Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
(Page 11 of 12)
The customers have already lost one round. Enraged because TUFCO received full deliveries of gas while other customers were being curtailed, San Antonio, the LCRA, and a new plaintiff, UT-Austin, asked the Railroad Commission to rescind the TUFCO contract and restore the gas to Lo-Vaca’s long-term customers. At the very least, they argued, TUFCO should be put in the same category with Lo-Vaca’s other customers and be forced to suffer curtailments. TUFCO was getting full deliveries of gas while Lo-Vaca’s other customers were being curtailed. Coastal answered that the TUFCO contract had transferred specific reserves to TUFCO; the gas actually belonged to TUFCO, and Lo-Vaca was merely transporting it. The three elected commissioners took one look at this disputed and wanted no part of it, not when they were being asked to take gas away from Dallas–Fort Worth and redirect it to Austin–San Antonio. As one Fort Worth legislator said, “They can count the votes.” The commission dismissed the request, saying it had no authority to set aside contracts. Wrong, said an Austin district court, overruling the Railroad Commission. Right, said the Texas Supreme Court, reversing the district court and upholding the commission. If you want to set aside a contract, the justices told the customers, then go to court.
One customer—Houston-based United Texas Transmission Company, formerly Pennzoil Pipeline—went to court in 1973 to contest the TUFCO contract and Lo-Vaca’s other sales of reserves to Clajon, Dow, and El Paso Natural Gas. United Texas purchases gas from Lo-Vaca, then sells it to Houston Lighting and Power for boiler fuel. Other customers have joined in the action, but the case has yet to come to trial.
Trial lawyers have a saying about cases where the facts are hard to understand and even harder to prove: “Bad facts make bad law.” If that is true, we may be headed for some very bad law. Nothing like this has ever happened before—a natural gas shortage, a runaway sellers’ market, and a public utility apparently heedless to the public interest—and it will take all the ingenuity of courts and lawyers alike to fit traditional utility law, developed under far different circumstances, to the present problems. An even more serious danger, however, is that the rush of events has already passed the courts by. Suppose, for a moment, that the customers win their cases. What then? Where will Coastal find the money to settle $1 billion in damage claims? If Coastal has to pay huge judgments, or if Lo-Vaca has to live up to its contracts, the companies will be driven into bankruptcy, and how will that help get more gas to Austin, San Antonio, Corpus Christi, the Rio Grande Valley, Houston (Lo-Vaca supplies Pennzoil, remember), and even Dallas–Fort Worth (Lo-Vaca is a heavy supplier for Lone Star)? The answer, of course, is that it won’t. This is the insolvable problem that confronts and frustrates lawyers for the customers: even if they win, they lose. No other pipeline company has enough gas to supply the millions of Texans who depend on Lo-Vaca; like it or not, the customers are stuck with their present supplier. They can deal with a bankrupt Lo-Vaca or a healthy one, but those are the only choices.
The worst consequence of bankruptcy is that Coastal could be turned over to a federal judge in New York or Delaware, who would appoint a trustee to operate the company (as bankruptcy law requires) for the benefit of its creditors rather than its customers. Coastal’s assets, including its gas purchase contracts, could be sold to the highest bidder, possibly an interstate pipeline company. This is the version put forward by Coastal and the Railroad Commission, who speak grimly of Texas gas “going up Yankee smokestacks.”
Most of the lawyers involved do not believe that bankruptcy would be so catastrophic. They say that utilities are different from ordinary corporations (an argument Coastal has been known to use), and that the system would undoubtedly be run for the benefit of the customers. On this issue the customers seem to have the better of the law. But bankruptcy would still not be pleasant; gas producers would hardly want to deal with a bankrupt company if they could avoid it. Gas supplies would be had to come by, and rates surely would not improve. Nevertheless, more and more of the lawyers in the case are ready to put Coastal out of business if they can, and worry about the consequences later. But no one pretends that getting Coastal out of the picture will make it any easier for their cities to get gas. That dilemma will remain.
Is there a solution? Perhaps. Hearing examiner Walter Wendlandt thought he had one after listening to the evidence in Lo-Vaca’s rate hearing before the Railroad Commission. In his recommendations to the commission, Wendlandt recognized that Lo-Vaca was a “sick corporation.” He also found that “[Coastal’s] management has vigorously pursued a rapidly increasing profit picture with little regard for the Public Interest.” His aim was to give Lo-Vaca a rate which would allow it “to become a strong, viable company able to purchase the gas necessary, but which does not unjustly enrich the Stockholders of Coastal States Gas Corporation. The Stockholders are the ones through their management who gambled on continued low field prices, lost, and must pay.”
