...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.
