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.
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.
George Farenthold operated several oil leases in the area when Wyatt was selling roller bits; he recalls that Wyatt was hungry for any information he could get his hands on. “As soon as we’d turn our backs, Oscar would sneak into the tool house and start checking the drilling logs to see what kind of luck we were having,” Farenthold says with a grin. “Sometimes we’d have to tell him to keep his nose out of the books because we were running a tight [secret] hole, but that didn’t seem to help much.” (Farenthold and his wife—gubernatorial candidate Sissy—are the godparents of Wyatt’s eldest child.) Wyatt was doing his homework, learning where the gas was and who had it. With the formation of Coastal, he was ready to put that knowledge to use.
Coastal States was Wyatt’s entry into a very tough league. It wasn’t easy for a newcomer to break into the gas business in 1955. Unlike the oil business, which always seemed to have room for another independent, the gas industry was tightly controlled by a few large companies. There are at least three routes to wealth and power in the oil industry—production, refining, and marketing—but in the gas business in 1955 there was only one: transportation. An oil producer can ship his crude oil to a refinery by pipeline, truck, or rail; a gas producer has but a single option—gas can be transported only by pipeline. The big pipeline companies, therefore, had immense power over producers, for without a connecting pipeline, a gas well—no matter how productive—was useless.
The major pipeline companies—Tennessee Gas, Texas Eastern, United, perhaps one of two others—controlled the South Texas gas fields in the early Fifties. They would hook up with a gas field only if it had enough reserves; normally the company would build one mile of pipeline for each billion cubic feet of reserves. Because a federal court had ruled that the Texas Railroad Commission could not regulate gas production (as it did oil), the pipeline companies established their own rationing system. They handed out payments to all the owners in a field—regardless of whether they actually had wells on their property—in proportion to each owner’s share of the underground reservoir. The companies even set their own daily allowable; they would take one million cubic feet of gas each day for each eight billion cubic feet of reserves, a formula designed to insure that the field would last for twenty years. Finally, the companies respected each other’s territory, a sensible business decision which avoided duplication of expensive pipelines. It also avoided competition. Every gas field was a monopoly, a separate fiefdom subject to the absolute rule of the pipeline company.
Oscar Wyatt knew all this, of course, but he also realized that the very circumstances which gave the monopolies their power could be turned against them. Wyatt did the one thing the pipeline companies did not anticipate: he built his own pipeline network. Coastal States Oil and Gas (soon to become Coastal States Gas Producing Company) began in November 1955 with 68 miles of pipes into fields too small for the big companies to bother about. Before long Wyatt was ready to challenge their monopolies in the big fields. Wyatt signed contracts with small landowners (known in the industry as “town lot operators” because the tracts often were ten acres or less), who were effectively shut out by the big companies’ practice of paying owners in proportion to their share of the field, whether they drilled or not. Wyatt would put in a pipeline and start hauling off gas. Coastal paid less for the gas than did the big companies, but the town lot owner was incomparably better off with his own well than he was under the proportional ownership formula imposed by the big companies. Wyatt sweetened his offer still further by promising to take one million cubic feet daily for each two billion cubic feet of reserves, a rate four times as fast as that used by the big companies.
Wyatt’s tactics enraged both the larger producers and the established pipeline companies. The town lot operators were producing far more gas than lay underneath their own small tracts—much of the gas came from beneath the larger landowners in the field. True, it was all perfectly legal under the rule of capture (which declares that oil and gas are not owned until produced), but it was practically like stealing gas, or so the pipeline companies claimed.
Coastal’s tactics did not win it many friends in the industry. Competitors whispered that Coastal pilfered gas in other ways that weren’t so clearly within the law. Gas can be measured only with the aid of a complicated instrument known as an orifice meter, and even then the meter readings are subject to interpretation. Producers were always complaining about Coastal’s calculations. In its early years the company was in and out of courthouses all over South Texas, getting sued by unhappy producers who felt shortchanged. One former Coastal employee says he has no doubt Coastal “took the benefit of the doubt on meter readings.” There were other complaints about the meters as well: some producers were convinced that Coastal tampered with meters by surreptitiously changing the diameter of the orifice. They installed their own meters as a check against Coastal’s, an unusual but not unprecedented action. One San Antonio producer who is no admirer of Coastal States says he “never had double metering in his life with any pipeline company except Coastal.” (Charges of meter-tampering were buttressed considerably by the fact that Coastal occasionally reported “negative line losses” to the Railroad Commission—in other words, more gas came out of Coastal’s pipelines than went into them. On the other hand, this mysterious surplus could also be explained by reasonable ambiguities in meter-reading that Coastal resolved in favor of itself.)
Most of Coastal’s tactics weren’t new to the industry; other small operators used the town lot device, and every company interpreted meters to its own advantage. Coastal, however, refused to remain in the shadow of the major pipeline companies. Instead, it developed an entirely new concept in the gas business: the gathering company, which was neither a producer nor a major pipeline company, but rather a broker that bought and packaged gas for resale. Coastal revolutionized the gas industry in Texas; it broke the monopoly and went on to create an even larger one of its own. In the end it was not only Coastal’s methods but also its successes that aroused such resentment in its competitors.
As Coastal’s markets grew, so did its need for gas. Wyatt was already getting gas from town lot wells at low prices; now he began to outbid the big pipelines in other fields. To their consternation, the big companies now found that they actually needed Coastal. The big companies pegged all their payments to the highest prices they were paying in a field; if they started paying more for gas to any one producer, then they had to renegotiate all their contracts. So the large pipelines let Coastal outbid them, then purchased the gas from Coastal. The single purchase might be more expensive, but at least it wouldn’t trigger the price escalation clauses in all their other contracts. Coastal, meanwhile, got a handsome profit for acting as a broker.
Oscar Wyatt had pulled it off. Not only had he successfully challenged the big boys, in the process he had made his company indispensable to them. He exuded optimism; in the early days the atmosphere at Coastal States was pervaded with a sense of destiny. “We knew we were going someplace—we didn’t know how far, how fast, how big, but we did know there weren’t any limits,” says Ellis Brown, an attorney in Coastal’s land department from 1958 to 1964. Wyatt developed a talented management team even though salaries started out well below the industry average. The staff was small, young, dedicated, and overworked. Wyatt himself was only 31 when he founded Coastal. As president he set the pace—driving, pushing, calling employees in the middle of the night, working in his shirtsleeves, acting—in the words of one of his engineers—“like he was going to die if he didn’t get the next dollar.”
The tempo of life at Coastal was furious; time was precious, so important that sometimes it seemed as though time and not natural gas was Coastal’s chief commodity. “Time is the most valuable thing in the world,” Wyatt said in 1965. “When it is gone it can’t be replaced.” (His critics would add that much the same thing can be said about natural gas.) Almost 90 per cent of Coastal’s top employees had pilot training (Wyatt had his license at age sixteen), and the company transacted much of its business by air. Wyatt’s impatience with wasting time and his proclivity for taking over the controls occasionally caused complications for his passengers. Once when he was flying to Austin from Corpus Christi, Wyatt radioed the control tower for permission to land with the wind so that he wouldn’t have to spend the time circling halfway around the field. On another flight into Austin he suddenly put the plane into a steep spiral dive when he saw a hole in the thick clouds enveloping the city. His uninformed passengers thought they were doomed. Usually, however, Wyatt did little actual flying even in Coastal’s early years; he liked to take off and land, but the rest was too monotonous. It was a waste of time.
Wyatt has been described as a genius by both his critics and his admirers. His early associates remember that he could calculate in his head faster than engineers could operate a slide rule. Ellis Brown says that Wyatt could grasp a complex point of law better than any other layman and many lawyers; what’s more, Brown says, Wyatt never forgot it.
