says Phillip Lookadoo, Among the improvements Dow bling to meet demand on facilities a partner in the electric utility prac- I would like to see are more and bet- that have been neglected for years." tice of law firm Thelen Reid & ter alarm systems to move to a completely "self-healing" grid. The Priest. "Clearly, the voluntary rules ...Costs and Repercussions have not worked." 1 nation's transmission system, he Early estimates put the overall Fleishman says national rules says, also needs more lines in high- cost of the outage at between $4 would also appeal to investors, ly congested areas, uniform rules billion and $6 billion, hardly a rip- specifically those interested in and regulations and tighter integra- ple in a national economy of over investing in interstate transmission. tion of communications between $10 trillion. Hardest hit were the "Investors like certainty," he notes. system operators. EPRI has called electric utilities themselves,airlines, "Federal rules would add a lot for investments of up to $100 bit- cities and smaller retailers who lost more certainty than we have now." lion in new nationwide transmis- business for the day or a few days. William Museler, president and sion systems, and Dow makes the David Wyss, chief economist at CEO of the New York ISO, calls case that even in challenging eco- Standard & Poor's, calls the black- for mandated Federal reliability nomic times the nation must invest out "a minor nuisance, as opposed standards as well as improved in its infrastructure if it hopes to to a major disaster." incentives for siting new transmis- avoid future blackouts. "Load By way of comparison, the sion. "New York's transmission growth over the past decade has Insurance Services Offices, a com- grid needs to be strengthened," been 35 percent while growth in pany that tracks the cost of natural Museler says. "Current incentives investment has been 17 percent," and man-made disasters, estimates for building transmission are inad- Dow says. "If we don't increase the cost of the September 11 terror- equate, the state's transmission sit- investment, there is no way we are ist attacks at $20.7 billion, of ing law can be further streamlined going to be able to keep up with Hurricane Andrew in 1992 at and, in the case of interstate facili- demand." 519.9 billion and of the 1994 Los ties, a federal override may be "A major outage was bound to Angeles earthquake at $15.2 appropriate." happen at some time," adds Robert billion. Perhaps most importantly, the Michaels, a professor of economics The blackout may even turn out lights going out on Broadway on at California Stare University to be of economic benefit to the August 14 — in this case in :c'ather Fullerton and consultant to electric electric utility industry as a whole, dramatic fashion—serves to remind 28 I 4th Quarter 2003 both politicians and the public just pal author and editor of The the woodwork, but I cannot imag- how dependent we are as a nation Energy Antitrust Handbook. "This ine that to be the case. It wasn't just on electricity. was a wake-up call that should a particular city like it was in "When you can't go up and result in significant action." Manhattan years ago. It was a big down in your elevator, can't get "I consider this a watershed deal and it was international with water, can't get your car out of the event," adds Richard Michelfelder, Canada involved. The attention garage, you are reminded how assistant professor of finance at will not wane. Investment will important electricity is," says Rutgers University and former occur and changes will happen. As James Serota, a shareholder and executive at electric utility Atlantic to how much and how many years head of the antitrust department of Energy. "There are folks that are will go by before we see this, that Greenberg & Truarig, and princi- concerned that this will fade into remains to be seen." • - Anatomy of A Power Failure AU.S./Canada power outage task force reports netted from the system due to a brush fire under a filed on September 12,2003 details the sequence portion of the line. Hot gases from a fire can ionize of events of the outage before and during the cascade the air above a transmission line, causing the air to that led to the blackout on August 14, 2003. The conduct electricity and short-circuit the conductors. report shows the events beginning on August 14 and provides a "picture" of the sequence of events and 3:05:41 - 3:41:33 PM – Transmission lines discon- how the grid situation evolved over the afternoon. It nect between eastern Ohio and northern Ohio focuses chiefly on events that occurred on major • 3:05:41 –Harding-Chamberlain 345 kV transmission facilities (230 kilovolts and greater)and • 3:32:03 –Hanna Juniper 345 kV at large power plants. • 3:41:33 –Star-South Canton 345 kV The timeline provides an early picture of what happened. Most of the events that appear to have These three transmission lines are part of the path- contributed to the blackout occurred during the peri- way into northern Ohio from eastern Ohio. At this od from about noon EDT until 4:13 p.m. EDT time, the reason for the Harding-Chamberlain line Generation and transmission operating events plus going out of service is unknown. The Hanna-Juniper scheduled interchange through the systems in the line contacted a tree, creating a short-circuit to region may have affected events later in the day. The ground that task force is studying these events beginning at 8 a.m. caused the line to disconnect itself. The Star-South on August 14 to determine whether they were signif- Canton line had disconnected and reclosed twice ear- icant to the blackout. her in the day, but the significance of those events is not yet clear. Events Leading to the Blackout With these lines disconnected, the effectiveness of the transmission path from eastern Ohio into the 12:05:44 - 1:31:34 PM–Generator trips northern Ohio area was reduced. The electricity that • 12:05:44–Conesville Unit 5 (rating 375 MW) had been flowing over these lines instantly began • 1:14:04–Greenwood Unit 1 (rating 785 MW) flowing over other transmission lines, including the • 1:31:34 –Eastlake Unit 5 (rating: 597 MW) underlying 138 kV systems, that connect northern Ohio to the grid. However, this new power flow pat- Conesville plant is in central Ohio and Greenwood tern began to overload those other lines as well. As plant is north of the Detroit area. Greenwood Unit 1 voltage was dropping, demand of about 600 MW tripped at 1:14:04 and returned to service at 1:57. disconnected in the northern Ohio area from indus- Eastlake Unit 5 is in northern Ohio along the south- trial customers (whose motors dropped off line due em shore of Lake Erie and is connected to the 345 kV to low voltage) and distribution-level customers who transmission system. These generating unit trips were disconnected automatically from the 138 and (shutdowns) caused the electric power flow pattern 69 kV transmission system. to change over the transmission system. 3:45:33-4:08:58 PM–Remaining transmission lines Y 2:02 PM – Transmission line disconnects in south- disconnect from eastern into northern Ohio f' western Ohio • 3:45:33 –Canton Central-Tidd 345 kV •Stuart–Atlanta 345 kV • 4:06:03 –Sammis-Star 345 kV .- This line is part of the transmission pathway from Canton Central-Tidd disconnected at 3:45:33 and southwestern Ohio into northern Ohio. It discon- reconnected 58 seconds later. However, the Canton 4th Quarter 2003 I 31 •4:08:58—Galion-Ohio Central-Muskingum 345 kV _ r ■ 4:09:06-East Lima-Fostoria Central 345 kV •4:09:234:10:27-Kinder Morgan (rating: 500 MW; loaded to 200 MW) �� When the Galion-Ohio Central-Muskingum and East �. d .3 �- Lima-Fostoria Central transmission lines disconnect- ' Y aj z ` ed, this blocked the transmission paths from south- . outh- ,rt ,`�� em and western Ohio into northern Ohio and east- re4 - em Michigan.Thus the combined northern Ohio and :i,'. eastern Michigan load centers were connected only t , a 11 by the transmission lines from: 1) northeastern Ohio and Pennsylvania along the southern shore of Lake d - * '-- �`• +�= Erie; ?) western Michigan via the west-east lines that li ,,) cross the scare; and 3) Ontario. Eastern Michigan was connected to northern Ohio only by three 345 kV transmission lines near the southwestern bend of Lake Erie. 7 • The Kinder Morgan generating unit tripped (shut down) in central Michigan (loaded to 200 MW). � s ov ` i _; Power flows became heavy from Indiana and over An electrical transmission tower rises behind the entrance the west-east Michigan transmission lines to serve to the Hanna Substation in Rootstown, Ohio Sunday, loads in eastern Michigan and northern Ohio. Aug. 17, 2003. A problem with one of the transmission lines leading from this substation, belonging to The reduced transmission capacity serving the FirstEnergy is suspected as being part of the chain of events that led to the massive power blackout Thursday northern Ohio load centers resulted in the transmis- n the eastern United States and parts of Canada. sion voltage becoming depressed in that area as (AP Photo/Jamie-Andrea Yanak) load exceeded the rapidly declining power delivery capability. Central 345/138 kV transformers disconnected and did not reconnect, isolating the 138 kV system from At about 4:09, the Eastern Interconnection frequen- the 345 kV support at the Canton Central substation. cy rose by 0.020 - 0.027 Hz, which represents a The Sammis-Star 345 kV line then disconnected at demand loss in the range of 700 - 950 MW. 4:06:03, which completely blocked the 345 kV path into northern Ohio from eastern Ohio. This left only 4:10:00-4:10:38 PM-Transmission lines disconnect three paths for power to flow into northern Ohio: 1) across Michigan and northern Ohio,generation trips from northeastern Ohio and Pennsylvania around off line in northern Michigan and northern Ohio, the southern shore of Lake Erie, 2) from southern and northern Ohio separates from Pennsylvania Ohio (recall, however, that part of that pathway was •4:10— Harding-Fox 345 kV severed following the Stuart-Atlanta line trip at • 4:10:04 - 4:10:45 —Twenty generators along Lake 2:02), and 3) from eastern Michigan. This also Erie in northern Ohio (loaded to 2174 MW total) substantially weakened northeast Ohio as a source • 4:10:37—West-East Michigan 345 kV of power to eastern Michigan, making the Detroit • 4:10:38 —Midland Cogeneration Venture (loaded area more reliant on the west-east Michigan lines and to 1265 MW) the same southern and western Ohio transmis- •4:10:38—Transmission system separates northwest sion lines. of Detroit During the period 3:42:49-4:08:58, multiple 138 kV 4:10:38 —Perry-Ashtabula-Erie West 345 kV lines across northern Ohio disconnected themselves. Twenty generators (loaded to 2174 MW) tripped off This blacked out Akron and the areas west and line along Lake Erie during the period 4:10:04 - south. 4:10:45. The loss of this generation increased the 4:08:58 - 4:10:27 PM — Transmission lines into Mich ganoload cente seon thehremaiining paths,ewhich northwestern Ohio disconnect, and generation trips included the west-east transmission lines that cross in central Michigan Michigan. 32 1 4th Quarter 2003 The west-east Michigan 345 kV paths then discon- been flowing along that path immediately reverse nected at 4:10:37, leaving eastern Michigan con- direction and began flowing in a giant loop coon nected by only a circuitous path around northern terclockwise from Pennsylvania to New York • Michigan that disconnected one second later, and Ontario and into Michigan. the connections to Ontario and northern Ohio. Investigators are still studying the power flows that What happened in Pennsylvania, New Yor4 resulted. Ontario,Quebec,and Maritimes areas. At 4:10:38, the Midland Cogeneration Venture 4:10:40 -4:10:44 PM—Four transmission lines dis (MCV), loaded to 1265 MW, tripped off line. connect between Pennsylvania and New York F • 4:10:40—Homer City-Watercure Roa d 345 kV The MCV generation trip imposed heavier flows on • 4:10:40—Homer City-Smile Road 345 kV • the remaining transmission system, and left eastern • 4:10:41 —South Ripley-Dunkirk 230 kV Michigan and nor^ern Ohio with very depressed • 4:10:44 —East Towanda-Hillside 230 kV voltages. The remain-L-1g transmission paths into the Responding to the surge of energy flowing north ou Detroit area from the northwest separated. of Pennsylvania through New York and Ontari, into Michigan, these four lines disconnected withc At 4:10:38, the Perry-Ashtabula-Erie West 345 kV four seconds of one another and separate transmission line tripped, severing the path into the Pennsylvania from New York. northern Ohio area from Pennsylvania along the southern shore of Lake Erie. At this point, the northern part of the Easter Interconnection (which still included the rapidl The MCV generation trip imposed heavier flows on dwindling load in eastern Michigan and norther the remaining transmission system, and left eastern Ohio) remained connected to the rest of th Michigan and northern Ohio with very depressed Interconnection at only two locations: 1) in the eat_ voltages. The remaining transmission paths into the through the ties between New York and Net Detroit area from the northwest separated. Jersey, and 2) in the west through the 230 kV tram mission line between Ontario, Manitoba, r At 4:10:38, the Perry-Ashtabula-Erie West 345 kV Minnesota. transmission line tripped, severing the path into the northern Ohio area from Pennsylvania along the Heavy power flows were moving northward ow southern shore of Lake Erie. the New York-New Jersey ties. Summary of the Situation at 4:10:38 4:10:41 PM — Transmission line disconnects an When the Perry-Ashtabula-Erie West 345 kV generation trips in northern Ohio transmission line disconnected at 4:10:38, the entire • Fostoria Central-Galion 345 kV eastern Michigan and northern Ohio load centers • Perry 1 nuclear unit (rated 1252 MW) had little generation left available to them and the •Avon Lake 9 unit (rated 616 MW) • voltage was declining.The only connection between •Beaver-Davis Besse 345 kV those load centers and the rest of the Eastern Interconnection was at the interface between the The Fostoria Central-Galion line forms part of di Michigan and Ontario systems. Also, the frequency pathway from central to northern Ohio. That pat was declining in northern Ohio in those areas that was already blocked by the combination of di had separated from the Interconnection. Galion-Muskingum-Ohio Central line disconnec When the transmission lines along the southern ing at 4:08:58, and the East Lima-Fostoria Centre shore of Lake Erie disconnected, the power that had line disconnecting at 4:09:06. • I 11 l I ' I ,111,1..I _.... • • Perry 1 nuclear unit, located on the southern shore of Ontario, plus the Quebec system. To the south of of Lake Erie near the border with Pennsylvania, and that line was the rest of the Eastern Interconnection, Avon Lake 9,located near Cleveland,tripped off line which was not affected by the blackout. at virtually the same time. When the Beaver-Davis Besse 345 kV line which 4:10:46 - 4:10:55 PM — New York splits east- connects the Cleveland and Toledo areas, discon- to-west. New England (except southwestern Connecticut) nett York ed, it left the Cleveland area isolated from the annd d remain main in the Maritimes separate from New and n Eastern Interconnection. Cleveland area load was tact. disconnected first by automatic underfrequency load During the next nine seconds, several separations shedding, and finally by the disconnection of the occurred between the areas in the northern section transmission lines. of the Eastern Interconnection. 