Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
(Page 4 of 12)
Almost immediately there was trouble. Five months before Lumar was to start deliveries to Corpus Christi, it asked the city to put up $600,000 to help build a connecting pipeline. That ominous sign was followed by a letter to the city council from Coastal questioning Lumar’s ability to live up to its contract. In fact, Lumar was in deep financial trouble, and so were two of its directors who had personally cosigned a loan to the company from the First City National Bank of Houston; one of those directors was a lawyer who was closely connected to the bank both personally and through the giant Vinson Elkins law firm. The company had paid no interest on the note, but time was running out. So was Lumar’s gas; the hoped-for reserves hadn’t panned out. Coastal bailed Lumar out by purchasing its Corpus Christi operations through an intermediary company called Hydrocarbon Development.
So Coastal now had the contract to supply the main Corpus Christi gas system that it had failed to get twice before—but for a substantially lower price than it had been willing to accept on either occasion. If this worried people in authority in Corpus Christi, then they kept it to themselves. Meanwhile, Coastal States was busily consolidating the remainder of the Corpus Christi market. Central Power and Light, the giant South Texas electric utility, made Coastal its chief supplier of natural gas for boiler fuel in 1964. One year later Coastal acquired the supply contract for the tiny city-owned Southern Community distribution system on the western edge of town. The Southern Community contract passed to Coastal when it purchased the previous supplier, Southern Coast Corporation, a small local company that had been operating more or less under Coastal’s wing for several years.
The last holdout was the old Houston Natural Gas distribution system. HNG was still supplying the southeast area under a contract which required it to accept the same price paid to the supplier of the main city system. That worked fine from 1962 until 1966, so long as Houston Natural also supplied the main system. But when Lumar took over in 1966, Houston Natural’s payoff dropped from 24.5¢ mcf to 18.5 cents. One year later HNG cancelled its option to renew and yielded its last foothold in Corpus Christi.
Now there was no one left but Coastal States. Suddenly the company—which had been so eager to supply gas at low prices—took a hard line: it informed the city the new price for the HNG system would be well above 18.5 cents. The city refused to negotiate and called for bids. But there was no one left to challenge Coastal. The new contract called for Coastal to receive 23.5 cents, with regular price escalations. Seven years after the Corpus Christi city council had given Houston Natural Gas a twenty-year contract over Oscar Wyatt’s objections, Coastal States had a complete monopoly in Corpus Christi.
Austin, 1962. Frank Erwin’s name was not yet a household word, but the Austin City Council knew very well who he was: a close associate of Vice President Lyndon Johnson and gubernatorial nominee John Connally, a power in state Democratic Party circles, and a highly skilled lobbyist with a shrewd mind and an acerbic tongue. He had made his political reputation in Washington by guiding a depletion allowance for brick manufacturers through Congress after numerous other lobbyist had tried and failed. He was a good advocate to have on your side in a tough fight; there was little chance his clients would not get a full and fair hearing. And his client, Coastal States Gas Producing Company, was in a very tough fight: it was bidding to supply Austin’s power plants with natural gas, a contract which had been held for 37 years by United Gas of Shreveport.
A strange combination of circumstances brought Erwin before the council on behalf of Coastal. In the late Fifties, Councilwoman Emma Long got the idea that Austin shouldn’t rely on United, but should find a permanent gas supply. She wanted the city to build its own pipeline to a field near Mineral Wells, but her male colleagues on the council had a well-developed habit of ignoring the somewhat iconoclastic Mrs. Long and this was no exception. So she approached former Governor Allan Shivers, who was more receptive. Shivers joined with oil and gas lawyer Clint Small and others to form a group known as Intra-Tex, which would seek the contract to supply Austin’s proposed Holly Street power plant. They even obtained a conditional contract signed by the city manager, but, Small recalls, Mayor Tom Miller torpedoed the deal and forced the council to ask for bids. This touched off a wild fight among four companies, including Coastal States. Eventually the city hired a consultant to evaluate the bids; he turned out to be a former attorney for United, and when he recommended that United get a five-year contract, the Intra-Tex group headed for the courthouse. United agreed to resubmit the contract for bids, along with a new long-term contract to supply the city’s other electrical generating stations. The two contracts were lumped together, and the Intra-Tex group prepared another bid. They retained Erwin to plead their case and made a contract with Coastal States for the gas.
