BOOK 3: ENRON ASCENDING: THE FORGOTTEN YEARS, 1984-1996
Chapter 1 Internet Appendix
1.1 Linda Herrold Lay
1.2 Mandatory Open Access for Interstate Gas Pipelines
1.3 Ken Lay’s New Team
1.4 John M. ‘Mick’ Seidl
1.5 Public Utility Regulatory Policies Act of 1978 (PURPA)
1.6 InterNorth and Interstate Pipeline Deregulation
References for Chapter 1 Appendix
1.1 Linda Herrold Lay
In the mid-1970s, Ken Lay discovered an energetic, intelligent, and efficient legal secretary at Florida Gas. Linda Phillips Herrold (1945–), a divorced mother of three, was attractive and well groomed. She was perky and possessed strong interpersonal skills and social graces, somewhat in contrast to Ken’s wife of a decade, Judith Ayers Lay (1944–).
Ken’s then-assistant at Florida Gas, while competent in routine office tasks, wasn’t able or eager to handle larger projects. When she left the company, Lay interviewed Linda. “I told her I needed somebody that could take some of these more complicated projects and just run with them,” Ken remembered, “as well as doing the basic stuff to keep the office going” (Lay interview 2, 14).
Linda accepted the job in 1976 and grew professionally and personally close to her boss. By 1980, the married CEO of Continental Resources Company (the renamed Florida Gas Company) was having an affair with his assistant. Ken filed for divorce from Judith, a homemaker raising their children, Mark (12) and Elizabeth (10). Meanwhile, Ken accepted the presidency of Transco and relocated to Houston, Texas, whereupon Linda transferred to the Houston office of Continental Resources Company (Bradley, Edison to Enron, 310–12).
In July 1982, one month after finalizing his divorce from Judith at the courthouse in Winter Park, Florida, Ken married Linda in Houston. The year before, Transco’s COO had taken the company plane to a mental hospital in North Carolina to deal with Judith, who was admitted after having a “psychotic episode” (Bradley, Edison to Enron, 341).
These events in Lay’s personal life, also reviewed elsewhere (McLean and Elkind, 7–8), are important for understanding both Ken Lay’s overarching ambition and the unusually high number of executive affairs at Enron in its heyday. But most important is the influence of Linda on Ken throughout Enron’s life.
Linda, who married at age 19 and gave birth soon thereafter, never obtained a college degree. (She attended American University and Orlando Community College.) But she was resolved to work hard and rise above those from with more credentials (such as Judith Lay, who graduated from the University of Missouri). Linda Lay’s ambitions fueled Ken’s—and vice-versa.
In 1972, Linda’s brother Raymond married Elizabeth “Betsy” Linder, making Linda sister-in-law to the daughter of P. Scott Linder (1923–1990), the head of Linder Industrial Machinery Company in Lakeland, Florida. Scott was one of the best-connected businessmen in the state, heading the Florida Chamber of Commerce in 1975. It was Linder who helped Linda get employment at Florida Gas Company. And in 1986, Lay tapped Linder for Enron’s board, one of two open board positions Ken filled after becoming CEO.
Linda did not rest when Ken’s success allowed her to leave the workplace. She was Ken’s sounding board for the move from Transco to HNG (Bradley, Edison to Enron, 476–77), and she would remain close and involved in Ken’s business matters thereafter. Enron pipeline executive Stan Horton remembered how effectively Linda worked with the families of the Continental Resources Group executives when they visited Houston from Winter Park, Florida, to consider taking new jobs with HNG. Linda hosted parties for the spouses, dispensed advice, and let the relocation experts take it from there (Horton interview, 14).
HNG board director John Duncan described Linda Lay as Ken’s corporate partner, not only spouse, in an interview for the Enron Oral History project in April 2001, about seven months before Enron’s bankruptcy.
Linda has had an enormous influence on Ken and thus, Enron. I remember about one dozen years ago, someone said: “Oh my gosh, what would happen to the company if something happened to Ken?” And my immediate thought and answer in public was, “Well, we’ve got Linda.” And the reason I said that is that Linda has been the sounding board for Ken from the beginning. She’s got a unique ability to analyze people and their talents, and help with the corporate image, put the heart into the corporation. And Ken talks to her more than any CEO that I have ever known talks to their spouse. And, as a result, she is intimately familiar with everything that goes on at Enron (Duncan interview, 2).