4:10:42 - 4:10:45 PM — Transmission paths discon- •4:10:46-4:10:55—New York-New England trans- nett in northern Ontario and New Jersey, isolating mission lines disconnect the northeast portion of the Eastern Interconnection The ties between New York and New England •4:10:42 —Campbell unit 3 (rated 820 MW) trips disconnected during this period, and most of the •4:10:43 —Keith-Waterman 230 kV New England area became an island with genera- •4:10:45 —Wawa-Marathon 230 kV tion and demand balanced close enough that it •4:10:45 —Branchburg-Ramapo 500 kV could remain operational. However, southwestern At 4:10:43, eastern Michigan was still connected to Connecticut was separated from New England and remained tied to the New York system for about Ontario, but the Keith-Waterman 230 kV line that one minute. forms part of that interface disconnected. At 4:10:45, the Ontario system separated when the •4:10:48—New York transmission splits east-west. Wawa-Marathon 230 kV line disconnected along The asansmtssine system in New New Jersey and the northern shore of Lake Superior. The portion of soan uthwestern western line, with northern New the ann P P southwestern Connecticut connected to the eastern Ontario to the west of Wawa remained connected to part of the New York system, and Ontario and Manitoba and Minnesota. eastern Michigan connected to the western part. At the same time, the Branchbur -Rama o 500 kV During the next second, Ontario and New York g P would separate, with 15% of the demand across line was now the remaining link between the Eastern New York state disconnected automatically. About Interconnection and the area ultimately affected by 2500 MW of Ontario demand automatically the blackout, and that line disconnected at 4:10:45 disconnected as Ontario attempted to rebalance along with the underlying 230 and 138 kV ties in its system. New Jersey.This left the northern part of New Jersey connected to New York. Pennsylvania and the 4:10:50 - 4:11:57 PM — Ontario separates from j remainder of New Jersey remained connected to the New York west of Niagara Falls and west of St. Eastern Interconnection. Lawrence. Southwestern Connecticut separates from New York and blacks out. At this point, the Eastern Interconnection was split P •4:10:50—The Ontario system just west of Niagara into two sections separated by an east-to-west line. Falls and west of St. Lawrence separates from To the north of that line was New York urn north- New York. em New Jersey, New York, New England, the •4:11:22 —Long Mountain - Plum Tree 345 kV Maritime provinces, eastern Michigan, the majority •4:11:57 — Remaining transmission lines between 1.114:',,..‘'s.f.LL:'412.1:-;a RENZ-VENT _ _ ,. __ .i`i'.:�; _~ �' ".+.?�- Zk 10_ www.k re nzv ro • Ontario and eastern Michigan separate Eastern Interconnection (the area within the dotted line in the map above) was blacked out. The Ontario-New York separation at 4:10:50 left Some isolated areas of generation and load New York's and Ontario's large hydro and some remained on line for several minutes. Some of tho thermal generators at Niagara and St. Lawrence, as areas in which a close generation-demand balanc.. well as the 765 kV and direct current interties with could be maintained remained operational; other Quebec, connected to the New York system, sup- generators ultimately tripped off line and the areas porting the demand in upstate New York just south they served were blacked out. of Lake Ontario. Three of the transmission circuits One relatively large island remained in operation near Niagara automatically reconnected Ontario to serving about 5700 MW of demand,mostly in west- . I New York at 4:10:56. Another 4500 MW of ern New York. This service was maintained by gen- Ontario demand automatically disconnected. At crating stations south of Lake Ontario with Ontario 4:11:10, the Niagara lines disconnected again, and generators at Niagara and St. Lawrence as well as New York and Ontario again separated. Most of the 765 kV and DC interties with Quebec. This Ontario blacked our after this separation, leaving island formed the basis for restoration in both New li - 22,500 MW of demand disconnected out of a total York and Ontario. demand of about 24,000 MW. The eastern New York island blacked out with only scattered small Conclusion pockets of service remaining. The western New This sequence of events for the August 14, 2003 York island continued to serve about 50% of the blackout summarizes some of the many significant demand in that island. events that occurred before and during this wide- When Long Mountain-Plum Tree (connected to spread and complex system failure. It reflects Pleasant Valley substation in New York) disconnect- events that have been identified and verified as of ed, it left southwestern Connecticut connected to September 10, 2003. Much more data collection, New York only through the 138 kV cable that cross- analysis, and research must be completed before es Long Island Sound.About 500 MW of southwest the Joint United States-Canada Power Outage Task Connecticut demand was disconnected by automatic Force will be able to state with confidence exactly grid operations. Twenty-two seconds later the Long what happened and why it happened. Our under I Island Sound cable disconnected,islanding southwest standing of the events described here, and of tho, I Connecticut and blacking it out. not yet fully catalogued, may change as the inves- tigation progresses.The Task Force's future reports 4:13 PM-Cascading sequence essentially complete will include a more detailed timeline, and will address the causal relationships among these The major portion of the northern section of the events. • NERC:Trying to Fill In the Blanks President Michel)! Gent Responds to Tauzin and Dingell Queries Mrchehl R. Gent is the President and Chief His education has Executive Officer of the North American been in engineering Electric Reliability Council (NERC) and is the and business, having -� . lead policy person for assuring a reliable bulk elec- earned his BSEE "' tricity supply system in North America. Mr. Gent at Texas AlrM joined NERC in 1980 as Executive Vice President and MSEE at and was elected President in 1982. Prior to join- the University of ing NERC, he served for seven years as the Southern California.' General Manager of the Florida Electric Power He has taught in the Coordinating Group—a voluntary power pool for graduate schools of all of Florida's electric utilities. Before Florida, he USC and Loyola, and worked for ten years with the Los Angeles is a registered profes- Department of Water trr Power m both operations" ' sional engineer: Michehl it Gent,Prey derdNb! and planning positions. American Electrical Rilinbilky.' Council. 36 1 4th Quarter 2003 . The Kiplinger Letter FORECASTS FOR MANAGEMENT DECISIONMAKING 1729 H St. NW, Washington, DC 20006-3938 • KiplingerForecasts.com • Vol. 80, No. 51 Dear Client: Washington, Dec. 19, 2003 America's infrastructure is strained, INSIDE THIS LETTER struggling to meet increasing demands on roads, bridges, water use, power plants, railroads , Traffic Snar;s cads, bridges,etc. __ r_s , :c_s_e ±is_osal s- s_ets , - etc . _ The problem will F Sea & Airpors Expansion plans affect businesses by cutting productivity gains, slowing growth Water Keeping acequate supplies in the economy and adding to production costs. Energy Fixing:ne electricity grid It will force new strategies to avoid tie-ups. Dams More failures likely Congress is promising major assistance. But the tab for upgrades is staggering: Schools Enrollment gains ease Nearly $2 trillion over five years to address Telecom Plenty of capacity the nation's top deficiencies. Available funds More People Planningforgrowth will fall far short of reaching that amount. MENDING Many U.S. utilities and public works are becoming antiquated, AMERICA notably in the Northeast and Midwest. Those in high-growth areas, mainly in the South and Southwest, are struggling to keep up with demand. There's plenty of work to be done. For example: Roads. A third of major roads are in mediocre or poor condition. Bridges. Nearly 30% are obsolete or structurally deficient. Dams. More than 10,000 are considered at high risk of failing. Waterway locks. Half of them are past their 50-year life spans. Schools. About 20% need extensive repairs to meet standards. Sewer systems. Some are 100 years old, and many require upgrades. A new wave of federal funding will address many of these issues. Next year, Congress will OK about $375 billion to be spent over six years to build new and upgrade old roads, bridges and mass transit systems. But more than bricks and mortar is needed to end growing pains. Innovative business practices. . .subsidizing use of mass transit by employees, encouraging telecommuting, staggering employee work hours, even setting up satellite offices in the suburbs to cut down on commutes. Better government management of existing facilities. For example, new procedures to quickly clear roads when accidents threaten tie-ups. And technology. More electronic toll taking to minimize backups. Improved coordination of traffic signals. Computer chips to track cargo. Sensors and other monitors on bridges, tunnels and other structures to detect problems early on and avoid catastrophic emergency shutdowns. And new materials that lengthen the lives of roads, bridges, pipes, etc. What's ahead for America's infrastructure is a big subject, so we're dedicating this entire preholiday Letter to discussing it. We're also including a two-page regular Letter. . .our last of the year. Pr 100gs Lett(ISSN 1 5367130)is P1ashod*MWy b awe veal.91544,o yeas.f2LMee years Subsarip6m inquires:acc-5444755msub.serwattek.Vitor wnswovashingwemmuzsmaJmvsmonccuosmi PeSOab ER:$ovay.s,da'aa.9 Eaftadalin/wmadorr: rtl..2a2-0B2646£Far,1Ot7Al26: POSIVASIER Sera am as ramie o Pia 4c LMw PO.Boa]295.NNam IA 51591. EIW.NWApl plowx or Websae,x'pYpwFpe asewm Trsarnc Road delays will cost $80 billion next year and rise 7% a year. SNARES The tab includes the loss of 4.5 billion hours of productive work and nearly 6 billion gallons of fuel wasted by vehicles in traffic jams. Motorists are socked $50 billion a year for damage caused by bad roads. Traffic congestion threatens to add 5%-10% to the cost of goods by 2010. Of course, the decline in quality of life for commuters is incalculable. Highways will get MORE congested, even with a fresh dose of money from the big highway funding bill that Congress will approve next year. In 10 years, time spent in road delays will increase by about 50%. . . more in L.A. , San Francisco, Houston, Washington, D.C. , San Jose, Calif. , San Diego, Denver. Seattle, Austin, Texas , Chicago. Atlanta ___ Detroit. STUCK IN TRAFFlC That will force changes for businesses: 40 Larger inventories for some manufacturers Annual Hours of Delay and retailers who can't afford to take chances. 30 (par parson In urban warm' Reworked delivery schedules to make better use of less hectic periods, such as early morning. 20 More logistical technology, such as ID chips, global positioning systems, traffic monitoring 10 , I and so on, to prevent goods from being waylaid. Traffic management will help some: More controls 1986 1991 1996 2001 2006 2011 to feed cars onto freeway ramps. Signal lights Saurus; Toad Transportation Ina,KIpIInp r that adjust to conditions. Better coordination of police, rescue and towing personnel to clear accidents more quickly. A common electronic toll-paying system among roads, bridges and tunnels. And by about 2010, devices in vehicles to warn of road hazards ahead. Connections for cargo are headed for overhauls. About 2% of future federal highway money will be earmarked to improve land, sea and air connections. New tunnels and overpasses, like those being built as part of the L.A./Long Beach port, aim to end transfer bottlenecks. Bridges require special attention to avoid major disruptions. Almost 30% need repair, and new ones are needed in crowded metro areas. The price tag for the repairs alone is more than $9 billion a year. Weight restrictions and closures are sure to become more common, especially in older cities such as N.Y. Repair funds are lacking. Railroad upgrades are falling short. At $6 billion a year, funds are about $2 billion below what is needed to handle heavier use. For Amtrak, there will be more slowdowns on cross-country routes. More government-private financing deals will provide some help, getting projects moving. Innovative arrangements like the one devised for Calif. 