Calif. Ballot Battle Over Big Oil May Be Costliest in U.S. History

By John Pomfret
Washington Post Staff Writer
Friday, October 20, 2006

LOS ANGELES, Oct. 19 -- Call it the battle of Big Oil vs. Silicon Valley with a whole lot of Hollywood funding thrown in. Oil companies are squaring off against venture capitalists in a fight over a California proposition that would tax oil production in the state to fund alternative energy.

To date, $107 million has been raised in the fight. If it is all spent, it will make Proposition 87 the most expensive proposition in the nation's history, dwarfing the $93 million epic, also in California, to legalize Las Vegas-style casinos on Indian reservations in 1998. Oil companies, including Chevron; Aera Energy, a partnership of Shell Oil and Exxon Mobil; and Occidental Petroleum have given more than $60 million to oppose the measure. On the other side is a coalition of environmentalists and venture capitalists led by John Doerr, a partner at the Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers, and former partners Vinod Khosla and William Randolph Hearst III. The 800-pound gorilla in that camp is Hollywood mogul Stephen Bing, who has donated $40 million.

"This is a huge amount of money," said John Matsusaka, the director of the Initiative and Referendum Institute at the University of Southern California. "Bush and Kerry spent $250 million for a national election. This measure is costing nearly half that for a local issue in one state."

The idea behind Proposition 87, formally known as the Clean Alternative Energy Act, is simple. Oil companies, the proposition's backers charge, have not spent enough on alternative energy in the state that consumes the most oil and has the dirtiest air. So it's time that the government forced them to do so.

Prop. 87 would impose a tax of 1.5 to 6 percent per barrel of oil extracted from California, generating $225 million to $485 million a year in new tax revenue. California provides 12 percent of the U.S. oil supply and 40 percent of the state's supply. This money would create a $4 billion fund that would be used to develop alternative energy, with the goal of cutting petroleum consumption by 25 percent in 10 years. The measure also prohibits oil companies from passing the tax on to consumers.

In addition to strong financial backing from Silicon Valley and Hollywood, several political, business and entertainment luminaries have rallied to the measure's cause. Among them are former president Bill Clinton, who addressed a rally on Oct. 14 of 5,000 in Los Angeles in favor of Prop. 87; former vice president Al Gore, who cut his first political commercial since the 2000 presidential campaign in favor of Prop. 87; Richard Branson, the British entrepreneur; and actress Julia Roberts.

Yes on 87's campaign strategy has been to demonize the oil companies and to raise the specter of foreign oil imports and global warming. "We buy their oil, they burn our flag," intoned the announcer on one ad that featured a photograph of King Abdullah of Saudi Arabia and a Middle East mob. And in a state where Big Oil is as popular as earthquakes and even the Republican governor's Hummer is a hybrid, that strategy might seem like a winner. But support for Prop. 87, which had been in the double digits in July, is slipping. A Field Poll released earlier this month showed voters nearly evenly split on the measure.

One reason is the onslaught of ads funded by oil company money. As with any measure focused against multinational corporations, Matsusaka said, Big Oil "is trying to signal to anyone else contemplating similar measures that if you're going to take on the industry, you are going to have to spend a ton of money." The No on 87 campaign ads say that gas prices will rise and that the measure will actually increase, not lessen, California's dependence on foreign oil by forcing producers to stop pumping oil from their wells in the state. Independent economists have challenged that logic, saying energy prices are set globally, not locally.

There is also growing concern, expressed by economists and editorialists, about the state agency the measure would create and how the $4 billion would be distributed. The Los Angeles Times called the formation of a whole new government bureaucracy to fund alternative energy, already a prime target of venture capital, a "spectacularly bad idea." Indeed, of the 24 papers in California that have editorialized on the issue, only two have supported it.

Taxpayer groups have lambasted the measure, saying the new bureaucracy would be unfettered by normal checks and balances. And even energy economists worry that the proposition would simply create a taxpayer-funded piggy bank to subsidize the investments of Silicon Valley's richest venture capitalists, such as Doerr and Khosla, who are backing the measure.

Responding to those criticisms, Leslie Miller, a spokeswoman for the Yes on 87 campaign, acknowledged that firms associated with the measure's supporters could benefit but said that others would, too.

"It's going to be kids driving in clean-energy school buses," she said.

Although she acknowledged that alternative energy is already attracting millions in investment, Miller contended the program is necessary because "at a certain point you need government investment in order to propel implementation."

"This is not corporate welfare, this is venture-capitalist welfare, and that bothers me," countered James Sweeney, an economist at Stanford University who is starting a new institute that could profit from the energy fund. "I think they've chosen a bad instrument for a good goal."

© 2006 The Washington Post Company