Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
(Page 10 of 12)
The Railroad Commission struck the next blow at Coastal. After learning how desperate Lo-Vaca’s situation really was, lawyers for Austin and the LCRA urged the commission to strip Coastal of all control over its subsidiary and place Lo-Vaca in receivership. The commission was unwilling to take such a drastic step; instead, it reached an agreement with Coastal which called for a partial separation of the two companies. Coastal Producing gave an Austin court an irrevocable proxy to vote its Lo-Vaca stock. Lo-Vaca’s board of directors resigned and was replaced by a court-appointed board and a supervisor-manager, whose jobs was to oversee the operations of the company and report back to the court. Furthermore, Coastal agreed to supply Lo-Vaca $2.5 million per month for capital expenses (not operating costs) such as pipeline construction and advance payments for new gas. But Coastal and Lo-Vaca did not have to separate physically; they were allowed to remain in the same building, use the same telephone switchboard, and in some instances, share the same law firm (Houston’s Fulbright and Jaworski).
There is considerable debate over the effect of the separation. Some critics believe that the Railroad Commission didn’t go far enough; as San Antonio’s Johnny Newman puts it, “Anybody who believes they are really separate is a damn fool.” The separation agreement is designed to last for a maximum of five years, but can be terminated earlier if Lo-Vaca manages to accumulate enough gas to meet 90 per cent of its commitments—so Lo-Vaca’s employees know that before too long they will be working for Coastal States again.
Lo-Vaca’s new board may be independent, but as its supervisor-manager James Hargrove points out, it also must be “conscious of its obligation to operate the corporation on behalf of its stockholders.” Besides, as Hargrove says, on major issues like rate increases and liability to customers, Coastal’s and Lo-Vaca’s interests are essentially the same. Any real damage to Coastal’s financial situation would equally damage Lo-Vaca, and vice-versa; the companies are tied together in complex financing arrangements because Lo-Vaca has never had independent borrowing power. If either goes bankrupt, the other will almost certainly follow. The partial separation of the two companies has not altered the fact that, in Hargrove’s words, “It would be a form of suicide for us to jump in against the long-term interests of Coastal States. We’re on the same umbilical cord.”
The beneficial effects of the separation have been largely psychological. Customers have found Lo-Vaca far more communicative since the Railroad Commission’s action. Now they have some idea how long curtailments will last and how serious they will be. Prior to the split, customers would receive only a terse message that pressure was dropping in Lo-Vaca’s line and curtailments would be imposed in a matter of hours. R.L. Hancock, director of Austin’s electric utility, says that Lo-Vaca’s performance in the field and in the office has improved considerably. So has the company’s ability to buy gas.
Coastal, too, has benefited from the present arrangement, despite having to supply up to $30 million annually in capital contributions. Prior to the winter of 1972–73, Lo-Vaca was buried in obscurity. True, Coastal had turned its long-term contracts over to Lo-Vaca as far back as 1963, but all of the customers continued to view Coastal as their gas supplier. Coastal treated the distinction between itself and its subsidiary fairly casually; the company’s annual reports during the boom years of the late Sixties don’t even refer to Lo-Vaca by name. Frank Erwin, who received continuing payments for his role in landing the Austin gas supply contract for Coastal, recalls that as late at 1971 his checks would come one month from Lo-Vaca, the next month from Coastal, in a random pattern.
But once the crisis hit, Coastal was eager to isolate its ills in one subsidiary. (In its 1970 annual report, Coastal reported that “the Company is the supplier of consumer gas for several major cities in Texas,” but in 1973 these cities were described as Lo-Vaca’s customers.) The separation agreement has also aided Coastal’s efforts to avoid having its healthy non-utility functions subsidize its sick subsidiary. One SEC investigator believes that the Railroad Commission action was designed not to save Lo-Vaca but to bail Coastal out of its legal difficulties. Why else, he asks, would the commission have gone after the subsidiary instead of the parent? One possible answer is that the commission was uncertain of its jurisdiction over the parent; another is that the commission wanted to avoid a protracted legal battle and simply settled for what Wyatt would agree to.
By the end of the summer, the SEC was ready to proceed against Coastal itself. The federal agency filed suit against Coastal on September 11, but that was only for show; one day later Coastal signed a consent decree settling the controversy. Coastal agreed to refrain from making false or misleading statements about reserves, deliverability, and earnings. It also consented to a reorganization of its board of directors and its executive committee—two moves which the agency hoped would end what one SEC source called “the dictatorial authority of the chief executive,” that being, of course, Oscar Wyatt. The SEC plan called for four Coastal directors to step down. The remaining six directors were then joined by seven new appointees mutually acceptable to the SEC and the company. Two of the seven new members would join Wyatt on the three-member executive committee.
