Edison to Enron: Energy Markets and Political Strategies
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Book 2 Internet Appendices Chapter 12: Formation and Maturation
12.1 Standard Oil and Texas PoliticsThe political phobia in Texas toward Standard Oil Company a century ago reflected three factors:
Texas’s antitrust law, passed in 1889, was aimed at Standard Oil and Waters-Pierce. (Bradley, 1996a: 1077). It was used several times against the company by Texas officials, the last being in 1923 when a suit was filed against Humble Oil and Refining, which was 60 percent owned by Standard Oil of New Jersey (ibid.: 1078). Another ten states attacked Standard Oil on antitrust grounds as well (ibid.: 1080). Why did the entrepreneurially astute Standard Oil miss out on a grand opportunity to move into Texas, which, post-Spindletop, was the emerging center of its petroleum industry? Antitrust was prominent in their decision. Daniel Yergin described how the company that grew into oil-major Gulf Oil could have been a Standard affiliate:
With Standard Oil mostly at bay, a wide door swung open in Texas for from-scratch integrated oil companies. Sure enough, the enormous Spindletop discoveries gave birth to such industry majors as Joseph Cullinan’s The Texas Company (later Texaco) and William Mellon’s Gulf Oil. Shell Oil Company also gained a major U.S. beachhead from the field that “was to remake the oil industry” (Yergin: 87). 12.2 Joseph Cullinan as a Political CapitalistJoseph Cullinan, a first-generation Texas oil executive, was a political capitalist. Oil production under the rule of capture, which created a buyers’ market for oil products, led him to advocate a federal role for price-setting (floors, not ceilings)—and even federal control of the industry. Cullinan’s “virtual nationalization” proposal attracted criticism from only one of the state’s newspapers, the Dallas Morning News (King: 211). Cullinan moderated his views later on, losing faith in federal regulation because of FDR’s New Deal. His new position advocated state wellhead regulation (restriction) to buoy prices (ibid.). On the free-market side, Cullinan opposed Texas’s antitrust law, which discouraged integrated industry operations (ibid.: 215). The common denominator of his public-policy positions was his personal bottom line, not a principled belief in either free markets or government planning. Cullinan, a lifelong Democrat, would be followed by later generations of Texas oil and gas independents who favored government intervention that helped the industry and opposed government intervention that hurt the industry. Political capitalism was not an ideology; it was pragmatism based on the calculation of profits and losses by particular firms in the face of legislative/regulatory change. Thus, Cullinan cannot necessarily be criticized much more or less for his political advocacy than oil industry executives during or after his time. 12.3 “Natural Monopoly” and Gas Regulation in Houston, TexasSubdivision by subdivision, street by street, and house by house, competition between Houston Natural Gas and Houston Gas and Fuel (HGF) revealed that “natural monopoly” was hardly natural. It was not until 1976, after a half-century of rivalry, when HNG’s distribution division merged with the successor company to HGF, Entex Corp. And even then the consolidation was because of regulation that discriminated against any company (HNG) that was integrated between wholesale and retail, as discussed in chapter 13 (453—54). The natural-monopoly doctrine, popularized through a well-conceived and -funded public relations effort by the utility industry itself, concludes that that there can only be one provider of such “essential” urban services as gas, electricity, water, and telephones because of fundamental economic characteristics. Where there are competing firms, it is held, price wars will inevitably lead to consolidation of the industry into one firm per geographical area. Competition is seen as wasteful in such situations, unnecessarily duplicating facilities where one company network will do. Thus, in the name of economic efficiency, the theory of natural monopoly concludes that public authorities should award an exclusive franchise to one company whose rates and terms of service are regulated in the public interest. As explained in Book 2’s Epilogue, competitive fatigue within the gas industry, not ideology within or outside of the industry, was a driving force behind public utility regulation. The industry led, not followed, in consequence. But a rationale for policy reform was needed. That rationale, however self-serving and static for a real-world (dynamic) economy, would define the textbooks and blackboards of academia. As shown in the case of the city of Houston, direct competition can self-regulate prices and ensure timely service to residents and commercial users, as well as to larger industrial consumers. Franchise protection, establishing a legal monopoly over a certain geographical area, is not a public policy that self-evidently favors consumers. Neither is rate regulation, compared to a situation where competition is legally permitted. In the absence of antitrust laws and their strict enforcement, two companies can soften competition. An example of avoiding uneconomic competition was remembered