Power Politics
How one company’s wheeling and dealing brought the energy crisis into your life.
When l.E. Norman opened his monthly utility bill from the San Antonio City Public Service Board last June he couldn’t believe his eyes. Yes, the figures were in the correct column, all right, and they indeed read $101.97. But it had to be a mistake. His May bill had been only $32.93, and even that was a substantial increase over the March amount of $20.68. How could his bill have tripled in one month, quintupled in only three? Other San Antonians besieged City Hall with similar questions; to their dismay they learned there had been no mistake. Worse, they were told bluntly that their bills would continue to soar; another increase could be expected by August and still others would follow.
Austin was next, then Corpus Christi. Utility rates in both cities jumped markedly during the summer, stayed high all winter, and will certainly climb even higher during the hot months ahead. (An Austin-based engineer for the Lower Colorado River Authority, which provides electricity for rural Central Texas, predicts it will cost nearly $300 per month to keep his all-electric home functioning this summer.) Nor has the rest of the state escaped the malaise spreading like a plague from South Texas. Natural gas rates will rise in Fort Worth beginning May 1, while Dallas and Houston are fighting delaying actions against inevitable increases. Nothing, absolutely nothing, indicates that utility rates will decrease or even level off; on the contrary, all economic and political signs suggest that the situation will continue to worsen.
These cities, and the more than four million Texans who live in them, have one thing in common: all depend to some degree on a single company for the natural gas which heats their homes and generates their electricity. That company is the giant Coastal States Gas Corporation, an enterprise which—before it helped bring the energy crisis home to Texas—was one of the great success stories of American business. Today the company is fighting for its very existence; the value of its common stock has long ago collapsed, and its assets are threatened by lawsuits totaling more than a billion dollars. Behind it all is Oscar Wyatt, Coastal’s founder and chairman of the board. Wyatt is tireless, innovative, daring, charismatic—a man compelling enough to have numbered among his friends Frank Erwin, Sissy Farenthold, Price Daniel, Ralph Yarborough, and Leon Jaworski. Once Wyatt was hailed as an entrepreneurial genius; now he is vilified by critics who seem to blame him for most of the world’s evils since the Defenestration of Prague.
In order to understand what has happened to Coastal and its customers, it is first necessary to know something about the gas business. Natural gas is a form of petroleum, but for many years it remained the poor stepchild of crude oil. As late as the 1950s, oil producers wasted trillions of cubic feet of gas by flaring it—an oilfield euphemism for burning gas as a waste product. The usefulness of gas was limited to home heating or cooking; today gas used in this manner is described as burner-tip gas or domestic gas. Gradually, however, people began to recognize the potential of gas as a clean-burning, marvelously efficient form of energy. And cheap! Oh, was it ever cheap, sometimes as little as two centers per thousand cubic feet (2¢ per mcf). Natural gas could generate heat far more cheaply than its chief competitors, coal and fuel oil. This discovery led to the use of natural gas as boiler fuel in power plants: gas heated the water in the boiler, converting it into steam to drive the generators and produce electricity.
Everyone benefited; cheap boiler fuel meant cheap electricity. One of the major beneficiaries was Coastal States Gas Producing Company, the forerunner of Coastal States Gas Corporation. Between 1962 and 1968, Coastal secured contracts to supply virtually all of Central and South Texas with gas for power plants and domestic use; it also agreed to supply gas to companies that served the mammoth Houston and North Texas markets. On the strength of these contracts, Coastal borrowed money to expand its operations until its complex of 41 corporations and subsidiaries formed the eleventh largest corporation in Texas.
How did this corporate Goliath get us—and itself—into this mess? The answer is deceptively simple: Coastal ran out of gas. More precisely, it had more commitments to deliver gas than it had gas to deliver. This is another way of saying that Coastal sold what it turned out not to have—very much the same type of transaction that got Billie Sol Estes in trouble. There are a number of crucial differences, however, not the least of which is that Billie Sol dealt in fertilizer, a product which can be seen and, if necessary, touched and smelled. Natural gas, on the other hand, is buried far below ground, and is invisible, intangible, even odorless; consequently, there is a far greater chance of making a mistake about how much is actually there. The company blames its shortages on just such a mistake—its West Texas fields have produced far below expectations—but some of Coastal’s customers believe otherwise. They say that Coastal sold reserves for high prices on the open market in defiance of its contractual obligation to supply local utilities at much lower prices. At the very least, they argue, Coastal failed to behave like a responsible public utility; some have even accused Coastal (and Wyatt personally) of fraud.
