Energy October 2009

The California Experiment

Busted budgets, failing schools, overcrowded prisons, gridlocked government—California no longer beckons as America’s promised land. Except, that is, in one area: creating a new energy economy. But is its path one the rest of the nation can follow?
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Amid all the starpower assembled in the White House Rose Garden on a crystalline afternoon last May, the unassuming gray-haired woman who sat beaming in a prime first-row seat went largely unnoticed. But if not for California state Senator Fran Pavley, none of the other people who had gathered might have been there at all. In 2002, as a first-term member of the California Assembly, she had steered through the nation’s first law requiring automakers to reduce the tailpipe emissions of carbon dioxide and other gases linked to global warming. Fourteen other states indicated they planned to adopt the California law. But George W. Bush’s administration refused to provide the federal waiver the state needed to proceed, and the major auto companies added new hurdles by challenging the state law in court. In January 2009, when Bush left office, the California plan was as stuck as a commuter caught behind a rush-hour pileup.

With the change of administrations, though, the road suddenly cleared. Candidate Obama endorsed the California initiative, and once he became president, his aides negotiated an agreement between the state, environmentalists, the auto-workers union, and the leading auto companies to use the California law as the basis for nationwide regulations to dramatically improve the fuel efficiency, and reduce greenhouse-gas emissions, of all new cars and trucks. The result was the unprecedented, almost unimaginable, scene that unfolded, fittingly enough, under perfect California weather that May afternoon in the Rose Garden. On the podium, President Obama stood flanked by senior executives from 10 global auto companies (including eight that the U.S. government did not own). In the chairs arrayed across the lawn, environmentalists mingled with auto-industry lobbyists, and Californians who had led the fight for stronger fuel-economy standards, like Pavley and Republican Governor Arnold Schwarzenegger, wedged in beside Michigan legislators who had fiercely resisted them. Obama didn’t acknowledge Pavley by name, but he made clear that without California’s “extraordinary leadership,” the landmark environmental agreement he was announcing might never have been reached. Californians “have led the way on this,” Obama said, “as they have in so many other efforts to protect our environment.”

In politics and policy at large, the time is long past when the nation routinely looked to California, as it did in the 1960s and the ’70s, as the most fertile incubator of new ideas. On many fronts, the state government appears almost dysfunctional, hobbled by constitutional constraints and partisan polarization. The collapse of the state’s (latest) real-estate bubble has sent California’s economy into free fall. A short list of the state’s current problems would include surging unemployment, struggling schools, and a budget deficit larger than the entire budget in almost every other state.

But on energy and climate change, the story is very different. Ever since the first Arab oil embargo, in 1973, California has consistently defined the forward edge of energy-policy innovation in America. In 2006, California’s per capita energy consumption was the fourth-lowest in the country. The state emits only about half as much carbon per dollar of economic activity as the rest of America. It generates significantly more electricity than any other state from non-hydroelectric renewable energy sources like solar, wind, and biomass. California registers more patents associated with clean energy than any other state and attracts most of the venture capital invested in U.S. “cleantech” companies exploring everything from electric cars to solar power generation.

“I unequivocally believe we are a model for the rest of the country,” says F. Noel Perry, the founder of Next10, a nonpartisan Silicon Valley–based think tank, whose “California Green Innovation Index” studies have tracked these trends.

Some of California’s edge can be traced to the state’s natural advantages, particularly a temperate climate that does not require as much heating in the winter or cooling in the summer as do many other parts of the country. But the difference is also rooted in conscious policy decisions. The American Council for an Energy-Efficient Economy, a leading nonprofit research group, recently ranked California first among the states in promoting energy efficiency.

“California has fouled up plenty of things,” said John Bryson, the former chairman of both the California Public Utilities Commission and Southern California Edison, the major Los Angeles–area utility that is a national leader in energy efficiency. “But on this set of issues—the clean-energy issues, the kind of things that need to be done in terms of the risk of climate change—I think California is getting it right… More than any other state I know of, California has done already most of the things that need to be done.”

