THE LEGAL BUT LARGELY UNREGULATED WORLD OF POT MERCHANTS THRIVES

In his nondescript San Francisco flat, Kevin Reed operates a sleek,
efficient marijuana delivery service.

Five drivers deliver the product -- glistening green buds in white
paper bags -- to neighborhoods throughout the city. Two operators
work the phones. Flat-screen TVs display security feeds of the
surrounding neighborhood.

Mr. Reed, who had a clean-shaven head and wore a pinstriped shirt,
calls his business the Green Cross. It is the only pot delivery
service in San Francisco with a city permit, for which Mr. Reed paid $15,000.

Getting the permit was a laborious, three-month process, and this is
why Mr. Reed is watching the proliferation of rival pot delivery
services -- none licensed -- with dismay.

"I have to compete with the guy who has 2,000 plants in a field
behind his house," Mr. Reed said in a lilting Alabama accent as he
smoked a joint. "And is selling his pot for $200 an ounce in the
newspaper, delivery fee included. And not paying Uncle Sam a dime."

In the new marijuana economy, the guy with the pot field behind his
house is increasingly at odds with a growing class of Bay Area
cannabis merchants.

A patchwork of local, state and federal laws -- some in direct
contradiction to one another -- has led to a freewheeling marketplace
for Bay Area pot, some of the world's finest. With a state ballot
measure to legalize the drug set for November, the economic activity
has reached a fever pitch, drawing in local politicians, trade
unionists, doctors and a variety of entrepreneurs.

Some of the activity is still blatantly illegal. In Oakland, a house
where growers surreptitiously used eight car batteries to cultivate
300 pot plants recently burst into flames. And, in a practice that
growers now say is widespread, pesticides not meant for consumable
crops are being sold in hydroponic "grow" shops throughout the
region, often in unlabeled vials.

Other activities occupy a more informal gray area. Posts on Web sites
like budtrader.com propose to exchange marijuana for Nintendo systems
and offer warnings about "rippers" who cheat or steal from suppliers.

With so much cash flying around, these transactions also attract
crime. Last week, a San Francisco State student who ran an unlicensed
delivery service out of his apartment took an order over the
Internet. When he went to deliver a pound of marijuana to Richmond
after midnight, the student was robbed of the pot and $1,000.

Still other activities are perfectly legal. The 29 licensed medical
marijuana stores, or dispensaries, in San Francisco, Oakland and
Berkeley are prohibited from turning a profit, but many are thriving.
Harborside Health Center in Oakland is the largest medical marijuana
store in the world -- it shares 52,000 registered members with a
sister location in San Jose. Harborside puts these earnings into free
programs -- like yoga classes and cannabis for low-income members --
and makes charitable contributions.

"Some people think that our movement is being hijacked into big
business," said Jeff Jones, a proponent of the legalization
initiative and a longtime medical marijuana activist. "I think we are
just maturing."

It has been 13 years since voters passed Proposition 215, which laid
out narrow rules for patients with a doctor's prescription to grow
and consume marijuana. More state rules followed, and local
governments have added their own regulations.

Municipal governments decide how many dispensaries can operate within
the city limits -- Oakland allows four, Berkeley three, while San
Francisco sets no cap. Some city and county governments limited how
much medical marijuana can be legally grown by individuals and dispensaries.

Marijuana remains a controlled substance -- and illegal -- under
federal law. But most local authorities take a laissez-faire approach
to marijuana businesses that would appear to be only loosely
connected to medical treatment.

But legal ambiguities aside, pot is rapidly evolving into a
legitimate business in the Bay Area.

Last week, Rebecca Kaplan, a member of the Oakland City Council,
appeared at a news conference of union leaders to announce that pot
industry workers -- including bud tenders-- would become members of
the United Food and Commercial Workers Local 5. It was a move that
dispensary operators and legalization proponents applauded as
bringing new legitimacy to their industry.

"This is a good day for Oakland," Ms. Kaplan told reporters. "Having
the workers in a union adds another check and balance as this movement grows."

