Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
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Sales of specific reserves. The TUFCO deal was Lo-Vaca’s most ambitious maneuver, but the company also sold off reserves to Dow Chemical, Clajon, and El Paso Natural Gas. In each case Lo-Vaca received a transportation fee for hauling the gas it once had under contract.
Brokerage deals. Occasionally Lo-Vaca would learn that a package of gas was available, but instead of increasing its own reserve supply, the company would locate a buyer for the gas. This tactic enabled Lo-Vaca to collect a brokerage fee (sometimes more than $1 million) for arranging the transaction, plus a transportation fee for carrying the gas.
Gas banking deals. Lo-Vaca acted as a depository for producers and purchasers who had temporary excess supplies of gas. The company accepted the gas, then promptly sold it through its system, assuming it could replace it later. Now it must redeliver the gas (to companies like AMOCO), but today it must buy gas for $1.50 per mcf and more, in order to replace gas it sold for less than 25 cents.
This wheeling and dealing is what really arouses the ire of Coastal’s customers. All of these maneuvers occurred while Coastal was occasionally curtailing Austin, the LCRA, and Central Power and Light between 1969 and 1972. Lo-Vaca was already short of gas; yet it continued spot sales well into the crisis that propelled Coastal toward the Railroad Commission and its customers toward the courthouse. Nor did the arrival of the crisis end the sale of reserves: in December 1972 Lo-Vaca transferred reserves to El Paso Natural Gas for a $5.1 million fee. Knowing that they were facing an emergency, Coastal and Lo-Vaca nevertheless continued to do exactly as they pleased, making deals, as a lawyer for the San Antonio City Public Service Board put it, “designed to enhance the short-term interests of Oscar S. Wyatt Jr. and other stockholders of Coastal at the expense of the long-term interest of San Antonio and other customers.”
The “extraordinary transactions,” as the wheeling and dealing became known, served the useful purpose of staving off the evil day when the Coastal balloon might burst. The deals all had one feature in common: they produced quick, immediate income, allowing the company to achieve for a few more years Wyatt’s projections for a fifteen per cent compounded annual growth rate. By 1973, however, not even spot sales and other short-term transactions could compensate for the rising cost of gas. Coastal was being squeezed by escalating gas prices on the one hand, and its long-term, fixed-price contracts on the other.
When the squeeze became unbearable, Coastal, through Lo-Vaca, requested relief on its long-term contracts from the Railroad Commission. In so doing it surrendered control over its own destiny. The future of this cornerstone of Oscar Wyatt’s empire would be determined not in its own board room but in a drab hearing room in Austin and in a dozen or more courtrooms across Texas. Never again would Coastal States have the privilege of doing exactly as it pleased.
Judgment Day
“You’ve got to give security to the carriers,” Texas Governor Jim Hogg (1891– 95) liked to say, arguing for his pet idea—creation of a new state agency to regulate the railroad industry. Concerned by the ruinous competition threatening to bankrupt the state’s railroads, Hogg proposed the creation of a special commission which would establish a system of uniform rates. His idea won acceptance as the Texas Railroad Commission, an agency which from its inception was designed to protect the industry it regulated. When the commission was assigned the task of overseeing oil and gas activity in 1917, its approach to the problem was very much the same: the agency viewed itself as responsible for the care and feeding of the infant industry.
The commission’s role as nursemaid to the oil and gas industry has remained largely unchanged for years, although from time to time the industry has violently disagreed with the commission’s view of what was best for it. When the commission first attempted to regulate production in the East Texas oil fields back in the Thirties, producers threatened to lynch any agency employee foolish enough to set foot in the area. But the commission won that fight, just as it won the right to prohibit flaring of gas in the Fifties. Eventually the industry recognized that the commission had been right all along in both cases. The rest of the time the commission and the industry worked together closely and comfortably; they were, to borrow Oscar Wyatt’s phrase, partners in the energy business.
This was the agency to which Coastal and Lo-Vaca turned in 1973 for relief from their long-term, fixed-price contracts. Coastal States had been contemplating this step for a long time. A confidential company memorandum written in March 1969, only five days after Coastal’s long-term contract with Austin was amended, boasted that the negotiations had strengthened “our position to appeal to the Railroad Commission in the event this sale becomes monetarily burdensome to Lo-Vaca prior to the expiration of the original contract.” Three months later, a second memo called attention to Frank Erwin’s promise to the Austin City Council in 1962 that Coastal would never ask for rate relief, and suggested that it might “tend to shed a new light on our proposed filing with the Railroad Commission for a rate increase with the City of Austin.” And so, four years before the actual request, Coastal was preparing to circumvent its promise not to appeal to the Railroad Commission, the promise that had helped win it the Austin contract in the first place.
