BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                        AB 865


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       Date of Hearing:  April 29, 2016 


          ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY


                                Eduardo Garcia, Chair


       AB 865  
       Alejo - As Amended April 16, 2015


       SUBJECT:  State Energy Resources Conservation and Development  
       Commission:  grants and loans:  diversity


       SUMMARY:  Requires the State Energy Resources Conservation and  
       Development Commission (Commission) to establish guidelines for the  
       purpose of encouraging grantees and borrowers to engage women,  
       minority, disabled veterans, and LGBT business enterprises in  
       subcontracts, as specified.   Specifically, this bill:   


       1)Requires the Commission to condition the receipt of a grant or loan  
         with a commitment by the grantee or borrower of a certain size to  
         meet diversity planning and reporting requirements.



       2)Requires each grant or loan recipient with revenues exceeding $25  
         million to undertake the following:



          a)   Annually submit a detailed and verifiable plan for increasing  
            procurement from women, minority, disabled veteran, and LGBT  
            business enterprises in all categories, including, but not  
            limited to, renewable energy, advanced technologies, and  
            demonstration projects; and







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          b)   Provide an annual report to the Commission regarding the  
            implementation of outreach programs to inform and recruit women,  
            minority, disabled veteran, and LGBT business enterprises to  
            apply for procurement contracts, as specified.



       3)Requires the Commission to establish guidelines for specified  
         grantees and borrowers to use in creating supplier and subcontractor  
         outreach programs.



       4)Authorizes the Commission to set a revenue threshold other than $25  
         million for those Commission grantees and borrowers mandated to  
         comply with the planning and reporting requirements in this measure.



       5)Requires that the annual report on outreach program implementation  
         be a public document and posted on the Internet website of the grant  
         or loan recipient or Commission.



       6)Requires the Commission, following the recipient of the plans and  
         reports, to consider establishing a Diversity Task Force to consider  
         and make recommendations about diversity in the energy industry,  
         including diversity of corporate governing boards and procurement  
         from diverse businesses.  



       7)Provides that if the Commission establishes a Diversity Task Force,  
         that the Commission consider how the Task Force can address and  
         promote local and targeted hiring.  








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       8)Defines the following terms:



          a)   "Control" means exercising the power to make policy decisions.



          b)   "Disabled veteran business enterprise" has the same meaning as  
            defined in Section 999 of the Military and Veterans Code, which  
            is defined under existing law.



          c)   "LGBT business enterprise" means a business enterprise that is  
            at least 51 percent owned by a lesbian, gay, bisexual, or  
            transgender person or persons, or, in the case of any publicly  
            owned business, at least 51 percent of the stock of which is  
            owned by one or more lesbian, gay, bisexual, or transgender  
            persons, and whose management and daily business operations are  
            controlled by one or more of those individuals.



          d)   "Minority business enterprise" means a business enterprise  
            that is at least 51 percent owned by a minority group or groups,  
            or, in the case of any publicly owned business, at least 51  
            percent of the stock of which is owned by one or more minority  
            groups, and whose management and daily business operations are  
            controlled by one or more of those individuals. The contracting  
            utility shall presume that minority includes African Americans,  
            Hispanic Americans, Native Americans, and Asian Pacific  
            Americans.



          e)   To "operate" means to be actively involved in the day-to-day  
            management. It is not enough to merely be an officer or director.







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          f)   "Renewable energy project" means a project for the development  
            and operation of an eligible renewable energy resource meeting  
            the requirements of the California Renewables Portfolio Standard  
            Program [Article 16 (commencing with Section 399.11) of Chapter  
            2.3 of Part 1 of Division 1].



          g)   "Women business enterprise" means a business enterprise that  
            is at least 51 percent owned by a woman or women, or, in the case  
            of any publicly owned business, at least 51 percent of the stock  
            of which is owned by one or more women, and whose management and  
            daily business operations are controlled by one or more of those  
            individuals.
       EXISTING LAW:   


       1)Establishes the Commission to serve as the state's primary energy  
         policy and planning agency.  The Energy Commission is comprised of a  
         five-member board appointed by the Governor and approved by the  
         California State Senate.  Among other duties, the Energy Commission  
         administers a range of grant and loan programs

       2)Requires the Public Utilities Commission (PUC) to require each  
         electrical, gas, water, wireless telecommunications service  
         provider, and telephone corporation with gross annual revenues over  
         $25 million (including commission-regulated subsidiaries and  
         affiliates) to submit annually a detailed and verifiable plan for  
         increasing women- and minority-owned business and DVBE procurement  
         in all categories.