's $3.4-billion Alameda Corridor offer prospects of progress. Additional funds are coming for mass transit, but not enough to modernize an aging fleet of buses and railcars. Deferred maintenance is likely to cause breakdowns. Fares and local taxes are sure to rise. Waterway shippers will have to make do. There's just no money for expansion, even though more cargo is moving on U.S. waterways. Many locks and dams are old, and the $1.5 billion a year Uncle Sam spends barely covers required maintenance of the 238-lock transportation system. Air For new forecasts daily and instant online access,go to KiplinaerForecasts.com/star sa& Ports are in danger of becoming choke points in the trade boom. AIRPORTS Since 1970, annual tonnage moving through seaports has doubled to 1.3 billion. But facility improvements haven't kept up with that pace. One reason: Spending on security is diverting expansion funds. Meeting new legal requirements will cost $6.6 billion over 10 years. Through 2010, port authorities need to invest $2.4 billion a year on expansion and upgrading to avoid shipping delays. By that time, twice the number of cargo containers will have to be loaded and unloaded. Plus a new class of cargo ship means new facilities must be built to handle the behemoths. One-third larger than today's biggest ships, they' ll be steaming into many of the nation's 80 ports within five years. Exlstfng airports are expanding, out no new ones are planned. Congress recently gave the OK to streamline regs for airport growth, and new or lengthened runways are planned for Boston, Atlanta, Cleveland, Cincinnati, St. Louis and Minneapolis-St. Paul at a cost of $3.6 billion. They'll rely largely on boosting efficiency to relieve crowding when air travel recovers from its Sept. 11 dip, setting new records. A 10-year push to modernize air traffic control will bear fruit with a new radar system allowing controllers to handle more traffic and improved access to weather data for more-efficient routing of planes. Regional airports will pick up some flights. Start-up airlines and low-cost carriers are going to increase routes to smaller markets. WATER Many areas face supply woes: Old, leaky systems in some cities. In coastal towns, saltwater intrusion. And in high-growth areas, simply too few nearby supplies. The result: More desalination plants, water-saving appliances and use of treated wastewater for irrigation. That plus tighter quality and security regs mean higher costs. Average water bills will climb by 2%-3%, more a year than inflation. Managing storm water surges carries billion-dollar price tags for several U.S. cities, including Atlanta, Cincinnati, Detroit and Portland, Ore. They need separate facilities for storm water runoff to prevent rainwater from overwhelming sewage treatment plants. ENERGY Power shortages sap $200 billion from the economy every year. Fixing the problem will cost $100 billion over the next decade, half of it to modernize the country's power transmission system. The other half is necessary to build plants and improve old ones. In addition, new natural gas pipelines are needed to move more volume. New energy legislation should help attract more investment. When it gets the nod, probably next year, new rules will make it easier to buy, sell and transmit electricity and harder to block construction of transmission lines. The legislation will also offer tax incentives for construction of pipelines and ease siting approval for a pipeline from Alaska to the lower 48 states. But projects are sure to take years, and businesses needing reliable supplies will require backup systems. Upgrading infrastructure will add 1X a year to utility bills. DAMS From now to 2015, about $10 billion will be needed for repairs to the nation's dams, an increasing number of which are in danger of collapsing. This year, scores were declared unsafe, and 21 failed. The funds aren't likely to be forthcoming, barring a calamity resulting in loss of life. Current spending can't keep up with problems. Your subscription now includes THE KIPLINGER LETTER online at no additional cost SCHOOLS The need for new schools will ease with slower enrollment growth. But there's plenty of catchine up to do and strain in some areas, such as the West and South. The number of children entering elementary and secondary schools will increase by about 5% in the coming decade, considerably less than the 20% growth spurt between 1988 and 2001 . • Many schools require repairs. The average school is 40 years old and hasn't been renovated in 11 years. Estimated cost: Some $130 billion to bring them up to snuff. . .an especially heavy burden for older cities. A quarter of schools are overcrowded. During the next 10 years, new classrooms will be needed most in Alaska, Hawaii, Calif. , Idaho, N.M. , Nev. , Wyo. , Utah, Ariz . , Texas , Colo. , Ca. , Wash. , Ore. ana Fla. Pressure to hike property taxes to fund schools will lessen a bit as enrollment growth slows . But Zeman_ for financing will vary by locale. TELECOM Telecommunications networks are an infrastructure success story. The information superhighway is in good shape. The building boom of the late 1990s has led to ample capacity in undersea fiber optics and powerful communications satellites to handle global Internet traffic. The same is true for high-speed links between major U.S. cities. Some information side roads need work. . .smaller cities and towns and rural areas that aren't high on the list for fiber-optic connections. But relief is coming. Within three years, wireless options will enable such low-traffic areas to get access to high-speed networks. The radio spectrum is being reshuffled to improve communications. Airwaves are being reallocated by federal regulators. . .away from users whose ventures failed and toward companies with promising technologies. The result will be new, affordable wireless data transmission at high speeds available everywhere in the U.S. by the end of the decade. Internet security will improve as businesses step up investment. Spam and hackers won't disappear, but new software is being developed to keep both at bay. Federal regulations provide a powerful incentive for businesses to guard their customers' health and financial data. MORE PEOPLE Underlying U.S. infrastructure woes: Population growth, as well as economic and trade gains and consumption trends. Each year, there are simply more people traveling roads and highways and consuming water, energy and other resources. . .public and private. By 2015, 40 million more Americans. . .a total of 330 million. Growth is uneven, though. Calif. , Texas, Fla. , Ga. and Wash. will gain the most people. Growing the fastest are Calif. , N.M. , Hawaii, Ariz. and Nev. , adding more than 50% to their populations between 1995 and 2025. In contrast, the populations of W.Va. , Pa. , Ohio, Mich. , Iowa and N.Y. will grow by less than 10% over that time. The disparities will add to the challenge of finding solutions as policymakers grapple with America's infrastructure problems. Yours very tr y, Happy Holidays • Dec. 19, 2003 THE K INGER ASHY GTON ITORS Copyright 2003. The Kiplinger Washington Editors,Inc. Quotation for political or commercial use is not permitted. Duplicating an entire issue for sharing with others.by any means,is illegal. Photocopying of individual items for internal use is permitted for registrants with the Copyright Clearance Center,222 Rosewood Drive.Danvers,MA 01923. For details,call 978-750-8400 or visit www.copyrightcom. m WHAT ' S AHEAD r � ;. 0 I 1\1) O Aar 0 1n w, a And What You Can Do About It A SPECIAL REPORT PREPARED EXCLUSIVELY FOR CLIENTS OF THE KIPLINGER LETTER Contents I 1 The U.S. Economy Solid growth, higher profits lie ahead, as business picks up speed 2 Global Economic Outlook Exports improve as the world economy expands 3 Political and Legislative Outlook Democrats face an uphill fight for the White House and Congress 4 Tax Changes in 2004 Additional tax relief and savings incentives take effect 5 Government Regulation War on terror and financial scandals add to regulation 6 U.S. Population Diversity increases as our population continues to grow 7 Changing Consumer Markets Catering to a more demanding marketplace 8 Career Prospects Opportunities improve for managers and tech-savvy workers 9 Labor Trends Finding and keeping good workers becomes more challenging 4 1 The U.S. Economy Solid growth, higher profits lie ahead, as business picks up speed usiness activity will post its best growth in four rates until it's Byears in 2004. We expect gross domestic prod- 0 sure the econo- L uct(GDP) to gain as much as 4.5%, compared my is growing with about 3% in 2003. steadily. When dThough welcome, the pace will be slower than the Fed moves— usual at this stage of an economic recovery. The rea- perhaps as early son: Car and home sales stayed strong during the , as the middle of slowdown, leaving them little room to grow. Here's a 2004—it's likely• look at prospects for key indicators and sectors. i. to make a num- ber of hikes that • ' MODEST INFLATION is expected next year with the _ will put the Consumer Price Index(CPI)rising about 2%, down a - .art » --- prime at 5% by little from 2003. There will be exceptions.The costs of the end of 2004, health care, energy,education,household repairs and about a percent- accounting services figure to rise faster than the overall age point higher CPI. In other sectors of the economy,excess capacity than now. at home and competition from abroad will make it Long-term hard to raise prices. Even companies facing increases rates will move in raw materials prices and medical insurance will be up, too, pro- hard-pressed to pass them along to customers.They'll pelled in part by . have to rely on im- worry about a EARNINGS GAINS STILL TO COME proved productivity- mounting federal budget deficit. The yield on 10-year us s Soo Treasury bonds will be about 5.5% by year-end 2004, Operating r Share compared with 4.5% at year-end 2003.Mortgages wi HIGHER CORPORATE ,,� p Y PROFITS are likely in i14 %•j:i be more expensive,but still affordable, with the 30- 2004, rising 13%, ,iii year fixed rate in the 6.50% to 6.75% range. ii about the same as so o e,,, in 2003. Greater ,,,,,, VOLATILE ENERGY PRICES will persist,although relief is productivity gets $6 n/of",,,,, t„ on the horizon. Crude oil should average about$28 a most of the credit 2000 2001 2002 2003 2004 barrel early in the new year, then slip to the$22-$25 Sources:Standard&Poor,,Klptger because it generates range as production increases in Iraq. higher output without pushing up prices. In fact, But there are wild cards: Civil unrest in oil-pro- price hikes will be hard to sustain until 2005. ducing countries such as Venezuela and Nigeria,or a major pipeline break in Russia, could cause prices to ANOTHER GOOD YEAR IN STOCKS, with major indexes spike by$5 or$10 a barrel. Demand for oil is growing rising about 10%, roughly in line with corporate earn- thanks to strengthening economies around the globe. ings. Bonds will take a modest hit when interest rates Gasoline prices at the pump can be expected to start to rise- soften, ranging from$1.30 to $1.60 a gallon during 2004,with the high mark coming in the peak summe LOWER UNEMPLOYMENT is coming, but the dip will be driving season, as usual. But even a brief production small—from about 6.4% in 2003 to just under 6% in glitch could push the price to $1.75 a gallon. 2004. Job growth will stay relatively slow but should Natural gas will remain costly: Production can't exceed 150,000 jobs a month by midyear, enough to keep up with demand. The price per million British trim the jobless rate. Pay won't rise much. thermal units (MMBtu), now about$5,will average $5-$7 this winter, soaring to $10 per MMBtu in cold HIGHER INTEREST RATES are a sure thing,but not right snaps. By summer,the price is likely to slip to about away. The Federal Reserve won't boost short-term $5 per MMBtu, climbing to$6-$8 in December. 2 I The Kiplinger Letter • KiplingerForecasts.com 1 STRONGER BUSINESS SPENDING is in the cards. We ex- facturers' rebates are likely to keep dealers' show- pect companies to increase spending by 10% in 2004, rooms busy. But the same incentives will keep profit after a meager 2.5% rise in 2003 and two straight margins slim for manufacturers. They'll continue to years of declines before that. Leading the rebound: pressure parts suppliers for lower prices, buying more purchases of new equipment. Trailing: office and fac- and more from China and other low-cost producers. tory construction. Spending on information technolo- gy will climb 6% or so, twice as much as this year. A STRONGER U.S. FARM SECTOR is in the offing. Wacky weather patterns have skewed grain production world- A COOLER HOUSING MARKET is likely, but builders and wide,boosting the U.S. market share. Farm exports are sellers will enjoy a good year. Housing starts and likely to be worth nearly$60 billion in 2004,up more home sales both will dip 4% to than $3 billion over 2003. The 5% next year, leasing them at A cooler lingering effects of the mad cow still-high levels. Any negative im- disease scare in Canada are sure pact from higher mortgage rates housing market to help keep U.S. meat prices will be offset by job growth. firm. The numbers: Housing is likely, but builders Meanwhile, generous farm starts will total about 1.65 mil- supports from Washington, high- lion in 2004, down from 1.72 and sellers will enjoy er land values in the Farm Belt million this year. Total home and low interest rates every- sales will ease to 5.5 million after a good year. where will help keep the farm this year's record high of nearly economy stable. 