Wyatt’s creative energies matched his retentive powers. Almost everything about Coastal States during its early years was innovative: the concept of a gathering company, its method of attracting investors, and its approach to financing. Coastal paid no cash dividends—highly unusual for a company in the utility business—but was instead a growth stock. And what growth! The original stock was valued at $5 a share; by 1961 it was selling for $87.50 before splitting three-for-one. In 1963 it was first listed on the New York Stock Exchange, opening at 29. It crept upwards to 32 ¾ by mid-1965, and then began the phenomenal growth that made Coastal States Gas a darling of Wall Street: 49 ¾ in late 1967, a ten per cent stock dividend in January 1968 and a high of 69 5/8 in April of that year before splitting again, this time two-for-one. One hundred shares of stock purchased in 1955 for $500 would then have been worth $22,960.
Wyatt was equally successful in developing new forms of financing. Traditionally, pipeline companies offered their pipelines as security for bank loans. Coastal, on the other hand, made contracts to buy and sell gas, hoping to borrow money based on anticipated profits. There was some risk involved, to be sure, but Wyatt once explained his philosophy of business as “taking a reasonable risk and then working like hell to make sure it works.”
Some of his former employees, looking back on their days with Coastal States, shake their heads and wonder how they survived. Most say they would never do it again, that the drain on their physical resources was too great; but all agree that working for Wyatt was an unforgettable experience. A former Coastal vice-president tried to explain how he felt: “In most big corporations, the only time you see the chairman of the board is on the cover of the annual report. If you work for Coastal States Gas, the chairman of the board will be in to see you. He wants to know if you’re his kind of person—quick, ambitious, self-starting, willing to take a risk. The air is really electric around there, knowing that he might come through that door any minute.” He paused for a minute, then added, “That’s a lot of pressure.”
Wyatt departed from traditional patterns in the political sphere, just as he did in the business world. He was somewhat unpopular for a time in financial circles for espousing liberal economic theories, but as usual he was ahead of his time, one of the few businessmen in the Fifties who understood how inflation worked to his advantage. Coastal was a growth company, short of capital and surviving on borrowed funds; he recognized that inflation enabled him to pay off loans with cheaper money. His first political ventures were on the liberal side in Corpus Christi; at one point in the early Sixties he was so popular he was urged to run for mayor. By 1964 he was known as a big liberal contributor on a statewide level, and during the U.S. Senate campaign that year he was cochairman of a Ralph Yarborough appreciation dinner. But his liberalism stopped at the plant gate. When Coastal bought the old Sinclair refinery in Corpus Christi in 1962, Wyatt spent heavily (and successfully) to beat an effort to unionize the plant.
An unusual aspect of Wyatt’s political involvement is his interest in the judiciary, a branch of government often ignored by businessmen. He has contributed heavily to opponents of judges who have ruled against him, and is generally credited with the defeat of a Mission district judge named William Rogers Blalock in 1960. (Blalock, who now lives in Houston, says he was warned by a friendly lawyer after the trial that “ruling against Oscar Wyatt is serious business.” Blalock’s decision was later upheld by the Texas Supreme Court.) Wyatt is known to have entertained a number of state district judges lavishly at his South Texas ranches. Information collected by the Securities and Exchange Commission, which has been investigating Coastal States off and on for two years, confirms Wyatt’s involvement in judicial politics.
By 1960 Coastal had reached a plateau, just as Wymore had in 1954 when Oscar Wyatt flew over the Orange Grove Oil Field. In less than five years, Coastal had increased its assets from $3.3 million to more than $48 million, and had carved out a strong foothold for itself in the gas industry. It had a somewhat unsavory reputation in the industry, and was decidedly unpopular among its competitors, but it was here to stay nevertheless. Coastal had carried Wyatt’s original gas-gathering idea about as far as it would go; now Wyatt had to decide whether to continue to grow, or to slow down and consolidate his successes. The decision was inevitable from the beginning; growth it would be.
If the old idea had spent its force, then it was time for a new idea. Wyatt’s first choice was a cross-state pipeline to supply El Paso Natural Gas, but that faded quickly under the threat of Federal Power Commission intervention. Then, just as Wyatt and Coastal were casting about for new markets, a series of fateful decisions in three Texas cities opened the way for Coastal to supply four million Texans with natural gas. The gas broker was about to become, at least in name, a public utility.
Too Good To Be True
Most of the great success stories of American business involve a piece of luck, and the rise of Coastal States is no exception. Oscar Wyatt’s good fortune was that long-term gas contracts in three large Texas cities—Corpus Christi, Austin, San Antonio—were up for bids between 1960 and 1962, which was perfect timing for Coastal States. The company was old enough to have a firm financial base, but young enough to remain innovative, daring, and above all, hungry. If the contracts had lapsed even three years earlier, Coastal would have been in no position to make a move; a few years later the supply of gas was becoming so scarce that competition for new markets would have been virtually impossible.
Circumstances in all three cities were different—San Antonio owned both its gas and electric utilities; Austin controlled only its electric system; Corpus Christi owned the three gas distribution systems which served its residents—but in one essential way all three cities were alike. They all wanted cheap gas. Each was lured by the promise of low prices; each believed that gas would be available forever. The few spokesmen for restraint went unheard; the low bids were too attractive to pass up. In the end the cities bought twenty-year gas supplies with little more caution than if they were buying two years’ worth of ball-point pens. The cities in the early Sixties did exactly what they later accused Coastal of doing in the early Seventies: they went after the quick dollar, the short-term gain, and ignored the long-range consequences. This is their story:
Corpus Christi, 1960. Everybody involved in local politics knew that Oscar Wyatt was a brash upstart, but this time he had gone too far. The city’s gas advisory committee had just negotiated a twenty-year contract with Houston Natural Gas, which had supplied the main city distribution system since 1952; all that remained to make the contract effective was perfunctory approval by the city council and the voters. Then, with the election only six weeks away, here came a letter from Wyatt, questioning whether the proposed contract was the best one obtainable, and asking for a hearing before the committee.
Wyatt had a point. The old contract required the city to pay only 8.5¢ per mcf; the new agreement averaged 26.5¢ per mcf for eight years, with the remaining twelve years at cost-plus. But the advisory committee ignored him, and Wyatt vowed to fight. His attorneys questioned the legality of a negotiated contract, arguing that the city was required to take bids. Wyatt accused Mayor Ellroy King of playing political footsie with Houston Natural and trailed King and other supporters of the negotiated contract as they made the civic club circuit; whenever and wherever King spoke, Wyatt was present, monopolizing a microphone on the floor, turning a question-and-answer session into a debate. After four weeks of relentless pressure, Wyatt forced King to agree to a televised confrontation. It was no contest. The best argument King could muster was that the city had already come up with the best obtainable contract. Wyatt exploded that by offering to bid fifteen per cent lower than the Houston Natural price. He wasn’t asking for Coastal States to get the contract, Wyatt kept saying, just for the chance to bid.
When he wasn’t debating King, Wyatt was appearing at black churches, courting Mexican-Americans, and visiting union halls—putting together a potent political coalition of minority groups, labor, and white liberals. They were his natural allies, not because he was carrying the liberal banner—the gas contract fight had nothing to do with liberal-conservative issues—but because he was taking on the entrenched establishment, represented by King and the majority of the city council. Despite his business success and his contributions to the city (two downtown buildings and a third one planned, a payroll of $1.5 million, $10 million spent annually by Coastal in Corpus Christi), Wyatt was considered a pariah by the local establishment. They found him brash, cocky, and pushy, a young man in too much of a hurry; they hadn’t accepted him by 1960 and they never did. But they were no match for him in open combat. Despite the relative obscurity of the gas contract issue, Wyatt’s coalition turned out a record vote for a special election, and the Houston Natural contract was rejected by a 2–1 margin.