by an HNG participant: “After [World War II], in new Houston subdivisions we had a gentlemen’s agreement with our competition; if we signed a contract to do business with a particular subdivision, they would honor it and we would do the same” (Harold Sexton, quoted in Hardcastle: 13). No doubt that competition between firms to initially sign up a subdivision was a consumer benefit, and if the established firms got too cozy, there would still be the potential for a new entrant, perhaps with the cheapest gas supply, to enter the market, maybe in the suburbs, and work inward from there. The turn to public-utility regulation at the gas-distribution (retail) level, while creating its own problems (namely losing the benefits of the competitive process), became more problematic with the creation of a “regulatory gap” where gas companies naturally took advantage of partial regulation. This and other regulatory problems resulted in an expansion of regulation in the name of just-and-reasonable prices, as explained in the Epilogue of Edison and Enron (503—509). 12.4 Federal Regulation and Gas-Industry DisintegrationNatural market incentives encouraged integration wherein natural gas companies engaged in exploration/production, transmission, and distribution. The Public Utility Holding Company Act of 1935 (PUHCA) empowered the Securities and Exchange Commission to scrutinize and disaggregate integrated natural gas companies that were 10 percent or more owned by a holding company (Bradley, 1996: 862). The country’s largest integrated natural gas operations were affected. Stated two industry historians:
Houston Natural Gas, operating in Texas and thus outside the jurisdiction of the Natural Gas Act, was an integrated natural gas company to the extent the law allowed. Texas’s strict antitrust law prevented a forward integration from transmission to distribution, which forced Houston Oil’s Houston Pipe Line Company (HPL) to create a sister company, Houston Natural Gas, formed in 1925, to engage in gas sales to the residential and commercial market under local franchise regulation. In 1957, HNG purchased HPL to become an integrated gas company from the wellhead to the burner tip. But the pipeline-distributor relationship encountered a regulatory death sentence when the Texas Railroad Commission (TRC) limited the pass-through of increased gas costs to 65 percent of the total. This would lead to the 1976 sale of HNG’s gas distribution arm to Entex, as described in chapter 13, 453—54). Thus, as on the federal level, the disintegration of the gas industry in Texas was encouraged by anti-integration regulation, although HNG welcomed the sale to concentrate on its other activities. 12.5 Houston MilestonesThe growth of Houston, Texas, since the turn of the twentieth century is a major theme of chapters 12 and 13. The Galveston (Texas) Storm of 1900, with 130-mile-an-hour winds, devastated the vibrant city and spurred the growth of Houston as a safer inland locale (Platt: 2—3). The Spindletop oil discovery the next year relocated the center of the U.S. oil industry to Houston. The deepwater ship channel, making the Port of Houston an international export and import point, was completed in 1914. HNG president Frank Smith was a natural at the podium. “There was no one who spoke out more frequently or eloquently in prophesying the growth and development of the Texas Gulf Coast,” wrote Kenneth Fellows (62). At the 1937 banquet of the Kingsville Chamber of Commerce, for example, Smith brought his audience to their feet with the words:
It was observed in the September 1948 issue of Reader’s Digest: “Within a 200-mile radius of [Houston] more wealth is taken from the soil than from any other area of equivalent size on earth; more oil, more natural gas, more rice, about 90 per cent of the world’s sulphur, plus cotton galore, salt, timber, grass for livestock, sugar cane, minerals from the sea” (quoted in Fellows: 121). The rise of Houston as the refining and petrochemical center of the United States was a very significant event. Houston’s wartime growth was summarized by Don Carleton:
Other major events in Houston’s growth, directly boosting natural gas demand, were described in HNG’s annual reports:
Sources for Chapter 12 Internet Appendices Bradley, Robert. Oil, Gas & Government: The U.S. Experience. Lanham, MD: Rowman & Littlefield, 1996. Cited as 1996. Carleton, Don. Red Scare! Right-wing Hysteria, Fifties Fanaticism, and Their Legacy in Texas. Austin: Texas Monthly Press, 1985. Fellows, Kenneth. Houston Natural Gas Corporation: Its First Fifty Years, 1925—1975. Houston: Houston Natural Gas, 1976. Hardcastle, April. “The Way We Were.” HNG Magazine, Spring 1985, 11—13. Houston Natural Gas Corporation, Annual Report, 1977. King, John. Joseph Stephen Cullinan: A Study of Leadership in the Texas Petroleum Industry, 1901—1908.Nashville, TN: Vanderbilt University Press, 1970. Platt, Harold. “Energy and Urban Growth: A Comparison of Houston and Chicago.” Southwestern Historical Quarterly 91(1) July 1987, 1—18. Tussing, Arlon, and Connie Barlow. The Natural Gas Industry: Evolution, Structure, Performance.Cambridge, MA: Ballinger, 1984. Yergin, Daniel. The Prize: The Epic Quest for Oil, Money & Power. New York: Simon & Schuster, 1991. |
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