5.8 million. Sales of new homes, which also set a record this year by topping a million,are likely to slip A GOOD YEAR FOR THE TRUCKING INDUSTRY is coming a bit, to about 970,000. First-time buyers will stay in up, probably the best since 2000. A major shakeout in the market because 30-year mortgages rates will re- the business is over. The stronger economy, especially main under 7%. in retailing and manufacturing, is increasing demand for trucking. Freight haulers plan to raise rates,proba- SLOW COMMERCIAL CONSTRUCTION will continue into bly by 6% or so. Smart shippers will look for breaks 2004. High vacancy rates for office and retail space by joining with others to earn volume discounts. dampen those sectors,and apartment construction will be slow until developers are convinced that job STRONGER EARNINGS IN FINANCIAL SERVICES are likely growth is for real. As a result, rents are likely to slip a in 2004. An improving economy means more bank bit. Tight state and local budgets will dictate less lending. But insurance companies,hurt by years of spending on schools, roads and other public works. cutthroat price competition and hefty claims from Hurricane Isabel and the California wildfires,won't STRONGER RETAIL SALES are likely to extend through be offering premium discounts anytime soon. the holidays. Holiday spending,expected to be up 6% this year over last, will be fueled by federal tax THE HEALTH CARE BOOM has no end in sight, even as cuts, mortgage refinancings and the rebounding stock employers and the government grapple with the ques- market. Next year, retailers will see stronger unit tion of how to pay for it. Managed care firms and sales, but profits won't grow much because retailers nursing homes will do well in 2004. Pharmaceutical will have to keep discounting to remain competitive. companies, though, face a problem: The patents on some big-name medications are running out,opening A RISE IN AUTO SALES is coming in 2004, to 16.6 mil- up competition from generics. lion vehicles. Nearly 40% of new vehicles sold in the U.S. next year will have a foreign nameplate. By 2010, TRAVEL INDUSTRY DOLDRUMS will continue in 2004— the percentage will be 50%. But a growing number of lingering fallout from the Sept. 11 attacks. The num- "foreign"cars and trucks are already made in the ber of foreigners traveling to the U.S. will increase by USA, mainly in new car plants in the Sunbelt. about 5%, but the 2000 record of 51 million won't be Fresh models,0% financing and tempting manu- matched until 2006 at the earliest. WHAT'S AHEAD FOR 2004 1 3 i 2 Global Economic Outlook Exports improve as the world economy expands 1 he global economy is going to move into high- bottlenecks were resolved,but a fix to that problem is er gear in 2004, improving the fortunes of nowhere in sight. U.S. exporters after three lean years. Gains in world gross domestic product(GDP) are likely to CHINA continues to set the pace for rapid growth in reach 4%, the fastest pace since 2000 and a welcome Asia. Its GDP gain in 2004 is likely to reach 8%,about increase from about 3% in 2003. the same as in 2003. China will help lift economies The outlook for U.S. exports is even brighter: a throughout the region by buying more imports and surge of 6% after a 3% gain in providing a low-cost manufactur- 2003. But imports will also grow, -44-itiyoamorsi, ing base for South Korea and rising about 7% in 2004, about x Japan as well as the U.S. the same percentage gain as this China is going to be a subject r g g I year That means the U.S. trade v f' of economic controversy in 2004 deficit is bound to rise in 2004 to 41 . °` as the U.S. presidential race heats about$600 billion,up from the t '" 1 �' up. The loss of U.S. manufactur- record $550 billion or so this year '4.4Z.1 •rt,r° ing jobs to China, inevitable snags ., ''....71 `x-.�t_ in implementing pledges to open Markets Gaining ., \ its markets when China joined the " World Trade Organization(WTO) major U.S. trading partners `' y�J g ( ) expect to see higher growth in '� ♦ in 2001 and China's refusal to let :Zi tom*P. its currency float freely in the 2004 as the rising economic tide ; lifts all boats. , „.-,- world market are sure to be topics k ,pt ' • k ,• of hot debate. �N . CANADA AND MEXICO, by far our tx' t., d' President Bush will try to loo., \ 41 top trade partners, will see their ,, tough on these issues,but Democ economies expand in tandem ,-. rats will charge him with not with U.S. growth. The cost of ex f , t doing enough. " ports from Canada has risen with t" the strengthening of Canada's '1 :`.. _- JAPAN, which is nip and tuck with i currency against the U.S. dollar. China for third ranking in overall But greater demand for Canadian goods in the U.S. trade with the U.S.,is likely to grow 1.5% in 2004, will more than offset that. Canada's economy is set to down from 2% in 2003. U.S. exports of information grow by 3.3% in 2004, up from about 2% growth pro- technology to Japan are going to increase,and U.S. jected for 2003. U.S. exporters will find Canadian travel destinations popular with Japanese tourists, businesses more eager to invest in information tech- such as Hawaii and California,will see some improve nology,telecommunications gear, machine tools and ment in business. farm equipment. After years in the economic doldrums,Japan has Look for Mexico's economy to expand about 3% shed much of its excess industrial capacity and is be- in 2004. Mexico will open its power generation and ginning to increase capital spending. But its banking natural gas sectors to foreign investment,which is system, which is weighed down by loans to insolvent sure to draw substantial U.S. capital. Its oil industry, companies, is sure to hinder the expansion. however, will remain nationalized. Sweeping economic and tax reforms sought by SOUTH KOREA AND TAIWAN are each heading for a gait President Vicente Fox will remain stymied in a hos- of about 4% in 2004. Growth is somewhat depender tile legislature.Mexico's economy contracted slightly on continued political stability in the region. South in 2001 but eked out economic growth in 2002 and Korea is bound to suffer if North Korea's unpre- will expand by about 13% this year. Its trade with dictable regime decides to escalate tensions on the the U.S. would grow more rapidly if border-crossing peninsula. Elections in Taiwan may prompt renewe2 4 1 The Kiplinger Letter • KiplingerForecasts.com political strife between Taipei and Beijing, which con- nation remains badly divided over his tenure. Barring siders the island to be a breakaway province. a major crisis,the economy will gain about 3% in 2004 following a 15% plunge in 2003. GERMANY, the heavyweight in the 12-nation euro zone and the fifth-largest U.S. trading partner, is INDIA should keep growing at about 5.5% in 2004, coming out of its mild recession in 2003 and will thanks to improvement in the agricultural sector and achieve GDP growth of about 1.7% in 2004. The gov- a booming business services sector. But the country's ernment is reforming some rigid labor laws that have lingering protectionist policies limit trade prospects. hampered efforts by businesses to adapt to changing economic conditions and global markets. AFRICA is sure to benefit from rising prices for com- modities such as gold and diamonds. Growth on the OTHER EURO-ZONE ECONOMIES will see gains ranging continent will hit 4°ro in 2604, up from 3% in 2003. from about 2% for France and Italy to 3% for Spain, which has done the most to liberalize labor laws. A Soft Dollar Overall, the zone can expect growth of about 2% in Pressure from the huge U.S. trade and budget deficits 2004, up from less than 1% in 2003. will cause the dollar to stay weak against other major currencies in 2004 and probably through 2005. De- Other Markets spite an occasional THE UNITED KINGDOM will have an increase of about FURTHER TO FALL rally, the overall 2.7% in GDP, up from 1.7% in 2003. U.S. exports 110 trend will be down. that will benefit include construction and building 105 That won't prompt products, medical technology and water resource countermeasures by equipment. 90 9U the Bush adminis- 85 tration because it fa- EASTERN EUROPE is sure to be a bigger market for U.S. 80 Dollar vs.Major Currencies'•.... vors a weak dollar as (Index,1990=100) exports as the economies of Poland, the Czech Re- 75 i I a way to make U.S. Jan. Jan. Jan. Jan. Jan. Jan. public, Hungary and others grow at just over 3% in 2000 2001 2002 2003 2000 2005 exports more cOm- 2004, giving businesses and consumers more money sources:Federal Reserve,aolingerPoeasu Y . petitive. to spend on foreign goods. Eight of the most ad- vanced countries in the region will join the duty-free Trade Talks European Union(EU) in May. The area is on track to Multilateral efforts to negotiate lower trade barriers become a growing market for U.S. information tech- will make progress in 2004 but aren't likely to bear nology, construction equipment, telecommunications fruit until 2006 at the earliest. The WTO,launched services and auto parts and accessories. in 1995 and comprised of 148 nations, will eventually work out a compromise over reducing the agricultural RUSSIA depends on sales of oil and natural gas to bol- subsidies that rich countries give their farmers to the ster its economy. High natural gas prices are going to detriment of growers in less-developed nations. partially offset lower oil prices,but the economy's Meanwhile, the U.S. is going to move ahead with growth rate will slow to 4.5% in 2004, down from 6% separate trade deals with countries in Central Ameri- in 2003. Russia will continue to import U.S. aeronau- ca, Africa and Asia. tical, telecommunications and oil and gas equipment. U.S. farmers are sure to win a battle with the EU over genetically modified foods. The WTO is expect- SOUTH AMERICA can expect Brazil, the continent's ed to insist by mid-2004 that the EU drop its opposi- biggest economy, to be an economic growth leader. tion to the sale of such foods. Despite that victory, Brazil's GDP will grow 3.5% in 2004 from just 1% in public opposition in Europe will hamper sales. 2003, thanks to ongoing efforts to rein in government A nagging tax tiff between the U.S. and Europe is spending. Argentina is likely to continue a slow recov- headed for settlement in 2004 to avoid sanctions the ery from a depression with 4.5% growth. Venezuela's WTO has authorized against U.S. exports. The top economic prospects remain subject to political tur- tax rate on U.S. manufacturers will be cut from 35% moil under embattled President Hugo Chavez. The to 32% to help make up for lost export subsidies. WHAT'S AHEAD FOR 2004 I 5 3 Political and Legislative Outlook Democrats face an uphill fight for the White House and Congress The presidential election and races for the ed party, a new Republican governor in California House and Senate are going to dominate po- and the presidential bully pulpit. And he doesn't have litical discussion in 2004. By March, Democ- a strong third party candidate like Ross Perot, whose rats will know who is likely to win their nomination to 19% of the vote helped defeat his father in 1992. face President Bush. Congressional contests will be 1 well under way, and election-year politics are sure to House Contests influence the shape and timing of major legislation. Although the current makeup of Congress is narrow- ly divided, Democrats face long odds of taking con- The Presidential Race trol of either the House or the Senate in 2004. The Democratic Party's nominee in 2004 faces an up- ' hill battle to unseat the incumbent. REDISTRICTING after the 2000 census has shifted con- While Bush cruises to an easy renomination, De- gressional seats from Democratic strongholds in the mocrats will have to recover from a bruising primary Northeast to the GOP-leaning South. New congres- , marathon that will highlight the differences between sional boundaries in key states such as Texas and party moderates and liberals, who provide the most Michigan firm up Republican districts. That leaves strident opposition to the president. Democrats with fewer takeover opportunities. KEY CAMPAIGN ISSUES include the economy, national RETIREMENTS also favor the GOP. Senior Democrats, security, the U.S. occupation of Iraq and health care. facing slim prospects of regaining committee chair- Although the economy will strengthen through manships, are retiring in greater numbers than Re- 2004, Democrats are sure to focus on the slow pace publicans. Districts lacking an incumbent in the race of job creation. They'll be espe- are most likely to see party cially vocal about Bush's tax The cost and availability switches. cuts,which they claim benefit the rich, prompt huge deficits of health care Senate Races and fail to create jobs. With at least four Democrats - Bush will counter by touting is sure to be a from the South retiring, it's un- an improving economy and in- likely that the party can take silting that low-and moderate- major campaign issue. control of the Senate,despite income taxpayers saw their tax the fact that Republicans now bills drop by a larger percentage than the wealthy did. hold the majority by only one seat. National security will be on voters' minds. Bush will cite his willingness to act alone if necessary to THE EDGE GOES TO THE GOP because Democrats Zell prevent attacks on the U.S.,while Democrats will in- Miller of Georgia, Ernest Hollings of South Carolina, sist that Bush has damaged relations with longtime al- John Edwards of North Carolina and Bob Graham of lies. U.S. policy in Iraq is going to dominate the parti- Florida are among senators who won't seek reelectioi san debate, including such issues as pre-war in 2004. They are from states in which Republican intelligence,postwar management and casualties. candidates have a realistic chance of winning. In ad- The cost and availability of health care is sure to dition, Tom Daschle of South Dakota,a top Democ- be a major campaign issue. Democrats will call for ratic critic of Bush, is likely to face a tough reelectior more government programs to address health incur- bid in a state that is trending toward the GOP. ance problems,while Bush will tout Medicare re- A Democrat has a shot at an open seat in Illinois forms that help seniors pay for prescription drugs. created by the retirement of Peter Fitzgerald. Also in Alaska, where Republican Lisa Murkowski holds the TACTICAL ADVANTAGES go to Bush. He enjoys a big Senate seat vacated by her father when he was elect- edge in campaign funding over the Democratic con- ed governor. She was appointed by her father in De- tenders. He also has a veteran campaign staff, a unit- cember 2002,and she is thought to be vulnerable. 