Edison to Enron: Energy Markets and Political Strategies

Book 2 Internet Appendices

Chapter 7: A Monumental Mistake (Trans-Canada Pipe Lines, Ltd.)

• 7.1 Lobbying Howe
• 7.2 Nationalist Arguments for Trans-Canada
• 7.3 Would Trans-Canada Have Been Built?
• 7.4 Trans-Canada and U.S. Wellhead Gas Controls
• 7.5 Canadian Gas Export Policy
• 7.6 The Rise and Fall of Clint Murchison Jr.
• Bibliography (PDF)

7.1 Lobbying Howe

The lobbying blitz by Clint Murchison toward C. D. Howe began when Howe enjoyed a gratis week of vacation with Murchison and friends in early 1951 (Bothwell and Kilbourn: 288) and ended only with Howe’s death in late 1960. Part of the story is preserved in correspondence between the two, as well as in Howe-related letters to and from O. M. “Red” Mosier, CEO of American Airlines (of which Murchison was a director).

Snippets of their letters in 1951—53 impart the nature of the multi-faceted relationship and the raw politics behind Trans-Canada.

• “We are going to re-do the [vacation] deal with wives this season…. I plan to have a house in Acapulco” (Murchison to Howe: 10-18-51);
• “I must say that the package you left with me had most magnificent contents, which will be thoroughly enjoyed” (Howe to Mosier: 11-7-51);
• “If your wife feels like traveling [in your absence], I would like to offer to her a house I have rented in Acapulco…. It will be well staffed with servants” (Murchison to Howe: 12-3-51).
• “I think it would be very important that you contact C. D. Howe … and without letting him know that you are swabbing, find out exactly what you can about his attitude toward our pipe line program” (Murchison to Mosier: 2-15-52);
• “We keep the place staffed … if at any time you feel that you can tear way” (Murchison to Howe: 2-15-52);
• “Any time you are ready to take off to the south, let me know, and pick your friends you would like to take with you” (Mosier to Howe: 2-4-52);
• “I would like to appoint you my bird dog [to understand Premier Ernest Manning’s] view on the export of gas out of the Albertan Province to the Eastern Canadian market … if you will take the job” (Murchison to Howe: 5-13-52);
• “I am looking forward to picking you up [in my plane] in Mexico City” (Murchison to Howe: 10-16-52);
• “Several of your Canadian competitors have called on me looking for advice on what position they should take” (Howe to Murchison: 10-27-52);
• “You may be sure that no export permit will be granted other that [sic] the one now outstanding for the West Coast until you change your mind about building the line East” (Howe to Murchison: 12-8-52);
• “I can swing five or six votes which heretofore have been cast against the [St. Lawrence Seaway] project. This, of course, switches the position from loser to winner…. As a matter of fact, confidentially, I have already gotten five votes committed to switch. P.S. Please burn all this correspondence” (Murchison to Howe: 12-17-52).
• “I know you are in the heat of a campaign…. I sent you a copy of one of our newspapers we cooked up and used here during the Eisenhower campaign [that helped swing Texas to him]. If you think the campaign is going to wax hot enough to use this, don’t hesitate to call on me” (Murchison to Howe: 2-19-53);
• “We pretty well have the Fish [Northwest Pipeline] project on the rocks” (Murchison to Howe: 3-18-53);
• “Anything you can do to delay a ruling on the West Coast Transmission Company application until the situation can be reviewed by the new members of the [Federal Power] Commission will be very helpful” (Howe to Murchison: 4-14-53);
• “The Seaway situation is too complicated for me to try to work out politically just exactly what you want to do” (Murchison to Howe: 4-15-53);
• “In the absence of any regulation at this time we have proposed that after we have received a fair return on our investment we will divide the savings 50% to the consumers and 50% to the producers” (Murchison to Howe: 4-16-53);
• “It might require more Canadian laws to offset some political maneuvering the Pacific Northwest crowd is trying to stir up down here” (Murchison to Howe: 6-18-53);
• “Had you not from time to time given me a friendly pat on the back and convinced me that you were unalterably opposed to any other disposition of the gas than the Toronto-Montreal market, I am sure we should have become disheartened and disillusioned by the delaying tactics of the people in control of the gas from the western end of the line” (Murchison to Howe: 9-11-53).

