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Following Massachusetts and Ohio, Golden State Abandons Deregulation for Local Control with passage of Assembly Bill 117

by Paul Fenn

Communities in California won the right to take control of their energy supply on Tuesday when Governor Gray Davis signed Assembly Bill 117 (AB117), the California Community Choice Law, drafted by Local Power in 2000, passed and vetoed by Davis in 2001 and refiled this year, that allows any California community to choose an alternative electricity provider for both bulk power supply and related services such as energy efficiency, solar and other green energy technologies.

Passage of the legislation marks a dramatic shift in the national debate on energy deregulation. While the California Energy Crisis has created deep anxieties about electric deregulation, the United States electric industry has already been deregulated by over 20 state legislatures, and the issue of national deregulation remains active in Congress with aggressive new proposals to further cut back on federal regulation of the energy industry despite the Enron et. al .debacle, by eliminating Franklin Delano Roosevelt's Public Utilities Holding Company Act. As the states and Congress take a second hard look at deregulation, California itself is moving in a new direction, which rejects both monopoly and laissez faire for competition under local public (government) control.

Moreover, the new Community Choice law moves away from the free market extremism of the 1990s toward a new focus on community energy sustainability and security, and holds enormous promise for a dramatic reform of energy policy toward aggressive development renewable energy sources like solar and wind power in the United States.

The wages of energy are massive. Some observers have called deregulation of the electric industry one of the most significant political events of the last quarter century. Electricity is not just any industry. Economically, it is the largest industrial sector in America, comprising fully one third of the cash economy, dwarfing the airlines, telecommunications and other already deregulated industries with which it is often mistakenly compared, already involving bailouts besides which the then massive Savings and Loan bailouts of the 1980s pale in comparison.

Environmentally, the electric industry is the largest single cause of Global Warming, creating two thirds of the pollution behind America's urban childhood asthma epidemic, and two thirds of all radioactive waste. Socially, the electric industry is the very life support system of America, without which civil society would collapse into chaos. One might say, in consideration of its sheer size that deregulating the electric industry amounts to deregulating the economy itself; and that it should be no surprise that both the Great Stock Market Crash of 1929 and the Crash of 2002 both started with the conspicuous collapse of America's electricity industry under conditions of cowboy capitalism.

Next July when the Community Choice law becomes active, California cities will be given the authority to purchase electricity, not merely as government agencies but as whole communities using their local government to find alternative providers. In one sense a revival of 19th century municipal control over the power companies, a "Community Choice" law is elementally new in the fact that 21st century cities will award not permanent monopolies but short term six year contracts to alternative providers. What is more, it will award them not merely to power plant owners but integrated energy service companies through competitive bidding. The Community Choice bill, Assembly Bill 117 (Carole Migden SF), will not only buy power from the grid but require its contractors to install conservation technologies to reduce their communities' dependence on the transmission grid, build solar and other distributed generation. In short, they will contract out everything but distribution, meter reading and billing.

The City of San Francisco, which asked for this law in 1999, is now preparing to implement it alongside a plan sponsored by Board of Supervisors President Tom Ammiano to build by the world's largest urban solar power system under the voter-approved "solar bond" authority, Proposition H (which we also wrote for Ammiano). Together, Community Choice and "Community Power" will present not merely a promise but the funding to demonstrate that renewable energy resources can be cost-effectively developed on the same scale that coal and gas plants are developed, and are therefore a superior and available alternative to fossil and nuclear sources of power.

As the state of California moves forward with its own "municipal" bond sale in U.S. history the largest ever - to pay for yet another bailout in a series of multi-billion dollar bailouts since the passage of its 1996 electric industry deregulation law, passage of the Community Choice bill in California marks a major change of direction in U.S. policy towards its largest industrial sector: it marks an acknowledgement that local government authorities are needed to make the electric industry act competitively; it marks recognition that markets are, in fact, creatures of government, not some captive animal that would be liberated from it. It showed that local democratic control is needed to bring discipline to the market, not merely to deliver environmental benefits, but economic benefits and benefits to competition itself. It revealed the fallacy of the idea of a market as a discreet, disembodied nonpolitical activity: and the absolute necessity of developing new local democratic authorities to provide viable, sustainable and secure conditions for disciplined markets.

