Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
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Coastal’s intransigence at the negotiating table was reminiscent of the high-handed attitude displayed by an earlier monopoly—United Gas—a dozen or more years earlier. When Coastal was fighting for long-term supply contracts in the early Sixties, the company had gone out of its way to appear cooperative; it even submitted its bid for the Austin contract in the form of a signed contract complying with all specifications. Once Coastal had driven off the competition, however, everything changed. Coastal appeared interested only in making the best possible deal for itself. The cities found themselves in the same position San Antonio had tried to avoid in the late Fifties: they had no leverage.
They soon had even more to worry about. On the morning of November 7, 1972, Lo-Vaca notified its power plant customers that pressure as declining in its pipeline system. The Coastal subsidiary blamed mechanical malfunctions and advised its cusomters to use fuel oil in their boilers until the problem was solved. That was the beginning. During the next six months, the electric utilities suffered curtailments on thirteen separate occasions, for periods ranging up to twelve days. Altogether Coastal cut back deliveries on 65 different days in the winter of 1972–73, a winter which brought the most severe weather in memory to Central Texas.
In January, ice covered the streets of Austin for three consecutive days; the thermometer remained below freezing for nearly a week; the University of Texas at Austin had to shut down for a week in January because gas supplies for the school’s power plant were critically low. (There was an element of grim irony in the fact that one-time Coastal advocate Frank Erwin angrily watched all this happen from his seat on the UT Board of Regents.) Residents of Austin and San Antonio lowered thermostats despite the cold (this was almost a year before the Arab embargo made such practices commonplace throughout the country), and cities doused their lights at midnight.
The bitter winter accelerated demand for natural gas, both at the burner tip and for generating electricity, but Coastal and Lo-Vaca continued to fall short in their deliveries. Lo-Vaca and Coastal concealed the seriousness of the situations from their customers during November and December, continuing to blame mechanical problems for the curtailments. By January, Lo-Vaca’s customers began to suspect that they were in a full-fledged crisis, one they were totally unprepared for. They had been told repeatedly by Coastal States that the company had plenty of gas to perform its current contracts—the problem was to begin planning for the future.
R.L. Hancock, general manager of Austin’s electric utility, and the other customer representatives through that the future meant the next decade, not the next few months. When the curtailments began in earnest, Austin had a fuel oil storage capacity of 3.5 million gallons. Since the city had burned only 1.25 million gallons in all of 1971 plus the first two months of 1972, that seemed more than ample. But in the last two months of 1972, Austin’s boilers consumed 6.25 million gallons; in the first two months of 1973, the city burned an astonishing 7.25 million gallons. The situation was near-catastrophic. Austin and Coastal’s other customers were burning fuel oil as fast as it could be hauled in by truck. Worse, they were competing against each other for limited supplies. San Antonio managed to survive the crisis only because a crusty, outspoken oilman named Johnny Newman had been appointed to the City Public Service Board in the late Sixties, and had managed to push through a fuel oil storage program just before the curtailments hit in late 1972.
The drastic winter of 1972–73 doomed whatever hope as left for successful negotiations between Coastal and its customers—not that the chances were very good anyway so long as Coastal refused to reveal information about its reserves and commitments. Coastal was running out of time and alternatives. Both its customers and the legislature had declined to bail Coastal out of its fixed-price contracts. That left only one option: the Texas Railroad Commission, whose assigned role in the state government has traditionally been to protect and nurture the oil and gas industry. In March 1973, Coastal and Lo-Vaca asked the commission to ignore the contract prices and establish a new rate for gas that would guarantee the company a fair rate of return—exactly what Frank Erwin once promised the Austin City Council that Coastal States would never do.
Shell Game
Coastal was doing a lot more between 1968 and 1972 than urging its customers to renegotiate their contracts. By the end of the Sixties, the company had reached another plateau, just as it had at the beginning of the decade. In the early Sixties, Coastal could have remained in its innovative role as a gas gatherer and broker; instead, it abandoned its comfortable niche in order to challenge industry giants like United Gas and Houston Natural Gas. Now the company faced a similar decision. It had virtually complete control over the intrastate pipeline market in an immense, irregular swatch of Texas stretching east to west from Corpus Christi to Del Rio, and north to south from Brownsville to Austin. Was that enough, or was Coastal’s destiny still unfulfilled? To ask the question was to answer it. Coastal again opted for new markets and continued growth.
The company decided to venture into the rapidly developing gas fields in West Texas, where gas was plentiful but inaccessible to the great population centers in the eastern half of the state. Coastal announced in March 1968 that it would build a $33-million line across 305 miles of West Texas semidesert to bring gas into the San Antonio area. By 1969 the first intrastate line into West Texas was operational.
