Arnold's Enron Connection

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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 be disastrous.

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 entitled "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-dollar 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 sparked 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 state's tax revenue.

Lay asked the participants at the meeting to support his plan and lobby the state legislature to make it 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, did not return 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 were ripping off the state.

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