California's electric industry tried and failed to create a deregulated electricity market with America's first "British" style 1996 deregulation law, seeking to find their customers one-by-one. Enron executives believed in 1996 that they would sell branded Enron power to residents and businesses in much the same manner that Shell sells gasoline, taking customers from PG&E, Edison and Sempra. Soon after the market opened, they realized how mistaken a strategy this was. Just three months after the Golden State's market opened, now reviled Ken Lay announced his company had to abandon the effort to sign up enough residents and businesses to make it profitable. What so few critics of California's energy crisis acknowledge is that Enron et al got into high risk trading when they were forced into the state's spot markets by a law written by Edison and PG&E, not Enron. In particular, this law prohibited Community Choice, and with it the ability of alternative suppliers to compete for large regional markets.

Today, though bankrupt, PG&E remains a political untouchable in the state Legislature and Public Utilities Commission, where every effort is being made to put Humpty Dumpty back together again, as if the nation's largest monopoly were a good thing to reassemble after fleecing the state for at minimum $7 billion. The same formula applies to Edison in Los Angeles and Sempra in San Diego. While most politicians are now verbally harsh about the Traders and Merchant power companies, they see no irony in quietly propping up PG&E, Edison and Sempra, who wrote the dereg law, AB1890, in the first place.

Considering their actions, they deserve an equal if not harsher public ire. Using Northern California's money, PG&E formed an unregulated parent company in Bethesda, Maryland and "gave" it at least $7 billion to buy and build unregulated power plants all over the world. Do not be fooled; that is a lot of money. Edison, the champion of AB1890's bailout, did the same thing with Los Angeles' money in Asia and throughout the world. Then when Texans came to California and did the same thing, they cried foul and threatened bankruptcy. Now, after all that has happened, both Republicans and Democrats agree that PG&E and Edison must be "saved." Some day they will appear nearly as absurd as California's congressional delegation when it unanimously declared AB1890 a "national model" soon after its passage. Because the news media never hold the leaders of this folly accountable for their actions, no doubt today's champions of restoration will never be punished for their stupidity either.

In this vein, the Governor signed another bill yesterday which local utility executives celebrated as restoring the creditworthiness of their corporations. Sponsored by Assemblymember Rod Wright (D-Los Angeles), the new law would allow PG&E, Edison and Sempra to enter into long term contracts for power with unregulated power companies and have those contracts guaranteed by the State of California if they are approved by the Public Utilities Commission. This is a veiled attempt to reinstate monopoly without informing the public, and will create another opportunity for the utilities to create new stranded costs guaranteed by the state, and use the threat of such costs to further block competitors. Under the bill, Wright told the Associated Press, the California Public Utilities Commission "would have the opportunity to review the (utility) package of contracts in advance...but once they sign off on it, its part of the procurement package, its reasonable," he said.

While the Wright bill clearly indicates an aggressive effort to reestablish private monopoly in California, Community Choice cities will be strongly positioned to challenge them. And while the Bush administration continues to extol the benefits of deregulation and describe California as an accident of some kind, it is more or less clear that the British model of deregulation celebrated at Berkeley and Harvard as much as at the University of Chicago is an utter failure. Not only has it not delivered the promised environmental benefits, it has not delivered lower rates, nor has it even resulted in a significant degree of competition. It has resulted, as San Francisco economist and deregulation critical Dr. Eugene Coyle so brilliantly predicted, in nothing but collusion, price discrimination, gaming of markets, and redlining.

While those of use who opposed AB1890 recognized it as bad economics from the beginning, for a time, some believed that green power would take over the market by convincing consumers to pay 10% more for power from clean sources. While hyped and used politically to sell deregulation itself this green marketing vision also proved sadly mistaken, as less than 5% of Californians ever signed up with an alternative provider, and only a small percentage of them were willing to buy clean and green. California already had 11% of its power from renewable sources due to official state policy under Governor Davis' former boss, Jerry Brown, but California's market was not even able to market that power to the much-celebrated Green Consumer.

