Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
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As Coastal continued to grow, Wyatt’s personal star was also in ascendancy. In 1962, shortly after his third divorce had terminated a short and stormy marriage, Wyatt met a beautiful Houston divorcee at a Houston society party. Her name was Lynn Sakowitz Lippman, daughter of Houston merchant Bernard Sakowitz. They married in Jly 1963, and before long the man whom the Corpus Christi establishment had never accepted was a prominent jet-set socialite, flying off to New York for affairs like the April in Paris Ball at the Waldorf. In November 1963 the Wyatts bought the River Oaks Boulevard home of the late Hugh Roy Cullen, a Houston oilman who somehow had managed to spend $1.8 million on the six-bedroom, six-bath mansion. (The house listed in 1963 for $650,000.)
Coastal’s momentum was irrepressible: gas was cheap, supplies were plentiful, business was good. Still . . . there were a few trouble signs her and there for anyone who wanted to look for them. The most serious of these was the Alamo Gas reserves—or rather the lack of them. In-house memos indicate that Coastal knew as early as January 1962 (after it had acquired one-fourth of Alamo but before Alamo started deliveries to San Antonio), that something was wrong with Alamo’s gas supply. At the very least, some of Alamo’s purchase contracts weren’t properly drawn. Coastal admits it knew the contracts were defective, but denies knowing that the gas wasn’t there to start with. The memos are too ambiguous to resolve that dispute, but Coastal must have known when it purchased the remaining Alamo stock in October 1963 that wells had already been abandoned in seventeen of Alamo’s gas fields. However, Coastal did not admit publicly that Alamo’s reserves were short until 1966, when it warned—accurately—that the deficiencies were more than 50 per cent. The City Public Service Board at first was not particularly concerned; it apparently expected Coastal to make up the shortages by purchasing new reserves. The price of gas was still low enough in 1966 that Coastal could have bought new gas and still made a profit on the contract price. Besides, Coastal had promised to perform all of Alamo’s obligations—and Alamo had vouched that it would supply 1.2 trillion cubic feet of reserves.
The CPSB was in for a shock. Coastal said flatly that it had no legal obligation to replace Alamo’s missing reserves at contract prices. Those prices, according to Coastal, applied only to the gas Alamo actually had in 1962, not to the 1.2 trillion cubic feet it claimed to have. If you want new gas, Coastal said in effect, you’ll have to pay extra for it. This was the beginning of a bitter disagreement that led, inevitably, to the courthouse. (The suit was filed in 1972, but still has not come to trial.) It was also the beginning of a pattern that was to be repeated time after time in the coming years: whenever Coastal saw a chance to increase its profit margin, it grabbed the opportunity.
In addition to the Alamo reserve issue, a second, much more subtle problem became apparent to some members of the Coastal family in the middle Sixties. They sensed a change in the atmosphere around the company, a feeling that the company had outgrown and outstripped many of its employees. Coastal was growing so fast that more and more of the new jobs opening at upper management levels were being filled by outsiders. The new people were different; they were experts, technicians, specialists, aloof individuals sharing only a common entrepreneurial urge. The people who had built the company from nothing, who had won the war against the monopolies, no longer felt wanted. It was a different company now; Coastal was the monopoly. One by one, the original staff began to leave, a few of them more than a little disillusioned. Ellis Brown is one of those who left; today, eleven years after his departure, he believes that Coastal’s downfall began when the company snuffed out the unique esprit de corps that marked its early years and substituted in its place a fixation on growth and profits.
The first hint of real trouble came in January 1968. For the first time Coastal curtailed gas deliveries to the San Antonio power plants. Fourteen months later the company imposed a second curtailment. (A curtailment is just a fancy name for rationing gas.) If customer demand exceeded the supply of gas, the pressure in the pipeline will drop so low that gas will no longer be able to flow through the system. Even domestic gas—gas for home heating and cooking—would be cut off, causing chaos in affected communities. (Every pilot light in town would go out. Imagine, say, Houston Natural Gas having to send a serviceman to every building in Houston with a gas connection in order to rekindle a half-million pilot lights. Imagine the danger if the gas flow resumed with so many pilot lights out.)
Coastal claimed that the 1968–69 curtailments were caused by factors beyond the company’s control—compressors and regulators in the pipeline system failed, causing gas to “freeze” in the pipes. The City Public Service Board thought otherwise; it was convinced that Coastal had oversold its gas supply. During the next three years the CPSB repeatedly asked Coastal for information about the company’s gas reserves and contract commitments. The company responded by handing the CPSB copies of Coastal’s annual reports, which indicated that the company had plenty of gas under contract: 9.5 trillion cubic feet of reserves in 1968 had grown to 11.3 trillion cubic feet by 1971. The company also produced a finding by a Houston engineering firm which certified that Coastal’s available gas supply would met customer needs through 1989. (The CPSB was given no data, only the conclusion.) The board’s concern over the curtailments may have accomplished something, however, for during 1970–72 Coastal did not cut back deliveries to San Antonio, although it did occasionally curtail Austin, Central Power and Light, and the Lower Colorado River Authority.