Whether the SEC achieved its goal is doubtful. Former Railroad Commission hearing examiner Walter Wendlandt, who handled the Lo-Vaca rate case for the commission, says Wyatt remains in control through “incredible ability and personal magnetism.” Wyatt also had some help from Washington attorney Manuel Cohen, who handled the SEC investigation for Coastal. Cohen knows something about such matters; he was chairman of the commission from 1964 to 1969. (SEC sources have confirmed that Cohen became involved in the case at the request of one of Coastal’s directors who later resigned to take a legal job of his own in Washington—the soon-to-be Special Prosecutor of the United States, Leon Jaworski.) SEC investigators are quick to point out that Cohen was totally cooperative in producing needed documents and in not impeding their work—“We’ve never had an investigation go so smoothly,” one lawyer said—but somebody managed to convince the SEC chiefs in Washington to accept “independent” directors whose independence was open to question. One of the seven “independent” directors had already been nominated by the Coastal board; he was embraced by the SEC as one of its own. Another “independent” director, former Tenneco president Harold Burrow, has had close ties with Wyatt for many years.
If the public regulatory bodies had limited success in their legal battles with Coastal, they at least scored some points here and there. The customers, who were also lining up at the courthouse at the same time, so far have been shut out. Most of these lawsuits involve two types of claims. The customers have fixed-price, long-term contracts, but are required to pay an interim rate far higher than their contract price. They want Lo-Vaca and Coastal to make up the difference. Sometimes, however, Lo-Vaca hasn’t been able to supply gas at any price. During these curtailment periods, customers have had to purchase fuel oil to keep their electrical generators running. They want to be reimbursed for that cost, too. San Antonio, the LCRA, Corpus Christi, and Central Power and Light are all suing Coastal, Lo-Vaca, and in some cases, Wyatt himself, for damages suffered in one or both of these ways. Austin will almost certainly join in after its spring city council runoffs. Each lawsuit is slightly different from the others (the LCRA, for example, contends that its contract is with Coastal, not Lo-Vaca), but the differences are such that only a lawyer could care.
One lawyer who definitely cares is Tracy DuBose, a former Coastal director and house counsel who now operates out of an office on the sixth floor of Houston’s Lincoln Liberty Life Building. Lawyers for the customers have been tangling—usually unsuccessfully—with DuBose for years now, and yet they feel toward him none of the rancor they hold for Wyatt. Perhaps this is because lawyers reserve a special place in their fraternity for men like DuBose—tough, tenacious advocates who epitomize the adversary process, who display a command of rhetoric, logic, and the law itself but seldom let disputes touch on personalities.
DuBose professes little concern about the legal issues in the various cases. He does not see how Coastal or Lo-Vaca can be held liable for charging an interim rate approved by the Railroad Commission, nor does he believe that the companies can be faulted for following curtailment schedules which also had Railroad Commission approval. As for the possibility that Coastal’s profits should be sued to lower Lo-Vaca’s gas rates, DuBose rejects that out of hand: “It is axiomatic that non-utility operations by a utility company do not subsidize utility operations.” That doesn’t mean DuBose is without problems, however. “The most frustrating thing I face is that I sincerely believe any lawyer taking an objective view would agree that we have the better side of the case,” DuBose says. “But where do we get a fair trial? San Antonio, where customers who pay utility bills sit on the jury? Where do we go to find a forum where the case isn’t tried in a lynch-mob, prejudicial atmosphere?” He pauses, pours himself a drink, looks up at the ceiling. “Oh, well, I always wanted to be a big-time lawyer. And when you’re getting sued for a billion dollars, at least you know you’re big-time.”
On the other side of the case, lawyers for the customers exude none of DuBose’s confidence. They do not agree that the law is against them, but they do concede that their side has the more difficult task. Before they can recover damages from Coastal and Lo-Vaca for breach of contract, they must prove that the current shortages were caused not by factors beyond Lo-Vaca’s control—the “energy crisis” —but by the wheeling and dealing maneuvers that took place between 1969 and 1972. They must also demonstrate that these “extraordinary transactions” were bad business judgments which Coastal and Lo-Vaca knew at the time to be detrimental to their long-term customers. That is not an easy burden to carry in a lawsuit.
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