...The key fact about California's crisis is that it peaked not in summer,
when air-conditioners gobble electricity, but in the cooler months. Supplies
should have been ample. Instead, there were severe shortages, because for some
reason a third of the state's capacity stayed off line.
The power companies say that generators were shut down for maintenance after
being worked hard the previous summer. But the mysterious shutdowns went on for
about six months, and continued despite sky- high prices for electricity. Surely
there was time and incentive enough to carry out some expedited repairs.
A more likely explanation — widely accepted by energy economists — is that
power companies found that they could make more money by shutting down some of
their plants, and hence creating shortages that sent prices into the
stratosphere, than they could by actually meeting demand.
If conventional wisdom was right, the crisis should have gotten even worse
last summer. Instead, electricity suddenly became abundant, and prices plunged.
Frank Wolak, the Stanford professor who heads California's electricity market
surveillance committee, has explained why: by June, thanks in part to energetic
conservation, most of the state's power needs were being supplied under those
long-term contracts. The spot market, which was so easy to manipulate, had
become relatively small; so the incentive for power companies to drive up spot
prices by taking generators off line had largely vanished. Lo and behold, idle
capacity came back on line, and the crisis was over...
...But at least the post-Enron change in climate makes it possible to revisit
California's crisis, a crisis that should have provoked a rethinking of our
economic ideology, before the ideologues flush it down the memory hole.