7.2 Nationalist Arguments for Trans-Canada

William Kilbourn’s pro-Howe perspective fails to consider seriously that Trans-Canada was a mistake from start to end. Kilbourn invoked intellectual closure, so to speak, by arguing as follows:

I begin by making certain assumptions. These can be challenged and argued at length, but I do not propose to do so here. I assume first that any just action towards maintaining the existence of Canada as a viable political and economic entity is a good thing. Secondly, I assume that by 1953 Canadians wanted, and were prepared to pay a price if necessary, to keep control of a new means of transportation for a new source of energy in their own hands. Thirdly, I assume that the economic and political advantages of having an east-west pipeline on Canadian soil outweighed the disadvantages. To protect national sovereignty and maintain a better bargaining position it was preferable to have at least one of Canada’s two greatest potential sources of energy under Canadian control. The industry of central Canada would be less completely dependent on American supplies of coal and natural gas or upon seaborne petroleum and liquid natural gas brought in by tanker to the port of Montreal (1970: 188—89).

Yet Trans-Canada was not good for Canada given the predicament created for the country’s producers and consumers. The only beneficiaries of the seven-year delay were Ontario, which was subsidized by Trans-Canada’s taxpayer-funded route through their sparsely populated area, and rival fuel interests. Regarding the latter, the Western Canada Coal Operators’ Association lobbied hard against the project, arguing that gas from Trans-Canada would displace seventy-five train cars of coal per day and 3,000 miners (Newman: 7).

On the U.S. side, “that ancient volcano of the American labour movement,” John Lewis, warned the FPC that “natural gas from a foreign country poses a dagger at the heart of [our] coal industry … and threatens to disrupt a broad segment of the American national economy” (quoted in Bothwell and Kilbourn: 307). Every day that Canadian gas was prevented from expanding the overall market share of gas in North American was a gain for less economical and dirtier rival fuels.

Canadian nationalism with regard to natural gas was not predestined, and anti-Americanism was increased by the prolonged machinations of Murchison and Howe. Kilbourn (1970: 27) incorrectly credits Murchison “with a canny sense of what the Canadian political climate was likely to be,” as if Murchison simply uncorked latent public opinion that was always on his side. Actually, Murchison and Howe found themselves with an increasingly flimsy and tired nationalistic argument. Howe stubbornly refused to relax his “national policy” of an all-Canadian line to let Trans-Canada die or be revamped to become competitive.

On the political end, the American consortium that controlled 51 percent of Trans-Canada, “distressed and embarrassed by the ‘Gringo, Go-Home’ tone of the parliamentary debates and press comments,” offered to sell out at cost to the government or any other party (Bothwell and Kilbourn: 307).

Trans-Canada was less the result of nationalism and anti-Americanism than the cause of it. This is why Canadians threw out the ruling party and Howe a month after the Trans-Canada bailout in Parliament.

Statistics and analyses suggest that the compelling economics of international integration were overcoming psychological barriers to “Americanization.” Hugh Aitken observed (1961: 11): “Regional economic integration has emerged, not for political reasons and not by a deliberately engineered elimination of trade barriers, but as the net result of the drive for economic development on both sides of the border, of the free mobility of capital, labor, and enterprise, and of the complementarity of resources and markets.” A seven-fold increase in direct foreign investment in Canada between 1946/49 and 1955/58, a significant amount of which was American capital for oil and gas development, was part of this trend (1961: 53—54).

Aitken concludes (1961: 153, 194) that the “tremendous benefits to Canada” from economic integration had the “logical conclusion” of “removal of all impediments to the transfer of goods, capital, labor, entrepreneurship, and technology between the two countries.”

Kilbourn (1970: 21) stated that a more liberal export policy by Alberta at the beginning might have allowed Trans-Canada to have been built without public controversy and government subsidy. This is highly speculative given that viable projects pre-dated Trans-Canada. At no point did Trans-Canada appear to be a done deal in the early 1950s, or thereafter. It turned out to be a down-the-throat political deal as the bailout debate attested.

Kilbourn (1970: 37—38) cited a study done for Imperial Oil Company in 1952 by the Stanford University Research Institute and University of Western Ontario Business School that concluded that Trans-Canada was economical. Yet Trans-Canada could not execute sufficient contracts with producers or consumers, and a sizeable two-front government bailout was necessary to finally construct it. Markets themselves, not professors or consultants, ultimately determine economic viability.