Long treated as unnecessary by the deregulation visionaries, Community Choice has come into its own with the recent passage of Assembly Bill 117. The Community Choice law will be implemented by San Francisco if both Board President Tom Ammiano and Willie Brown's energy czar, Ed Smeloff, have their way. Across the Bay, Mayor Jerry Brown has been an active supporter since 1998. San Francisco, Marin County, Oakland, Berkeley, and other Bay Area cities passed resolutions asking for it in 1999 and have been pushing for its passage with local and regional governments such as the Southern California Cities Joint Powers Consortium, a group of fifteen cities with 450,000 customers in the Los Angeles area.

Community Choice is not just an idea, but a functioning law since 1999 in the nation's third largest electricity market, Ohio, and in Massachusetts, where it was first became law in 1997, and Cape Cod towns recently combined to purchase power together. In Ohio, Community Choice has already resulted in the nation's largest green power contract, with 450,000 Northeast Ohio customers switching from nuclear and coal power to natural gas and renewable sources, representing a virtual 33% greenhouse gas reduction caused by their daily electricity use.

Not only did Community Choice break an ecological record and balloon contract winner Green Mountain Power from 100,000 customers nationally to 550,000 over night, the number of people in that contract alone matched the 500,000 customers participating in Pennsylvania's market, then the success story of deregulation proponents.

Milton Friedman and the Chicago School of Economics, which led Berkeley and Harvard in championing of free market supremacy and efficiency, must acknowledge a significant loss on this one: community based purchasing has easily outperformed a free market structure both in quantity and quality.

Indeed, the failure of deregulation to bring about competition the fact that markets left to energy supply and energy demand without mediation by government did not bring about competition but collusion, gaming and fraud, not green technology but massive fossil fuel expansion and an attempted nuclear revival, not lower prices but billion dollar price spikes and a succession of public bailouts is only the more profound in its implications for both economic theory and political theory considering that it is the largest industrial sector, the very backbone of the economy itself. The failure of AB1890 and the British Model, called California's greatest policy blunder ever with $43 billion siphoned from the world's fifth largest economy, should put to rest for decades, if not for ever, the notion that free markets will deliver efficiency, competition, lower prices, technological innovation, environmental and social benefits.

The failure of the British Model of deregulation in America is highlighted by the fact that, much as in the Great Crash of 1929, it precipitated the crash of the Stock Market in general, a domino effect bankruptcy unseen since the Great Depression with daily exposure of massive corruption, fraud and collusion among a long list of corporations whose CEO's, until recently so admired for their avarice that they have taken to running for public office, are now as widely regarded as criminals by every American citizen.

Just as the Stock Market's Great Crash of 1929, which also began with the collapse of America's electric industry and the flight to Paris, capture, deportation and conviction of Sam Insull, who personally owned a third of America's electric industry, the call for fundamental change in the energy industry is replete with déjà vu for California's "model law." As if an historical amnesia had taken hold of the children and grandchildren of those who survived the Great Depression and World War II, the forgotten crimes of today's Robber Barons and their corporations are re-enacted by the Best and the Brightest, reconfirming that those who forget History are destined to repeat it.

The rejection of President Jimmy Carter by the America electorate, and his replacement by Ronald Reagan was clearly the birthplace of all deregulation since then. Under Reagan, airlines and telecommunications were first to be deregulated in the 1980s, then electricity and banking in the 1990s: all the industries whose cartels, trusts, and other conspiracies caused the Great Crash, and which Franklin Roosevelt brought under regulation.

Indeed, the triumph of deregulation under Reagan and his successors supported by the Democratic Party's leadership after the death of Tip O'Neill was no mere political phenomenon but a national movement with leadership from our most prestigious universities, not only Friedman's Chicago School but also led by "liberal" universities like Berkeley and Harvard. Francis Fukayama's book, The End of History, perhaps the most widely celebrated, printed well-distributed and blockbuster academic book of the 1990's, declared that the era of politics had ended, to be replaced by pure economics: and that this was for the better. Human affairs would no longer be governed by ideology through conflict or politics, but through economic interactions: negotiation of special interests. Free markets would replace Democracy as the system governing mankind. Political debates about the public interest would be replaced by the brokering of private interests. Indeed, Fukayama gave a new legitimacy to the supremacy of free markets over government by suggesting that there was no longer a need for debate about what kind of government America should have. Henceforth, America's decisions would be made not through public debate but through "stakeholder processes" in which the special interests of corporations and individuals would be negotiated, not legislated.