The city then drew up specifications for both a twenty-year contract and a short-term contract which the council could award without approval from the voters. Wyatt angrily charged that the specifications favored Houston Natural (one of the conditions could only be met by a company which was already supplying gas to the city), and promised another fight. Coastal was low bidder for the twenty-year period, but Houston Natural reduced its previous offer substantially to become low bidder for the five-year, short-term contract. To no one’s surprise, a Houston engineering firm hired as the city’s consultant recommended a short-term agreement with Houston Natural. The city council awarded the contract over Wyatt’s protests that his twenty-year offer was a better deal. Wyatt promptly retaliated by filing suit as a taxpayer in state district court. When the trial judge found “fatal defects” in the contract and declared it void, it looked like Coastal might win after all; but an appellate court, without ruling on the validity of the contract, declared that Wyatt could not contest the procedure as a taxpayer, since no tax funds were involved. For a few days Wyatt blustered about appealing to the Texas Supreme Court, but eventually he accepted the adverse ruling. He had, after all, accomplished a great deal: through sheer force of personality, he had sliced fifteen years—and 3¢ per mcf—off Houston Natural’s contract. What’s more, the political coalition he forged had meanwhile grown into the Progress Party, which ousted the establishment-backed Action Party in the 1961 city elections. Coastal’s president had proved himself a force to be reckoned with in local politics.
The point was not lost on Houston Natural. When the new city council asked for bids in 1962 on a twenty-year contract to become effective when the short-term Houston Natural contract expired in 1966, HNG didn’t even enter a bid. In 1953, at the high water mark of its influence in Corpus Christi, Houston Natural had almost purchased the main city-owned gas system; it already owned a distribution system serving the fast-growing southeast area of the city near the Naval Air Station. Now, less than a decade later, it reluctantly prepared to withdraw from the lucrative Corpus Christi market. Houston Natural even sold its own distribution facilities to the city, retaining only an option to continue supplying the southeast area through 1977. The Corpus Christi gas market was wide open.
The immediate beneficiary, however, was not Coastal States, but a little-known Houston outfit called Lumar Gas Company. Coastal bid substantially lower than it had in 1960, but Lumar’s offer, city officials said, was “a much lower figure than expected.” Indeed, it was 6¢ per mcf lower than the existing HNG contract, an astounding bid of only 18.5 cents. Newspaper reports indicate that the city could hardly believe its good fortune; why, it was almost too good to be true! Not even Coastal States could match that price, and Lumar got the contract even though it was only two years old, had no major supply contracts, and had no guaranteed reserves.
Almost immediately there was trouble. Five months before Lumar was to start deliveries to Corpus Christi, it asked the city to put up $600,000 to help build a connecting pipeline. That ominous sign was followed by a letter to the city council from Coastal questioning Lumar’s ability to live up to its contract. In fact, Lumar was in deep financial trouble, and so were two of its directors who had personally cosigned a loan to the company from the First City National Bank of Houston; one of those directors was a lawyer who was closely connected to the bank both personally and through the giant Vinson Elkins law firm. The company had paid no interest on the note, but time was running out. So was Lumar’s gas; the hoped-for reserves hadn’t panned out. Coastal bailed Lumar out by purchasing its Corpus Christi operations through an intermediary company called Hydrocarbon Development.
So Coastal now had the contract to supply the main Corpus Christi gas system that it had failed to get twice before—but for a substantially lower price than it had been willing to accept on either occasion. If this worried people in authority in Corpus Christi, then they kept it to themselves. Meanwhile, Coastal States was busily consolidating the remainder of the Corpus Christi market. Central Power and Light, the giant South Texas electric utility, made Coastal its chief supplier of natural gas for boiler fuel in 1964. One year later Coastal acquired the supply contract for the tiny city-owned Southern Community distribution system on the western edge of town. The Southern Community contract passed to Coastal when it purchased the previous supplier, Southern Coast Corporation, a small local company that had been operating more or less under Coastal’s wing for several years.
The last holdout was the old Houston Natural Gas distribution system. HNG was still supplying the southeast area under a contract which required it to accept the same price paid to the supplier of the main city system. That worked fine from 1962 until 1966, so long as Houston Natural also supplied the main system. But when Lumar took over in 1966, Houston Natural’s payoff dropped from 24.5¢ mcf to 18.5 cents. One year later HNG cancelled its option to renew and yielded its last foothold in Corpus Christi.
Now there was no one left but Coastal States. Suddenly the company—which had been so eager to supply gas at low prices—took a hard line: it informed the city the new price for the HNG system would be well above 18.5 cents. The city refused to negotiate and called for bids. But there was no one left to challenge Coastal. The new contract called for Coastal to receive 23.5 cents, with regular price escalations. Seven years after the Corpus Christi city council had given Houston Natural Gas a twenty-year contract over Oscar Wyatt’s objections, Coastal States had a complete monopoly in Corpus Christi.
Austin, 1962. Frank Erwin’s name was not yet a household word, but the Austin City Council knew very well who he was: a close associate of Vice President Lyndon Johnson and gubernatorial nominee John Connally, a power in state Democratic Party circles, and a highly skilled lobbyist with a shrewd mind and an acerbic tongue. He had made his political reputation in Washington by guiding a depletion allowance for brick manufacturers through Congress after numerous other lobbyist had tried and failed. He was a good advocate to have on your side in a tough fight; there was little chance his clients would not get a full and fair hearing. And his client, Coastal States Gas Producing Company, was in a very tough fight: it was bidding to supply Austin’s power plants with natural gas, a contract which had been held for 37 years by United Gas of Shreveport.
A strange combination of circumstances brought Erwin before the council on behalf of Coastal. In the late Fifties, Councilwoman Emma Long got the idea that Austin shouldn’t rely on United, but should find a permanent gas supply. She wanted the city to build its own pipeline to a field near Mineral Wells, but her male colleagues on the council had a well-developed habit of ignoring the somewhat iconoclastic Mrs. Long and this was no exception. So she approached former Governor Allan Shivers, who was more receptive. Shivers joined with oil and gas lawyer Clint Small and others to form a group known as Intra-Tex, which would seek the contract to supply Austin’s proposed Holly Street power plant. They even obtained a conditional contract signed by the city manager, but, Small recalls, Mayor Tom Miller torpedoed the deal and forced the council to ask for bids. This touched off a wild fight among four companies, including Coastal States. Eventually the city hired a consultant to evaluate the bids; he turned out to be a former attorney for United, and when he recommended that United get a five-year contract, the Intra-Tex group headed for the courthouse. United agreed to resubmit the contract for bids, along with a new long-term contract to supply the city’s other electrical generating stations. The two contracts were lumped together, and the Intra-Tex group prepared another bid. They retained Erwin to plead their case and made a contract with Coastal States for the gas.
Apparently Coastal had a change of heart and decided to bid on the contract in its own name, but first it had to get Intra-Tex out of the way. Coastal paid Small (Shivers had dropped out by this time) to release Coastal from its obligations to supply gas—and to keep Intra-Tex out of the bidding. This transaction has been characterized, somewhat unfairly, by San Antonio Congressman Henry B. Gonzalez as a “finder’s fee,” but the evidence does not support the charge. Intra-Tex obviously was not conceived as a front for Coastal; indeed, had the conditional contract become binding in 1960, Intra-Tex planned to purchase its gas from Houston Natural and not Coastal.
United, meanwhile, was not at all happy about how the situation was developing. The company had a huge capital investment in the Austin area—hundreds of miles of pipelines—which would be useless unless it won the bid. United argued strenuously, just as it was doing in San Antonio, that competitive bidding for the gas supply contract was an unwise course for the city. Any company could throw together a low bid just to win the contract, United contended. Further, they said, such bids meant nothing because a pipeline company is a public utility which by law is entitled to make a profit. If the contract price proved insufficient, the winning company could always go to the Railroad Commission and ask for a rate increase; the Commission would have to keep the company afloat in order to keep the gas coming into the city.
We’ll put a stop to that, said the city. It included a clause in the contract extracting a promise from the winning company never to go to the Railroad Commission for rate relief. Coastal says the clause was the city’s idea, but Erwin recalls that the concept originated with Coastal. “United was giving us a hard time, saying our bids didn’t mean anything,” Erin says. “Oscar’s number two man was up here for the negotiations, and he authorized me to say that we’d never go to the Railroad Commission.”
