Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
(Page 5 of 12)
San Antonio, 1960. The City Public Service Board (CPSB), which operates the city-owned electric and gas utilities, wasn’t getting anywhere in its discussions with United Gas. The Louisiana-based pipeline company had supplied the city with natural gas for 38 years, but the current contract was running out and negotiations for a new one were not going well for the city. United wanted to raise the price of gas from 17¢ per mcf to 30 cents, an increase the CPSB equated with piracy. Nor was price the only point of contention: United refused to bid firm prices for a long-term contract, and it also declined to dedicate specific reserves to San Antonio’s use. What really upset the CPSB, however, was United’s attitude. The company owned the only pipeline capable of bringing gas to San Antonio, and it rarely missed an opportunity to remind city negotiators of this monopoly position. Irritated by United arrogance, the City Public Service Board decided to teach its long-time gas supplier a lesson in power politics.
In most cities a government-owned utility like City Public Service would have been no match for a giant company like United Gas. But CPS was no ordinary municipal utility. It answered not to the city council but to a self-perpetuating board of trustees who constituted the essence of power in San Antonio. In 1960 the five-member board included (in addition to J.E. Kuykendall, the city’s mayor) the president of Joske’s, the president of Alamo Iron Works, an attorney for the King Ranch, and the chairman of the board of the National Bank of Commerce. The mayor was the only board member chosen by the public; the remainder had been selected by their predecessors and would in turn choose their successors.
Together they ran the utility system as if it were a private corporation, rarely consulting the city council or the city administration. This strange arrangement was designed to inspire confidence in potential bondholders by placing businessmen rather than politicians at the top of the utility’s organizational chart, but it had another purpose as well. It supplied the rich and the powerful with a means of retaining control of the machinery of government in a city where they were fast becoming part of an ethnic minority. Regardless of the makeup of the city council, the old leadership could be sure of controlling the utility system and its rate structure. (Other special boards oversee other important functions of government—water, hospitals, and transportation.) Many of the board members through the years have been real heavyweights—financially, politically, and socially—and the CPS board in 1960 was no exception. These were not the people to have mad at you when you were after a $500-million gas contract.
United had been blithely ignoring these political realities for years. In fact, the CPSB had considered dumping United as far back as 1952, when the city’s contract with the company still had ten years to run. Alarmed by the prospect of bargaining with a haughty monopoly, the board hired a consultant to assess three options the CPSB might choose when the contract expired: renew with United, put the contract up for competitive bids, or go into the natural gas business and become its own supplier. To the board’s dismay, the consultant recommended renewing with United for as long a term as possible.
What the board really wanted was to go into business for itself – or to threaten United that it would do so. It needed something to use as leverage in the contract negotiations. But geologist William Spice (of whom more will be heard later) advised the board that there wasn’t enough gas available within 150 miles of San Antonio to make public ownership a feasible business operation. That left competitive bids as the CPSB’s only alternative to United.
Overconfident, United brushed off the danger. United contended that CPS could not legally put the contract up for bids and that competitive bidding for a utility contract was not in the public interest. San Antonio couldn’t abandon United and its heavy investment in a pipeline network, the company argued, any more than United could refuse to sell gas to San Antonio when it had the only pipeline. If the city didn’t like United’s offer, then it should ask the Railroad Commission to set a fair price—not ask for competitive bids. After a few years of this, the CPSB and the city had heard enough. On July 8, 1960, they advertised for competitive bids on a twenty-year contract to supply two trillion feet of gas.
Three major cmpanies bid for the contract: United, Houston Pipeline (a subsidiary of Houston Natural Gas), and Coastal States. Coastal’s bid was far higher than the other two. But the low bidder was not one of those major companies; in fact, it was not a company at all. It was two San Antonio businessmen, Glen Martin and Fred Schoolfield, who decided they could supply gas more cheaply than anybody else.
Martin and Schoolfield had little more than an idea. They had no corporation, no pipeline, and no gas. They did, however, have one major asset: by this time the CPSB’s relationship with United had so deteriorated that the board was looking for any excuse to avoid doing business with United. Martin and Schoolfield’s proposed Alamo Gas Supply Company provided the necessary alternative. What’s more, their backers included some of the most respected names in San Antonio oil and gas circles—all of them well known to the businessmen who sat on the City Public Service Board.
