SYNOPSIS: Overinvestment in fun sounding tech stocks has led to underinvestment in vital areas.

At this time last year a share in WebMD — formerly Healtheon, the "new new thing" of Michael Lewis's best-selling book about Silicon Valley — was worth about as much as 1.5 megawatt-hours of wholesale California electricity. But since then tech stocks have plunged, while power shortages have driven prices in California's electricity market into the stratosphere. WebMD has actually weathered the dot-com crash better than many other companies, but right now you would need to sell about 75 shares to buy a megawatt-hour.

This wasn't supposed to happen. When The Wall Street Journal surveyed the economy a year ago, it brushed aside talk of physical limits as hopelessly old-fashioned, approvingly quoting an analyst who declared: "In a knowledge-based economy, there are no constraints to growth." The new millennium had, it seemed, ushered in an economic Age of Aquarius. But now the wizards of Silicon Valley sit there shivering (they have turned their thermostats down to conserve power) and talk about electricity g-g-generation. In other words, 2000 was the year that virtual reality — companies without physical assets, without profits and sometimes without products — lived down to the expectations of the skeptics. And it was the year that the real reality of oil supplies and power grids took its revenge.

Alas, it's no accident that the era of new-economy exuberance has been followed by shortages of old-economy staples like electricity.

California's power crisis is first and foremost a crisis of underinvestment — a booming state economy undone because nobody built the power plants and gas pipelines it needed. And at least part of the reason for that underinvestment was the excessive enthusiasm of the financial markets for all things tech: when digital businesses are valued at hundreds of times earnings, while utilities have multiples more like 10, who's going to put money into boring things like generators and transmission grids?

Phil Verleger, my favorite energy guru, believes that we have only begun to pay the price for the exaltation of clicks and bytes over bricks and mortar. For example, he argues that an important reason for the broader global energy problems of the past year, which sent prices of oil and natural gas as well as electricity soaring, was the neglect of exploration and extraction in favor of sexy new- economy ventures. Actually, he puts it even more strongly: "The United States has proceeded like a third world country. Our firms and consumers have purchased the latest technology gimmicks without bothering to build the necessary infrastructure." (If you've ever been in a developing-country hotel or office building during a power outage, you know what he's talking about.) If he's right, the two great nasty economic surprises of 2000, the tech bust and the energy crisis, are two sides of the same coin: both reflect the fallout from an infatuation with the new that made us unmindful of the old.

Of course, there's more to it than that. California's power crisis isn't just about misguided investors, too excited by the new economy to maintain the old infrastructure. It's also a tale of misguided policy — of an ill- conceived deregulation plan gone very wrong.

One indication of how badly deregulation has misfired is this: while the error of the tech sector — overestimating the demand for its services — was severely punished, the error of the California power companies — underestimating the demand for their product — has been richly rewarded. You don't have to be a raving populist to think that there is something wrong with that, and you don't have to be a conspiracy theorist to wonder whether there are some perverse incentives when an industry dominated by a few large players finds it hugely profitable not to invest.

But more on that another time. For now, let me just point out that deregulation, too, was based on the belief that we had transcended the old limitations — in the age of the Internet we no longer had to worry about the generation and transmission bottlenecks that had always prevented a workable free market in electricity, that had made regulation necessary to prevent abuses of market power. Now California has learned to its cost — $8 billion and counting — that those old limitations still apply.

What a difference a year makes. Last December everyone who mattered believed in magic — the magic of technology, the magic of the free market. Now it's back to dreary reality. Happy New Year.

Originally published in The New York Times, 12.31.00