Whosever idea it was, there is little doubt that the provision is meaningless. You can’t contract away the jurisdiction of a regulatory body to act in the public interest; that is basic second-week-law-school stuff. Tracy DuBose, a Houston attorney who is handling most of Coastal’s litigation, calls the paragraph “Mickey Mouse language.” DuBose, who as with a Corpus Christi law firm in 1962 but did some work for Coastal, says he wasn’t in on the contract negotiations, “but if I had been, I’d have advised, ‘Sure, go ahead and sign it, it doesn’t mean anything.’”
Three companies bid for the Austin contract: Coastal, United, and Humble. Coastal had filed an open offer with the city clerk before the bidding deadline, primarily to discourage competition. Humble beat Coastal’s original price, but Coastal’s sealed bid undercut its first proposal by $18 million. That ended Humble’s chances. United’s offer was more difficult to evaluate because it failed to meet contract specifications. For one thing, United refused to bid fixed prices for twenty years; for another, United would not agree to the provision never to seek rate relief. Erwin repeatedly stressed that Coastal was giving the city everything it wanted. On October 5, the Lower Colorado River Authority (LCRA) which had sought bids jointly with the City of Austin, awarded its contract to Coastal over Humble and United. One week later, Austin went with Coastal too.
Before another year had passed, Coastal won the residential gas contract for Austin over United, driving the Louisiana company out of the Central Texas market for good. Once again Coastal bid firm prices for twenty years, while United would bid for only ten years. Emma Long, back on the council after a four-year absence, was skeptical of Coastal’s offer, and tried to get Coastal to dedicate specific reserves to the Austin contract. Again she received no support from her council colleagues. “Wyatt snowed them,” she says, recalling his charm, optimism, and forcefulness. Coastal’s founder spent most of his time in Austin during the contract fight; his ebullience and drive overwhelmed the council.
By this time, United had had just about all it could take; it asked the Federal Power Commission to put a stop to Coastal States’ maneuvers. The FPC, whose function is to regulate interstate gas, said it had no jurisdiction over intrastate matters. United undoubtedly knew this all along; it probably went to the FPC out of utter frustration. United was an old company, somewhat stodgy and unquestionably arrogant towards its customers—but it was a basically sound and conservative organization, not given to making promises it might not be able to keep. Coastal, on the other hand, was a growing company, hungry for new markets and willing to gamble with its promises to get them. Furthermore—and this aspect cannot be underrated—it had Erwin to make its offer credible. Erwin himself says that “if the city council had known that Coastal was eventually going to go to the Railroad Commission, they’d never have let them have the contract.” Erwin today feels little loyalty toward Coastal, his former client: “I think the bastards out to be put in the penitentiary.”
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.
Did Spice fake the study? San Antonio Congressman Henry B. Gonzalez thinks so. In a series of speeches on the House floor he has accused Spice of falsifying his report to save the contract for Alamo Gas. Gonzalez points out that more than one-third of Spice’s $34,200 fee was eventually paid by Alamo, which in 1962 reimbursed CPS $12,475 for Spice’s work. The current CPS board chairman has described this transaction as “at best, a gigantic conflict of interest.” There are also indications (which Martin denies) that Martin—who, more than his partner Schoolfield, was the force behind Alamo—was deep in debt in 1961. If this is true, the Alamo contract could have insured his financial recovery. Any hope of exploring Martin’s financial dealings during this period was erased in 1974, however, when San Antonio District Judge Preston Dial quashed a grand jury subpoena for Martin and his records.
Spice himself says he doesn’t know what happened to the gas. He points out that many of the fields had little production history, making it impossible to use the most accurate method of measuring reserves—comparing the volume of gas produced with the drop in pressure of the well. Any other reserve measurement, Spice says, is educated guesswork and could be off 15 to 25 per cent either way. He speculates that after Coastal States took over Alamo in 1963, it may have produced and sold gas without telling anyone, including the Railroad Commission.
There is another explanation which lies somewhere between intentional fraud and honest mistake. People in the oil and gas industry joke that the first question a consultant asks when he is hired to verify reserves is, “Are you buying or selling?” Reserve estimates are exactly that; petroleum geology is an inexact science. One of the leading oil and gas consultants in Texas says that Spice is a good man to have when you’re selling; he tends toward optimism. Ostensibly his client, the City Public Service Board, was buying—but were they? Spice must have known how badly the CPSB wanted to do business with Alamo and avoid going back to United. The CPSB wanted those reserves to be there just as much as Martin and Schoolfield did.
While Spice was completing his study of Alamo’s reserves, White, Weld & Co. was having second thoughts about financing the venture. Martin said in a deposition taken in early 1975 that White, Weld withdrew its offer because United Gas had applied pressure in New York financial circles. (Alamo sued United in 1963, claiming that United had interfered with its financing arrangements, but never pursued the lawsuit.) White, Weld, on the other hand, recently told investigators from the Bexar County district attorney’s office that it withdrew because Alamo’s reserves were deficient. Both stories could be true, because United was proclaiming loudly to anyone who would listen that Alamo did not have enough gas.
Meanwhile, in Corpus Christi Oscar Wyatt and Coastal States Gas Producing Company had troubles of their own. Coastal had just swung its first big deal, an agreement with El Paso Natural Gas which required Coastal to build a pipeline to West Texas. Wyatt had already purchased tons of pipe when the Federal Power commission ruled that Coastal’s pipeline network would thereafter be subject to FPC regulation. Wyatt wanted no part of that, so he was left wit ha lot of pipe rusting away on the Corpus Christi docks. If ever two businessmen needed each other, it was Wyatt and Martin. Wyatt had pipe and money, but no market; Martin had the San Antonio market but no money for a pipeline. One of Alamo’s directors knew of Wyatt’s plight, mentioned it to Martin, and Alamo’s promoter wasted no time. The same day White, Weld backed away from financing Alamo, Martin turned to Coastal States. That was May 2. By May 11, Coastal had arranged to finance the pipeline through an Illinois bank. Coastal would guarantee half the debt and in return would share ownership of the pipeline with Alamo.
At last Alamo was ready to satisfy the terms of the conditional contract. Its reserves were verified (though not by DeGolyer-McNaughton) and its financing was assured (though not by White, Weld). But the City Public Service Board had gone too far with Alamo to back out now, even if Alamo by this time meant Alamo-Coastal States. On June 14, the CPSB awarded the final contract amid much ceremony and self-praise about saving rate-payers $33 million.
Coastal States was already a partner in supplying gas to San Antonio, and before long it became the dominant partner. The Illinois bank hedged on its financing offer when United sued to set aside the Alamo contract; the bank feared that a United victory would leave Alamo without funds to repay the loan. The bank asked for personal guarantees from Alamo’s directors, but only Martin agreed. That ended all hope of borrowing money; the pipeline would have to be financed through other means. Once again Alamo turned to Coastal States. This time Coastal purchased 25 per cent of the outstanding Alamo stock from Alamo’s directors, who used the money for a pipeline. Martin, however, sold no stock, but placed his shares in a voting trust whose trustees were Martin, Schoolfield, and Coastal States attorney Norman Davis. Theoretically Alamo remained independent, but as a practical matter Martin sided with Davis and Coastal against Schoolfield, giving Coastal effective control of 51.18 per cent of Alamo. Schoolfield, judging by notes Davis took at the time, didn’t like it but there wasn’t much he could do about it. By the time Alamo delivered its first cubic foot of gas in April 1962, it was already little more than a subsidiary of Coastal, and Davis was referring to Alamo as “we” in his notes. In October 1963, Coastal States made it official: it acquired all the remaining Alamo stock and two years later dissolved Alamo entirely.