       3)Defines the following terms:

          a)   "Women business enterprise" means a business enterprise that  
            is at least 51% owned by a woman or women; or, in the case of any  
            publicly owned business, at least 51% of the stock of which is  
            owned by one or more women; and whose management and daily  







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            business operations are controlled by one or more of those  
            individuals.

          b)   "Minority business enterprise" means a business enterprise  
            that is at least 51% owned by a minority group or groups; or, in  
            the case of any publicly owned business, at least 51% of the  
            stock of which is owned by one or more minority groups, and whose  
            management and daily business operations are controlled by one or  
            more of those individuals. The contracting utility is directed to  
            presume that minority includes Black Americans, Hispanic  
            Americans, Native Americans, and Asian Pacific Americans.

          c)   "DVBE" means a sole proprietorship, corporation, or  
            partnership whose management and control of the daily business  
            operations is by one or more disabled veterans.  If the  
            enterprise is a sole proprietorship, then at least 51% is owned  
            by one or more disabled veterans.  A publicly owned business must  
            have at least 51% of its stock unconditionally owned by one or  
            more disabled veterans.  A subsidiary that is wholly owned by a  
            parent corporation is a DVBE if at least 51% of the voting stock  
            of the parent corporation is unconditionally owned by one or more  
            disabled veterans and a joint venture is a DVBE if at least 51%  
            of the joint venture's management, control, and earnings are held  
            by one or more disabled veterans.

       FISCAL EFFECT:  Unknown

       POLICY ISSUE FRAME:
       
       Although California has enormous diversity in its population, this  
       does not mean by default that historically underserved populations are  
       seeing an increased prosperous role in the U.S. economy. Research  
       demonstrates that the highest earners received most of their income  
       from capital gains and business ownership. This strongly suggests that  
       an often overlooked means for challenging income disparity is to  
       increase diversity among entrepreneurs and acting on behalf of  
       minority, women, LGBT, and disabled veteran business owners, to  
       increase their access to self-employment and correct for historical  
       disparities.








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       This measure proposes to increase the rate of successful  
       entrepreneurship among minorities, women, LGBT-identified individuals,  
       and disabled veterans.  In doing so the bill recognizes the  
       demographic shifts of the California marketplace and helps to nurture  
       the new and next generation of energy technology leaders.  As an  
       additional community benefit, the bill mark progress towards  
       mitigating social prejudice and income disparity.

       The Comment section of the analyses includes additional information on  
       a model program and its complimentary outreach activities which draw  
       comparison to the intent of this bill, a Congressional Budget Office  
       report's findings on income disparity as it relates to business  
       ownership, and the contrast between current demographic shifts and the  
       lack of diversity among corporate leadership. Comment 6 includes a  
       list of amendments the author will be accepting that help  
       operationalize this measure.

       COMMENTS:  

       1)Author's Purpose:  According to the author's statement, "AB865 will  
         ensure that California's clean energy future is inclusive of diverse  
         communities.  This bill will help working families and working-class  
         communities make economic and environmental gains with its  
         investments. The Commission currently directs much of California's  
         investments in clean energy research, clean transportation, and  
         energy efficiency. This bill helps ensure California's climate  
         change policies and investments have maximum co-benefits to reduce  
         pollution and poverty.



         This bill will require recipients of commission funding - which  
         supports projects advancing clean transportation and energy  
         technologies as well as cutting edge research - to report annually  
         on their minority-, women-, LGBT- and disabled veteran-owned  
         business procurement efforts. 

