Record low capacity utilization in electric sector inconsistent with “regulations kill jobs” mantra

The rate of capacity utilization in the electric utility sector dropped below 80 percent in 2011. This is the lowest level on record, with data going back to 1967, or nearly a half-century ago. The figure is far below the average utilization rate of 89 percent over this period.  (See figure below.)

The exceptional degree to which there is unused capacity in the electric utility industry (or the “electric power generation, transmission, and distribution” sector as defined by Federal Reserve Board data) is entirely at odds with the notion that new regulations finalized or proposed by the Environmental Protection Agency are holding back job growth. To the contrary, this trend is consistent with the theory that such regulations can lead to modest increases in employment, since the compliance costs they lead to would not compete with other investments by this sector.

If regulation was holding back investment in the utility sector, one would expect there to be high capacity utilization rates. Companies would be relying heavily on existing capacity rather than investing in new capacity because they would be deploying investments on regulatory compliance, or because they were fearful new regulations would undercut their return on new investments.

While the existence of large, unused capacity is thus inconsistent with the notion that regulations are thwarting job creation in the electric utility industry, it is completely consistent with the notion that the lack of stronger demand is holding back increased investments in facilities or more hiring. Why make such investments when current resources are far from being fully utilized? The data suggest that until demand picks up more rapidly and cuts into excess supply, accelerated investments will not occur.

The broad attacks on regulation advanced over the past year have consistently featured the supposedly dire consequence of EPA regulations on the utility industry. The capacity utilization data for all of 2011 provide additional evidence that these attacks have been misplaced. Instead, the data are consistent with earlier EPI work finding that lack of demand, not regulations or regulatory uncertainty, underlie the modest pace of job growth and that now might be an especially timely moment to advance new regulations.

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  • Dave

    Could the drop in capacity utilization also be the result of a drop in demand for electricity due to the recession?  I see a corresponding slump that also occurs around the recession in the 80’s.