Apparently Coastal had a change of heart and decided to bid on the contract in its own name, but first it had to get Intra-Tex out of the way. Coastal paid Small (Shivers had dropped out by this time) to release Coastal from its obligations to supply gas—and to keep Intra-Tex out of the bidding. This transaction has been characterized, somewhat unfairly, by San Antonio Congressman Henry B. Gonzalez as a “finder’s fee,” but the evidence does not support the charge. Intra-Tex obviously was not conceived as a front for Coastal; indeed, had the conditional contract become binding in 1960, Intra-Tex planned to purchase its gas from Houston Natural and not Coastal.
United, meanwhile, was not at all happy about how the situation was developing. The company had a huge capital investment in the Austin area—hundreds of miles of pipelines—which would be useless unless it won the bid. United argued strenuously, just as it was doing in San Antonio, that competitive bidding for the gas supply contract was an unwise course for the city. Any company could throw together a low bid just to win the contract, United contended. Further, they said, such bids meant nothing because a pipeline company is a public utility which by law is entitled to make a profit. If the contract price proved insufficient, the winning company could always go to the Railroad Commission and ask for a rate increase; the Commission would have to keep the company afloat in order to keep the gas coming into the city.
We’ll put a stop to that, said the city. It included a clause in the contract extracting a promise from the winning company never to go to the Railroad Commission for rate relief. Coastal says the clause was the city’s idea, but Erwin recalls that the concept originated with Coastal. “United was giving us a hard time, saying our bids didn’t mean anything,” Erin says. “Oscar’s number two man was up here for the negotiations, and he authorized me to say that we’d never go to the Railroad Commission.”
Whosever idea it was, there is little doubt that the provision is meaningless. You can’t contract away the jurisdiction of a regulatory body to act in the public interest; that is basic second-week-law-school stuff. Tracy DuBose, a Houston attorney who is handling most of Coastal’s litigation, calls the paragraph “Mickey Mouse language.” DuBose, who as with a Corpus Christi law firm in 1962 but did some work for Coastal, says he wasn’t in on the contract negotiations, “but if I had been, I’d have advised, ‘Sure, go ahead and sign it, it doesn’t mean anything.’”
Three companies bid for the Austin contract: Coastal, United, and Humble. Coastal had filed an open offer with the city clerk before the bidding deadline, primarily to discourage competition. Humble beat Coastal’s original price, but Coastal’s sealed bid undercut its first proposal by $18 million. That ended Humble’s chances. United’s offer was more difficult to evaluate because it failed to meet contract specifications. For one thing, United refused to bid fixed prices for twenty years; for another, United would not agree to the provision never to seek rate relief. Erwin repeatedly stressed that Coastal was giving the city everything it wanted. On October 5, the Lower Colorado River Authority (LCRA) which had sought bids jointly with the City of Austin, awarded its contract to Coastal over Humble and United. One week later, Austin went with Coastal too.
Before another year had passed, Coastal won the residential gas contract for Austin over United, driving the Louisiana company out of the Central Texas market for good. Once again Coastal bid firm prices for twenty years, while United would bid for only ten years. Emma Long, back on the council after a four-year absence, was skeptical of Coastal’s offer, and tried to get Coastal to dedicate specific reserves to the Austin contract. Again she received no support from her council colleagues. “Wyatt snowed them,” she says, recalling his charm, optimism, and forcefulness. Coastal’s founder spent most of his time in Austin during the contract fight; his ebullience and drive overwhelmed the council.
By this time, United had had just about all it could take; it asked the Federal Power Commission to put a stop to Coastal States’ maneuvers. The FPC, whose function is to regulate interstate gas, said it had no jurisdiction over intrastate matters. United undoubtedly knew this all along; it probably went to the FPC out of utter frustration. United was an old company, somewhat stodgy and unquestionably arrogant towards its customers—but it was a basically sound and conservative organization, not given to making promises it might not be able to keep. Coastal, on the other hand, was a growing company, hungry for new markets and willing to gamble with its promises to get them. Furthermore—and this aspect cannot be underrated—it had Erwin to make its offer credible. Erwin himself says that “if the city council had known that Coastal was eventually going to go to the Railroad Commission, they’d never have let them have the contract.” Erwin today feels little loyalty toward Coastal, his former client: “I think the bastards out to be put in the penitentiary.”
My Library