Setting aside for the moment the cause of the shortages, the effects have been chaotic. Unable to supply enough gas to satisfy the appetites of all of its customers, Lo-Vaca Gathering Company, the subsidiary that operates Coastal’s intrastate pipeline network, had to cut back somewhere. Since domestic gas users have no substitute for burner-tip gas, Lo-Vaca chose to curtail deliveries to electric utilities, forcing local power companies to switch to fuel oil to heat their giant boilers. When the curtailments began in earnest during the severe winter of 1972–73, fuel oil was far more expensive than natural gas; each day a city generated electricity with oil instead of gas cost rate-payers dearly on their next electric bill. Consumers found a new phrase appearing on their monthly statements—“fuel adjustment cost”—which represented a 100 per cent pass-through of the added cost of fuel oil.
More bad news was on the way. In March 1973 Coastal asked the Texas Railroad Commission in effect to revoke the company’s fixed-price contracts with the cities by granting Lo-Vaca a new rate reflecting the higher prices the company was paying producers for gas. Lo-Vaca was already paying more at the wellhead for new gas than it was receiving from local utilities under the long-term contracts Coastal signed in the early Sixties. Alarmed by what it learned in a public hearing, the Railroad Commission took formal control of Lo-Vaca away from Coastal and placed the subsidiary under court supervision. Meanwhile the federal Securities and Exchange Commission (SEC) suspended trading of Coastal’s stock, which had plummeted from a 1972 high near 60 to 7 ½ by the time of the suspension in June 1973.
Nevertheless, Lo-Vaca got its rate increase, which of course hit the consumer in the pocketbook again; now he couldn’t win even if Lo-Vaca actually delivered the gas it was obligated to supply. Lo-Vaca’s customers are currently paying almost seven times the price called for in their contracts. Virtually every penny of the excess has been borne by the consumer, who through it all has steadfastly maintained an air of disbelief. Living in a state which has some of the world’s richest natural gas fields, often within an hour’s drive of his beleaguered city, he asks, “How could it happen here?” The answer, as we shall see, is that it could happen only here.
Success Story
The pilot looked down from the cockpit at the gas flares burning at night in the Orange Grove Oil Field and knew he was almost home. Beneath him was the desolate South Texas landscape between Alice and Robstown; Corpus Christi, his destination, lay a little to the east. The field was a convenient landmark which the pilot knew well, for he was not a professional aviator but an oil and gas man, the president of Wymore Oil Company of Corpus Christi.
If he had mused about his own life that night, the pilot probably would have been rather satisfied with himself. In only five years he had parlayed a Texas A&M diploma (Class of ’49) and a short stint as a roller bit salesman in the presidency of Wymore, a growing company which was developing the lucrative Saint Joseph’s Field in Webb County. But if the pilot had been thinking such thoughts, his name would not have been Oscar Wyatt, Jr. Instead, Wyatt’s active mind was working overtime. He looked at the flares and thought of all the gas that was going to waste because none of the big pipeline companies found it worthwhile to build a line into the Orange Grove Field. And he had an idea: why not build small lines into Orange Grove, collect the waste gas, and offer it as a package? If he could get enough gas together, perhaps one of the big companies might deal with him.
Wyatt’s idea was the genesis of the Coastal States Gas story. By late 1955 Wyatt’s enthusiasm for gas (and his enthusiasm in general) brought Wymore to the point of division; Wyatt took all of Wymore’s gas properties and his partner got the oil interests. Now Wyatt needed capital. Somehow he coaxed a number of Wymore investors to buy stock in a new company he planned to call Coastal States Oil and Gas.
Coastal’s founder may have been short of capital, but he did bring with him two invaluable assets. One was a penchant for hard work, a characteristic he retains even today. By the time Wyatt graduated from Texas A&M as a distinguished student, he had already held down jobs as a hayfield worker, a service station hand (afternoons and weekends for sixteen months), a shipfitter, and a roustabout (for Brown and Root). He had even tried his hand at rice farming while a student at Beaumont’s Lamar Junior College, using the profits from a bumper crop to transfer to A&M. His other great asset was an intimate knowledge of the South Texas gas fields. As a salesman for the Reed Roller Bit Company, Wyatt had learned the history of every well.