If curtailments were a bad omen, far worse was to follow. The bad news came, as it so often does in this state, from the Texas Legislature—Senate Bill No. 540 and House Bill No. 1018 in the 1971 session. (The original House version was introduced by Carl Parker, cousin to one Oscar Wyatt, after it was prepared by Coastal States’ registered lobbyist.) the bill gave the Texas Railroad Commission regulatory authority over natural gas pipelines—and authorized the commission to set rates without regard to contract prices so as to insure gas companies a fair rate of return. The bill became known in Capitol circles as the “S.O.S. bill,” legislative shorthand for “Save Oscar’s Shirt.” Coastal backed the legislation with some high-sounding rhetoric. “Save Texas gas for Texans” was the theme of Coastal’s argument; at this same time, however, Coastal was making highly profitable sales of gas to interstate pipeline companies.
Wyatt went to San Antonio to plead personally for support from the city, but for once he was outgunned. Everybody—majors, independents, customers—was against him, except for one small Panhandle gas company, and that was hardly enough backing. The bill never escaped committee in either house, but the message was clear enough: Coastal wanted out of its fixed-price contracts.
With its pet legislation doomed, Coastal tried to get its customers to renegotiate their contracts voluntarily. The company still claimed to have enough gas to fulfill current contracts. Wyatt wrote San Antonio in April 1971 that Coastal had bought substantial quantities of gas in West Texas at 16¢ to 20¢ per mcf, “and this puts Coastal States in an adequate position to supply the City of San Antonio for the remainder of its contract.” The contracts had to be renegotiated, Coastal argued, because conditions in the gas industry were changing: gas was getting scarce, and the wellhead price was climbing rapidly. Like it or not, the cities were stuck with Costal and Lo-Vaca even after their contracts expired; no one else would have enough gas to challenge Coastal’s monopoly. The purpose of renegotiation, the company said, was to keep Coastal and its gas-gathering subsidiary Lo-Vaca in a healthy competitive position for new gas, so that Coastal would continue to have an adequate supply through the Eighties and Nineties.
Negotiations got down to specifics on May 25, 192, when Coastal gave its proposal to the City Public Service Board. A year earlier Wyatt had written the CPSB that “you are Coastal States’ partner in the energy business.” Now the board was learning that one partner was more equal than the other. Coastal’s first offer was hard-line all the way: the old contract and their fixed prices would be thrown out; instead, Coastal would supply gas on a cost-plus basis. And that was only the beginning. There were other onerous features, like an additional charge for cost-of-living increases. Somewhat stunned, San Antonio and the other customers at the bargaining session revered to the position they had take for three years: before we make any deals, we intend to find out just what is going on. They reiterated their requests for information about Coastal’s reserves, its commitments, and the cost of its gas.
After a month of deliberation, Coastal agreed to the study—and then promptly sabotaged it. The city’s consultant (Ryder Scott of Houston) tried to verify Coastal’s reserves, but the company would permit only limited access to its information. Ryder Scott couldn’t copy any data, nor could it examine all of Coastal’s contracts with producers. Based on its over-the-shoulder examination, Ryder Scott guessed that Coastal had eight trillion cubic feet of reserves—some three trillion less than the company was claiming, but still ample.
The cost study never got even that close to Coastal’s data. A Washington firm the city retained turned out to be on permanent retainer from Colorado Interstate Corporation, which Coastal was then acquiring through a merger—a potential conflict of interest which ended the study before it really had begun.
While these studies were going on, contract negotiations took a new turn. Coastal now proposed a “total fuels” contract, which would allow the company to substitute high-cost fuel oil (marketed by a Coastal subsidiary) for cheap natural gas whenever necessary. This arrangement was even more advantageous to Coastal than the company’s first offer; not only would the old contracts be cancelled, but Coastal would also be relieved of any obligation to provide gas—and the decision of what fuel to supply when and to whom would rest wholly with them. An attorney involved in the bargaining took one look at Coastal’s proposal and described it as a “total fools” contract. Nevertheless, Coastal did find one important taker, the giant South Texas electric utility, Central Power and Light. (In August 1974, CPL sued Coastal and Wyatt personally for $625 million, claiming willful fraud in the contract negotiations.)
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