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Long Beach Public Power Revival a Unique, Historic Opportunity for Greens, Consumers, Labor, Community, Democracy if They Think Big:

Electric Municipalization Wave Could Follow California's Dysfunctional Anti- Community Choice Deregulation Law

Long Beach's recent public power revival could enrich the coffers of this city, and it could reduce taxes for business. Sound like a lot to ask for? Actually, it is much too little.

With bold leadership from incoming City Manager Henry Taboada, the Long Beach city council voted 6-2 in December to authorize Taboada to prepare a plan to investigate municipalizing that city's electric system. Emboldened by a subsequent survey indicating that Long Beach citizens "want more competition," Taboada said he would invite competitors to present credentials (RFQs) and bids (RFPs) to replace Edison. Enron presented the city with a letter of intent. While Edison's lobbyists later convinced the council to give its corporate leadership 45 days to sweeten their offer, some observers believe Long Beach may see green and lead California cities in a new wave of municipalizations under the one year old and dysfunctional electric deregulation law.

The outcome will depend on whether the consumer, business, environmental, and labor communities realize what an opportunity they have before them: and how rare that opportunity is in California. For the first time in a hundred, the community of Long Beach has a hands free opportunity to choose, among a number of competing power companies, what kind of electricity its homes, businesses, and municipal facilities -- including one of the largest 24 hour container ports in the United States -- should purchase. For consumers and all but the largest businesses, it could make Long Beachers the only community to enjoy real choice under California's abortive electric deregulation law. For environmentalists, competitive bidding for Long Beach's electric service could be one of the few hopes remaining in the fight against global warming and nuclear contamination. For Labor, the outcome could either protect or demote the middle class status of utility workers.

For Long Beach as a whole, the debate on what to do with Long Beach's franchise contract may be the first real opportunity this community has ever had to talk, think and decide how to deal with America's largest industrial sector and economic backbone, the greatest single cause of Global Warming, radiation, mercury contamination, and childhood asthma: and among the most powerful special interests in American politics.

While California's electric industry was "deregulated" more than a year ago, today less than one percent of Californians are finding a new supplier, and nearly all would be power marketers have abandoned residents and even most businesses here as too small to serve profitably. Green power, sold at a higher price like organic food or specialty coffees, is being demoted from a public right to breathable air to a high end feel good niche market for the wealthy.

In short, the deregulated market is rigged to prevent real competition and the benefits that it might otherwise bring. During the deregulation debate in 1996, Edison's lobbyists were instrumental in seeing to it that the California deregulation law explicitly prohibited "Community Choice," which is the right -- established in Massachusetts -- of whole urban communities to negotiate collectively with power companies through their local government. "We lobbied hard to get Community Choice during the deregulation debate," said Long Beach gas department general manager Chris Garner, "but there was no way. It was politically impossible."

"To have choice," says Garner, "you have to have a seller. And they have nearly all disappeared from the market." For Long Beach, it may now be possible to line up the sellers, as two unrelated phenomena combine to form one opportunity. First, electric deregulation means there are suppliers out there if you can come up with a large enough contract to make it worth their while. Second, Long Beach is in the 28th year of a 60-year franchise agreement with Edison that gives Long Beach the right to renegotiate the pact in the 30th year: or to buy the investor-owned utility's distribution system.

While power marketers have given up on California residents and most businesses as too small to serve, they will line up for a customer as large as the entire community of Long Beach. And there is much that you could ask them for. With 440,000 residents and $250 million per year in electric revenue, Long Beach is the largest city served by Edison. Long Beach's franchise contract provides an opportunity not merely to enrich city coffers or reduce a utility fee, but to offer real energy choice to the community of Long Beach.

For Long Beachers, the only thing to thing to fear is: narrowness. To date, the city council appears to be more narrowly focused on revenue and utility tax reductions rather than on securing more competitive rates for Long Beach residents and businesses or protecting the environment. When the Long Beach city council voted 6-2 in December to authorize its City Manager, Henry Taboada, to prepare a plan to investigate municipalizing that city's electric system, city bureaucrats liked it because it could bring in a windfall of needed revenue to city coffers, to reduce a utility tax which is unpopular with businesses. "We are basically looking for ways to secure new revenue streams that will allow us to reduce utility fees," said Taboada.

Toboada is not off the mark: California cities are underfunded, and local governments can only be effective if they do find new revenue sources: but this alone is too cheap a price to ask. Indeed, both Enron and Edison have already offered to pay Toboada's price in an effort to avoid competitive bidding. A partnership of Enron Corporation and Denver-based City Light and Power Inc, which manages Long Beach's street lights, has already proposed that it will pay Long Beach $8 million more a year than the $3.5 million the city now receives from Edison, if the city will set up a municipal power distribution system run by Enron and City Light. "How do you turn down $8 million a year for the next 30 years?" asked Taboada. Edison answered him by offering to raise its franchise fee to $10 million.