7.3 Would Trans-Canada Have Been Built?

C. D. Howe warned that the defeat of Trans-Canada would mean “the use of [Alberta] gas in eastern Canada will be a dead issue for all time” (Kilbourn, 1970: 63). This might have been true—and for the best. But the fact remains that growing market demand and different circumstances might have allowed a trans-provincial movement of Alberta and even British Columbia gas at a later date.

Three scenarios can be imagined in the absence of Trans-Canada in the 1950s. One, a route south of the Great Lakes could have reached eastern markets, perhaps in a second phase as proposed by the amended Western Pipe Lines application. Second, strong gas markets in Winnipeg and Toronto served by an international exchange could have set up incremental expansions toward the middle as markets developed.

Third, a middle leg might have been expeditiously constructed in anticipation of, or in response to, interrupted gas imports. Such an interruption, which occurred in the northeast United States during the frigid winters of 1971/72 and 1976/77, would have required line looping from Alberta to Winnipeg and a northern Ontario leg. On the other hand, Canadian officials could have pressured regulators and politicians in the United States to relax wellhead price controls in order to avoid the shortages and export problems, discussed below.

7.4 Trans-Canada and U.S. Wellhead Gas Controls

Did Trans-Canada turn out to be a blessing during the U.S. natural gas shortages of the 1970s? After all, greater reliance on transnational exchange (the alternative to Trans-Canada) could have fallen victim to import interruptions from the United States side.

While the U.S. Federal Energy Regulatory Commission (FERC) could have imposed export restrictions to victimize Canadian cities, such a crisis would have inspired new pipeline construction north of the Great Lakes to get Alberta gas, which was not price controlled, to eastern markets.

Also, Canada would have been motivated to lobby against U.S. wellhead price regulation that could leave them so vulnerable on the far end of the “Three T’s”—Tennessee Gas Transmission, Transcontinental Gas Pipe Line, and Texas Eastern Transmission. Another lobby for wellhead deregulation, particularly one as powerful as Canada, might have been enough to terminate regulation much sooner than was the case. The battle over continued regulation of U.S. gas dedicated to interstate markets was that close.

And perhaps most important, Canadian regulators likely would have threatened to block western gas exports if eastern imports were imperiled—a club in the closet favoring price liberalization over regulated-price-induced shortage. The closest example offered by history is when the United States restricted oil imports in 1959, a move that was relaxed in a matter of weeks for Canada (as for Mexico) from diplomatic pressure and the threat of a new all-Canadian oil line (Bradley: 739-40; Aitken, 1964: 16—17).

Thus it can be concluded that supply interruptions and price distortions would not have been tolerated by Canadian officials, giving United States authorities another reason to do the right thing.

7.5 Canadian Gas Exports

In October 1957, Westcoast Transmission Company became the first Canadian project to export gas to the United States when it began deliveries from British Columbia to Pacific Northwest Pipeline for transport to the U.S. Pacific Northwest (Leeston and Crichton: 341).

This was not easy. In addition to concluding negotiations to buy gas, finance and construct the pipeline, and sell the gas, a several-year regulatory delay ensued to obtain an export permit (from the Alberta Conservation Board), pipeline permit (from Board of Transport Commissioners), and import permit (from Federal Power Commission). The project did not require government funding or guarantees (Hanson: 242), a fact undermining the case for building Trans-Canada.

Tennessee Gas’s Midwestern Pipeline began importing Alberta gas delivered by Trans-Canada in October 1960 (TGTC, 1960 Annual Report: 9). This was six-to-seven years after Northern Natural Gas had finalized an agreement with Western Pipe Lines to import gas from the same point to serve the U.S. Midwest, indicating several years of regulatory delay fathered by Murchison and Howe.

Canadian exports to the United States reached a new level when Alberta and Southern Company, a gas gatherer in the province, began exporting supply to Pacific Gas Transmission, a wholly owned affiliate of Pacific Gas and Electric, to serve northern California. All told, Canadian exports that began by supplying about 1 percent of U.S. consumption with Trans-Canada exports in 1959 reached 5 percent in the 1970s and 15 percent of U.S. consumption in the late 1990s.

7.6 The Rise and Fall of Clint Murchison Jr.

Ken Lay’s Enron and Samuel Insull’s utility empire went from dizzying triumph to stunning failure. John Henry Kirby of chapter 10 also had repeated ups and downs that were brought on in part by external events—the Great Depression—but also in part by his own failings.