         It will also require that fund recipients develop a verifiable  
         supplier diversity plan. In addition, it will create a diversity  
         advisory committee to support the Commission's supplier diversity  







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         efforts, including creating guidelines for fund recipients to use in  
         carrying out bill requirements.

         AB865 builds upon the success of CPUC, General Order 156, which  
         created an effective supplier diversity program that has led to $8.5  
         billion in procurement contracts with diverse business enterprises  
         out of the $24 billion total purchased by applicable companies. The  
         insurance industry has seen similar success under AB53, with an  
         effective and innovative diversity task force achieving higher  
         diversity procurement numbers in California. It is now time to see a  
         successful supplier diversity program apply to the entire energy  
         sector."

       2)Model Program:  Beginning in 1986, the Legislature enacted a series  
         of statutes, and the PUC adopted General Order (GO) 156, for the  
         purpose of encouraging greater participation in utility contracts by  
         women, minorities, and disabled veteran owned business enterprises  
         (WMDVBE).  In 2014, lesbian, gay, bisexual, and transgender business  
         enterprises were added through statute.   Currently regulated  
         entities include electrical, gas, water, wireless telecommunications  
         service providers, and telephone corporations with gross annual  
         revenues over $25 million including commission-regulated  
         subsidiaries and affiliates.

         Statute and GO 156 include rules and regulations for the utilities'  
         compliance with the WMDVBE contracting program, and requires  
         participating utilities to inform, recruit, and obtain at least 20%  
         of their products and services purchased within a five-year period  
         from women- and minority-owned businesses.  The targets are 15% for  
         minority-owned businesses, 5% for women-owned businesses, and 1.5%  
         for DVBEs.

         GO 156 further requires woman- and minority-owned business  
         enterprises to be certified through the CPUC's Utility Diversity  
         Supplier Program Clearinghouse, and disabled veteran-owned  
         businesses to be certified by the Department of General Services  
         pursuant to DVBE certification established under the California  
         Disabled Veteran Business Enterprise Program.  There are currently  
         7,944 verified vendors in the Clearinghouse database, of which 2,358  
         are minority-owned businesses, 2,661 are women-owned businesses,  







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         1,164 are minority women-owned or woman and minority male-owned  
         businesses, and 1,761 are DVBEs.  Utilities subject to these  
         diversity contracting requirements are assessed a charge based on  
         intrastate revenues to support operation of the Clearinghouse.

         Regulated entities are required to annually submit a detailed and  
         verifiable plan, with goals and timetables, for increasing WMDVBE  
         participation in all categories of procurement, including  
         technology, equipment, supplies, services, materials, and  
         construction.  Although there is no penalty for failure of a utility  
         to meet its goals, each utility is required to report annually on  
         its progress.  The CPUC, in turn, is required to make an annual  
         progress report to the Legislature.

         The California Constitution prohibits the state from discriminating  
         against, or granting preferential treatment to, any individual or  
         group on the basis of race, sex, color, ethnicity, or national  
         origin in the operation of public employment, public education, or  
         public contracting.  According to the CPUC, nothing in GO 156  
         authorizes or permits a utility to use set-asides, preferences, or  
         quotas in administration of its WMDVBE program, and utilities retain  
         the authority to use legitimate business judgment to select a  
         supplier for a particular contract.

       3)Outreach Activities:  AB 865 requires grantees and borrowers to  
         establish outreach programs as a means to inform and recruit a  
         broader diversity of applicants to their contracting activities.   
         Examples of the types of outreach activities recommended in GO 156  
         include:



          a)   Actively seek out opportunities to identify WMDVBE contractors  
            and to expand WMDVBE source pools;



          b)   Actively support the efforts of organizations experienced in  
            the field who promote the interests of WMDVBE contractors;








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          c)   Work with WMDVBE contractors to facilitate contracting  
            relationships by explaining utility qualification requirements,  
            bid and contracting procedures, materials requirements, invoicing  
            and payment schedules, and other procurement practices and  
            procedures;



          d)   Encourage employees involved in procurement activities to  
            break apart purchases and contracts as appropriate to accommodate  
            the capabilities of WMDVBEs; and



          e)   At the request of any unsuccessful WMDVBE bidder, provide  
            information concerning the relative range/ranking of the WMDVBE  
            contractor's bid as contrasted with the successful bid. 