California hasn’t solved all the puzzles associated with replacing fossil fuels. And its successes cannot necessarily be easily replicated. But the state is grappling with every major energy-related issue that currently faces the country. Its experience doing so is also likely to shape an intensifying national debate, because so many key players have roots in the state, from Barbara Boxer and Henry Waxman, who chair the Senate and House committees that are considering climate change, to Energy Secretary Steven Chu. California’s story illuminates some of the obstacles the nation will need to overcome as it seeks cleaner forms of power. But more broadly, California demonstrates how sustained political leadership can reshape how we produce, sell, and use energy—can “bend the curve,” as they say in Silicon Valley.

The epicenter of California’s energy revolution might justifiably be considered a roomy, dimly lit office in the bunker-like Energy Commission building in downtown Sacramento. There, behind a long conference table, surrounded by an untouched cup of chili and plates of apples, bananas, grapes, and tomatoes, sits Art Rosenfeld, at 83 years of age compact and contained, with thinning gray hair and a slight hunch. Looking natty in a hunter-green wool sport coat and a plaid shirt, Rosenfeld has hearing aids in both ears and a BlackBerry on his belt. Nothing about Rosenfeld is imposing, except his ideas, which for decades have earned him an audience at the highest levels of government. Former Vice President Al Gore, for one, described him to me as “a national resource. He’s quite a thinker. I like him a lot.” Then Gore laughed. “I also like that he starts to get more innovative as he gets older.”

In 1973, Rosenfeld was working as a particle physicist at the Lawrence Berkeley National Laboratory. That September, the Democratic-controlled state legislature passed a bill creating a commission to manage California’s energy policy. Ronald Reagan, then governor, vetoed it as an intrusion on free enterprise. But after the first Arab oil embargo caused energy prices to spike, two things happened. First, Reagan switched his position. Stung by popular discontent in car-conscious California, he agreed in 1974 to create what eventually became known as the California Energy Commission. Second, Rosenfeld shifted his focus toward energy efficiency, organizing a working group (which eventually became the Center for Building Science) at the laboratory. “I thought,” he told me dryly, “we had better do such things as learning how to turn out the lights.”

California’s new commission was born with something of an identity crisis: environmentalists hoped it would promote conservation, while utilities wanted it to fast-track production (particularly of nuclear power) to close a potentially crippling shortage in electricity generation. Rosenfeld, who had initially come to the commission’s attention when he critiqued its first energy-efficiency standards for residential buildings, quickly proved instrumental in setting the agency’s direction. In 1976, San Diego Gas & Electric Company asked the commission to approve a nuclear-power plant called Sundesert. Jerry Brown, the eclectic Democrat who succeeded Reagan as governor, didn’t want to authorize the plant, but he faced pressure to close the anticipated gap between electricity demand and supply. Rosenfeld squared the circle for him, telling Brown that if the state imposed efficiency standards on refrigerators (which then consumed about 20 percent of a typical home’s power), it would save at least as much electricity as Sundesert could produce. The state went on to block the Sundesert plant, and in 1977 the commission approved aggressive efficiency standards not only for refrigerators and freezers but also for air conditioners.

“Efficiency just gradually took over,” Rosenfeld said. In the next decade, the Energy Commission followed with efficiency standards for furnaces, dryers, swimming-pool heaters, household cooking appliances, heat pumps, showerheads, and fluorescent-lamp ballasts, among other products. Those rules became models for use in other states and, eventually, for federal appliance standards. In 1978, using a pioneering computer program developed by Rosenfeld and his colleagues, the Energy Commission opened another front by approving more-sophisticated energy-efficiency standards for new buildings. Other states, and even other countries, followed.

