Global Policy Forum

By Paul Krugman

"You are one of only a handful of major players selling wholesale electricity. Surely the thought has to occur to you: what would happen to prices if one of my plants just happened to go off line? And when companies act on that thought . . . well, you get the picture."

I wrote that in March 2001, when the California electricity crisis was at its height. Even then the experts I talked to — economists who followed the situation closely, and kept an open mind — believed that energy companies were deliberately creating shortages. But only in the last few weeks, with a series of damning reports and judgments, has conventional wisdom grudgingly accepted the obvious.

And that's the real mystery of the California crisis: how could a $30 billion robbery take place in broad daylight?

True, it was always hard to pin down specific acts of market manipulation. Stanford's Frank Wolak likens energy companies to an employee who keeps calling in sick: the pattern is clear, but unless you catch him faking an ailment, it's hard to prove that he is malingering.

But the evidence is starting to pile up. First there were those Enron memos. Then the California Public Utilities Commission determined that most of the blackouts that afflicted California between November 2000 and May 2001 took place not because generating capacity was inadequate, but because the major power companies kept much of their capacity off line. Most recently, a judge for the Federal Energy Regulatory Commission has ruled that El Paso Corporation used its control over a key pipeline to create an artificial natural gas shortage.

But why did energy companies think they could get away with it?

One answer might be that the apparent malefactors are very big contributors to the Republican Party. Some analysts have suggested that energy companies felt free to manipulate markets because they believed they had bought protection from federal regulation — the conspiracy-minded point out that severe power shortages began just after the 2000 election, and ended when Democrats gained control of the Senate.

Federal regulators certainly seemed determined to see and hear no evil, and above all not to reveal evidence of evil to state officials. A previous FERC ruling on El Paso was, in the view of many observers, a whitewash. In another case, AES/Williams was accused of shutting down generating units, forcing the power system to buy power at vastly higher prices from other units of the same company. In April 2001, FERC and Williams reached a settlement in which the company repaid the extra profits, but paid no penalty — and FERC sealed the evidence. Last week CBS News reported that "federal regulators have power control room audiotapes that prove traders from Williams Energy called plant operators and told them to turn off the juice. The government sealed the tapes in a secret settlement" — the same settlement? — "and still refuses to release them."

If that's true, FERC caught at least one power company red-handed, in the middle of the crisis, at a time when state officials were begging the agency to take action — and then suppressed the evidence. Yet this story has received little national play. For some reason it has never been cool to talk about what was really happening in California. When the crisis was in full swing, most commentators clung to a story line that blamed meddlesome bureaucrats, not profiteering corporations. When the crisis came to an end, it suddenly became old news.

Maybe our national faith in free markets is so strong that people just don't want to talk about a case in which markets went spectacularly bad. But I'm still puzzled by the lack of attention, not just to the disaster, but to hints of a cover-up. After all, this was the most spectacular abuse of market power since the days of the robber barons — and the feds did nothing to stop it.

And if FERC was strangely ineffective during the California crisis, what can we expect from other agencies? Across the government, from the Interior Department and the Forest Service to the Environmental Protection Agency, former lobbyists for the regulated industries now hold key positions — and they show little inclination to make trouble for their once and future employers.

So we ignore California's experience at our peril. It's all too likely to be the shape of things to come.

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