Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
(Page 12 of 12)
The fuel oil memo underscores one seldom-discussed effect of the gas crisis: while Lo-Vaca has been suffering, other Coastal subsidiaries have profited from Lo-Vaca’s sickness. Coastal States Marketing, where the memo originated, supplied fuel oil on an emergency basis to the same customers who were curtailed by Lo-Vaca. Austin even gave Coastal Marketing a $5-million contract for twenty million gallons of fuel oil. Coastal States Gas Producing Company has done all right for itself at Lo-Vaca’s expense, too. Coastal supplies Lo-Vaca with about seven per cent of the pipeline company’s gas; in the last year deliveries have remained constant at 80 million cubic feet per day, but the average price Lo-Vaca pays its parent has skyrocketed from 44¢ per mcf in December 1973 to 81 cents in November 1974. Why the sudden jump? No, Coastal isn’t selling Lo-Vaca huge quantities of expensive newly discovered gas; rather, it persuaded Lo-Vaca’s former supervisor-manager Mills Cox to renegotiate contract prices upward. The increase should bring in around $10 million annually for Coastal Producing—and $10 million less for Lo-Vaca. The overall effect is doubly beneficial to Coastal States Gas Corporation: one subsidiary gains when the other loses—and the one that loses is the utility, which can plead poverty before the Railroad Commission and recoup its losses at the expense of the rate-payer.
One further intracorporate transaction should be mentioned, primarily because it is so bizarre. Lo-Vaca delivers gas to the old Rio Grande Valley Gas distribution system, which for very complicated reasons is now operated by Coastal States Gas Corporation rather than by a subsidiary. Coastal, therefore, is buying gas from its own subsidiary—at the same high price everyone else in the state has to pay for Lo-Vaca’s gas. Now Coastal wants to pass this cost on to its domestic customers in the Valley, whose reaction verges on apoplexy. They say Coastal will be making a killing at both ends of the pipeline (Lo-Vaca is actually paying very little for the gas) simply because it was clever enough to maneuver itself into this position.
These intra-family manipulations prove one thing: Coastal has never stopped wheeling and dealing. It continues to find ingenious ways to profit from the mess it created. This emphasis on profit and growth at the expense of utility obligations has been a Coastal characteristic for years. Other gas utilities like Houston Natural and Lone Star have a totally different philosophy from Coastal’s. Both companies have avoided fixed-price, long-term contracts. Neither company has ever sold any reserves. Both companies store surplus gas in huge natural reservoirs. Houston Natural purchased an entire reservoir in 1965, the played-out Bammel field near Katy, to use for storage. (Natural gas can’t be stored in tanks, like oil, but must be injected into a natural reservoir by expensive compressors.) Lone Star owns ten reservoir areas and is looking for more. The Bammel field will hold 85 billion cubic feet of gas, while Lone Star can store 57.7 billion.
Coastal States, on the other hand, has virtually no storage capacity. On days when demand for gas is slack, Houston Natural and Lone Star can pump gas underground for use on peak days; Coastal cannot. It must take gas from producers or pay for it anyway, and even if Coastal decides to take it, it may have to unload the gas somewhere. Many of Coastal’s most devastating deals during the 1969–72 period might not have been necessary if Coastal had owned storage facilities—but, as a Coastal spokesman said earlier this year, “Sure, we’d like to have storage, but the expense is prohibitive.” What that means, a Houston Natural vice-president said, somewhat disgustedly, is that storage doesn’t generate income. And income has always been Coastal’s foremost concern—income and growth. Those were the concepts pushed at Wyatt by his New York financial advisor, German refugee Joachim Silberman. It was Silberman who worked the Wall Street investment crowd for Wyatt, and who pushed for a fifteen per cent annual growth rate. Many members of the original Coastal family hated “Joey,” as they called him; they found him cold, aloof, and arrogant, but one early Coastal employee recalls that Silberman “was the only man I ever saw Oscar Wyatt treat as an equal.”
The commitment to growth was responsible for the rise of Coastal, but it eventually led to the company’s downfall. Once gas prices started rising, only spot sales, reserve transfers, and brokerage commissions could keep income at high levels. The importance of these transactions can be seen from the fact that in the last half of 1972, Coastal’s gas systems accounted for 66 per cent of the company’s profit; only 17 per cent of the profit came from refining. One year later, when the Railroad Commission had clamped down on the wheeling and dealing, the situation was radically different: refined products accounted for 92 per cent of the profit, while gas systems actually lost money.
Yet, Coastal is far from deserving all of the blame. The company may not have taken all the precautions of a responsible utility, but as long as gas was plentiful, that didn’t matter. In the early years of its long-term contracts, Coastal brought millions of Texans cheaper gas than anyone else could, and still made a profit on it. When Lo-Vaca went to the Railroad Commission to ask for rate relief in 1973, most of its municipal customers were paying less than 25¢ per mcf; Houston Natural’s rate was 38.3 cents and Lone Star was getting 43.7 cents. Any calculation of how much Coastal is costing rate-payers now should be balanced by how much the company saved them before 1973.