One reason Coastal waited until 1973 before going to the Railroad Commission was Lo-Vaca’s ability to keep afloat financially by making spot sales and other short-term deals—deals that would later leave the company unable to meet its contract commitments. But in January 1973 the Railroad Commission ended Lo-Vaca’s wheeling and dealing by prohibiting any pipeline company facing a curtailment situation from making spot sales. Within two weeks of that ruling, Coastal and Lo-Vaca informed customers of their decision to ask the commission for new rates.
Lo-Vaca was in trouble in 1973, bad trouble. In order to replace the reserves it had sold for short-term profit, Lo-Vaca was buying new gas at more than three times its average sales price. Altogether the company’s average cost for gas was 22.75¢ per mcf, much too close to its average selling price of 24.21 cents. (Those now seem like the Good Old Days; new gas is now over $2 and Lo-Vaca’s average cost for gas is $1.27.) Part of the problem was beyond Lo-Vaca’s control: demand for gas was up; discoveries of new reserves were down; most of the cheap, shallow gas had already been produced; and once-productive fields were running out. It was a sellers’ market, and producers knew it. If a producer found a new package of gas, he made pipeline companies renegotiate old purchase contracts in order to get new supplies. New contracts with producers called for prices to be revised annually. The gas market was changing monthly, even weekly, and here in the middle of these fluid conditions was Lo-Vaca, stuck with its fixed-price contracts. Small wonder that Lo-Vaca argued to the commission that “because of drastic and unforeseen changes in the availability and prices of natural gas in Texas, especially in the past few months, the prices and rates being charged by Lo-Vaca in its gas sales agreements are unfair, unreasonable, confiscatory, and contrary to the public interest.”
Greatly simplified, Lo-Vaca’s argument was this: we are a gas utility; gas utilities are vital to the public interest and welfare; a utility can serve the public interest only when it is healthy; we are sick; a new rate will make us well again. Therefore, the commission should—indeed, it must—act in the public interest and give us a new rate, so that we will have the financial ability and incentive to compete for new gas supplies.
Lo-Vaca’s customers, who turned out in force to oppose the rate request, were stunned by the company’s presentation. For years they had been pressing Coastal for the true facts about its reserves, commitments, and costs. Now they were getting them, and the truth was far worse than they had suspected. The customers had long ago discounted Wyatt’s glowing statements in Coastal’s annual reports, but none of them realized how misled they had been: of Coastal’s 9.4 trillion cubic feet in reserves, only 3.7 trillion—about a five-year supply—were available for Texas customers. Lo-Vaca had daily obligations of 1.9 billion cubic feet (2.4 billion on peak winter days), but had only enough gas available to deliver 1.4 billion cubic feet. And there was more bad news ahead. Beginning in November, TUFCO and North Texas would get 300 million cubic feet, 21 per cent of Lo-Vaca’s already inadequate daily deliverability.
The customers entered the hearings with the attitude that their contract prices should not and could not be changed. As the gravity of Lo-Vaca’s condition became clear, however, the focus of the argument shifted to how much, rather than whether, the rates should be changed. One lawyer explained his client’s response to Lo-Vaca’s argument this way: Assuming you get a new rate, our contract still shouldn’t be ignored. All you should get is the minimum rate necessary to satisfy the public interest—just enough to pay operating and maintenance expenses, but not enough to give you a return on your investment. Rate-making bodies don’t exist to get utilities out of bad bargains. Besides, you’re not entitled to a full rate of return in any event; a full rate should be a reward for full service, and you have not provided it.
Lo-Vaca asked the Railroad Commission for a new rate based on its average cost of gas plus 15.10 cents. After three months of hearings and thousands of pages of testimony, the commission issued a temporary order on September 27 authorizing Lo-Vaca to charge cost plus a nickle. It wasn’t what Lo-Vaca wanted, but it was enough: the fixed-price contracts were no longer an albatross around Lo-Vaca’s neck.
The subsidiary was on its way back to health, but the parent’s problems were just beginning. The Coastal family of corporations was reorganized at the end of 1972 to prepare for the acquisition of Colorado Interstate. A new parent company, Coastal States Gas Corporation, replaced Coastal States Gas Producing Company, which was reduced to the status of a wholly owned subsidiary. (Coastal Producing continued to own Lo-Vaca, which became a second-tier subsidiary.) Investment analysts did not consider the merger a good one, and the new corporation was soon in trouble on Wall Street. Its stock, which had climbed near 60 while the Producing Company was still the parent, opened 1973 in the mid-30s and soon nosedived below $10 per share. Institutional investors began unloading their shares in May. Spurred on by San Antonio Congressman Henry B. Gonzalez, Coastal’s most persistent critic, the Securities and Exchange Commission suspended trading in Coastal stock on June 5, pending an investigation of rumors that Coastal had misrepresented its gas reserves.
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