         GO 156 also provides that outreach activities should vary for each  
         utility depending on its size, service territory, and specific lines  
         of business.





       4)Using Entrepreneurship to Address Income Disparity:  In  
         understanding how business ownership can shift the income disparity  
         dynamic, it may be useful to consider a 2011 Congressional Budget  
         Office (CBO) report on after-tax incomes of American households.  



         The CBO found that between 1979 and 2007, income for households at  
         the higher end of the income scale rose much more rapidly than  
         income for households in the middle and at the lower end of the  







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         income scale.  Most significantly, by the end of the reporting  
         period (2005-2007), the after-tax income received by the top 20%  
         exceeded the after-tax income of the remaining 80%.  The chart below  
         illustrates the CBO's findings in more detail.





           ------------------------------------------------------------ 
          |            After-Tax Income Growth 1979 to 2007            |
          |                                                            |
          |                                                            |
           ------------------------------------------------------------ 
          |---------+---------------+--------------+------------------|
          | Income  |Income Earners |  Percentile  |Percentage Growth |
          | Bracket |               |              |                  |
          |         |               |              |                  |
          |         |               |              |                  |
          |---------+---------------+--------------+------------------|
          |    1    |    Top 1%     |    100th     |       275%       |
          |         |               |              |                  |
          |         |               |              |                  |
          |---------+---------------+--------------+------------------|
          |    2    |   Next 20%    | 81st to 99th |       65%        |
          |         |               |              |                  |
          |         |               |              |                  |
          |---------+---------------+--------------+------------------|
          |    3    |   Next 60%    | 20th to 80th |       40%        |
          |         |               |              |                  |
          |         |               |              |                  |
          |---------+---------------+--------------+------------------|
          |    4    |  Bottom 20%   |  1 to 19th   |       18%        |
          |         |               |              |                  |
          |         |               |              |                  |
           ----------------------------------------------------------- 
           ------------------------------------------------------------ 
          |Source: "Trends in the Distribution of House Income Between |
          |1979 and 2007,3 Congressional Budget Office, 2011           |
          |                                                            |







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          |                                                            |
           ------------------------------------------------------------ 



         The two primary reasons for the increase in income disparities were  
         (a) the uneven distribution in the sources of household income and  
         (b) the differing economic circumstances of those sources.   
         Households in the higher income brackets (1 & 2) received a majority  
         of their income through capital gains and business income, which  
         increased in value as a share of total income, while individuals in  
         the bottom two brackets (3 & 4) received a majority of their income  
         from labor income and capital income, which decreased in value.   
         With the recession, this income disparity has continued to increase,  
         in part, because of the impact of long term unemployment on wages (a  
         core component of labor income), and rental rates (a core component  
         of capital income).  





         The findings in the report also suggest that policies that inhibit  
         access to self-employment serve to reinforce income disparities and  
         that policies which encourage entrepreneurship, especially to  
         historically underserved populations, could begin to break the  
         trend.





       5)Market Impacts of California's Demographic Shift:  As unprecedented  
         numbers of baby boomers prepare to retire from the market place,  
         many corporate boards will be seeking new members to help shape  
         their businesses for the future.  This demographic trend reflects  
         not only a generational shift in the U.S., but it also marks a shift  
         in the race and ethnicity of the nation's working age population.  

         The California Budget Project estimates that by 2020, nearly 60% of  







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         the working age population in California will be comprised of  
         Latinos, African Americans, and Asian Americans.  Similarly, the  
         composition of the U.S. consumer base is changing.  Minority  
         purchasing power in the U.S. is expected to triple from $1.3  
         trillion in 2000 to over $4 trillion by 2045.  This represents over  
         a 70% growth of total U.S. purchasing power during the same time  
         period.  Latino and African American purchasing power is already so  
         significant in the U.S. that if it were compared to national GDPs,  
         it would be greater than all but nine economies in the world.

