Global Warming and Local Governments: The Case for Community Choice as an "Act Locally" Strategy

By Sean White

The 1992 Rio Summit on Global Warming fingered local government as the essential layer of government to deal with Global Warming. There is a movement among local governments to do so, and electricity is key to this effort, being the largest single cause of greenhouse gases. The following paper summarizes the political situation in California surrounding empowering local governments to act.

California's 1996 electric deregulation statute (Chapter 854 of 1996) prohibits Community Choice, providing that all consumers who do not find their own power supplier are automatically "defaulted" to purchase power from their incumbent utility (e.g. Pacific Gas & Electric, Southern California Edison), while restricting local and county governments to aggregating on an "opt-in" basis, meaning they must sign up each resident and business individually just like for-profit aggregators.

When California's electric deregulation bill, AB1890, was passed in September 1996, it was heralded as a national model for other states to imitate; it would deliver a "rate reduction," and put an end to monopoly. Proponents claimed it would foster renewable energy and energy efficiency development, and with it a competitive, consumer-responsive, and cleaner energy industry. Today, nearly two years after AB1890 went into effect - and after many states did in fact imitate California - just above one percent of Californians are participating at all in the deregulated market, leading many to call AB1890 a dismal failure in supply side economics.

There are two major contributing factors: the law's stranded costs bailout, and its prohibition of Community Choice.

While the stranded costs factor has been the most contentious among consumer advocates, its impacts are temporary, lasting only as long as it takes to pay off the utilities, the state's ban on Community Choice is a permanent structure of the industry, in effect forming a new "default-opoly" market governed not by Consumer Choice but rather by default service through the Power Exchange. Given the fact that 99% of Californians continue to receive default service, both consumer advocates and environmentalists are increasingly calling for Community Choice

Put simply, Community Choice is the right of local governments, established in Massachusetts and Ohio, to aggregate demand for electric service on behalf of their residents and businesses on an "opt-out" basis (consumers wishing to find their own supplier may opt-out of the municipal contract), forming in effect one large consumer which can wield market power in the electric industry, enabling communities to make unprecedented, high-impact decisions regarding renewable energy and conservation.

It should be emphasized that the rights of local governments to aggregate were restricted by statute in spite of franchising authorities established in California's constitution. Section 19 of the California constitution provides that "any municipal corporation may establish and operate public works for supplying its inhabitants with lights, water, power, heat, transportation, telephone service or other means of communication. Such works may be acquired by original construction or by the purchase of existing works, including their franchises, or both. Persons or corporations may establish and operate works for supplying the inhabitants with such services and operate works for supplying the regulants with such services upon such conditions and under such regulations as the municipality may prescribe under its organic law, on condition that the municipal government shall have the right to regulate the charges thereof."

Indeed, early on in the debate, California's cities were vocal about their franchise authorities, and lobbied state legislators to respect those rights in any restructuring legislation. "Cities should continue to have the authority to issue franchises and any program should be at least revenue neutral relative to revenue currently received from franchises," announced the California League of Cites in June, 1995.

More than merely assert the right municipalities to administer Community Choice, or "opt-out" aggregation programs, the League asserted that their franchise rights gave local governments exclusive authority over power providers within their jurisdictions. "Under any restructuring program, local government should have the authority to become an aggregator to negotiate the purchase of electricity with electricity suppliers for their customers. The decision of whether the individual customer within a local government jurisdiction should have the option to purchase power directly from an electricity supplier should be made by the local governing body, consistent with the principle of local control."

By September, 1996, however, it was clear that the legislature would not recognize these rights, and lobbyists for the League of Cities became strangely silent on the issue, meekly endorsing legislation which curtailed the franchise authorities of local governments by restricting their aggregation to an "opt-in" approach, and denying outright that the legislation was harmful to local governments.

There is in fact a prehistory of municipal activism in the electric industry which partly explains why Community Choice was prohibited in AB1890. Prior to its passage - indeed prior to the restructuring debate itself, the city of Palm Springs had been active for a number of years in an attempt to separate its community from Southern California Edison's system by means of a "Muni Lite" proposal presented to the Federal Energy Regulatory Commission (FERC). In it, Palm Springs claimed that sundry distribution facilities owned by the city qualified Palm Springs as a "municipal utility" with rights to buy and sell power as a wholesaler within its jurisdiction. The intention of "Muni-Lite" was to enable the city to open up competitive bidding among alternate power suppliers to serve the businesses and residents of Palm Springs.