And although he is really not a figure of import in this book, the rise and fall of Clint Murchison Jr.—squandering much of his father’s empire and good name—is another case study in failing to cope with success because of arrogance—and worse.

Clint Jr. was the smartest guy in the room. A mathematical whiz that stood out even at MIT (Wolfe: 6—7, 119), he started strongly and suffered from a growing detachment and hubris that also characterized the titans of this book and trilogy. Clint Jr.’s portfolio of more than one hundred companies (Wolfe: 8), including “America’s Team” Dallas Cowboys, fell victim to high debt and a slumping Texas economy. What had been Clint Jr.’s hundreds of millions of dollars of net enterprise value was liquidated after Chapter 11 bankruptcy filing in 1985 (Wolfe: 13, 432—38).

The “arrogant egotist” overtook “the brilliant and inventive businessman” (Wolfe: 7),

leaving a trail of wreckage from what had been bequeathed to him by his father. Clint Sr., arguably the closest thing to a Warren Buffett in his time. He was betrayed in the end by his son’s personal characteristics and business outcomes.

Clint Jr.’s personal failings translated into his business failings in a way that his father in his prime could have predicted. But had not Junior followed his father’s maxim of borrowing to the hilt? And was not Senior’s Trans-Canada play the exactly wrong example to set for his legacy? Seeking monuments and status instead of creating real economic value, and discounting the downturn of external business cycles, create business failure that exacerbates the market’s creative destruction.

Bibliography for Chapter 7 Internet Appendices

Aitken, Hugh, American Capital and Canadian Resources. Cambridge, MA: Harvard University Press, 1961.

Aitken, Hugh, “Government and Business in Canada: An Interpretation.” Business History Review, Spring 1964, 4—21.

Bothwell, Robert, and William Kilbourn. C. D. Howe: A Biography. Toronto: McClelland and Stewart, 1979.

Bradley, Robert, Jr. Oil, Gas, and Government: The U.S. Experience. Lanham, MD: Rowman & Littlefield, 1996.

Hansen, Eric. Dynamic Decade. Toronto: McClelland & Stewart, 1958.

Howe, C. D. Letter to O. M. Mosier. November 7, 1951. (Copy in author’s possession.)

Howe, C. D. Letter to Clint Murchison. October 27, 1952. (Copy in author’s possession.)

Howe, C. D. Letter to Clint Murchison. December 8, 1952. (Copy in author’s possession.)

Howe, C. D. Letter to Clint Murchison. April 14, 1953. (Copy in author’s possession.)

Kilbourn, William. PipeLine. Toronto: Clarke, Irwin & Company, 1970.

Leeston, Alfred, and John Crichton. “The Natural Gas Industry in Foreign Countries.” In Crichton Leeston and John Jacobs, eds., The Dynamic Natural Gas Industry, 337—84. Norman: University of Oklahoma Press, 1963.

Mosier, O. M. Letter to C. D. Howe. February 4, 1952. (Copy in author’s possession.)

Murchison, Clint. Letter to C. D. Howe. October 18, 1951. (Copy in author’s possession.)

———. Letter to C. D. Howe. December 3, 1951. (Copy in author’s possession.)

———. Letter to O. M. Mosier. February 15, 1952. (Copy in author’s possession.)

———. Letter to C. D. Howe. February 15, 1952. (Copy in author’s possession.)

———. Letter to C. D. Howe. May 13, 1952. (Copy in author’s possession.)

———. Letter to C. D. Howe. October 16, 1952. (Copy in author’s possession.)

———. Letter to C. D. Howe. December 17, 1952. (Copy in author’s possession.)

———. Letter to C. D. Howe. March 18, 1953. (Copy in author’s possession.)

———. Letter to C. D. Howe. April 15, 1953. (Copy in author’s possession.)

———. Letter to C. D. Howe. April 16, 1953. (Copy in author’s possession.)

———. Letter to C. D. Howe. September 11, 1953. (Copy in author’s possession.)

Newman, Peter. Promise of the Pipeline. Calgary: TransCanada PipeLines Limited, 1993.

Tennessee Gas Transmission Company (TGTC). Annual Reports, 1953—60.

Wolfe, Jane. The Murchisons: The Rise and Fall of a Texas Dynasty. New York: St. Martin’s Press, 1989.