         Companies that want to remain competitive are designing new and  
         adapting existing products and services to meet this expanding  
         market.  Corporate leadership, however, has not kept pace with the  
         changing demographics, and there remains a gap in the ethnic and  
         gender diversity on corporate boards.  According to a 2008 report by  
         Virtcom Consulting on the leadership of Fortune 100 companies, while  
         women comprise slightly more than half the U.S. population, they  
         hold only 17% of the positions on corporate boards of Fortune 100  
         companies.  Research also suggests that companies with more diverse  
         boards have higher performance and other financial metrics such as  
         return on equity, return on sales, and return on investment.

         However, even given this type of empirical evidence for  
         out-performance, there has been very little progress in bringing  
         diversity to boardrooms.  The above-referenced report states that  
         Caucasian, non-Latinos, still hold a disproportionate share of board  
         seats by occupying 84% of the 1,031 corporate board seats of Fortune  
         100 companies.  African Americans held 10%, Asian Americans 2%, and  
         Latinos 4%.  Another study conducted by the Alliance for Board  
         Diversity examined growth in diversity from 2004 to 2006, revealing  
         that only three net seats were gained by women and minorities.  

         A 2012 study by Alliance for Board Diversity noted that between 2004  
         and 2012, among Fortune 100 companies:

              Women had gained only 38 board seats, 16.2% to 19.8% or a 2.9%  
            increase.
              Minority men had gained only 12 seats, 11.9% to 12.4% or a  
            0.5% increase.
              Minority women had gained 9 seats, 3% to 3.9% or a 0.9%  







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            increase.

         Among Fortune 500 companies, women held less than 20% of corporate  
         board seats in 2014, according to a January 2015 study by Catalyst,  
                                                                        a Canadian nonprofit organization that publishes research on women  
         and business.  

         Encouraging more diverse boards is an important public policy as it  
         lessens income and equity gaps, generates higher tax revenues, and  
         contributes to the state's overall competitiveness.  By modernizing  
         the state's procurement policies to reflect new cultural, racial and  
         gender business conditions, AB 865 advances an important public  
         policy for the post-recession economy. 

       1)Proposed Amendments:  The Committee staff is in discussions with the  
         author on the amendments listed below. 



          a)   Shift the size of business revenue trigger to a size of loan  
            or grant trigger.



          b)   Streamline the Commission's oversight and clarify the purpose  
            of the outreach programs.



          c)   Reduce planning and reporting to an outreach plan and a  
            document that tracks its implementation and outcomes.



          d)   Direct the Commission to address certification of the targeted  
            populations including the use of existing certification processes  
            of the state and nationally recognized third-party  
            certifications.  









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          e)   Require the grantee or borrower, within 60 days following a  
            grant award or loan approval subject to this bill, to report to  
            the Commission on whether they are a certified business, as well  
            as the diversity composition of their suppliers and  
            subcontractors in the current and prior year.



          f)   Require the grantee or borrower to continue to track and  
            report on the diversity of its subcontractors for two-years  
            following receipt of the Commission's funds or the term of the  
            loan or grant, whichever is longer.



          g)   Require all annual reports to be on the Commission's website.



       1)Related Legislation:  Below is a list of bills from the current and  
         prior sessions.
          a)   AB 873 (Davis) PUC Procurement Contracts with Water Companies:  
            This bill requires each water corporation with 10,000 or more  
            service connections to submit annual plans for increasing  
            procurement from women- and minority-owned businesses and DVBEs  
            to encourage each electrical, gas, water, and telephone  
            corporation that is not required to submit a plan under current  
            law to voluntarily adopt a plan for increasing women, minority,  
            and DVBE procurement in all categories. Status:  Signed by the  
            Governor, Chapter 316, Status of 2008.

          b)   AB 1255 (V. Manuel Pérez) Corporate Board Registries  
            Notification:  This bill, as it was heard in JEDE, would have  
            enhanced access to information about the range of minority and/or  
            women candidates qualified to serve on corporate boards by  
            requiring that the Secretary of State provide corporations a  
            listing of known registries of potential board candidates.   
            Status:  The bill was amended with different language in the  
            Senate, 2012.