6 I The Kiplinger Letter • KiplingerForecasts.com Legislative Issues may get some tax incentives, and pretax dollars will Politics is sure te• color much of.c-.at gets done, and be allowed for retirement planning. what does not get done, in Con_..-ess in 2004. lou can expect more rhetoric than action ,n many big issues. TORT REFORM sought by business groups is likely to win passage in 2004. It will shift many class-action ENERGY POLICY will be a contentious leftover from lawsuits involving more than 100 plaintiffs and at :003. Incentives to boost energy efficiency are a good least 55 million from state courts to federal courts, bet—tax breaks for homeowners who make energy- which are deemed friendlier to business interests. sating improvements and manufacturers of energy-ef- Federal jurisdiction will apply if fewer than two-thirds :is lent appliances. Other breaks :7.:11 promote domes- of the plaintiffs live in the same state. tit energy explr=r_-non and extrs.-.en and subsidize rnatitc fury.,, _:ancrgs, 111,.__ad; ethanol, '.find, THE FEDERAL DEFICIT is expected to rise to about$600 solar and biodies.i. But Bush t.. :: - get approval for billion in 2004. Reasons include tax cuts,higher do- drilling in the Arctic National \\:':dlife Refuge. mestic spending, the occupation and rebuilding of Iraq and Afghanistan and homeland se- t( �— curity. But despite the rising red ink, 7 1 Congress won't reinstate the kinds of — — spending caps that worked in the 1990s. Spending on election-year pork is too tempting. '� `• `" I DEFENSE POLICY, while hotly debated, 11 t!1:1i ` " will remain relatively unchanged—no quick transformation to a lighter, faster and smaller military. There'll be calls 1 for a larger standing army,but that I won't happen either. Spending on high- tech weaponry is going to increase, in- cluding an additional$8 billion for mis- sile defense research and development. A TAXPAYER BILL OF RIGHTS proposal is likely to pass, making interest on refunds tax free and easing under- TRANSPORTATION PROJECTS are in for a fresh dose of payment penalties. But there'll be no permanent re- federal funding—billions for roads,bridges, tunnels peal of the estate tax in 2004. and mass transit systems. The money will be part of a Manufacturers will get an arras of tax relief as multiyear highway transportation funding bill. compensation for the loss of an export tax break ruled illegal by the World Trade Organization. JUDICIAL NOMINATIONS will spark more fireworks next Changes Congress is likely to OK include trimming year. The only way Bush will get to appoint a the top tax rate on manufacturers from 35% to 32%. Supreme Court justice during the last year of his first Congress will also pass legislation to expand tax term is if the vacancy occurs by early 2004 and if his incentives aimed at increasing charitable donations pick is close to the middle of the road. Democrats will by individuals and businesses. And it will extend a stall on any late or conservative nominee until after temporary moratorium on state and local taxation of the presidential election. Internet access services. MUTUAL FUND OVERSIGHT will prompt additional hear- INCENTIVES TO SAVE for retirement are gaining sup- ings during which lawmakers will explore such issues port and are going to be implemented incrementally. as requiring fuller disclosure of mutual fund fees and Congress is likely to increase from 701E to 75 the age limiting conflicts of interest involving fund managers. at which retirees with individual retirement accounts But opposition to additional regulation and the corn- and 401(k)s must start withdrawing funds. Annuities plexity of the issues are likely to slow legislation. WHAT'S AHEAD FOR 2004 17 4 Tax Changes in 2004 Additional tax relief and savings incentives take effect ax rules are changing in 2004, affecting your up. People who turn 62 in 2004 will have to wait unt personal finances and your business. Here's a they are age 65 and 10 months to get full benefits, rundown to help you with tax planning. two months later than folks who turned 62 in 2003. The Medicare Part B premium will cost$66.60 a Saving More for Retirement month in 2004, up by$7.90. You'll be able to save more income for retirement. The cap on payins to 401(k), 403(b) and 457 plans Health Care Revisions rises to $13,000 in 2004. Workers born prior to 1955 Starting in May 2004, seniors will be able to buy a can contribute an additional $3,000. Medicare-sanctioned discount card for$30 or less. Workers with SIMPLE plans (Savings Incentive Discounts will be 10%-25% off normal prescription Match Plan for Employees), used by self-employeds prices. In 2006 the card will be replaced by Medicare and employees of small businesses, have a payin limit drug coverage. The plan has a$35 monthly premium, of$9,000,or$10,500 if born before 1955. a $250 deductible and other restrictions. Individual retirement account(IRA)deductions Health saving accounts(HSAs)will get their start phase out at higher in 2004. These accounts can be set up by individuals income levels for tax- LESS TAX,MORE TO SPEND or employers, but benefits are limited to folks coverec payers in company re- 15.5% by high-deductible policies, and account owners can- tirement plans. The not have basic health insurance. phaseout starts at 14.0% The minimum allowable deductible to qualify for $65,000 of adjusted 1z 5% a HSA is $2,000 for family coverage and $1,000 for gross income(AGI) self-only coverage. Contributions to HSAs are limited for couples and ends 11.0% Total Taxes as% +„ to $5,150 for families and $2,600 for self-only. HSA at$75,000. For sin- of Personal Income payins are tax deductible,and account earnings are glen,it starts at 9.5%1 997 1998 1999 200D 2001 2002 2003 2004 tax free,as are withdrawals if used for medical bills. $45,000 and ends at so' s:BEA.SiPlingm Forecasts Unused amounts can be carried over to the next year $55,000.A deduction can be taken for a payin for a spouse not in a plan if Energy Tax Breaks AGI is less than$150,000. Congress is likely to approve an energy bill loaded with tax incentives to develop domestic energy re- Social Security sources and to reduce energy usage. The Social Security wage base inches up to $87,900, Homeowners are expected to get tax credits of ui a $900 hike. Tax rates stay the same: 6.2% on employ- to $2,000 a year for energy-saving improvements and ers and employees for Social Security, 1.45% on each builders and manufacturers will get tax breaks for en for Medicare. The Medicare tax applies to ALL ergy efficient homes and appliances. Tax breaks for wages. The tax on self-employeds is 15.3% on the the purchase of hybrid vehicles will be increased. first$87,000 and 2.9% above that. Energy producers will get bigger tax breaks for of Social Security beneficiaries will see a 2.1% in- and gas exploration,production from marginal wells, crease starting with their January checks. energy infrastructure improvements and alternative The earnings limits for beneficiaries are confus- energy sources such as ethanol,wind and biodiesel. ing.Those between ages 62 and 65 and four months can earn $11,640. For each$2 earned above that,$1 of Bigger Travel Deductions benefits is lost.Those who will be age 65 and four The standard allowance for business driving goes up t months in 2004 can earn$31,080 until they reach that 37.5¢ a mile in 2004. And in a further easing,taxpayer age. For each$3 earned over that,benefits drop by$1. can take the standard mileage rate on fleets of as man There is no cap on earnings for people age 65 and as four vehicles used concurrently in a business. four months or older. The rate for medical travel and moving expense: Normal retirement age for Social Security goes rises to 14¢ per mile, a 2¢ hike. 8 I The Kiplinger Letter • KiplingerForecasts.com Employers can provide a bit more tax-free park- for marrieds filing jointly, $142,700 for singles and ing: $195 a month. The limit on tax-free transit passes $178,350 for heads of household. They disappear they can give stays at $100 a month. completely above $336,550 for joint returns, $265,200 for singles and 5300,850 for heads of household. Higher Standard Deductions Standard deductions rise to adjust for inflation. Estate and Gift Tax Easings For marrieds, the deduction is $9,700. It rises to Both estate and gift taxes become slightly less bur- $10,650 if one spouse is 65 and to $11,600 if both are. densome in 2004. For singles, the deduction is $4,850; $6,050 if 65. The lifetime annual exemption jumps to $1.5 Heads of household can take $7,150, or $8,300 if 65. million, a rise of 5500,000. But note that the gift tax The cutback in itemized deductions starts at a exclusion remains $11,000. higher income level in 2uu4. It is decreased by 3% of The top estate and gift tax rate falls to 48%, a 1% AGI over 5142.700, whether the taxpayer is married reduction. The lower rate kicks in for estates and gifts or single. of more than S2.5 million. The personal exemption is $3,100 each for you, Special estate tax valuation of real estate is higher your spouse and each dependent. for 2004. Up to $850,000 of farm or business realty But the exemptions phase out as your income in- can receive discount valuation. But the credit for creases by 2% for each $2,500 of AGI above $214,050 state estate taxes is smaller in 2004. The New Personal Income Tax Brackets for 2004 The following tax tables reflect all income'tax rate reductions and bracket expansions. MARRIEDS If taxable Income Is The buck Not more than $14,300 104601 taxable incote P w ��ry wa'Y:.,.t3`F�^a'�a' �» '� . F"� ' Over$14,300 but not more U $581 a e)t„ x> , $1 00 as � ��sr a x.��-, w s , ,� ^� >� r Over$58,100 but not more than$117 20 $82140 OO±25%of excess '-�a s f� xa + '°�a„vn SOY&r• "P`,` fX��°'°s��- Over$117,250 but not more than$178,650 $ 2,7875E}+28%ofexcessover 250 Over$178,650 but not more then $319,100 $39,979.50+33%of excess over$178,650 Over$319,100 �; � - $86328.00+35%af excess over 1t0;100; v'w` SINGLES - s ,,1� ,� , F+• If taxable Income Is ,1 fli,;> The tax Is:::< p k q '072: Not more than $7,150 10%of taxable income ` ilr11-;`,-t< el,+ Over$7,150 but not more than$29,050 $715.00+ 15%of excess over$7,150 ,. v`. Over$29,050 but not more than $70,350 $4,000.00+25%of excess over$29,050 ? Over$70,350 but not more than $146,750 $14,325.00 + 28%of excess over$70,350 Over$146,750 but not more than $319,100 $35,717.00 +33%of excess over$146,750 Over $319,100 $92,592.50+ 35% of excess over$319,100 rg; HEADS OF HOUSEHOLD tt If taxable Income Is The tax Is ;:: t"'§I.,"` , ` Not more than $10,200 10%of taxable income f ' ; ' ;;: Over$10,200 but not more than $38,900 $1,020.00 + 15%of excess over$10,200 Over$38,900 but not more than $100,500 $5,325.00+25%of excess over$38,900 '✓ '`''- fi Over$100,500 but not more than $162,700 $20,725.00 + 28%of excess over$100,500 x), Over $162,700 but not more than $319,100 $38,141.00 + 33%of excess over$162,700 :1 t n Over$319,100 $89,753.00+35%of excess over$319,100 .er' A LL WHAT'S AHEAD FOR 2004 19 5 Government Regulation War on terror and financial scandals add to regulation n the future, federal and state governments are vironmental Protection Agency(EPA)and the depart- going to have even greater say on issues such as ments of Transportation, Health and Human Ser- environmental controls. land use, product liabili- vices, Energy. Agriculture and Labor. ty, food safety, workplace rules and much more. And the war on terrorism plus efforts to prevent New Moves to Slow Regulation more financial scandals are adding to the regulatory The Bush administration has several initiatives it burdens facing businesses. hopes will stem the tide of new regulations. Reform Efforts Faii Siiui i PEER REVIEW is the latest tactic being used to ease the Congress had good intent:ins ri:hen it passed regula- flood of regula--ins. The president has ordered that, tory reform legislation in 1q96. But a look at the starting in 2004. federal regulatory agencies must record shows that the results have not met the goal of meet a greater burden of proof that proposed rules easing the weight of regu- are cost effective. New lations on the economy. regulations will have to It is impossible to pass muster with scientif- measure the overall costs is peer groups. Exceptions and benefits of federal will be allowed when the White es to society. But DANGER there is an imminent t the White House Office threat to public health of Management and Bud- and safety. get(OMB) reports that the 107 major regulations REVISITING OLD RULES is issued in the past 10 years part of the administra- cost$36 billion-$42 billion tion's effort to ease regula- a year to implement and tory burdens. Under the had benefits valued at direction of the OMB, $146 billion to $230 bil- t- _ e ±fag 3 federal agencies have re- 1 lion. The Cato Institute, a ., r ` viewed current rules and I libertarian think tank in now have a list of more Washington, D.C.,esti- than 