Furthermore, even the “extraordinary transactions” look worse in hindsight than they must have appeared at the time. Coastal may have anticipated that prices were going to rise—but did anyone in the industry guess how much and how fast? The company probably knew that gas would be expensive to replace—more expensive than it could afford under its contracts—but it sold its reserves anyway, hoping to bludgeon the Railroad Commission into giving Lo-Vaca a higher rate. What Coastal did not anticipate is that there would not be enough gas available at any price. Looking back, we know now that Coastal sold when it should have bought. It did nothing illegal, but it did gamble on the continued availability of gas, and it lost.
Oscar Wyatt lost too. Before the gas crisis engulfed Coastal, Wyatt and his relatives owned the largest single block of its stock—2,298,819 shares, or 11.9 per cent of all outstanding stock, worth close to $130 million. When the stock fell from its high of near 60 to 7 ½, Wyatt suffered a paper loss of more than $100 million.
In the face of adversity, Wyatt remains firm. He challenges everything, conceding nothing, battling much like he did fifteen years ago when he faced a hostile Corpus Christi City Council alone and vowed to fight the Houston Natural contract to the finish. Wyatt denies that Coastal oversold its reserves; instead, he attributes the company’s shortages to failures in deliverability. We have the gas, Wyatt says—we just can’t get it out of the ground as fast as we would like. He argues that the incriminating memos were just individual opinions, not company policy; in short, he admits no wrong except the failure to have perfect foresight. He lashes out at his critics at every opportunity, blaming the news media for intensifying Lo-Vaca’s gas-buying problems, then blaming the cities for not listening to him back in the Sixties.
Wyatt is right. The cities did bring the crisis upon themselves—though not for the reasons he suggests. Like Coastal, like Wyatt, the cities also gambled, but theirs was a double gamble: not only that the gas market would remain stable, but also that they could risk abandoning their reliable, long-time suppliers. They were so sure of themselves, so certain that they were dealing in a buyers’ market, that they forgot that twenty years is a long, long time.
The public regulatory bodies did not exactly cover themselves in glory, either. The Federal Power Commission, which regulates all aspects of the interstate gas market, helped create the gas crisis by keeping the wellhead price below what was needed to stimulate an active drilling program. Once again, the short-range view—providing cheap gas for the out-of-state consumer—prevailed. Nor was the Texas Railroad Commission any help. The commission had enough close ties with the Texas gas industry to know what Lo-Vaca was doing to its gas supply between 1968 and 1972. People in the gas industry certainly knew; a high official with Tenneco warned San Antonio’s Johnny Newman in 1971 that “San Antonio’s gas supply situation is going to be sick, sick, sick in a few more years.” Where was the Railroad Commission while all of this was going on? Surely it had enough information to begin an investigation. But the commission preferred to wait for the crisis to come to it.
Even the Legislature cannot escape blame. For years it has debated—and rejected—proposals to establish a state utilities commission. Certainly a commission would be no panacea—the dismal record of the existing regulatory bodies in preventing the current crisis is evidence enough of that. But a utilities commission could have made some very real differences: for example, Coastal could never have built its North Texas pipeline—or entered into the TUFCO contract—without official scrutiny. It might never even have been able to get the city contracts in the first place.
In the end, nothing worked the way it was supposed to—not the economic system, not the political system, not the regulatory system. The saga of Coastal States Gas is the story of the American Dream—how one man, starting with nothing but an idea, can build an empire. But it is also the story of the American Nightmare—how the successful can become too big, too greedy, too arrogant, too obsessed with becoming still bigger. Coastal chose privilege over duty, reward over responsibility, and there was no one to say no. In the beginning, Oscar Wyatt and Coastal States epitomized the best in American business traditions; in the end, the worst.
Footnote:
* The text of the letter from Houston Pipeline’s president to the CPSB is worth nothing:
“[A]nyone offering to supply your entire requirements at fixed prices must be gambling on his ability to buy or discover gas in the future as your requirements increase. In view of the great uncertainties as to what the future cost of gas will be and the large volumes involved, no responsible supplier can afford to assume the risk that the cost of gas in the field may approach or rise above the prices quoted for delivery to the City. This risk must be considered most substantial when it is recognized that the average wellhead price of gas has increased at the rate of approximately 1¢ per mcf for the past ten years.”
Every Year a Record Year
Coastal States Gas Corporation had its biggest year ever in 1974, according to the company’s annual report released in early April. For the first time, Coastal’s revenues were more than $1 billion, and net income was up a whopping 45 per cent over 1973, from $38.1 million to $55.1 million. Record profits included an $11.2-million loss by Lo-Vaca Gathering Company, the subsidiary that supplies gas to more than 400 Texas cities and businesses.
The figures will undoubtedly be used by Lo-Vaca to justify its request for still higher rates, while Coastal’s profits will be cited by customers to support their position that the parent company, rather than local rate-payers, should subsidize Lo-Vaca.
My Library