Wendlandt recommended that Lo-Vaca receive its cost of gas plus 6.16¢ per mcf. He also recommended that the Railroad Commission establish a contract reimbursement fund—and that all profits made by Lo-Vaca, Coastal States Gas Producing Company, and Coastal States Gas Corporation in future years go into this fund until customers receive the difference between their contract prices and the new rates they would have to pay. It was a clever, careful recommendation—recognizing the principle that utility operations are entitled to show a profit on their own, yet rejecting it. Customers describe it as “innovative,” which it is; DuBose calls it “totally unrealistic” and “in conflict with established principles of law,” which it also may be. One thing is certain: the Railroad Commission isn’t saying anything. Wendlandt issued his recommendations last April; one year later, the commission has done nothing.
From the viewpoint of the rate-payer, the future looks bleak. Lo-Vaca has already applied to the Railroad Commission for a five-cent increase in its interim rate, and if the company is successful, the rate-payer will suffer still more. One bright spot is that the upcoming hearing will again raise the issue of whether Coastal’s highly profitable nonutility operations should help subsidize Lo-Vaca—but so far the Railroad Commission has shown no inclination to decide this question. Even if Coastal has to reimburse its customers, there is little likelihood that the consumer would benefit immediately. All electric utilities are facing huge capital outlays in the next few years to convert from gas and oil to coal, lignite (low-grade coal), and nuclear power, and any extra money the cities receive would surely be used for new facilities. There is ample energy available, but it won’t be cheap energy. Those days are gone forever. The energy crisis, it turns out, is just another facet of the economic crisis.
Power To the People
Who is to blame for the gas crisis? Already overburdened by rising utility bills, the consumer wants easy answers. But there are none.
Coastal States and Oscar Wyatt are the obvious targets, and doubtless both do bear a heavy share of the responsibility. The company has continually ignored its obligations as a public utility; it was conceived as a gas broker in 1955, and a gas broker it has remained—wheeling and dealing, taking a short-term profit whenever it could, and seldom worrying about long-term consequences. Nothing illustrates this more vividly than the transactions which occurred between 1969 and 1972, when Coastal dealt away its reserves, knowing full well that a gas shortage was imminent. A high officer of Lo-Vaca admitted during the 1973 Railroad Commission rate hearings that he was aware of the “acuteness of the problem of the gas supply” in early 1972. Undaunted by such foreknowledge, Lo-Vaca went ahead and sold its precious reserves to Clajon and El Paso Natural Gas later that year. In its numerous brokerage deals during 1972, it passed up the chance to buy gas in order to snatch a sales commission that could be reported as income.
There is some evidence that Coastal knew about an impending shortage even before the disastrous (for its customers) TUFCO contract in 1970. SEC investigators uncovered a five-year forecast written in 1969, estimating that Coastal’s reserves were 4.1 trillion cubic feet short of its contract commitments through 1980. There is nothing particularly shocking about this; most pipeline companies don’t have enough reserves to meet all their long-term commitments. But then most companies don’t compute their reserves like Coastal did before the SEC cracked down in 1973. Coastal counted as reserves every cubic foot of gas that went into its pipeline, including gas it was hauling for others—gas that Coastal did not own, would never own, and could not make available to long-term customers. Coastal was claiming nine and ten trillion cubic feet of reserves when it had only about one-third of that amount available for its intrastate customers. So if Coastal was estimating a shortage of 4.1 trillion cubic feet, the actual shortage was more like nine trillion. (Coastal’s reserve calculations have never been declared illegal, but the company did agree to change its reporting methods as part of its settlement with the SEC.)
If Coastal was not concerned about preventing a gas crisis, neither was it hesitant to take advantage of its customers once the crisis was upon them. In May 1973, just eleven days before San Antonio was hit with a drastic two-thirds curtailment, a Coastal memorandum discussed how the company could twist such a crisis to its own benefit by rushing to the rescue with fuel oil:
Marketing policy with regard to solicitation of any “contemplated Texas utility deal” is to wait until the crisis develops. This position is taken for two primary reasons: First, these people [San Antonio, Austin, the LCRA] do not want to talk oil at this time as they view it a poor substitute for natural gas. Second, once they are in trouble, Coastal’s availing of relief through liquid fuels should enhance Coastal’s image…
The memo concluded, “[W]hatever is done should be done in the best interests of Coastal States Gas Corporation.”
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