One year later the company announced plans for a second West Texas line. But there was something peculiar about this one: instead of terminating in San Antonio, Austin, or some other city served by Coastal and Lo-Vaca, the new West Texas line headed northeast for, of all places, Dallas–Fort Worth, an area already served by one of the healthiest utilities in Texas, Lone Star Gas. If the location of the line was unusual, the financing arrangements were even more so. Coastal, through Lo-Vaca, put up only 40 per cent of the $60.7-million price tag for the 395-mile line in return for half-ownership. Texas Utilities Fuel Company (TUFCO), a subsidiary of a North Texas utility consortium, supplied 60 per cent of the funds for its half interest. Coastal also got the right to use TUFCO’s Old Ocean pipeline from Dallas to the Gulf Coast. Not a bad deal for Coastal—except for one thing. Coastal turned over to TUFCO numerous Coastal contracts with producers totaling a whopping 500 billion cubic feet in reserves. It also gave TUFCO an option to purchase another 500 billion cubic feet. In a single transaction, therefore, Coastal parted with a trillion cubic feet of natural gas. The entire twenty-year San Antonio contract calls for only two trillion cubic feet.
Why would Coastal States enter into a deal like this? Wyatt told a legislative committee last summer that his company had little choice. Coastal had substantial reserves available in West Texas, but had secured them by contracting either to start hauling gas at once or to pay for it anyway. This requirement is commonly found in gas purchase contracts today and is known as a “take-or-pay” clause. (Ironically, Coastal helped pioneer this device during the company’s early years, using it to entice producers to deal with Coastal instead of an established pipeline company.) Wyatt and Coastal defend selling off the reserves to TUFCO as the only way the company could get even some of the gas to its regular South Texas customers. Their argument runs something like this: Coastal’s original West Texas pipeline, completed a year earlier, was already filled to capacity, so a new line was the only way to get the gas out of West Texas. But Coastal couldn’t build the second pipeline without financial help—and no one except TUFCO offered any assistance. Sure, TUFCO got half the gas, but Coastal’s customers got the other half (via Dallas and the Old Ocean pipeline); without the TUFCO contract, Coastal would have had to dump the gas to a nearby interstate pipeline company and then the customers wouldn’t have gotten any of it.
This is a nice little argument which sounds perfectly logical until it is measured against the facts. Yes, the original West Texas pipeline was filled to capacity—but not with gas for Coastal’s customers. Much of the gas in the southern line belonged to a subsidiary of Houston Natural; Lo-Vaca was merely hauling it for a fee. If Coastal truly wanted to save its West Texas gas for customers like San Antonio and Austin, then why did it fill up its only pipeline with transportation gas? The answer, of course, is that Coastal did not intend the TUFCO pipeline in North Texas primarily for its long-term customers.
Wyatt himself explained the true purpose of the TUFCO deal in his 1970 message to Coastal’s stockholders: “[T]he North Texas gathering system brings Coastal States into new areas for expansion. It will give the Company access to gas supplies previously unreached and to other opportunities in a territory that will be opened up to Coastal States for the first time.” The specific “expansion” that Wyatt had in mind was Lone Star Gas. Coastal had been rumored to be interested in acquiring Lone Star for several years. One knowledgeable Texas gas consultant states flatly that Coastal wanted the North Texas line for leverage in its attempt to take over Lone Star: if Coastal had the only lines into West Texas, Lone Star might eventually become dependent upon Coastal for gas.
Unfortunately for Coastal—and for Coastal’s customers—this was one gamble that didn’t work. Lone Star responded by building its own 36-inch line. It was absurdly wasteful—two parallel lines from Dallas to West Texas, neither one close to being full—but it preserved Lone Star’s independence. Eventually Coastal had to drop its merger efforts when the Justice Department refused to give antitrust clearance to the proposed union. Coastal had squandered billions of cubic feet of reserves in a losing gamble.
The TUFCO deal was only the first in series of unusual transactions that Lo-Vaca attempted between 1970 and 1972—unusual, that is, for a public utility pipeline company with a duty to act in the public interest. Most pipeline companies hoard their reserves; Coastal and Lo-Vaca, on the other hand, couldn’t seem to get rid of theirs fast enough. These transactions feel into four categories:
Spot sales to interstate pipeline companies. Starting in 1969 Lo-Vaca agreed to furnish gas on a short-term basis to large interstate lines like Natural Gas Pipeline of America, Northern Natural Gas, Transcontinental Gas Pipeline, and Texas Eastern Transmission. These deals usually involved gas Lo-Vaca had purchased for 18¢ per mcf; its selling price ranged between 30.5 cents and 35 cents. (The San Antonio contract price for 1971 was 23.754 cents.) By 1972, Lo-Vaca was selling 200 million cubic feet of Texas gas to interstate pipeline companies every day.
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