With staunch opposition from Southern California Edison and Pacific Gas and Electric, the FERC eventually rejected Palm Springs' claim as a "sham wholesale transaction" in the months just prior to deregulation, mainly on the basis that it would interfere with the state legislature's efforts to negotiate a deregulation "stakeholder agreement."

AB1890, which was the result of those negotiations, severely restricted cities from getting very involved in the deregulated market. Proponents of the legislation said it was modeled on long distance telecommunications deregulation, under which individual consumers have enjoyed a significant choice of service providers seeking their business (many have since demonstrated that telecomm deregulation has also hurt small consumers). Under the telecomm model, the very act of allowing competition would deliver choice to consumers. Few questioned whether power suppliers would compete for any consumer's business.

Regarding Community Choice as a form of "slamming," the legislation treated municipal or county aggregation as no different from commercial aggregators, requiring that communities seeking to purchase power collectively sign up each consumer individually. This has come to be known as "opt-in" municipal aggregation. The logic of this provision was that because consumers would have choice, any municipal intermediary role would interfere with this choice.

It soon became clear, however, that residents and small businesses in California had been locked out of an uncompetitive market. Only months after California regulators claimed its market was "open to competition," and a despite spending $10 million in marketing and advertising in California, dereg champion Enron Corporation had signed up only 30,000 customers (a $333 per customer marketing cost), announced "it's virtually impossible to make money" on small customers, and scaled back its efforts to market power to residents and small businesses. San Francisco-based Working Assets, expected to play a significant role as a green power marketer, said it would not enter the California market. Since that time, virtually all "consumer choice" in the state has been restricted to large corporate consumers such as the California Manufacturers' Association, McDonald's, Jack in the Box, etc..

"Green Power," whose alleged promise was a selling point for deregulation itself, proved no less disappointing under "Consumer Choice" economics, which reduced it to a niche market for wealthy consumers. One-third (33%) of California's residential consumers would have to sign up for a 100% renewable energy product, just to subscribe what the state already has in place. Yet, a year after the market opened and after tens of millions of dollars in advertising, less than 0.4% of residential consumers (about 25,000) have subscribed to green products that contain from 50-100% renewables.

The reason: transaction costs required to sign up green consumers render it uncompetitive. Green marketers have stated publicly that it costs $100 in advertising and marketing costs just to acquire a new green customer - over 15% of an average consumer's total annual electric bill.

Meanwhile, green marketing efforts are aimed at the residential sector, which comprises only a third of electricity sales. Of the other two thirds of electricity sold, few commercial and industrial customers will place themselves at a competitive disadvantage by paying for higher cost power when their competitors don't.

Community Choice advocates had predicted this outcome from the outset. By setting community standards for renewable energy and efficiency, Community Choice spreads the cost of green investment across all customer classes and bypasses prohibitive marketing costs. Green Citizens are the key to a renewable future: Green Consumers represent only the gentrification of renewable energy.

The state's anti-Community Choice provision has both discouraged cities from attempting to aggregate on behalf of their communities, and has crushed one determined city's efforts to aggregate under its "opt-in" requirement. The city of Santa Monica recently voted to power its city facilities with 100% renewable energy, but was prevented from including residents and businesses in the mix. After losing its "Muni-Lite" fight, Palm Springs remained determined to aggregate on behalf of its community, and signed an agreement with Enron to market "Palm Springs Energy Services" electricity to each individual resident and business on an "opt-in" basis. After an early mailing to Palm Springs' 29,000 residents and businesses, a strong 30% "interested" response (9000 consumers) boosted the city's confidence that it would be able to meet the 25% of market benchmark with Enron to lock in the contract. "But when we called them back, they didn't respond," said Art Lyons, who headed up the efforts. In the end, only 8.5% of Palm Springs' customers signed up with the city. "We tried a TV and radio blitz in September, and got a few more customers, but not enough." Enron has indicated it can "no longer afford to subsidize Palm Springs' rates," and may raise its prices to match the State's Power Exchange.