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          c)   AB 1678 (Gordon) LGBT Procurement Participation:  This bill  
            extends provisions that require investor owned electrical, gas,  
            water, wireless telecommunication service providers, and  
            telephone corporations to encourage, recruit, and utilize  
            minority, women, disabled veteran owned business enterprises to  
            include Lesbian, Gay, Bisexual, and Transgender business  
            enterprises.  Status:  Signed by the Governor, Chapter 633,  
            Statutes of 2014.

          d)   AB 1918 (Davis) PUC Procurement Wireless Telecommunications:   
            This bill requires the PUC to require specified wireless  
            telecommunications service providers to annually report on their  
            progress in increasing contracting with women- and minority-owned  
            businesses and DVBEs.   Status:  Signed by the Governor, Chapter  
            456, Statutes of 2010.

          e)   AB 2593 (Bradford) Diversity at the Air Resources Board:  This  
            bill would have required businesses with gross annual revenues  
            exceeding $25 million that participate in programs administered  
            by the Air Resources Board (ARB) that receive funding from the  
            Greenhouse Gas Reduction Fund to report to ARB on efforts to  
            increase procurement from women, minority, and disabled veteran  
            business enterprises. Status:  Vetoed by the Governor, 2014.  The  
            Governor's veto message stated, "This bill would require a  
            business enterprise with gross annual revenue exceeding $25  
            million, participating in a program administered by the Air  
            Resources Board that is funded from the Greenhouse Gas Reduction  
            Fund, to report annually to the Air Board regarding supplier  
            diversity procurement.  Without question, I support the general  
            goal, but this bill establishes a burdensome and expensive  
            requirement for businesses with no clear way to ensure that  
            supplier diversity would actually increase. Furthermore, State  
            agencies are already taking action to report on diversity  
            procurement and currently report to both the State and Federal  
            governments on supplier diversity procurement contracts."

          f)   AB 2758 (Bradford) PUC Minority and Women Procurement Goal  
            Reporting:  This bill requires the PUC to include in their  
            required report to the Legislature, the renewable energy,  







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            wireless telecommunications, broadband, smart grid and rail  
            projects as categories for which utilities should increase  
            procurement from women, minority, and disabled veteran-owned  
            enterprises, specified.  Status:  Signed by the Governor. Chapter  
            475, Statutes of 2010.

          g)   AB 3678 (Moore) PUC Procurement Goals: This bill codified the  
            broader parameters of GO 156, and requires electrical, gas, and  
            telephone corporations (with gross annual revenues exceeding $25  
            million) to annually submit a detailed and verifiable plan for  
            increasing women- and minority-owned business procurement in all  
            categories that includes short- and long-term goals and  
            timetables, and furnish an annual report.  It also required the  
            PUC to establish guidelines for the plans. Status: Signed by the  
            Governor, Chapter 1259, Statutes of 1986.

          h)   SB 2398 (Dills) PUC DVBE Procurement Goal:  This bill included  
            DVBEs in the classes of entities eligible under women- and  
            minority-owned business programs. A subsequent PUC decision  
            includes disabled veteran-owned business enterprises (D.  
            95-12-045) and establishes a 1.5-percent goal for disabled  
            veteran-owned businesses.  Status:  Signed by the Governor,  
            Chapter 516, Statutes of 1990.



       2)Double Referral:  The Assembly Rules Committee has referred this  
         measure to the Assembly Committee on Utilities and Commerce (U&C)  
         and the Assembly Committee on Jobs, Economic Development and the  
         Economy.   This measure passed U&C on a 10 to 3 vote.
       REGISTERED SUPPORT / OPPOSITION:


       Support
       Asian Business Association


       Asian Business Association, Inland Empire









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       Asian Pacific Environmental Network


       California Black Chamber of Commerce


       Coalition for Clean Air


       Environment California


       Environmental Defense Fund


       Equality California


       Green Technical Education and Employment


       Greenlining Institute (Sponsor)


       Natural Resource Defense Council


       sustainableSMARTS


       West Angeles Community Development Corporation




       Opposition
       None received


       







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       Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916) 319-2090