250 regulations that mates that all federal might be changed or elim- rules add$860 billion a Mated in 2004. year in costs to the econo- '' s ' r my-8% of gross domes- Pending Rules tic product. The administration may One rough measure succeed in slowing the of federal regulatory activity is the number of pages rulemaking process,but it won't stop agencies from devoted to promulgating new rules in the Federal coming up with new rules. Here are some of the regu . Register,the government's rulemaking bible. The latory issues likely to reach fruition in 2004. number of Federal Register pages hit an all-time high of 75,606 in 2002. Compare that with about 50,000 in FINANCIAL REFORMS are sure to keep coming from 1990, 20,000 in 1970 and 10,000 in 1950. agencies such as the Securities and Exchange Com- About 8 BILLION hours are spent each year mission(SEC) and the Financial Accounting Stan- complying with government requests for data, accord- dards Board(FASB)in the wake of corporate and Be- ing to the OMB. Approximately two-thirds of that curities scandals. _ time is spent by businesses, most of it to comply with The SEC is stepping up its scrutiny of financial the federal tax code and regulations issued by the En- reporting and accounting procedures with closer in- 10 I The Kiplinger Letter • KiplingerForecasts.com spections of company books. And it won't be just the Legislation being sought by Bush to curb power Fortune 500 firms that get a going-over. Mutual funds plant emissions of nitrogen oxides and sulfur dioxide and financial advisers will also be watched in 2004 will go nowhere in Congress in 2004 because of and more brokers are likely to face penalties. Also, the strong opposition from opponents who say the plan is SEC is going to implement new operating rules, pro- too weak. Industries that would be affected by the posed by the major U.S. stock exchanges, requiring plan are also split over details in the proposal. listed companies to have more independent directors Dubbed"Clear Skies," the Bush plan would let on their boards of directors, firms that exceeded pollution- tougher auditing procedures and a Unsolicited e-mail reduction goals sell their ex- more active role for stockholders. cess reduction to companies FASB is planning to flex its is going to be slammed that did not meet their own regulatory muscles in 2004 by ap- targets. EPA will seek a similar proving rules requiring public by Congress, which pollution credit scheme to re- companies to take fuller account duce mercury emissions from of employee stock options as an will prohibit deceptive fossil fuel power plants. expense. Firms will have some lee- way in placing a value on options, practices by e-mailers. DRINKING WATER regulations but they won't be able to bury po- from the EPA will include tentially costly option obligations as a footnote in an- tighter rules on disinfectants and for water treatment nual reports to stockholders. plants that use groundwater. Also likely from FASB next year: new rules on cal- culating the liabilities of cash-balance retirement TRUCKING companies will have to let drivers have at plans. The changes are going to increase the cost of least 10 hours of rest per day starting in 2004, up such plans by 20% or more. from eight hours. And the number of hours a driver can be kept on duty will drop to 14 from 15 for any ERGONOMICS rules proposed by President Clinton are 24-hour period. The new rules, which are designed to being scrapped by President Bush and replaced by reduce truck accidents, are expected to add$1.3 bil- voluntary guidelines from the Department of Labor. lion to the nation's shipping costs each year. POLLUTION regulations are under review at various BABY BELLS will get relief from discounts they are re- agencies and are likely to see some streamlining to quired to give new competitors that use their net- speed airport and highway construction and shorten works. The Federal Communications Commission is the time it takes to make decisions on the use of fed- going to phase out the discounts as markets become eral lands for grazing livestock and other purposes. more competitive. A recent easing of EPA rules makes it possible for the operators of power plants, refineries and factories OVERTIME PAY rules will be revised in 2004. The De- to repair and overhaul equipment without being sub- partment of Labor will make managers earning$425 ject to the same clean air reviews required for new a week or less eligible for overtime. That's up from a plant construction. That saves them from having to cutoff of$155 a week. But some workers making spend millions of dollars on new pollution control more than $65,000 a year or with only occasional su- equipment for the parts of their facilities that are not pervisory duties will lose overtime eligibility. being renovated. But states face a 2010 deadline set by federal reg- UNSOLICITED E-MAIL is set to be slammed by Congress, ulations to reduce smog and soot in the air. State and which will prohibit deceptive practices by e-mailers. local governments are having to implement tougher, But don't look for a national"do not spam"list. Regu- more-costly cleanup rules. lators say that such a list would be impractical. Diesel fuel will have to contain less sulfur, and nonroad engines will be subject to phased-in pollu- FOOD SAFETY regulations will establish a livestock- tion rules aimed at cutting emissions. The regulations tracking system to quickly stop the spread of disease affect tractors, generators, pumps and the like. from contaminated meat. WHAT'S AHEAD FOR 2004 I 11 6 U.S. Population Diversity increases as our population continues to grow Demographic changes shape consumer mar- kets through gradual shifts in the age, racial and ethnic makeup of our population. Each change brings opportunities and pitfalls for business. What is good for some businesses might have a negative effect on the profits of others. A product or service aimed at a particular group can expect growth A 4,„:„,...: . ,.- y ,. rt if that group expands or find itself in trouble if the group contracts. Focusing on the Future ;,. , A' �,.• Knowing about population trends and what they `" "'" mean for you and your business will help prepare you jt ` ; P h for changes in the years to come. It is the basis for sound planning and is often the P g li aj - key ingredient in developing products, crafting mar- keting strategies and setting goals. C . d1 Continuing growth in the U.S. population is as- °" J cured for the near future, although the rate of growth ll is slowing somewhat. it' BY 2015, 40 MILLION MORE AMERICANS are going to need shelter, food,health care, education, transporta- tion and more. Roughly 3.5 million people a year will be added, raising total U.S. population from 293 mil- _ lion in 2003 to 315 million in 2010 and 333 million in 2015. most 24 million in 2015. Here's an overview of what to expect based on census data and projections by NPA Data Services of SCHOOL-AGE CHILDREN—those between five and 19— Arlington,Va. will also increase by 3 million, rising from 63 million in 2004 to 66 million in 2015. Shifting Age Groups Expect major changes among age groups over the YOUNG EARNERS AND CONSUMERS-20-34—will in- next decade. crease by 8 million by 2015, reaching nearly 70 mil- The biggest changes will come as baby boomers lion. Those in the youngest years of this age group —people born between 1946 and 1964—move into are going to be attending college either full- or part- ' and through middle time. age and the oldest AGING POPULATION reach senior citizen 15% EARLY SAVERS AND PRIME SPENDERS-35-54—are status. 14% headed for modest gains. They constitute the bulk of 13% the baby boomers, and their numbers are going to INFANTS AND 12% r rise by about 700,000 to just under 87 million in 2015. PRE-SCHOOLERS— 11% %ot Total Population children up to 4 years —Seniors(age 504., YOUNG EMPTY-NESTERS—those who are 55 to 64—will 10% —Empty Nesters(age 5569) old—are going to in- be far more numerous. Their numbers will increase crease from about 20 9 2004 2007 2010 2013 2016 2019 by more than 12 million and will total nearly 41 mil- . million in 2004 to al- source:NPA Oats Services lion in 2015. 12 I The Kiplinger Letter • KiplingerForecasts.com SENIORS—those 65 and over—will increase by nearly about$10,000 above the median for non-Hispanic 10 million, numbering 46 million by 2015. Gains in whites,$22,000 above Hispanics and about 524,000 this group are going to be even higher in the follow- above blacks. Keep in mind that Asian and Hispanic ing decade. households often have more workers per household, which skews the numbers somewhat. A Changing Racial and Ethnic Mix The nation's racial and ethnic makeup is also going Growing Through Immigration to change significantly in years to come. Immigration—both legal and illegal—continues to be a major source of population growth for the U.S. For- WHITES as a share of total popula- eign-born residents make up tion will decline from about 74% The Census Bureau 12% of the nation's population. now to about 65% by 2015. p That percentage is likely to de- estimates that 860,000 dine, but there is no sign of a BLACKS will increase slightly, major drop in the number of from 13% to nearly 14%. legal immigrants newcomers. The Census Bureau esti- HISPANICS recently became the will come to the U.S. mates that 860,000 legal immi- nation's largest minority. The grants will come to the U.S. each U.S. adds more Hispanics daily each year from now year from now to 2012. They join than any other group, including an illegal immigration popula- non-Hispanic whites. In years to 2012. tion estimated at 9 million. ahead, more Hispanics are going The large inflow of immi- to be native born. Hispanics of all races now account grants is changing the age structure of U.S. popula- for 13.5% of the population. By 2015, the percentage tion in addition to increasing the total number of resi- will rise to about 15%. dents. While they make up 12% of total population, foreign born residents make up about 20% of the ASIANS are also increasing in numbers,largely U.S. population between the ages of 25 and 34 and through immigration. They make up 4.5% of the about 17% of those between ages 35 and 44. That's population now and should reach about 5% by 2015. because most immigrants come to the U.S. in their 20s and 30s. Educational attainment varies widely by ethnic group. Asian-Americans are the most educated, with NEW ARRIVALS CONCENTRATE in states and cities that about 44% of those 25 and older having a college de- already have large immigrant populations. Most live gree. For whites, the figure is 28%. For blacks, 17%, in California, New York,Texas and Florida and in and for Hispanics, 11%. major metropolitan areas such as Miami, San Francis- Household income reflects educational attain- co, Los Angeles, New York, Boston, Chicago, Detroit ment. Asians are tops at about$56,000 a year. That is and Philadelphia. Estimated U.S. Population, in Millions r= Ages 0-4 'F 5-19 20-34 35-54 55-64 65-plus Tole' 2004 20A", 20 W 62 5 61.2 , 86.2 , 28,0 3c.3 T r,, •*".; 2010 22.3 63.6 65.4 87.5 36.2 39.8 314.7 4, 2015 23.8 65.8 69.7 86.9 40.7 '46.6 - 332.8 2020 24.9 70.7 71.1 88.2 .swRe.NPao.n t WHAT'S AHEAD FOR 2004 I 13 Fewer Children, Rising Incomes The percentage of families :fj with children age 18 and uric' - is declining, from 56% in 197u ' tfr to about 44% now and 41% b} 2010. By 2010, 46 million fami- a� lies will have no children at • 412.t 1 ' home, up from 35 million now sj1 HOUSEHOLD SIZE dipped to 4. 3 under three people in the earl: mai 1970s. It now averages 2.6 and fliL175r3:t.lx.lj9 as as ,., r � , ?nr is likely to stay at that level for m w a decade or so. "r <" INCOME is heading up modest- ly, on average, after inflation. TOP COUNTRIES OF ORIGIN ARE CHANGING. Although So is the number of two-income households. Average Mexico has been the main source of new immigrants household income, which was $76,700 in 2002, is ex- during the past 20 years and is likely to remain so, pected to be $89,400 by 2010 and $106,000 by 2030. Asian countries—China, the Philippines and Viet- nam—have replaced western Europe and Canada as Moving West and South the other leading sources of foreign-born residents. Population growth continues to be strongest in the South and West, a trend that has been occurring for More Household Formations decades. California,Texas and Florida can expect to The number of new households in the U.S. will grow add the most people from now to 2010—nearly 10 about 1.3% annually in the years just ahead, reflect- million total. ing births in the 1980s. The pace of household formations is increasing as SHIFTS IN POLITICAL POWER reflect the changes in children of the baby boomers—the echo-boomers— population. The South and West continue to gain leave home to set up their own households. seats in the House of Representatives at the expense of the Northeast and Midwest. 7.8 MILLION NEW HOUSEHOLDS are going to be formed In addition to the big three—California,Texas from 2004 to 2010, according to estimates from the and Florida—other fast-growing states likely to gain National Association of Home Builders. The result is House seats in 2010 and/or 2020 are Arizona, Neva- more people needing a place to buy or rent plus pur- da, Colorado, Georgia and North and South Carolins chasing furniture, appliances and other household States likely to lose include New York, Pennsylvania, goods. By 2010, the nation will have nearly 120 mil- Ohio, Michigan, Indiana and Illinois. lion households. A GLOBAL PERSPECTIVE: The U.S. constitutes less that SINGLES make up a larger share of the population 5% of the world's population. Even as it grows, the today, including divorced people, people choosing not U.S. population will decline as a percentage of world to marry or to delay marriage, single-parent families, population. About 98% of the rise in world popula- widows and widowers and singles who live together as tion in the next 25 years will occur in less developed roommates or otherwise. countries in Africa, Asia and Latin America. Immigration will make the U.S. one of the few dt AND THERE ARE MORE BLENDED FAMILIES, mostly di- veloped countries to add population between now vorced and remarried parents,often living with chil- and 2025. Barring a major influx of immigrants, Japa dren and stepchildren in the same household. and most of Europe will lose population. 