But Edison's offer is also too cheap. Way too cheap, because they also keep the system. Taboada could mistakenly underestimate the city's leverage, much of which is provided by a well-drafted 30 year old franchise contract between Long Beach and Edison. Rather than exposing the city to inflated utility lawyer claims in condemnation court, the franchise calls for a board of appraisers, two chosen by the city, two by Edison, and a fifth by the four appraisers, to decide on a fair value for Edison's distribution system, which has been roughly estimated at $150 million to $250 million. In classic form, Edison claims it is worth $500 million. If the city's appraisers are well chosen, the Long Beach market will prove "competitive" to suppliers, meaning the Long Beach community is well positioned to attract competitors, and should not sell out for a few million dollars.

The environmental implications of Long Beach's situation are profound. Santa Monica city council's recent unanimous vote to power its city buildings and streetlights with renewable geothermal energy highlights the potential of Community Choice to combat global warming, of which electricity is the largest single cause. Because Santa Monica is prohibited by law from including its residents and businesses in its "green RFP," its 5 megawatt purchase is equivalent to the volume of electricity consumed by only 5,000 to 6,000 homes: but even this will reduce emissions of air pollution and global warming particulates by thousands of tons annually. Because Long Beach could purchase power for the entire community of a half million people, the environmental benefits could be unprecedented.

Long Beach residents and businesses could also enjoy significant rate reductions. The city has already switched municipal facilities from Edison to New West Energy - a subsidiary of Arizona's Salt River Project - whose 2.75% lower rate has added up to $275,000 in annual savings to the government, according to Mr. Garner. These savings could be dwarfed by a citywide contract, and the benefits could extend to all Long Beachers, not just the government.

Perhaps the greatest threat to Long Beach's opportunity is pressure from both Edison and Enron to give them a contract without opening up competitive bidding against other competitors. This should be avoided at all costs, because competitive bidding is essential to figuring out just how much Long Beach's market is worth to power suppliers, including Edison Source or Enron.

Taboada may be missing this point. Early on in the process Taboada had already signed a letter of intent with Enron, and has already said publicly that financing a buyout of Edison's distribution system should not present a problem if Enron's group, "Long Beach Power," partners with the city, since Enron has deep pockets. Perhaps the confident new City Manager just knows how to get the political ball rolling, and fully intends to have open bidding.

But choosing a partner without competitive bidding is extremely hazardous. First, it prevents the public from knowing what the market will bear. But more importantly, it limits the ability of the city to control the process. Some utility analysts worry that Long Beach could go the way of other under-resourced cities -- such as Palm Springs, South San Francisco, and Philadelphia -- whose over-reliance on their corporate "partner" for money has resulted in a disastrous loss of control over red tape issues that proved fatal. "In terms of substance it will all depend on short and long term interests and who not only owns buts controls the assets," says Scott Ridley, a Massachusetts based utility analyst who spawned Community Choice in Massachusetts and has negotiated franchise contracts for large cities.

Recently, Philadelphia's effort to aggregate residents and businesses failed, and the city "handed over" its customers to its partner, Edison marketing subsidiary Edison Source. A similar phenomenon appears to have occurred in Palm Springs, whose Enron subsidiary "partner" Portland General removed its "Palm Springs Energy Services" office to Portland, Oregon and may increase its rates after announcing that the Palm Springs market was insufficiently profitable to justify the rent.

It is critical that the city go through a competitive bidding process that allows public input into the bidding guidelines and includes as many competitors as possible. Fortunately Tabaoda appears to have come to the same realization when he and Garner convinced Enron to withdraw its letter of intent so that competitive bidding can take place. Now the question is will the City Manager and council be seduced by a sweet deal offer from Edison, whose corporate officers must be horrified at the prospect of losing the largest city in their grid.

The city's Request for Proposals (RFP), which defines and calls for competitive bidding among power suppliers, is the best chance for the Long Beach community to exert its influence. These documents define what kind of energy services the community wants to purchase, and is the key opportunity to insert all the community's requirements. If Long Beach wants provisions for residents, businesses, renewable energy, labor protection, etc.. they should be included as requirements in the RFP.

The quick progression of Long Beach's municipalization debate has prompted observers to speculate that "municipal power departments could pop up at an alarming rate" throughout California, whose deregulated electricity market is widely regarded as a failure. If Long Beachers get involved soon and bring the Big Picture to the table, it could make major strides in environmental and consumer protection, and set a new standard for energy competition that really makes the suppliers compete in an otherwise dreary landscape of regulatory apology, utility mergers, nuclear development, and green power gentrification in California's deregulated market.

Copyright (c) 1999 by the American Local Power Project.