Looking back on the transactions that culminated in Coastal’s takeovers, the company’s critics have suggested that Coastal planned the entire scenario from the start—that Lumar, Alamo, and Intra-Tex were only fronts for Coastal States all along. As is usually the case with such theories, this one has some superficial supporting evidence, particularly in San Antonio, where Glen Martin can be tied in with Coastal States even before he submitted his bid. Two Coastal engineers, moonlighting to San Antonio on weekends, helped prepare Alamo’s offer. Furthermore, Coastal was going to supply a portion of Alamo’s reserves. Finally, Coastal was very generous about helping Martin financially after it acquired Alamo stock. The company authorized Martin to make gas deals or his personal benefit; it gave him $3-million half-interest in an extracting plant in exchange for a $500,000 note—a transaction questioned by Coastal’s auditors; and it agreed to buy gas from Martin for ten years or until he accumulated $425,000. But the history of Alamo indicates that Martin wanted the company to stand on its own—that is, until White, Weld’s last-minute pull-out left him with no alternative; if he didn’t turn to Coastal he would have to give up his chance at a half-billion-dollar contract. After investigating the Alamo contract for almost a year, Bexar County assistant district attorneys have also reached this conclusion.
Coastal did not conceive and execute a master plan; rather, it took advantage of circumstances that never should have been allowed to exist. San Antonio and Austin could have dealt with United Gas, which at the time claimed 34 trillion cubic feet of reserves, including 4.5 trillion in the San Antonio area alone. Corpus Christi and San Antonio could have chosen Houston Natural, which many Texas oil and gas operators consider the best pipeline company in the business. Yet all three cities chose to risk their futures with new, unproven companies.
“If there’s anything Oscar Wyatt understands better than the gas business,” a former Coastal employee says, “it’s politics and politicians.” What Coastal’s critics have described as a grand scheme was in reality nothing more than political acumen at work. Austin is a city of influence; Coastal reacted by first disposing of Intra-Texas (and its influential local backers) and then working through Frank Erwin. In Corpus Christi, Wyatt worked against the local establishment to drive out Houston Natural, while in San Antonio he worked with the local establishment, rescuing Alamo and saving the City Public Service Board from having to turn to much-loathed United Gas. The tactics were different, but the result was the same: Coastal States—and Oscar Wyatt—ended up firmly, completely, totally in control.
The Winter Of Discontent
With more than a billion dollars worth of long-term contracts safely tucked away, the company’s net income doubled between 1962 (when Coastal began supplying gas to San Antonio through Alamo) and 1964. It doubled again by 1969. Earnings showed huge annual gains: up sixteen per cent in 1965, eighteen per cent in 1966, seventeen per cent in 1967, eighteen per cent again in 1968. Money was no problem. Coastal obtained a $75 million line of credit through Houston’s Bank of the Southwest in 1965 without having to pledge any physical property as security; the contracts alone were enough to satisfy the bank.
“Every year a record year” became the Coastal slogan. The hometown newspapers, Corpus Christi’s Caller and Times, seemed to run the same stories over and over in the late Sixties: “Local Gas Firm Shows New Highs,” “Coastal’s 1st [2nd, 3rd] Quarter Profits Up,” “Coastal Sets New Record.” The figures changed but not the theme.
The company that broke the monopoly of the big pipeline companies now started to put together a monopoly of its own. In December 1964 Coastal acquired Texas Gas Utilities and its 400 miles of pipelines serving Del Rio, Eagle Pass, Uvalde, and Carrizo Springs. A few months later Coastal purchased the facilities of Nueces Industrial Gas Company. In 1968 Coastal tied up the loose ends by purchasing United’s useless 965 miles of pipelines near San Antonio, and by acquiring all the assets of Rio Grande Valley Gas—including 543 miles of pipelines and 834 miles of gas distribution lines.
The Rio takeover was a classic Oscar Wyatt maneuver, a combination power play and finesse. By 1967 Rio’s management knew that Wyatt has his eye on their company. They wanted no part in Coastal, however, and started looking for anyone else who might be interested in acquiring their company. They found someone—Houston Natural Gas. On October 20, 1967, Rio and Houston Natural announced their agreement. Three weeks later Coastal’s directors voted to go after Rio anyway. Wyatt set up a command post in the Coastal board room. He installed a battery of telephones and began contacting Rio’s stockholders personally, promising each one that Coastal would beat Houston Natural’s offer for Rio stock. Houston Natural had to throw in the towel—after all, the deal hasn’t been its idea in the first place – and in January 1968 Rio’s directors voted to accept Coastal’s offer.
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.)
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.
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.
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.
“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.
The Railroad Commission struck the next blow at Coastal. After learning how desperate Lo-Vaca’s situation really was, lawyers for Austin and the LCRA urged the commission to strip Coastal of all control over its subsidiary and place Lo-Vaca in receivership. The commission was unwilling to take such a drastic step; instead, it reached an agreement with Coastal which called for a partial separation of the two companies. Coastal Producing gave an Austin court an irrevocable proxy to vote its Lo-Vaca stock. Lo-Vaca’s board of directors resigned and was replaced by a court-appointed board and a supervisor-manager, whose jobs was to oversee the operations of the company and report back to the court. Furthermore, Coastal agreed to supply Lo-Vaca $2.5 million per month for capital expenses (not operating costs) such as pipeline construction and advance payments for new gas. But Coastal and Lo-Vaca did not have to separate physically; they were allowed to remain in the same building, use the same telephone switchboard, and in some instances, share the same law firm (Houston’s Fulbright and Jaworski).
There is considerable debate over the effect of the separation. Some critics believe that the Railroad Commission didn’t go far enough; as San Antonio’s Johnny Newman puts it, “Anybody who believes they are really separate is a damn fool.” The separation agreement is designed to last for a maximum of five years, but can be terminated earlier if Lo-Vaca manages to accumulate enough gas to meet 90 per cent of its commitments—so Lo-Vaca’s employees know that before too long they will be working for Coastal States again.
Lo-Vaca’s new board may be independent, but as its supervisor-manager James Hargrove points out, it also must be “conscious of its obligation to operate the corporation on behalf of its stockholders.” Besides, as Hargrove says, on major issues like rate increases and liability to customers, Coastal’s and Lo-Vaca’s interests are essentially the same. Any real damage to Coastal’s financial situation would equally damage Lo-Vaca, and vice-versa; the companies are tied together in complex financing arrangements because Lo-Vaca has never had independent borrowing power. If either goes bankrupt, the other will almost certainly follow. The partial separation of the two companies has not altered the fact that, in Hargrove’s words, “It would be a form of suicide for us to jump in against the long-term interests of Coastal States. We’re on the same umbilical cord.”
The beneficial effects of the separation have been largely psychological. Customers have found Lo-Vaca far more communicative since the Railroad Commission’s action. Now they have some idea how long curtailments will last and how serious they will be. Prior to the split, customers would receive only a terse message that pressure was dropping in Lo-Vaca’s line and curtailments would be imposed in a matter of hours. R.L. Hancock, director of Austin’s electric utility, says that Lo-Vaca’s performance in the field and in the office has improved considerably. So has the company’s ability to buy gas.
Coastal, too, has benefited from the present arrangement, despite having to supply up to $30 million annually in capital contributions. Prior to the winter of 1972–73, Lo-Vaca was buried in obscurity. True, Coastal had turned its long-term contracts over to Lo-Vaca as far back as 1963, but all of the customers continued to view Coastal as their gas supplier. Coastal treated the distinction between itself and its subsidiary fairly casually; the company’s annual reports during the boom years of the late Sixties don’t even refer to Lo-Vaca by name. Frank Erwin, who received continuing payments for his role in landing the Austin gas supply contract for Coastal, recalls that as late at 1971 his checks would come one month from Lo-Vaca, the next month from Coastal, in a random pattern.
But once the crisis hit, Coastal was eager to isolate its ills in one subsidiary. (In its 1970 annual report, Coastal reported that “the Company is the supplier of consumer gas for several major cities in Texas,” but in 1973 these cities were described as Lo-Vaca’s customers.) The separation agreement has also aided Coastal’s efforts to avoid having its healthy non-utility functions subsidize its sick subsidiary. One SEC investigator believes that the Railroad Commission action was designed not to save Lo-Vaca but to bail Coastal out of its legal difficulties. Why else, he asks, would the commission have gone after the subsidiary instead of the parent? One possible answer is that the commission was uncertain of its jurisdiction over the parent; another is that the commission wanted to avoid a protracted legal battle and simply settled for what Wyatt would agree to.