1.4 I The Kiplinger Letter • KiplingerForecasts.com 7 Changing Consumer Markets Catering to a more demanding marketplace Akey word for successful marketers in the years And consumers are insisting on value along with ahead is "convenience." It is very important quality in products and services. That means stiffer that businesses and investors keep it firmly in competition among providers of goods and services. mind when mapping a course for the future. Not doing so could prove costly. Anticipating Population Trends Like waves nearing shore, population trends can be The Growing Need for Convenience spotted long before they crest. They play a major role Demographic trends and changing lifestyles are put- in shaping the future of markets. ting a premium on consumers' time. So people want and need convenience to get the most out of their BABY BOOMERS remain a dominant demographic crowded schedules. Two force. The oldest groups whose numbers boomers are entering are set to rise in years to their late 50s and the come add to the impor- youngest turn 40 in tance of convenience. 2004. This demographic TWO-EARNER HOUSE- ,r y foreshadows a big in- HOLDS are one reason p- 4' t ; crease in empty-nesters convenience is seen as a fi' J —people age 55 to 64 necessity for an increas- whose children have left ing number of Ameri- - home. By 2010,about cans. They are willing , one out of eight Ameri- and able to spend more cans will be in this of their incomes on group. They will have products and services money to invest and that save time on chores spend. Members of such as cooking, shop- this age group are in ping, cleaning and their peak earning years, housework. They'll pay and with the costs of to have more time to spend on recreation and raising children behind them. relaxation. A major objective for them is saving and investing for retirement. Many buy second homes in places to SINGLE-PARENT FAMILIES have become a larger part of which they plan to retire. They'll purchase insurance the population. For them also, convenience is often a for nursing home and home care, and they'll pressure necessity. They don't have time to earn a living, care the government to provide more medical benefits. for children and keep house in the traditional way. SENIORS—those 65 and over—are another rapidly Marketing to Smarter Shoppers growing group. There'll be about 40 million by 2010, Tomorrow's consumers are going to be better-in- nearly 4 million more than now. And after 2010, their formed shoppers. Fewer will buy brands out of habit, numbers are going to rise even faster, reaching about and they'll do more market research. The Internet is 54 million by 2020. sure to be one of their main tools, making it much Many seniors today are well off financially,al- easier to compare prices and features and check with though poverty still affects a minority. A big segment consumer groups on product satisfaction. of the well-off group bought homes in the 1950s and Consumers have more choices in how they buy 1960s and are able to tap great appreciation in the —from catalogs, the Internet and at traditional stores. value of their property. Often, senior households Major marketers will want an outlet in each venue. have two pensions plus Social Security and, more and WHAT'S AHEAD FOR 2004 I is more, sizable individual retirement accounts,401(k) Tapping a More Diverse Market plans and portfolios. Another major force reshaping consumer markets is Thus, many seniors have the money to pay for the nation's surging ethnic and racial diversity. fun and comfort. That will spark more spending on HISPANICS AND ASIANS lead the trend. Hispanics al- leisure activities of all kinds, from hobbies and enter- ready are the nation's largest minority group, surpass- tainment to travel and books. Thanks to improved ing blacks. Hispanics will account for more than 45% medical care, many seniors stay physically active for of our population growth from now to 2010. And by years longer than their parents did. Average life ex- 2020, the Hispanic population is likely to double. pectancy in the U.S. continues to expand and is now Our Asian population is expected to more than at a record high of just over 77 years. double in the next 20 years. In actual numbers,the Seniors will also spend on necessities such as gain for Asians is going to be much less than that for health care, assisted living and nursing homes. And Hispanics because it starts from a much lower base. on services they used to provide for themselves, such as lawn In a few years, MARKETING STRATEGIES should care, minor auto maintenance be adjusted to take into account and household repairs. demand will increase these growing ethnic communi- ties. The Echo Boomers for children's clothes, The most successful adver- By 2010, there'll be about 4 mil- tising campaigns will be tailored lion more people aged 18-24 toys, day care and to address their desires. Busi- than there are now—the so- nesses will profit from carefully called echo boomers.As a group, all the many other researching ethnic tastes and they are well educated and tech preferences and then catering to savvy, with good prospects for things that infants them. high earnings. Future efforts are sure to in- Echo boomers are at the and toddlers require. dude more-targeted marketing, prime age for buying cars and notably in communities rich home electronics. Many travel extensively.As they with newly arrived immigrants. Special appeals to push into their late 20s, they'll buy starter homes and Hispanics,Asians and other niche markets will be- - furnishings. come more subtle over time as ethnic identities fade with succeeding generations. MORE MARRIAGES are coming over the next 10 to 15 years as the population of 20-to 34-year-olds increas- New Households es. Bridal shops, florists,photographers and other Changes in U.S.households also affect markets, from wedding-related businesses can count on more cus- their number to their size and makeup. All affect fu- tomers. ture consumer demands and preferences. AND MORE BABIES. The number of births in the U.S. SMALLER HOUSEHOLDS are a trend that marketers was declining until 2000. Now it is on the rise again must take into account for the future. More house- and by 2008, the number of babies born is going to holds will be composed of singles living alone,widows surpass the old record of 4.3 million during the peak and widowers and couples with no children.They of the baby boom. want the convenience of smaller packages for every- By 2020,births are likely to reach 5 million per thing from food for one to cleaning supplies for easier year, thanks to the echo boomers and immigrants storage in tight spaces. who came to the U.S. as children in the 1980s. Household formations will grow slowly in the So despite the aging of the population in general, next decade or so as a result of the fairly stable num- look for the baby-related market to grow again—a fact ber of births in the 1980s. Close to 10 million house- that is often missed. In a few years, demand will in- holds are likely to be added by 2010—meaning more crease for children's clothes, toys,day care and all the people needing a place to live, furniture,appliances many other things that infants and toddlers require. and all that goes with having separate space. 16 I The Kiplinger Letter • KiplingerForecasts.com 8 Career Prospects Opportunities improve for managers and tech-savvy workers anv exciting career opportunities are going NEW KINDS OF WORK are emerging as technology im- to open up in the Years ahead, but workers proves, just as computers and the Internet spawned will need skills applicable to expanding jobs that did not exist just a few years ago, including fields. The days are gone when workers with limited webmasters,cyberlibrarians, network and voice sys- training could step into a job with regular pay raises, tems engineers, just-in-time supply-chain managers, periodic promotions and a pension at retirement. automation engineers and warehouse technicians. A New Work Environment Fields of Opportunity Future job secuirs sill be tied ic the employee's Although many occupations can expect growth in the skills and performance plus his or her ability to adapt years just ahead, some are likely to have stronger gains than others. Here is the outlook for some of the top performers. rift& MANAGERS of all types are going to be in demand, both specialists and generalists who are good at corn- municating, motivating coworkers and building coop- , erative teams. aNNISIt Global managers will be especially valued. There'll be great opportunities for all kinds of techni- cians and professionals who can work comfortably in languages such as Spanish, Chinese and Japanese. Being multilingual will be a major asset. Crisis managers and security specialists are ex- pected to be in JOBS RETURNING AT LAST to new technology and procedures. greater demand as More workers are likely to think of themselves as j governments and independent contractors, even when they are not. ° businesses pay more They will be more likely than workers in previous -200 attention to poten- generations to change employees and professions. A00 - - -- tial threats to their The rise of 401(k)s and similar portable savings plans _ __ tar ag i infrastructure and in place of traditional pension plans will give workers °"`"°""""`) information systems. greater mobility. Employee loyalty is going to hinge more and i000 2001 2002 2003 - SCIENTISTS AND more on what the employer can offer in the way of �°""e5 a`S'"'D""g" ENGINEERS are sure opportunities for growth, not just pay and benefits. to do very well in the global economy. Biochemists Increasingly, Americans are competing in a global and molecular biologists are going to find plenty of labor market affecting not just workers in manufac- work in research and development in the growing turing, but professionals as well. biotechnology industry. Electrical engineers and computer scientists can THE IMPACT OF TECHNOLOGY is being felt by all work- count on lots of openings in microelectronics, nano- ers—those who adjust, learn new skills and prosper technology and computer sciences. AND those who don't. The latter will have a hard Environmental engineers will be needed to deal time earning a good wage. with ever more-stringent regulation of air and water For every type of low- or moderate-skill position pollution. that is reduced by technology, more and better jobs Civil engineers are also likely to see increased de- will be created in design, manufacture, marketing and mand for improving and replacing aging infrastruc- distribution using advanced technology. ture in the U.S. and for working on new projects in WHAT'S AHEAD FOR 2004 117 developing countries such as China, India and Brazil. environmental regulation and real estate. Increasing prosperity and more-crowded communities are bounc COMPUTER-SAVVY WORKERS will stay in demand. Com- to spawn disputes and raise issues that often require puters are certain to underpin many high-paying jobs legal counsel to help settle. That means an expanding in coming years in all kinds of industries, from servic- market for paralegals. Also for arbitrators who can es and retailing to manufacturing. There'll be steady handle disputes over everything from broker services demand for systems analysts, programmers, database to auto repairs. administrators and systems security experts. Web site • designers and technicians who know computer TEACHERS and others involved in education confront equipment will be needed by virtually every business. expanding opportunities as the nation's under-17 population increases. Demand is going to be especial- HEALTH CARE PROFESSIONALS can look forward to ris- ly high for teachers in math, science, special educa- ing demand as the nation's population gains more tion and foreign languages. Plus for those who can older citizens. In fact, one in six new jobs from now teach English to new immigrants. There'll also be a through mid-decade will be in health care. rise in demand for child day care service providers. Family practice doctors, internists, geriatric spe- cialists, pharmacists and nurses REPAIR SPECIALISTS, especially all are in short supply. Plus Good jobs those who are good at trou- physical therapists, physician as- bleshooting, correctly diagnosing sistants and home health care wont be automatic. a problem and getting it fixed providers. the first time, have many options Alternative health and med- They II require more for good-paying jobs. icine practitioners can also ex- Mechanics capable of repair- pect to see greater employment training and retraining ing increasingly sophisticated opportunities, as can nutrition- vehicles will be in high demand. ists, personal trainers and than good jobs Heating and air-conditioning health club workers. specialists will be needed to serv- in the past. ice state-of-the-art controls in FINANCIAL SPECIALISTS, includ- modern commercial and Indus- ' ing accountants, financial analysts and financial plan- trial buildings. ners, are among those who will enjoy an expanding Plumbers, carpenters, masons and electricians PENSIONS OUT,401(k)s IN job market in the will be sought after to satisfy the needs of builders 500 years ahead. One and renovators in the coming decade. .na o&ins l.n.In Plan. • reason for the Many other jobs will be in high demand in the 400 —9010 Plan growth is the big years ahead,including some in specialties that do not (in thousands) g g Y g P 300 '• shift from traditional now exist—totally new positions spawned by techni- pension plans to say- cal and managerial innovations. 