Around the same time, an even more obscure California regulatory agency produced another landmark innovation. Utilities traditionally make more money when they sell more electricity, especially since the fixed investment of building power plants and transmission lines comprises such a large part of their costs. As a result, their natural inclination is to encourage their customers to use more. With the state trying to save energy through its efficiency standards, that incentive seemed increasingly perverse—especially after energy prices again soared after the second oil shock, in 1979. John Bryson, a founder of the Natural Resources Defense Council, whom Brown had appointed as chairman of the California Public Utilities Commission, began looking for ways to enlist the utilities in promoting efficiency.

“I thought it was evident that [they] could make a big difference,” Bryson recalled. “But there was the fundamental fact that you were asking utilities, under the regime that existed at the time, to forego returns for their shareholders, because their returns were meaningfully based on increasing electricity sales.”

The solution was a policy known as “decoupling” because it severed the link between consumption and profits. Here’s how it worked: the commission first set a revenue target for utilities by calculating how much money they needed to make to recover their fixed costs, plus an approved profit rate. Next, the commission estimated how much power it expected the utility to sell. Then, it established an energy price that would allow the utility to meet its revenue target at the expected level of sales. If the utility sold more power than it needed to meet its target, the difference was returned to consumers. If it sold less, rates were increased to make up the difference. Applied to natural-gas sales in 1978 and electricity in 1982, decoupling had a profound effect.

“Utilities were rendered indifferent to sales,” says Ralph Cavanagh, a senior NRDC attorney and central figure in California energy policy since the late 1970s. “They couldn’t make more money by selling more; they didn’t lose money by selling less. Their addiction to increased sales was eliminated.” In September 2007, the state utility regulators shifted the incentives for utilities further toward conservation by allowing them to split the savings with customers whenever energy use falls below state targets.

How much those twin rules—decoupling and decoupling-plus, as they are known—have changed the motivation of utility companies became clear when I visited Peter A. Darbee, the chairman, CEO, and president of Pacific Gas & Electric. Darbee works on the 24th floor of a San Francisco office tower in a glass-enclosed corner office that looks like a ship’s bridge. The office has panoramic views of the Embarcadero, and on the windy, sunny day we spoke, boats silently glided through the water in the distance, as if a painting had somehow been set into motion.

“I think the biggest key to the success in California was putting in place the right incentives for California utilities,” Darbee noted. Echoing Cavanagh, Darbee said that decoupling made the utilities “neutral or indifferent” to sales; then decoupling-plus provided utilities “an incentive to sell less power rather than more.” With those economic signals nudging the utilities, he continued, “all of a sudden you’ve unleashed the power of these huge organizations to work with you rather than against you.” Darbee said that sometimes when he’s out sailing with customers, they will say to him, “‘Peter, you would love us, because we have all sorts of lights and air conditioning and we are using a lot of your power.’ And I look at them and say, ‘Well, actually I’d prefer that you use a lot less.’ And they look at me like I’m crazy. And then I say to them, ‘We actually make more money if we sell you less power, and we make less if we sell you more power.’”

Efficiency and decoupling have helped California to consume electricity far more thriftily than the rest of America. At the time of the 1973 oil shock, California used about 17 percent less electricity per person than the country at large. Since then, as Rosenfeld likes to point out in a chart that has been dubbed “the Rosenfeld Curve,” per capita electricity use in the nation has increased by about 50 percent to about 12,000 kilowatt-hours annually. Meanwhile, over that same period, per capita electricity use in California has remained absolutely flat at about 7,000 kilowatt-hours per year. That means the average Californian today uses about 40 percent less electricity per year than the average American.

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Ronald Brownstein is the editorial director of National Journal. More

Ronald Brownstein, a two-time finalist for the Pulitzer Prize for his coverage of presidential campaigns, is National Journal Group's editorial director, in charge of long-term editorial strategy. He also writes a weekly column and regularly contributes other pieces for both National Journal and The Atlantic, and coordinates political coverage and activities across publications produced by Atlantic Media.

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