San Francisco Chronicle - 26 May 01

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 10 May 09)

Enron's Secret Bid to Save Deregulation

PRIVATE MEETING: Chairman pitches his plan to prominent Californians

Christian Berthelsen and Scott Winokur
Saturday, May 26, 2001

Energy executive Kenneth Lay, head of powerful Enron Corp., quietly courted Arnold Schwarzenegger, Richard Riordan, Michael Milken and other luminaries this week in Beverly Hills to drum up support for his solution to California's energy crisis.

His prescription called for more rate increases, an end to state and federal investigations and less rather than more regulation.

Lay, a close friend of President Bush and one of his largest campaign contributors, hosted a private 90-minute meeting in a conference room at the Peninsula Hotel in Beverly Hills on Thursday.

Among the participants were Milken, the former head of the Drexel Burnham Lambert investment banking firm who pleaded guilty to fraud charges in 1990 and who now runs a think tank based in Santa Monica; movie star Schwarzenegger; and Riordan, the mayor of Los Angeles. Schwarzenegger and Riordan have been courted recently as GOP gubernatorial candidates.

One participant, who agreed to speak on the condition he not be identified, said the meeting appeared to be geared toward getting participants to support Lay's vision and then champion it to officials who are trying to solve the state's energy mess.

Plan to Rescue Deregulation

The source said the timing and tone of the meeting suggested Lay is concerned that California will abandon its disastrous experiment with power markets by either re-regulating the system or creating a government authority to provide electricity. Gov. Gray Davis signed legislation last week to create and fund a state power authority that would build, buy and run power plants in California.

"They're trying to rescue deregulation," the source said of Enron executives. "They think the whole state power authority is a bad idea."

At the meeting, Enron representatives circulated a four-page position paper titled "Comprehensive Solution for California," which was obtained by The Chronicle. It said ratepayers should bear responsibility for the billions in debt incurred by the state's public utilities and that investigations of power price manipulation and political rhetoric are making matters worse.

The paper made no mention of the possibility that much of the runaway electricity costs in California is due to market manipulation by power generators and traders -- a possibility given credibility in studies by regulators and economists.

One of the talking points read: "Get deregulation right this time -- California needs a real electricity market, not government takeovers." Another point suggested giving consumers monetary rebates for conserving electricity.

Involved in Early Days

Lay has been an aggressive champion of deregulated electricity markets and was an early advocate in persuading California to begin its experiment with a competitive power market system.

Lay has created a new kind of company in the process, one that essentially produces nothing but makes money as a middle-man, buying electricity from generators and selling it to consumers. During the first quarter of this year, Enron's revenues increased 281 percent to $50.1 billion.

Asked about the purpose of the meeting, Karen Denne, a spokeswoman for Enron, said she would "look into that" and then did not return repeated telephone calls seeking comment. One participant said Denne was present at the meeting.

D.C. Connections

Meanwhile, Lay's power in Washington is reported to have reached unprecedented heights. According to a story in yesterday's New York Times, Lay supplied the Bush administration with a list of candidates for jobs regulating the power industry and even interviewed one of them. The story also said Lay essentially threatened to seek the removal of the chairman of the Federal Energy Regulatory Commission, Curt Hebert, if he does not support Lay's desire to further deregulate the nation's electricity system. Lay denied the allegation.

Also in attendance at this week's meeting were 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.

Among those who were invited but did not attend were former Los Angeles Lakers star Earvin "Magic" Johnson; supermarket magnate and Bill Clinton supporter Ron Burkle; and Dennis Tito, recently returned from the world's first civilian space trip.

Milken, through a spokesman, confirmed that he attended the meeting, but declined to be interviewed. Schwarzenegger could not be reached for comment through a publicist, and Sharer did not return a call yesterday afternoon.

A spokesman for Riordan, Peter Hidalgo, said the Los Angeles mayor attended,

but was "not intending to formulate any kind of policy position on this issue.

His intent is to listen to all sides."

Attached to the Enron handout was a two-page open letter, addressed to Davis and the state Legislature, apparently prepared for those who support Lay's position and would be willing to sign their names to it. The source who participated in the meeting said those assembled appeared noncommittal and asked a number of questions of Lay, but did not agree to champion his agenda.