Total amnesia

Arnold can’t seem to recall anything about his secret meeting with Enron’s Ken Lay. Perhaps this will refresh his memory.

Arnold Schwarzenegger and Ken Lay leave Gray Davis and California ratepayers in the dark.

Arnold Schwarzenegger and Ken Lay leave Gray Davis and California ratepayers in the dark.

Photo Illustration by Gertie Scott

who spent two years covering California’s energy crisis as bureau chief of Dow Jones Newswires and is currently working on a book about the crisis

Arnold Schwarzenegger isn’t talking. The Hollywood action-film star and 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 a solution for the state’s budget deficit, an issue that largely got more than 1 million people to sign a petition to recall Governor Gray Davis.

More importantly, 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, Davis pleaded with President George W. Bush to enact much-needed price controls on electricity sold in the state, which skyrocketed to more than $200 per megawatt-hour (four to five times the price it was a year earlier). 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 of that year—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 that’s what had 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 have been 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 keep deregulation in place.

A month before Bush’s meeting with Davis, Vice President Dick 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 benefit his company financially. 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 had met with Lay and after the meeting between Bush and Davis.

Long before the recall became national news, Darrell Issa, the millionaire businessman and Republican congressman from California who funded the recall by tapping into his personal fortune, verbalized his disdain for Davis and his handling of the crisis by testifying at a House Energy and Commerce subcommittee hearing in Washington, D.C. His testimony illustrated how Issa, who in March 2001 was a newly elected congressman, already was using the energy crisis to advance his own political career.

“We find ourselves facing a crisis today because of an historical lack of leadership and the absence of a comprehensive energy policy,” Issa testified. “Rather than allowing energy consumers to see the true cost of electricity and send the appropriate price signals to conserve, state politicians continue to shift the cost to state taxpayers—spending billions of dollars to shield themselves from the political fallout.”

While Davis tried to shield consumers from skyrocketing power prices, Issa, the businessman, was ready to have consumers bear the brunt of the crisis by paying whatever price the power market dictated—without holding energy companies responsible for using manipulative tactics to boost profits. In convincing the public that Davis failed to solve the energy crisis, which means consumers today pay twice as much for power than do consumers in the rest of the nation, Issa was able to secure more than a million signatures for the recall ballot.

Schwarzenegger seems just as disingenuous. In a 60-second television spot aired this week, the actor claims he will put people before special interests. But Schwarzenegger is a businessman first, and it’s highly unlikely he would go to war with companies like Enron the way Davis has.

If Davis is indeed recalled, a new governor is still going to have to fight the Federal Energy Regulatory Commission (FERC) for the $8.9 billion in electricity refunds the state says it’s owed by out-of-state energy companies. The refund issue, which Davis refused to settle, is a perfect example of a public official putting people before special interests.

On August 19, in his first major address against the recall, Davis admitted for the first time that he was slow to act on the energy crisis, but he dismissed the recall in general as a Republican power grab.

“The Republicans behind the recall say they want you to vote me out because of past mistakes,” Davis said in a speech at the University of California, Los Angeles. “But they don’t give a rip about past mistakes. They want power for the future, and with so many candidates, they think they can get it with the support of a tiny fraction of California voters.”

What’s unknown to many of the voters who will decide Davis’s fate on October 7, the day of the recall election, is that—even as Bush officials dismissed Davis’s accusations that power companies were withholding electricity supplies from the state back in 2001—one company already had been caught engaging in exactly the type of behavior Davis described. But, at the time, Davis and the rest of the public were kept in the dark about the manipulative tactics the energy company engaged in because federal energy regulators chose to seal the details of the settlement.

In a confidential settlement with the FERC, whose chairman was appointed by Bush a year earlier, Tulsa, Okla.-based The Williams Cos. Inc. agreed to refund California $8 million in profits it reaped by shutting down one of its power plants in the state, deliberately, 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 had released the details of the Williams settlement publicly, 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 because the findings of the investigation by FERC took place around the same time the policy was being drafted.

But Davis—while being kept in the dark—still was 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.

And so we return to our secret meeting on May 24, 2001. Fearing that Davis would take steps to re-regulate California’s power market, which Lay spent years lobbying California lawmakers to open up to competition, Lay recruited Schwarzenegger, Riordan, Milken and other powerful business leaders, such as Bruce Karatz, chief executive of KB Home; Ray Irani, chief executive of Occidental Petroleum Corp.; and Kevin Sharer, chief executive of biotech giant Amgen Inc.

The 90-minute 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 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. What’s more, Enron’s coordinated effort in manipulating the price of electricity in California, which other power companies mimicked, led to the beginning of what is now the state’s 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 upon which California relied heavily.

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. Schwarzenegger’s 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 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 were 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 to keep 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 have been uncovered, with colorful names like “Fat Boy” and “Death Star,” and they contain 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 still are 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 year-long energy crisis. But FERC says California is due no more than $1.2 billion in refunds.

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.