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National Issues

Ahnuld, Ken Lay, George Bush, Dick Cheney and Gray Davis
by Jason Leopold
August 15, 2003

Arnold Schwarzenegger isn't talking. The Hollywood action film star and California's GOP gubernatorial candidate in the state's recall election has been unusually silent about his plans for running the Golden State. He hasn't yet offered up a solution for the state's $38 billion budget deficit, an issue that largely got more than one million people to sign a petition to recall Gov. Gray Davis.

More impv ortant, however, Schwarzenegger still won't respond to questions about why he was at the Peninsula Hotel in Beverly Hills two years ago where he, former Los Angeles Mayor Richard Riordan and junk bond king Michael Milken, met secretly with former Enron Chairman Kenneth Lay who was touting a plan for solving the state's energy crisis. Other luminaries who were invited but didn't attend the May 24, 2001 meeting included former Los Angeles Laker Earvin "Magic" Johnson and supermarket magnate Ron Burkle.

While Schwarzenegger, Riordan and Milken listened to Lay's pitch, Gov. Davis pleaded with President George Bush to enact much needed price controls on electricity sold in the state, which skyrocketed to more than $200 per megawatt-hour. Davis said that Texas-based energy companies were manipulating California's power market, charging obscene prices for power and holding consumers hostage. Bush agreed to meet with Davis at the Century Plaza Hotel in West Los Angeles on May 29, 2001, five days after Lay met with Schwarzenegger, to discuss the California power crisis.

At the meeting, Davis asked Bush for federal assistance, such as imposing federally mandated price caps, to rein in soaring energy prices. But Bush refused saying California legislators designed an electricity market that left too many regulatory restrictions in place and that's what caused electricity prices in the state to skyrocket. It was up to the governor to fix the problem, Bush said. However, Bush's response appears to be part of a coordinated effort launched by Lay to have Davis shoulder the blame for the crisis. It worked. According to recent polls, a majority of voters grew increasingly frustrated with the way Davis handled the power crisis. Schwarzenegger has used the energy crisis and missteps by Davis to bolster his standing with potential voters. While Davis took a beating in the press (some energy companies ran attack ads against the governor), Lay used his political clout to gather support for deregulation.

A couple of weeks before Lay met with Schwarzenegger in May 2001, the PBS news program "Frontline" interviewed Vice President Dick Cheney, whom Lay met with privately a month earlier. Cheney was asked by a correspondent from Frontline whether energy companies were acting like a cartel and using manipulative tactics to cause electricity prices to spike in California.

"No," Cheney said during the Frontline interview. "The problem you had in California was caused by a combination of things--an unwise regulatory scheme, because they didn't really deregulate. Now they're trapped from unwise regulatory schemes, plus not having addressed the supply side of the issue. They've obviously created major problems for themselves and bankrupted PG&E in the process."

A month before the Frontline interview and Bush's meeting with Davis, Cheney, who chairs Bush's energy task force, met with Lay to discuss Bush's National Energy Policy. Lay, whose company was the largest contributor to Bush's presidential campaign, made some recommendations that would financially benefit his company. Lay gave Cheney a memo that included eight recommendations for the energy policy. Of the eight, seven were included in the final draft. The energy policy was released in late May 2001, after Schwarzenegger, Riordan and Milken met with Lay and after the meeting between Bush and Davis and Cheney's Frontline interview.

The policy made only scant references to California's energy crisis, which Enron was accused of igniting, and did not indicate what should be done to provide the state some relief. Cheney said the policy focused on long-term solutions to the country's energy needs, such as opening up drilling in the Arctic National Wildlife Refuge and freeing up transmission lines. That's why California was ignored in the report, Cheney said.

What's unknown to many of the voters who will decide Davis's fate on Oct. 7, the day of the recall election, is that while Cheney dismissed Davis's accusations that power companies were withholding electricity supplies from the state, one company engaged in exactly the type of behavior that Davis described. But Davis would never be told about the manipulative tactics the energy company engaged.

In a confidential settlement with the Federal Energy Regulatory Commission, whose chairman was appointed by Bush a year earlier, Tulsa, Okla., based-Williams Companies agreed to refund California $8 million in profits it reaped by deliberately shutting down one of its power plants in the state in the spring of 2000 to drive up the wholesale price of electricity in California.

The evidence, a transcript of a tape-recorded telephone conversation between an employee at Williams and an employee at a Southern California power plant operated by Williams, shows how the two conspired to jack up power prices and create an artificial electricity shortage by keeping the power plant out of service for two weeks.