As California's deregulated market has proven itself a failure for 99 percent of Californians, and as obstacles facing Palm Springs' opt-in aggregation effort has proven insurmountable, a number of California cities are finally coming around to challenge the anti-Communty Choice provision.

This effort has been bolstered by a green streak among local governments. Green power advocates have recently announced that California cities - severely restricted by prohibitively expensive aggregation provisions in that law - are nevertheless the largest buyers of renewable energy in the state's ailing deregulated market, highlighting the failure of both Green Consumerism and "Consumer Choice" itself.

Consumer advocates behind the federal legislation say that by enabling whole communities to pool their energy demand in large volume contracts, Community Choice gives residents and businesses the buying power to attract competitive suppliers. "Low-income people, the elderly on fixed-incomes, small businesses, and families deserve to obtain the same market power as do large industry," said Mr. Sherrod Brown (D-Ohio), the primary sponsor of stand alone federal Community Choice legislation and a member of the House Energy and Power Subcommittee.

Pointing to an emerging urban sustainability movement, environmental supporters say the market power afforded by Community Choice will offer American communities their first opportunity to clean up America's most polluting industry, the largest single cause of global warming.

Proponents of California's 1996 deregulation law - and the each-man-for-himself "Consumer Choice" model copied by many other states that have since deregulated - continue to defend the market and the model, saying that deregulation will deliver competition and mainstream green power consumerism after a "transition period."

But Community Choice advocates such as California economist Eugene Coyle question the very idea of "Consumer Choice" in the electric industry, predicting "virtual monopoly with price discrimination favoring very large businesses over the rest, and data mining which targets wealthy consumers and heavy electricity users while redlining poorer ones." Green power, according to Coyle, will never amount to more than a niche market created by such "data mining" under the California model.

"Why not try something that will work now, and that would demonstrably have consumers and the environment better off with or without a transition period?" he asks. "What argument is there against Community Choice, other than the prerogative of default provider distribution utilities to retain monopoly control of the retail market?"

San Francisco Board of Supervisors President Tom Ammiano sponsored and carried the city's Community Choice amendment resolution in August, from its Utilities and Deregulation Committee to a 7-3 majority on the Board of Supervisors, with strong support from City Attorney Louise Renne - and despite strong opposition from Pacific Gas & Electric. "Competition from suppliers other than PG&E and Southern California Edison has not met the Public Utilities Commission's expectations," said Ammiano, proposing the Community Choice measure so that "a city like San Francisco could enter the marketplace to obtain better rates and/or cleaner electricity for their residents and businesses." Ammiano attributes the failure of California's market to anti-Community Choice provisions in the state's deregulation law that restrict community aggregation while "defaulting" stranded consumers to automatically purchase power resold by their deregulated utility company. "The result has been that 99% of California consumers continue to receive default service today" he said in June.

Proponents of the federal bill emphasize that consumer participation in a city's Community Choice contract is voluntary on an opt-out basis, but point out that this is moot in a market that offers consumers no real alternative to "default service" anyway. "At present, large industrial and business consumers are winning the best deals, and few choices are yet available to residential customers," said Culver City Councilman Albert Vera, founder and chair of the Southern California Cities Joint Powers Consortium, a leading proponent of Community Choice in California. "Deregulation must bring benefits to average Americans, or why bother?"

Environmental Support

The electric industry is the largest single cause of global warming, radiation and ozone (which causes childhood asthma). The U.S. Department of Energy has reported that electric deregulation is expected to cause substantial increases in U.S. pollution levels, flying in the face of Clinton Administration commitments to reduce U.S. greenhouse gas emissions in coming decades.

Proponents of Community Choice emphasize the potentially dramatic environmental benefits it offers the emerging movement for Clean Cities. "Community Choice gives local communities the ability to make decisions to not only lower their electric bills, but to purchase energy efficiency services or renewable energy options," said Representative Karen McCarthy of Missouri, another cosponsor of the bill and a member of the House Subcommittee on Energy and Power.