Ms. Kaplan is also working on a proposal with Councilman Larry Reid
to regulate marijuana production by licensing about four indoor pot
farms in the industrial areas of Oakland. The city already limits
indoor residential medical marijuana growing to 72 plants for
individuals and 6 mature plants plus 12 immature ones per patient for
dispensaries.

The Council will consider the new plan in July, and if it passes, the
AgraMed company will be poised to apply. The company proposes to
build a 100,000-square-foot medical marijuana megafarm beside
Interstate 880 near Oakland International Airport that, according to
projections, could generate 58 pounds of pot a day and $59 million a
year in revenue.

"I think the City of Oakland has shown a lot of courage in managing
cannabis from a common sense standpoint," said Jeff Wilcox, president
of AgraMed and a member of the steering committee of the initiative
to legalize marijuana. "They have rationally looked at it and found a
way to develop it into a real industry that serves individuals, that
serves the community."

Mr. Wilcox is hoping to bring a degree of corporate structure to the
medical marijuana industry. In March, he approached the city with an
economic study that proposed a 3 percent "production tax" on AgraMed,
which he said could generate $1.8 million a year for the city.
AgraMed would also create 371 jobs, many of them unionized, according
to the study.

Mr. Wilcox estimated that AgraMed would cost $20 million to develop
- -- a risk he said he was willing to take even though the company
would be technically illegal under federal law, and facility
operators would be subject to prosecution.

Mr. Wilcox's vision can be seen at his 7.4 acre complex of low
buildings. Although he said construction would not begin until the
Council signed off and his permit was granted, Pacific Gas and
Electric recently increased the power supply to one of his buildings
by about 2,000 amps. Martin Kaufman, Mr. Wilcox's associate,
estimates that the facility will require 600,000 kilowatt hours of
electricity a month to power the grow lights needed for 30,000
plants, which can be harvested six times a year.

Because marijuana is illegal, many growers are reluctant to open
their operations to scrutiny. Currently, there are no local, state or
federal agencies to provide that oversight. In this regulatory
vacuum, private businesses -- essentially self-deputized regulators
- -- have emerged to do things like certify that marijuana is organic
and test the product for contaminants.

The issue of testing is particularly sensitive because growers are
turning to an array of growth-enhancement products and illegal
pesticides to protect their lucrative crops.

"Medical cannabis has had to be produced and procured in a
not-quite-above-board way," Councilwoman Kaplan said. "I think we're
really at a turning point that we can handle this in a regulated and
permitted way."

Many Bay Area dispensaries participate in civic projects and
organizations like the Chamber of Commerce. And as the November
balloting get nearer, advocates of legalization are gathering new and
powerful allies.

Some medical marijuana activists worry that there is now a divide
between the well-connected dispensaries and smaller, more informal
groups of growers and consumers who for years have been part of the
medical marijuana scene.

"To me, it's a money movement now," said Chris Smith, who is part of
40 Acres Medical Marijuana Collective, an underground medical
marijuana group in Berkeley. "Most of them probably got a little
political pull or a little political networking; they got lawyers;
they got money for lawyers; they jump right in to position."

40 Acres Collective consists of about 100 growers and users who
gather to share pot, money and plants.

Mr. Smith said the collective would like to be able to get a city
permit and become a licensed dispensary. But the city has capped the
number of pot clubs at three, and all the spots are taken. Mr. Smith
said he worried that 40 Acres Collective might ultimately be shut out.

As he showed off several rooms filled with marijuana plants beginning
to flower, the collective's members gathered in another room to
celebrate the 76th birthday of Mr. Smith's father, Scott Smith Jr., a
former Black Panther who taught his son to garden.

The celebration was to be followed by an event called "the weed
Olympics," in which the participants try to out-smoke one another.

"Medical marijuana is not really a business, you know?" said the
younger Mr. Smith, as people around him laid out pot cookies, tiny
pot-laced pineapple upside-down cakes and decorative pot plants for
the party. "It's a community-based organization. There is revenues
being exchanged, transactions happening, but that's not really what
it's about."