The ideological restoration of pre-Great Depression free market ideology placed corporations in the driver's seat of a post-political and therefore post-historical world, in which non-elected corporations would provide the life support system of society. Markets took on a life of their own, and the actual physical limits of markets to create wealth was forgotten in a massive public frenzy of enthusiasm about money unseen since the "roaring" 1920s or the Dutch Bulb phenomenon.

Not only did the proponents announce that corporations were the new nations that would provide people with the terms, conditions and stories of their lives; they boasted that we would be better off for it. Resembling the flight of white middle class Americans from the cities before, during and after this period, they promised a better world without acrimony or local pettiness, equating politics with violence and war. President Clinton announced that his was a "globalization with a happy face," missing the surreal dystopianism of the phrase calling for better corporate "governance," and affirming the other worn phrase of the 1990's that government should be run like a business: that citizens were "customers" that should be treated as such presumably this meant better. This was, however, not the result.

Proponents of free markets painted globalization as the avant garde of an Open Society, and worshipped the internet for its promise as a border (i.e. government) transcending medium that would "free" the world from obsolete barriers such as governments. "Freedom," which from the American Revolution had metamorphosed from the freedom of the self-reliant small farmer to the freedom of suffrage to the freedom of economic opportunity to the freedom of enterprise and unregulated markets, broke new ground into the freedom of corporations to conduct their business in any nation. The freedom of corporations was itself reinterpreted as a liberator of the societies whose nation they penetrated. As proponents of granting Most Favored Nation, then normalization of trade relations with China, claimed, free enterprise was anointed as the cause of free societies, not vice versa. Capitalism would bring democracy to China, not despotism to America.

The delusions of free market enthusiasm reached deep into the environmentalist movement itself. National environmental groups like Environmental Defense Fund embraced Pollution Credits in the early 1990s, removing traditional government regulation of pollution with a "market-based" approach. With millions of dollars of funding from the Pew Charitable Trust and managed by the Energy Foundation, the Natural Resources Defense Council and Conservation Law Foundation promoted and literally brokered electric deregulation laws based on the promise that it would result in the growth of renewable energy, energy efficiency and conservation. Established environmentalist authors like Paul Hawken and Amory Lovins embraced market-based solutions, claiming that the adoption of inherently superior green technologies by the corporations was inevitable. Implicit in their predictions of "Green Capitalism" was the message that the market would deliver a green utopia; there was no need for government to see to it.

As the formerly Communist and hostile nations of Eastern Europe, Russia and the Caucuses collapsed, the Reagan-Fukayama movement bolstered its efforts to promote the opening of all "markets" to the multinational corporation. Pointing to the deregulation and privatization of the United States and United Kingdom as The Future, The International Monetary Fund and World Bank waved western money before the noses of Russia, South America, Africa, Asia, rewarding Third World nations in return for privatizing and deregulating their largely state-owned energy, telecommunications and other industries, and reducing availability of capital in the event that they refused.

Just before the 2001 Crash started, George Bush Junior nearly succeeded in privatizing Social Security itself and placing those funds in the Stock Market that was, indeed, about to crash. Had he succeeded, our condition might indeed resemble that of the Great Depression.

Instead, we are at war, an energy war. Our president and our congress do not want to stop climate change; instead, they will export the Afghanistan war to Iraq and ensure, once and for all, that Americans continue to pay one third the cost of gasoline that any nation in Europe, Asia or Africa pay. They will send our soldiers into battle to protect the American standard of living, the two-hour commute, the endless suburban sprawl, homogeneous subdivisions, the continued industrialization of agriculture with more petroleum products, pesticides and genetic engineering in our future. They will cut all federal support for solar power, wind power and the very development that is so essential to ensuring the long term economic and ecological sustainability and security of America.

Fortunately, it appears California may have other ideas....

------------------------------------------------------------- Paul Fenn, who authored the 2002 California Community Choice Law, AB117 (Migden-SF), the original 1997 Massachusetts Community Choice Law, and San Francisco's voter-approved 2001 Solar Bond Authority, Proposition H (Ammiano), can be reached at paulfenn@local.org

Copyright 2002 by Local Power.