Community Choice advocates point to evidence that Americans are far more likely to support renewables and conservation as communities than as isolated consumers. While anti-Community Choice provisions limit local government buying top municipal facilities, green power purchases from local governments nevertheless exceed that of any other sector in the market since it was opened to competition in 1998. While California's "Green Power" market remains a minor niche market for consumers willing to pay a premium, municipalities represent more than half of all clean energy purchases made there to date. "It's encouraging that over 100 local agencies statewide have made the switch to 'green' energy - setting an example for residential and business customers" said Steven Kelly, executive director of the Renewable Energy Marketing Board (REMB). "It's gratifying to see local governments taking the lead in environmental responsibility."

But the picture overall remains bleak for renewable energy in California. California green marketers have actually sold an amount equivalent to only 2% of the power already generated by renewable energy sources built under state mandates before deregulation. Of California consumers who have switched since the market opened, only about one third actually chose green power, whereas the other two thirds were unknowingly switched to green power by their suppliers - Enron and Commonwealth - eager to collect on state green marketing subsidies written into the 1996 law. Thus, only 30,000 consumers in a state of 30,000,000 people have personally switched to a green energy source, leading many critics to call the Green Consumer model an environmental disaster. "It's not hard to switch to green when, because of the green marketing subsidy, green is the only option that is cheaper than default utility service, and green products are the only ones being heavily advertised," said renewables advocate Nancy Rader. "Also, the renewables being marketed are low-cost existing renewables -- very few consumer dollars are actually supporting new projects or existing projects that need the support."

The City of Santa Monica led the municipal move toward green power in June 1999 by becoming the first city in the nation to purchase green power for all of its municipal needs. Then, in July, 60 of 78 local government agencies that comprise the San Diego Association of Governments (SANDAG) opted to power their city facilities with green power, also made cheaper by the state subsidy. Most recently, the Association of Bay Area Governments (ABAG), which represents 59 local governments within the San Francisco Bay Area (but none of its major cities), 6000 electric meters and 63MW of electrical capacity during periods of peak summer demand, decided that its ABAG Power member cities will purchase geothermal energy from Calpine corporation, a natural gas-fired merchant power plant developer which is marketing geothermal steam power from Sonoma County Geysers it recently purchased from Pacific Gas and Electric. The city of Oakland has recently issued a Green RFP for municipal facilities.

Rader points out that the same green marketing subsidy supports municipal green power purchases, which make green products artificially cheaper. And while California cities have demonstrated an interest in buying green, the state's prohibition of Community Choice limits their purchases to municipal facilities, which amount to two or three percent of power consumed - and pollution created - by the community.

"A larger, citywide load would enable communities to negotiate energy products with a far greater environmental impact."

Community Choice advocates point to an elemental difference in environmental values between the California model and Community Choice. "It's harder for anyone, whether whole cities or individual consumers, to think globally and act locally when their decisions are limited by state law to a small horizon," said Rader. Susan Munves, the Conservation Coordinator for Santa Monica who spearheaded its green RFP effort, emphasizes her frustration with the state's laws regarding municipal aggregation. "Just imagine what we could do with Community Choice." Pointing out that the total electricity use of Santa Monica's government facilities is equivalent to only 5000 homes in a population of 400,000 she said that the current law "limits the city to thinking about the environmental impacts of its municipal buildings, and limits consumers to thinking about paying extra to clean up pollution from one home in a half a million homes. It's not very encouraging. With Community Choice we could bring renewables and conservation to the whole community. Rather than having a debate on whether to spend public money to clean up a narrow slice of the city's electricity pollution, we could talk about leveraging community buying power to clean up the whole pie. In the big picture, cities could dramatically expand the market for wind, solar and other renewable power sources that are now being marginalized because of deregulation."

Similarly, while ABAG Power's Green RFP includes fifteen municipalities and nine counties throughout Northern California, their aggregate purchase amounts to little more than the demand of one medium sized town. "Without Community Choice and a Renewables Portfolio Standard to set minimum levels of renewables in all power, Green RFP's and an occasional green consumer are not going to amount to much," said Rader.

While California's advocacy community has focused the greater part of its efforts on fighting the stranded costs bailout, some observers now feel that the anti-Community Choice provision will prove even more devastating in the long term. Whether one is concerned about consumer protection, market power, renewable energy, or energy efficiency, Community Choice, or "opt-out" municipal aggregation, is critical to the public interest in a deregulated electric industry.