Details of the settlement had been under seal by FERC for more than a year and were released in November after the Wall Street Journal sued the commission to obtain the full copy of its report. Similarly, FERC also found that Reliant Energy  engaged in identical behavior around the same time as Williams and in February the commission ordered Reliant to pay California a $13.8 million settlement.

Had the evidence been released in 2001 when Davis accused energy companies of fraud it would have helped California's case and voters may have viewed the governor more positively. But if FERC were to publicly release the details of the Williams settlement it wouldn't have jibed with Bush's energy policy, which was made public instead in May 2001. It's highly unlikely that Bush, Cheney and members of the energy task force were kept in the dark about the Williams scam, especially since the findings of the investigation by FERC took place around the same time the policy was being drafted.

But Davis was still causing problems for Lay. California's power woes had a ripple effect, forcing other states to cancel plans to open up their electricity markets to competition fearing deregulation would lead to widespread blackouts and price gouging. For Enron, a company that generated most of its revenue from buying and selling power and natural gas on the open market, such a move would paralyze the company.

Fearing that Davis would take steps to re-regulate California's power market that Lay spent years lobbying California lawmakers to open up to competition, Lay recruited Schwarzenegger, Riordan, Milken, and other powerful business leaders like Bruce Karatz, chief executive of home builder Kaufman & Broad; Ray Irani, chief executive of Occidental Petroleum; and Kevin Sharer, chief executive of biotech giant Amgen.

The 90-minute secret meeting Lay convened took place inside a conference room at the Peninsula Hotel. Lay, and other Enron representatives at the meeting, handed out a four-page document to Schwarzenegger, Riordan and Milken titled "Comprehensive Solution for California," which called for an end to federal and state investigations into Enron's role in the California energy crisis and said consumers should pay for the state's disastrous experiment with deregulation through multibillion rate increases. Another bullet point in the four-page document said "Get deregulation right this time -- California needs a real electricity market, not government takeovers."

The irony of that statement is that California's flawed power market design helped Enron earn more than $500 million in one year, a tenfold increase in profits from a previous year and it's coordinated effort in manipulating the price of electricity in California, which other power companies mimicked, cost the state close to $70 billion and led to the beginning of what is now the state's $38 billion budget deficit. The power crisis forced dozens of businesses to close down or move to other states, where cheaper electricity was in abundant supply, and greatly reduced the revenue California relied heavily upon.

Lay asked the participants to support his plan and lobby the state Legislature to make it a law. It's unclear whether Schwarzenegger held a stake in Enron at the time or if he followed through on Lay's request. His spokesman, Rob Stutzman, hasn't returned numerous calls for comment about the meeting. For Schwarzenegger and the others who attended the meeting, associating with Enron, particularly Ken Lay, the disgraced chairman of the high-flying energy company, during the peak of California's power crisis in May 2001 could be compared to meeting with Osama bin Laden after 9-11 to understand why terrorism isn't necessarily such a heinous act.

A person who attended the meeting at the Peninsula, which this reporter wrote about two years ago, said Lay invited Schwarzenegger and Riordan because the two were being courted in 2001 as GOP gubernatorial candidates. A week before the meeting, Davis signed legislation to create a state power authority that would buy, operate and build power plants in lieu of out-of-state energy companies, such as Enron, that the governor alleged was ripping off the state.

For Enron's Lay, the timing of the meeting was crucial. His company was just five months away from disintegrating and he was doing everything in his power to keep his company afloat and the profits rolling in.

It wasn't until Enron collapsed in October 2001 and evidence of the company's manipulative trading tactics emerged that FERC began to take a look at the company's role in California's electricity crisis. Since then, memos written by former Enron traders were uncovered, with colorful names like "Fat Boy" and "Death Star," that contained the blueprint for ripping off California.

Enron's top trader on the West Coast, Timothy Belden, the mastermind behind the scheme, pleaded guilty in December to conspiracy to commit wire fraud and has agreed to cooperate with federal investigators who are still trying to get to the bottom of the crisis.

California is still demanding that FERC order the energy companies to refund the state $8.9 billion for overcharging the state for electricity during its yearlong energy crisis. But FERC says California is due no more than $1.2 billion in refunds because the state still owes the energy companies $1.8 billion in unpaid power bills.

Davis, who refused to cave in to the demands of companies like Enron even while Democrats, Republicans and the public criticized him, was right all along. Maybe Californians ought to cut Davis some slack.

Jason Leopold spent two years covering California's energy crisis as bureau chief of Dow Jones Newswires. He is currently working on a book about the crisis.

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