By the end of the summer, the SEC was ready to proceed against Coastal itself. The federal agency filed suit against Coastal on September 11, but that was only for show; one day later Coastal signed a consent decree settling the controversy. Coastal agreed to refrain from making false or misleading statements about reserves, deliverability, and earnings. It also consented to a reorganization of its board of directors and its executive committee—two moves which the agency hoped would end what one SEC source called “the dictatorial authority of the chief executive,” that being, of course, Oscar Wyatt. The SEC plan called for four Coastal directors to step down. The remaining six directors were then joined by seven new appointees mutually acceptable to the SEC and the company. Two of the seven new members would join Wyatt on the three-member executive committee.
Whether the SEC achieved its goal is doubtful. Former Railroad Commission hearing examiner Walter Wendlandt, who handled the Lo-Vaca rate case for the commission, says Wyatt remains in control through “incredible ability and personal magnetism.” Wyatt also had some help from Washington attorney Manuel Cohen, who handled the SEC investigation for Coastal. Cohen knows something about such matters; he was chairman of the commission from 1964 to 1969. (SEC sources have confirmed that Cohen became involved in the case at the request of one of Coastal’s directors who later resigned to take a legal job of his own in Washington—the soon-to-be Special Prosecutor of the United States, Leon Jaworski.) SEC investigators are quick to point out that Cohen was totally cooperative in producing needed documents and in not impeding their work—“We’ve never had an investigation go so smoothly,” one lawyer said—but somebody managed to convince the SEC chiefs in Washington to accept “independent” directors whose independence was open to question. One of the seven “independent” directors had already been nominated by the Coastal board; he was embraced by the SEC as one of its own. Another “independent” director, former Tenneco president Harold Burrow, has had close ties with Wyatt for many years.
If the public regulatory bodies had limited success in their legal battles with Coastal, they at least scored some points here and there. The customers, who were also lining up at the courthouse at the same time, so far have been shut out. Most of these lawsuits involve two types of claims. The customers have fixed-price, long-term contracts, but are required to pay an interim rate far higher than their contract price. They want Lo-Vaca and Coastal to make up the difference. Sometimes, however, Lo-Vaca hasn’t been able to supply gas at any price. During these curtailment periods, customers have had to purchase fuel oil to keep their electrical generators running. They want to be reimbursed for that cost, too. San Antonio, the LCRA, Corpus Christi, and Central Power and Light are all suing Coastal, Lo-Vaca, and in some cases, Wyatt himself, for damages suffered in one or both of these ways. Austin will almost certainly join in after its spring city council runoffs. Each lawsuit is slightly different from the others (the LCRA, for example, contends that its contract is with Coastal, not Lo-Vaca), but the differences are such that only a lawyer could care.
One lawyer who definitely cares is Tracy DuBose, a former Coastal director and house counsel who now operates out of an office on the sixth floor of Houston’s Lincoln Liberty Life Building. Lawyers for the customers have been tangling—usually unsuccessfully—with DuBose for years now, and yet they feel toward him none of the rancor they hold for Wyatt. Perhaps this is because lawyers reserve a special place in their fraternity for men like DuBose—tough, tenacious advocates who epitomize the adversary process, who display a command of rhetoric, logic, and the law itself but seldom let disputes touch on personalities.
DuBose professes little concern about the legal issues in the various cases. He does not see how Coastal or Lo-Vaca can be held liable for charging an interim rate approved by the Railroad Commission, nor does he believe that the companies can be faulted for following curtailment schedules which also had Railroad Commission approval. As for the possibility that Coastal’s profits should be sued to lower Lo-Vaca’s gas rates, DuBose rejects that out of hand: “It is axiomatic that non-utility operations by a utility company do not subsidize utility operations.” That doesn’t mean DuBose is without problems, however. “The most frustrating thing I face is that I sincerely believe any lawyer taking an objective view would agree that we have the better side of the case,” DuBose says. “But where do we get a fair trial? San Antonio, where customers who pay utility bills sit on the jury? Where do we go to find a forum where the case isn’t tried in a lynch-mob, prejudicial atmosphere?” He pauses, pours himself a drink, looks up at the ceiling. “Oh, well, I always wanted to be a big-time lawyer. And when you’re getting sued for a billion dollars, at least you know you’re big-time.”
On the other side of the case, lawyers for the customers exude none of DuBose’s confidence. They do not agree that the law is against them, but they do concede that their side has the more difficult task. Before they can recover damages from Coastal and Lo-Vaca for breach of contract, they must prove that the current shortages were caused not by factors beyond Lo-Vaca’s control—the “energy crisis” —but by the wheeling and dealing maneuvers that took place between 1969 and 1972. They must also demonstrate that these “extraordinary transactions” were bad business judgments which Coastal and Lo-Vaca knew at the time to be detrimental to their long-term customers. That is not an easy burden to carry in a lawsuit.
The customers have already lost one round. Enraged because TUFCO received full deliveries of gas while other customers were being curtailed, San Antonio, the LCRA, and a new plaintiff, UT-Austin, asked the Railroad Commission to rescind the TUFCO contract and restore the gas to Lo-Vaca’s long-term customers. At the very least, they argued, TUFCO should be put in the same category with Lo-Vaca’s other customers and be forced to suffer curtailments. TUFCO was getting full deliveries of gas while Lo-Vaca’s other customers were being curtailed. Coastal answered that the TUFCO contract had transferred specific reserves to TUFCO; the gas actually belonged to TUFCO, and Lo-Vaca was merely transporting it. The three elected commissioners took one look at this disputed and wanted no part of it, not when they were being asked to take gas away from Dallas–Fort Worth and redirect it to Austin–San Antonio. As one Fort Worth legislator said, “They can count the votes.” The commission dismissed the request, saying it had no authority to set aside contracts. Wrong, said an Austin district court, overruling the Railroad Commission. Right, said the Texas Supreme Court, reversing the district court and upholding the commission. If you want to set aside a contract, the justices told the customers, then go to court.
One customer—Houston-based United Texas Transmission Company, formerly Pennzoil Pipeline—went to court in 1973 to contest the TUFCO contract and Lo-Vaca’s other sales of reserves to Clajon, Dow, and El Paso Natural Gas. United Texas purchases gas from Lo-Vaca, then sells it to Houston Lighting and Power for boiler fuel. Other customers have joined in the action, but the case has yet to come to trial.
Trial lawyers have a saying about cases where the facts are hard to understand and even harder to prove: “Bad facts make bad law.” If that is true, we may be headed for some very bad law. Nothing like this has ever happened before—a natural gas shortage, a runaway sellers’ market, and a public utility apparently heedless to the public interest—and it will take all the ingenuity of courts and lawyers alike to fit traditional utility law, developed under far different circumstances, to the present problems. An even more serious danger, however, is that the rush of events has already passed the courts by. Suppose, for a moment, that the customers win their cases. What then? Where will Coastal find the money to settle $1 billion in damage claims? If Coastal has to pay huge judgments, or if Lo-Vaca has to live up to its contracts, the companies will be driven into bankruptcy, and how will that help get more gas to Austin, San Antonio, Corpus Christi, the Rio Grande Valley, Houston (Lo-Vaca supplies Pennzoil, remember), and even Dallas–Fort Worth (Lo-Vaca is a heavy supplier for Lone Star)? The answer, of course, is that it won’t. This is the insolvable problem that confronts and frustrates lawyers for the customers: even if they win, they lose. No other pipeline company has enough gas to supply the millions of Texans who depend on Lo-Vaca; like it or not, the customers are stuck with their present supplier. They can deal with a bankrupt Lo-Vaca or a healthy one, but those are the only choices.