200 ings plans such as 100 401(k)s, in which Greater Education and Training • 0 ------• workers control how Good jobs won't be automatic. Getting them and 1984 1988 1992 1996 2000 2004 their retirement nest keeping them will require more training and retrain- Sources: abor Deol.,wWinger eggs are invested. ing than good jobs in the past. And training won't come cheap. The cost of college continues to in- EMPLOYEE BENEFITS MANAGEMENT SPECIALISTS are in crease, with tax-favored education savings plans, growing demand and need additional training and scholarships and federal loan programs providing only skills to handle increasingly complex benefit pro- marginal relief. grams and government regulations. New graduates, especially those with advanced degrees,can expect to be saddled with heavy debts. LEGAL SPECIALISTS face a strong job market in fields Nevertheless, the earnings gap between them and such as estate planning and taxes,employee benefits, those without a degree will grow wider. 18 I The Kiplinger Letter • KiplingerForecasts.com 9 Labor Trends Finding and keeping good workers becomes more challenging he U.S. job market is ,.ng to tighten in 2004 MORE OUTSOURCING to firms doing specific jobs is after several years of job 'osses. Once the coming for accounting, payroll, mailing and delivery, economy is back in full ss ing, businesses are food service and other functions. It's a way to let expected to hire about 150,000 '.corkers per month. businesses stick to their core missions and allows top Longer term, the labor market .k ill become tighter as managers to concentrate on what their companies baby boomers start to retire in large numbers. do best. Outsourcing also involves moving more jobs over- Planning for Demographic Shifts ;was, including software design, data processing, There'll be slower growth _loiiiir force in i.e.in i lot-- tuml, accounting and le_ services in addition just ahead. The number of%V.:7;c_- between ages 25 to service call centers and manufacturing. and 44 will actually shrink. Increases in younger and i MORE TEMPS AND PART-TIMERS older age groups are going are going to be part of the solu- to be modest. And almost tion. They give managers 20% of those who join the greater flexibility in letting pay- workforce from now to 2012 rolls shrink in slack times and will be immigrants, mostly expand quickly when orders Hispanics and Asians. climb. LABOR SHORTAGES are sure Designing Benefits to be a challenge for many Employers will have to recog- businesses. In five years, nize the growing conflict be- workers in the 78-million- tween work and personal life. person baby-boom genera- Finding a balance is one of the tion—those born between biggest issues facing workers 1946 and 1964—will begin today. to retire with retirements peaking in 2015. The 45 mil- TAILOR YOUR BENEFITS to meet lion born into the following the most common concerns of generation won't be enough your workforce. Study the needs to replace them, much less of your employees in general, fill some 22 million white- then design the package that collar jobs expected to be will appeal to the greatest num- . . . . . . .. . created by 2013. ber. Take into account average Industries that can "- age and lifestyle. count on finding it hard to replace experienced workers HEALTH CARE is a basic but in- include health care, phar- creasingly expensive benefit, maceuticals,aerospace, utilities and many old-line particularly for small businesses. Good workers manufacturing firms. Plus those employing computer won't stay with employers that don't offer some software engineers, preschool and elementary school medical coverage. Successful firms have to provide teachers and supervisors in management, sales and fi- coverage, even if it means shifting more of the cost nancial services. to their employees in the form of higher deductibles and copayments. Companies that offer coverage Meeting Labor Needs that's least burdensome to workers have a leg up Look for changes in how companies meet their em- on the competition in luring and keeping good ployment requirements. employees. WHAT'S AHEAD FOR 2004 I 19 A RETIREMENT PLAN is another basic. A traditional de- Managing Time Off fined-benefit pension is a great retention tool but is Vacations and other days off can be handled in many becoming too expensive for many employers. Most different ways. Some companies are choosing to allot are shifting to cheaper defined-contribution plans their days off in one lump, making no distinction as such as 401(k)s. Others transform pensions into hy- to how much is vacation and how much is sick leave. brids,known as cash-balance plans, although such Most of them reduce the combined amount of time. switchovers can put longtime employees at a disad- But some keep it the same.This type of plan helps vantage. So many companies let those workers stick reduce abuse of sick leave and rewards conscientious with their old plans. workers. Other companies allow employees to opt for Going Beyond Basics extra paid leave in exchange for cutting back on other Although health care and retirement programs are benefits, such as reduced life insurance policies. fundamentals, good workers seeking stability are look- ing for more. Other Options Employers bidding for workers in a tight labor market A SAFE, PLEASANT WORKPLACE is high on their list of can get the edge by offering an array of little things expectations. It often means as that make life easier for time- much as good pay, especially if A traditional pressed employees, often at lit- ways to balance work and home tie cost. responsibilities are included. defined-benefit Examples include buying Flexible work schedules are a club memberships and offering hit with more workers, in the pension is a great group discounts from mer- form of flextime, a compressed chants,such as insurance and fi- four-day workweek, job sharing retention tool but nancial planning services, free or telecommuting.The key is to beverages and free Internet ac- help employees cope with per- is becoming too cess at home for personal as sonal demands and do a good job. well as business use. expensive for many Education and training pro- CAFETERIA PLANS can be a good grams build loyalty and improve • way to please the largest number employers. productivity. Community col- of employees. Workers get to leges can be a great resource. pick and choose from a buffet of benefits, provided More of them are offering courses tailored to a firm's the total cost of the benefits they select doesn't ex- needs. Another option is scholarship referral services. ceed a specific maximum set by the company. Stock options may have lost some of their allure, Such plans can help satisfy both younger and but bonuses have not. During competitive times older workers. For the young, membership in a health when profits are slim,many firms use cash bonuses in or fitness center may mean more than contributions lieu of pay raises to reward and retain top talent. toward retirement. Older workers might skip other Show employees all that the company does for benefits to get a health insurance plan that has lower them. Some businesses provide employees with an copayments and deductibles. annual statement listing all fringe benefits and show- . Helping with day care arrangements pays off with ing the total cost of compensation. It's an especially young parents. Some large firms have on-site day care effective way for firms with generous fringe packages facilities. Smalls are teaming up with other smalls to to show they provide more than paychecks. share costs. The federal government started to help in 2002 with a tax credit of up to $150,000 per year Remembering the Intangibles for firms operating a center. Most workers are not driven by money and benefits Other workers appreciate help with elder care— alone. They want to feel connected to the place for example, offering baby boomers the option of where they work and to be respected. Finding sincere purchasing long-term-care insurance for their aging ways to say"thank you"for a good job goes a long way parents and also for themselves. toward building a loyal and productive workforce. 20 I The Kiplinger Letter • KiplingerForecasts.com VIEWPOINT Associations Debate Water Tax Issue here is a debate boiling on how to help cities paw. A water tax is not a new idea. Other countries and for the cost of funding drinking water and waste- some regions have such a tax. And there's no doubt a water infrastructure improvements. One suggestion water-use tax could raise a significant amount of rhar's causing a rift in the industry is the concept of a money By some estimates. Americans use 25 trillion federal water tax. gallons of water a year. Even at S1 per thousand gal- lons,such a tax could generate tar more than the esti- W ile everyone agrees that there is a huge need for additional Funding for water infrastructure, there is lit- mated "gaps" that exist in current funding for water tle agreement on how that need should be filled. infrastructure. Members of the Water Sounds like a reasonable idea, right? Of course, the Infrastructure Network have money would sink into a federal bureaucracy and would called for the establishment of be a nightmare to administer. And the money filtering a federal trust fund to provide back to the individual utilities would no doubt come with • an automatic appropriation strings attached—in the form of onerous federal rules. for water infrastructure, but again, how to fund that And what about drinking water? I don't know that appropriation is unclear. the same arguments in support of a wastewater tax apply for drinking water. Typically, drinking water is The Association of used and financed locally. Yet, in many ways, the need Metropolitan Water Agencies is just as great has suggested that some sort of tax on water might be the answer. In the last few Drinking water associations, however, are very months the association has released two papers that much opposed to a tax on drinking water. The discuss funding mechanisms for wastewater infrastruc- American Water Works Association, the Association of ture. Metropolitan Water Agencies and the National Rural Water Association have all come out against such a tax. AMSA argues that wastewater treatment systems have an impact far beyond the borders of a specific city or In fact, the issue threatens to tear apart the Water town, especially in this age of watershed management. Infrastructure Network. As an example,the association talks about a generic city Although I see the need, and understand AMSA's upstream from a sensitive estuary and public beach. arguments,I tend to side with the drinking water folks. With no wastewater treatment, the city pays noth- No tax is a good tax, in my book. And one thing is ing, but pollution could destroy the ecosystem and guaranteed, if you institute a tax to solve a problem, drive people away from the beaches. On the other the problem may go away but the tax never will! hand, properly treating the wastewater is a financial burden for the city and its residents. Is it fair to make the city's residents pay the full cost of preserving an ecosystem that other, non-paying cit- izens enjoy? ANI compares wastewater — and its associated watershed management—to highways,transit systems, /Eifel giesaL, airports, and inland waterways, all of which are sup- ported by federal tax dollars. James Laughlin, Editor • Page 1 of 2 Bryan Adams From: "Sue Guenther"<sueg @mmua.org> To: <bryada @nsatel.net> Sent Friday, October 31, 2003 3:39 PM Subject: Jack's Memo MMUA Regional Meetings MMUA Members Jack Kegel, MMUA Executive Director :t: MMUA Regional Meetings 2 pages October 23, 2003 II and winter, MMUA will be holding meetings throughout the state to provide information to mbership concerning developments in reliability, legislation and safety. The agenda is as 7:00 PM Legislative Activities • 2003 Legislative Session • 2004 Legislative Session • Federal Energy Bill 7:30 PM Reliability & Regulatory Issues - Regulatory Activities Reliability Software 8:00 PM MMUA Activities • Safety & Training • Other Issues 8:30 PM Adjournment hould I: It is important that not only utility management attend but also utility commission members, city council members and city officials who have an interest in municipal operations. It's free. We just ask that you call the MMUA office and let us know how many plan to attend. 11/3/03 Page 2 of 2 7:00 to 8:30 PM at each location with exception for Bagley, time will be 4:00 to 5:30 PM following the NMPA meeting. , MMUA Regional Meetings ons: November 5 - Hibbing (Memorial Bldg., 400 E. 23rd Street) November 6 - Brainerd (City Council Chambers, 501 Laurel Avenue) December 9 - Granite Falls (Kilowatt Community Ctr, 600 Kilowatt Drive) December 11 - New Ulm (New Ulm Civic Center, 1212 No. Franklin) December 17 - Bagley (Fireside Grill & Patio, Hwy. #2 West) December 18 - Detroit Lakes (Council Chambers, 1025 Roosevelt Ave.) January 7 - Fairmont (Council Chambers, 100 Downtown Plaza) January 8 - Rochester (Utility Office Community Rm, 4000 E. River Rd) January 14 - Worthington (Noble County Gov't Center, Farmers Rm., 315 10th St.) January 15 - Hutchinson (Utility Office, 225 Michigan Street) January 20 - Alexandria (Utility Office, 316 Fillmore Street) January 22 - Elk River (Environmental Learning Center, Landfill Gas Power Plant, 22596 Hwy. 169, Elk River) ration 'ne: October 31 for November meetings. November 21 for all other meetings. .er: Call 1 .800.422.01 19 or 763-551 -1230 and ask for Sue or Bonnie. We will take the names of anyone planning to attend. Any questions or concerns please contact Bonnie. Sue Guenther Executive Assistant 11/3/03