Municipal Efforts. Because California cities are required to sign up each resident and business individually, local government aggregation efforts such as the Palm Springs Energy Services project have proven too expensive for local governments to pursue effectively. Recognizing that this "opt-in" provision must be changed to "opt-out," ten California cities have passed a resolution requesting Community Choice from the California legislature over the past year.

The cities of San Francisco, Oakland, and Berkeley in northern California, and West Hollywood, Lomita, Carson, El Segundo, Hawthorne, Culver City, and Lawndale in southern California represent 1.6 million residents whose local officials have asked for Community Choice in the foorm of the following resolution:

[Community Aggregation of Electricity]

URGING THE CALIFORNIA LEGISLATURE TO AMEND THE STATE'S ELECTRIC DEREGULATION LAW, CHAPTER 854 OF 1996, SECTIONS 366(A) AND (B) TO AUTHORIZE SAN FRANCISCO AND ANY OTHER CALIFORNIA MUNICIPAL CORPORATION, UPON A MAJORITY VOTE OF ITS GOVERNING BODY OR REGISTERED VOTERS, TO DESIGNATE ITSELF AS THE AUTOMATIC AGGREGATOR OF ELECTRICITY ON BEHALF OF ITS RESIDENTS AND BUSINESSES, SUCH THAT RESIDENTS AND BUSINESSES SHALL BE AUTOMATICALLY INCLUDED IN THE JURISDICTION'S COMMUNITY AGGREGATED ELECTRICITY BUYERS' GROUP, UNLESS EXERCISING A CHOICE FOR THE EXISTING ELECTRICAL CORPORATION OR ANOTHER PROVIDER.

WHEREAS, The state's electric deregulation law, Chapter 854 of 1996, came into effect on January 1, 1998; and

WHEREAS, Electricity choice has not followed the deregulation of the state's electric industry, with less than one (1) percent of Californian residents and businesses participating in or benefiting as consumers from the deregulated electricity marketplace more than a year after deregulation officially went into effect; and

WHEREAS, Residents and the vast majority of businesses in the City and County of San Francisco will not enjoy a meaningful choice of electricity service unless they are organized in aggregate to pool their electricity demand as a large volume buyer; and

WHEREAS, The citizens of City and County of San Francisco may be best be able to influence the price, terms and conditions of electricity sold within its boundaries if the City and County of San Francisco is able to play a role as an aggregator of electric consumers within its jurisdiction: and

WHEREAS, Section 366(b) of Chapter 854 of 1996 deregulating California's electricity industry prohibits local governments from automatically, even upon a majority vote of its citizens or the Board of Supervisors, aggregating residents and businesses who do not select an alternative power supplier to Pacific Gas and Electric Company: and

WHEREAS, The City and County of San Francisco has a direct interest in the proliferation of energy efficiency and renewable energy technology within its communities for purposes of job creation and environmental protection; and

WHEREAS, As an aggregated purchaser of electricity and marketplace participant, the City and County of San Francisco could condition its contracts for electricity with requirements for renewable energy, anti- discrimination, and first-source hiring to move residents from welfare to work; and

WHEREAS, The Commonwealth of Massachusetts and the State of Ohio have recently passed legislation for effective local government aggregation of electricity consumers, while ensuring that any customer who wishes to select his or her own electric supplier be allowed to opt-out of the community aggregation program: now, therefore, be it

RESOLVED, That the City and County of San Francisco requests the California Legislature to amend the State's electric deregulation law, Chapter 854 of 1996, Sections 366(a) and (b), as well as any other applicable sections, to authorize San Francisco and any other California Municipal Corporation, upon a majority vote of its governing body or registered voters, to designate itself as the automatic community aggregator of electricity on behalf of its residents and businesses, such that residents and businesses shall be automatically included in the jurisdiction's aggregated electricity buyers' group, unless exercising a choice for the existing electrical corporation or another provider.

Community Choice amendment legislation will be filed by February 25, 2000. Late in the Spring, the city of Oakland will sponsor a statewide conference of cities on Community choice, whose purpose will be to attract media attention to the issue, educate local governments on the opportunities inherent in the model, and mobilize support for the legislation.

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