The worst consequence of bankruptcy is that Coastal could be turned over to a federal judge in New York or Delaware, who would appoint a trustee to operate the company (as bankruptcy law requires) for the benefit of its creditors rather than its customers. Coastal’s assets, including its gas purchase contracts, could be sold to the highest bidder, possibly an interstate pipeline company. This is the version put forward by Coastal and the Railroad Commission, who speak grimly of Texas gas “going up Yankee smokestacks.”
Most of the lawyers involved do not believe that bankruptcy would be so catastrophic. They say that utilities are different from ordinary corporations (an argument Coastal has been known to use), and that the system would undoubtedly be run for the benefit of the customers. On this issue the customers seem to have the better of the law. But bankruptcy would still not be pleasant; gas producers would hardly want to deal with a bankrupt company if they could avoid it. Gas supplies would be had to come by, and rates surely would not improve. Nevertheless, more and more of the lawyers in the case are ready to put Coastal out of business if they can, and worry about the consequences later. But no one pretends that getting Coastal out of the picture will make it any easier for their cities to get gas. That dilemma will remain.
Is there a solution? Perhaps. Hearing examiner Walter Wendlandt thought he had one after listening to the evidence in Lo-Vaca’s rate hearing before the Railroad Commission. In his recommendations to the commission, Wendlandt recognized that Lo-Vaca was a “sick corporation.” He also found that “[Coastal’s] management has vigorously pursued a rapidly increasing profit picture with little regard for the Public Interest.” His aim was to give Lo-Vaca a rate which would allow it “to become a strong, viable company able to purchase the gas necessary, but which does not unjustly enrich the Stockholders of Coastal States Gas Corporation. The Stockholders are the ones through their management who gambled on continued low field prices, lost, and must pay.”
Wendlandt recommended that Lo-Vaca receive its cost of gas plus 6.16¢ per mcf. He also recommended that the Railroad Commission establish a contract reimbursement fund—and that all profits made by Lo-Vaca, Coastal States Gas Producing Company, and Coastal States Gas Corporation in future years go into this fund until customers receive the difference between their contract prices and the new rates they would have to pay. It was a clever, careful recommendation—recognizing the principle that utility operations are entitled to show a profit on their own, yet rejecting it. Customers describe it as “innovative,” which it is; DuBose calls it “totally unrealistic” and “in conflict with established principles of law,” which it also may be. One thing is certain: the Railroad Commission isn’t saying anything. Wendlandt issued his recommendations last April; one year later, the commission has done nothing.
From the viewpoint of the rate-payer, the future looks bleak. Lo-Vaca has already applied to the Railroad Commission for a five-cent increase in its interim rate, and if the company is successful, the rate-payer will suffer still more. One bright spot is that the upcoming hearing will again raise the issue of whether Coastal’s highly profitable nonutility operations should help subsidize Lo-Vaca—but so far the Railroad Commission has shown no inclination to decide this question. Even if Coastal has to reimburse its customers, there is little likelihood that the consumer would benefit immediately. All electric utilities are facing huge capital outlays in the next few years to convert from gas and oil to coal, lignite (low-grade coal), and nuclear power, and any extra money the cities receive would surely be used for new facilities. There is ample energy available, but it won’t be cheap energy. Those days are gone forever. The energy crisis, it turns out, is just another facet of the economic crisis.
Power To the People
Who is to blame for the gas crisis? Already overburdened by rising utility bills, the consumer wants easy answers. But there are none.
Coastal States and Oscar Wyatt are the obvious targets, and doubtless both do bear a heavy share of the responsibility. The company has continually ignored its obligations as a public utility; it was conceived as a gas broker in 1955, and a gas broker it has remained—wheeling and dealing, taking a short-term profit whenever it could, and seldom worrying about long-term consequences. Nothing illustrates this more vividly than the transactions which occurred between 1969 and 1972, when Coastal dealt away its reserves, knowing full well that a gas shortage was imminent. A high officer of Lo-Vaca admitted during the 1973 Railroad Commission rate hearings that he was aware of the “acuteness of the problem of the gas supply” in early 1972. Undaunted by such foreknowledge, Lo-Vaca went ahead and sold its precious reserves to Clajon and El Paso Natural Gas later that year. In its numerous brokerage deals during 1972, it passed up the chance to buy gas in order to snatch a sales commission that could be reported as income.
There is some evidence that Coastal knew about an impending shortage even before the disastrous (for its customers) TUFCO contract in 1970. SEC investigators uncovered a five-year forecast written in 1969, estimating that Coastal’s reserves were 4.1 trillion cubic feet short of its contract commitments through 1980. There is nothing particularly shocking about this; most pipeline companies don’t have enough reserves to meet all their long-term commitments. But then most companies don’t compute their reserves like Coastal did before the SEC cracked down in 1973. Coastal counted as reserves every cubic foot of gas that went into its pipeline, including gas it was hauling for others—gas that Coastal did not own, would never own, and could not make available to long-term customers. Coastal was claiming nine and ten trillion cubic feet of reserves when it had only about one-third of that amount available for its intrastate customers. So if Coastal was estimating a shortage of 4.1 trillion cubic feet, the actual shortage was more like nine trillion. (Coastal’s reserve calculations have never been declared illegal, but the company did agree to change its reporting methods as part of its settlement with the SEC.)
If Coastal was not concerned about preventing a gas crisis, neither was it hesitant to take advantage of its customers once the crisis was upon them. In May 1973, just eleven days before San Antonio was hit with a drastic two-thirds curtailment, a Coastal memorandum discussed how the company could twist such a crisis to its own benefit by rushing to the rescue with fuel oil:
Marketing policy with regard to solicitation of any “contemplated Texas utility deal” is to wait until the crisis develops. This position is taken for two primary reasons: First, these people [San Antonio, Austin, the LCRA] do not want to talk oil at this time as they view it a poor substitute for natural gas. Second, once they are in trouble, Coastal’s availing of relief through liquid fuels should enhance Coastal’s image…
The memo concluded, “[W]hatever is done should be done in the best interests of Coastal States Gas Corporation.”
The fuel oil memo underscores one seldom-discussed effect of the gas crisis: while Lo-Vaca has been suffering, other Coastal subsidiaries have profited from Lo-Vaca’s sickness. Coastal States Marketing, where the memo originated, supplied fuel oil on an emergency basis to the same customers who were curtailed by Lo-Vaca. Austin even gave Coastal Marketing a $5-million contract for twenty million gallons of fuel oil. Coastal States Gas Producing Company has done all right for itself at Lo-Vaca’s expense, too. Coastal supplies Lo-Vaca with about seven per cent of the pipeline company’s gas; in the last year deliveries have remained constant at 80 million cubic feet per day, but the average price Lo-Vaca pays its parent has skyrocketed from 44¢ per mcf in December 1973 to 81 cents in November 1974. Why the sudden jump? No, Coastal isn’t selling Lo-Vaca huge quantities of expensive newly discovered gas; rather, it persuaded Lo-Vaca’s former supervisor-manager Mills Cox to renegotiate contract prices upward. The increase should bring in around $10 million annually for Coastal Producing—and $10 million less for Lo-Vaca. The overall effect is doubly beneficial to Coastal States Gas Corporation: one subsidiary gains when the other loses—and the one that loses is the utility, which can plead poverty before the Railroad Commission and recoup its losses at the expense of the rate-payer.
One further intracorporate transaction should be mentioned, primarily because it is so bizarre. Lo-Vaca delivers gas to the old Rio Grande Valley Gas distribution system, which for very complicated reasons is now operated by Coastal States Gas Corporation rather than by a subsidiary. Coastal, therefore, is buying gas from its own subsidiary—at the same high price everyone else in the state has to pay for Lo-Vaca’s gas. Now Coastal wants to pass this cost on to its domestic customers in the Valley, whose reaction verges on apoplexy. They say Coastal will be making a killing at both ends of the pipeline (Lo-Vaca is actually paying very little for the gas) simply because it was clever enough to maneuver itself into this position.