From this point on, strange things began to happen. Between October 1960 and January 1961, the CPSB staff prepared four different comparisons between the Alamo and United bids; their conclusion on each occasion was that the gap between Alamo’s bid and United’s was even wider than it first appeared. (These were staff estimates, remember, not new bids.) Some of the staff’s actions seem highly questionable; for example, they summarily reduced the estimated cost of Alamo’s pipeline from $6.5 million to $1 million for no apparent reason. Best indications are that the final cost as indeed around $6 million. By the time the fourth and final comparison was made, the original spread of $14 million between the two bids that grown to—in theory at least—$33 million.
Other bids were not seriously considered. The best prices Coastal States could offer were anywhere from 2¢ to 6¢ per mcf higher than Alamo’s. Houston Pipeline essentially matched United’s bid, but offered firm prices only for the first 1.2 trillion cubic feet, reserving the right to charge cost-plus for the last 800 billion. Houston Pipeline’s president prophetically warned the CPSB that a long-term, fixed-price contract was a gamble no responsible company would take, but the CPSB had heard that kind of talk from United and had ceased to listen.*
On January 12, 1961, the City Public Service Board tentatively decided in favor of Martin and Schoolfield. But the local oilmen still had work to do before the contract became final. Within a few months they would have to show that Alamo had 1.2 trillion cubic feet of gas under contract and dedicated to San Antonio. They would also have to arrange financing of Alamo’s pipeline by responsible investment bankers. Five months earlier Martin and Schoolfield had begun with nothing; now they had a conditional contract and a corporation, but they still didn’t have a single cubic foot of gas. The conditional contract was really little more than a “hunting license” to search for gas—or at least that’s the way Alamo’s New York underwriters described it. United Gas thought so too. It attacked the conditional contract before the Railroad Commission and in court, calling it “not a contract but a device to help Martin and Schoolfield obtain the gas reserves, pipeline system, and financing that they needed before they could enter into a gas supply contract.”
Months of work and millions of dollars now depended upon whether Alamo could come up with the gas. Understandably worried about dealing with a wholly new entry in the pipeline business, the CPSB asked several San Antonio oilmen whether they thought Alamo could pull it off. The oilmen were dubious. (One later changed his mind and ended up on Alamo’s board of directors.) Martin and Schoolfield eased CPSB fears by offering to us the best consultants in the business, DeGolyer and MacNaughton of Dallas, to verify the reserves. For financing, Alamo would use White, Weld & Co. of New York, another blue-ribbon firm. But things didn’t quite work out that way. In early may, White, Weld broke off financing negotiations. As for the reserve study, DeGolyer-MacNaughton was never formally approached. Alamo’s reserves were indeed verified, but by a roundabout method that at best can be described as highly irregular. At worst—well, a San Antonio grand jury spent several months in late 1974 studying the events leading to the award of the final Alamo contract for evidence of fraud and conspiracy. The grand jury didn’t find an indictable offense, but District Attorney Ted Butler’s staff is still looking. Because, you see, the ink was hardly dry on the final contract before Alamo’s reserves proved to be short, hopelessly short, 99 per cent short in some cases.
Here’s what happened: the CPSB hired its own independent geologist to survey Alamos’ claimed reserves. Its choice was William Spice, the same consultant who several years before had found that there was not enough gas near San Antonio for the CPSB to go into the gas business. Now he found that there was more than enough for Alamo, 1.340 trillion cubic feet, to be exact. The firm Alamo hired instead of DeGolyer and MacNaughton also came up with a figure topping the critical 1.2 trillion mark. But Spice’s conclusions were far more important to the CPSB. He was working for the board, not for Alamo; furthermore, Alamo’s consultants had relied heavily on Spice’s data in their report. The Spice study clinched Alamo’s bid. One week after Specie handed his report to the CPSB, the board gave Alamo the final contract.
The Spice report is filled with irregularities. A consulting engineer who analyzed Spice’s work for the San Antonio grand jury concluded that “reserves were added with little, if any, supporting data.” In one gas field, the giant Word field in Lavaca County, the grand jury’s consultant determined that reserves “were simply added to the reserve tabulation in order to achieve the minimum total reserve” of 1.2 trillion feet called for in the bid specifications. Spice’s report also contained “probable misrepresentation,” and used reserve determinations that were “entirely opinion, unsupported with fact.” By the time the grand jury began its probe of the Alamo Gas contract, it was apparent that no more than 40 per cent of the reserves verified by Spice were recoverable.
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