These intra-family manipulations prove one thing: Coastal has never stopped wheeling and dealing. It continues to find ingenious ways to profit from the mess it created. This emphasis on profit and growth at the expense of utility obligations has been a Coastal characteristic for years. Other gas utilities like Houston Natural and Lone Star have a totally different philosophy from Coastal’s. Both companies have avoided fixed-price, long-term contracts. Neither company has ever sold any reserves. Both companies store surplus gas in huge natural reservoirs. Houston Natural purchased an entire reservoir in 1965, the played-out Bammel field near Katy, to use for storage. (Natural gas can’t be stored in tanks, like oil, but must be injected into a natural reservoir by expensive compressors.) Lone Star owns ten reservoir areas and is looking for more. The Bammel field will hold 85 billion cubic feet of gas, while Lone Star can store 57.7 billion.
Coastal States, on the other hand, has virtually no storage capacity. On days when demand for gas is slack, Houston Natural and Lone Star can pump gas underground for use on peak days; Coastal cannot. It must take gas from producers or pay for it anyway, and even if Coastal decides to take it, it may have to unload the gas somewhere. Many of Coastal’s most devastating deals during the 1969–72 period might not have been necessary if Coastal had owned storage facilities—but, as a Coastal spokesman said earlier this year, “Sure, we’d like to have storage, but the expense is prohibitive.” What that means, a Houston Natural vice-president said, somewhat disgustedly, is that storage doesn’t generate income. And income has always been Coastal’s foremost concern—income and growth. Those were the concepts pushed at Wyatt by his New York financial advisor, German refugee Joachim Silberman. It was Silberman who worked the Wall Street investment crowd for Wyatt, and who pushed for a fifteen per cent annual growth rate. Many members of the original Coastal family hated “Joey,” as they called him; they found him cold, aloof, and arrogant, but one early Coastal employee recalls that Silberman “was the only man I ever saw Oscar Wyatt treat as an equal.”
The commitment to growth was responsible for the rise of Coastal, but it eventually led to the company’s downfall. Once gas prices started rising, only spot sales, reserve transfers, and brokerage commissions could keep income at high levels. The importance of these transactions can be seen from the fact that in the last half of 1972, Coastal’s gas systems accounted for 66 per cent of the company’s profit; only 17 per cent of the profit came from refining. One year later, when the Railroad Commission had clamped down on the wheeling and dealing, the situation was radically different: refined products accounted for 92 per cent of the profit, while gas systems actually lost money.
Yet, Coastal is far from deserving all of the blame. The company may not have taken all the precautions of a responsible utility, but as long as gas was plentiful, that didn’t matter. In the early years of its long-term contracts, Coastal brought millions of Texans cheaper gas than anyone else could, and still made a profit on it. When Lo-Vaca went to the Railroad Commission to ask for rate relief in 1973, most of its municipal customers were paying less than 25¢ per mcf; Houston Natural’s rate was 38.3 cents and Lone Star was getting 43.7 cents. Any calculation of how much Coastal is costing rate-payers now should be balanced by how much the company saved them before 1973.
Furthermore, even the “extraordinary transactions” look worse in hindsight than they must have appeared at the time. Coastal may have anticipated that prices were going to rise—but did anyone in the industry guess how much and how fast? The company probably knew that gas would be expensive to replace—more expensive than it could afford under its contracts—but it sold its reserves anyway, hoping to bludgeon the Railroad Commission into giving Lo-Vaca a higher rate. What Coastal did not anticipate is that there would not be enough gas available at any price. Looking back, we know now that Coastal sold when it should have bought. It did nothing illegal, but it did gamble on the continued availability of gas, and it lost.
Oscar Wyatt lost too. Before the gas crisis engulfed Coastal, Wyatt and his relatives owned the largest single block of its stock—2,298,819 shares, or 11.9 per cent of all outstanding stock, worth close to $130 million. When the stock fell from its high of near 60 to 7 ½, Wyatt suffered a paper loss of more than $100 million.
In the face of adversity, Wyatt remains firm. He challenges everything, conceding nothing, battling much like he did fifteen years ago when he faced a hostile Corpus Christi City Council alone and vowed to fight the Houston Natural contract to the finish. Wyatt denies that Coastal oversold its reserves; instead, he attributes the company’s shortages to failures in deliverability. We have the gas, Wyatt says—we just can’t get it out of the ground as fast as we would like. He argues that the incriminating memos were just individual opinions, not company policy; in short, he admits no wrong except the failure to have perfect foresight. He lashes out at his critics at every opportunity, blaming the news media for intensifying Lo-Vaca’s gas-buying problems, then blaming the cities for not listening to him back in the Sixties.
Wyatt is right. The cities did bring the crisis upon themselves—though not for the reasons he suggests. Like Coastal, like Wyatt, the cities also gambled, but theirs was a double gamble: not only that the gas market would remain stable, but also that they could risk abandoning their reliable, long-time suppliers. They were so sure of themselves, so certain that they were dealing in a buyers’ market, that they forgot that twenty years is a long, long time.
The public regulatory bodies did not exactly cover themselves in glory, either. The Federal Power Commission, which regulates all aspects of the interstate gas market, helped create the gas crisis by keeping the wellhead price below what was needed to stimulate an active drilling program. Once again, the short-range view—providing cheap gas for the out-of-state consumer—prevailed. Nor was the Texas Railroad Commission any help. The commission had enough close ties with the Texas gas industry to know what Lo-Vaca was doing to its gas supply between 1968 and 1972. People in the gas industry certainly knew; a high official with Tenneco warned San Antonio’s Johnny Newman in 1971 that “San Antonio’s gas supply situation is going to be sick, sick, sick in a few more years.” Where was the Railroad Commission while all of this was going on? Surely it had enough information to begin an investigation. But the commission preferred to wait for the crisis to come to it.
Even the Legislature cannot escape blame. For years it has debated—and rejected—proposals to establish a state utilities commission. Certainly a commission would be no panacea—the dismal record of the existing regulatory bodies in preventing the current crisis is evidence enough of that. But a utilities commission could have made some very real differences: for example, Coastal could never have built its North Texas pipeline—or entered into the TUFCO contract—without official scrutiny. It might never even have been able to get the city contracts in the first place.
In the end, nothing worked the way it was supposed to—not the economic system, not the political system, not the regulatory system. The saga of Coastal States Gas is the story of the American Dream—how one man, starting with nothing but an idea, can build an empire. But it is also the story of the American Nightmare—how the successful can become too big, too greedy, too arrogant, too obsessed with becoming still bigger. Coastal chose privilege over duty, reward over responsibility, and there was no one to say no. In the beginning, Oscar Wyatt and Coastal States epitomized the best in American business traditions; in the end, the worst.
* The text of the letter from Houston Pipeline’s president to the CPSB is worth nothing:
“[A]nyone offering to supply your entire requirements at fixed prices must be gambling on his ability to buy or discover gas in the future as your requirements increase. In view of the great uncertainties as to what the future cost of gas will be and the large volumes involved, no responsible supplier can afford to assume the risk that the cost of gas in the field may approach or rise above the prices quoted for delivery to the City. This risk must be considered most substantial when it is recognized that the average wellhead price of gas has increased at the rate of approximately 1¢ per mcf for the past ten years.”
Every Year a Record Year
Coastal States Gas Corporation had its biggest year ever in 1974, according to the company’s annual report released in early April. For the first time, Coastal’s revenues were more than $1 billion, and net income was up a whopping 45 per cent over 1973, from $38.1 million to $55.1 million. Record profits included an $11.2-million loss by Lo-Vaca Gathering Company, the subsidiary that supplies gas to more than 400 Texas cities and businesses.
The figures will undoubtedly be used by Lo-Vaca to justify its request for still higher rates, while Coastal’s profits will be cited by customers to support their position that the parent company, rather than local rate-payers, should subsidize Lo-Vaca.