In June 1986, with five children in their joint custody—three from her side and two from his—the Lay family moved to 3195 Inwood Drive in the River Oaks subdivision near downtown Houston, the former address of the late Robert Herring (Bryce, 34–36). Contrary to what was stated in one Enron book (Swartz and Watkins, 29–30), however, Enron did not purchase the house (Joe Foy, email communication to author, March 22, 2007).
(Note: Some of the above biographical information on the Lay family is taken from: U.S. Office of Personnel Management, “Questionnaire”).
1.2 Mandatory Open Access for Interstate Gas Pipelines
A new profit center emerged at Enron in the 1980s that became the company’s most prolific money-maker in the 1990s: wholesale natural gas marketing. This vast new competitive space for Ken Lay’s company did not develop free-market style. It resulted from a new regulatory regime that took hold about the time when Houston Natural Gas remade itself into as a major interstate gas transmission company in the mid-1980s.
Traditionally, a regulated pipeline bought gas from a producer in the field for resale to a regulated local distribution company (LDC) at the so-called city gate. The commodity cost (price of the gas) was bundled with the transportation cost in the charge to the LDC under public utility regulation of interstate gas transmission companies (pursuant to the Natural Gas Act of 1938) administered by the Federal Power Commission (FPC) until 1977 and the Federal Energy Regulatory Commission (FERC) thereafter.
The new world of wholesale gas marketing allowed a third party to buy gas from the producer and turn to the pipeline for transportation service at a price that was called “unbundled,” because it did not include the cost of the gas. The price of the transportation, however, was still regulated. FERC Order No. 436 (1985):
1) Allowed unregulated margins on the buying and selling of gas in interstate commerce (commodity deregulation, as in the intrastate market), and
2) Gave the new gas merchants mandated national access to interstate pipelines to reach end-users (an expansion of regulation) (Tussing and Tippee, 204–205; Bradley, “Distortions,” 17).
This regulatory transformation, called mandatory open-access (MOA), begun in 1984/85 and virtually completed by 1990, is the law of the land today.
Evolution of Regulation
MOA was the third era in the history of U.S. interstate gas transportation. The first was the pre-1938 free-market era, when an interstate line was free to buy and sell gas and make whatever profit it could. The pipeline offered a bundled product, meaning that the interstate’s downstream customer bought gas at a price that reflected all costs of service, from acquiring the gas back in the field to delivering the gas to its customers (an industrial customer, or to either the local distribution company or the municipality at the “city gate,” the point where the interstate pipeline handed off the gas to the utility/municipality).
The second era of interstate gas transmission was the initial regulatory era. Pursuant to the Natural Gas Act of 1938, the FPC required every contract and transaction by an interstate gas pipeline to have a certificate of public convenience and necessity. Certification (commencing a new deal) and abandonment (terminating a deal) required case-by-case review (versus generic, blanket authority from the FPC/FERC). This regime continued for several decades until gas shortages in the 1970s, and then gas surpluses in the early 1980s, led to an industry push and changes in administrative regulation that would allow pipelines to separate their buy/sell commodity function from their transportation services (explained in greater detail below).
MOA is a regulatory regime under which a transporter—such as a natural gas pipeline—is required to provide carriage and related services on a nondiscriminatory basis, so long as the shipper complies with all the terms and conditions of service (Broadman and Montgomery, 66). Under mandatory contract carriage, tenders are accepted on a first-come, first-serve basis, with requests beyond the capacity of the carrier denied (mandatory contract carriage).
In contrast, another regulatory regime, mandatory common carriage, also requires accepting all valid requests for service, but it prorates capacity in the event that demand exceeds the capacity of the carrier. Oil pipelines in the United States have been regulated as common carriers at the state and federal level (Bradley, Oil, Gas, & Government, 118–20, 612–18, 776–85).
As noted above, pipelines traditionally bought gas in the field and sold it after transportation, generally at the city gate to a distributor (utility or municipality) as a bundled sale/transport service. Each new deal, or termination of the same, had required a Section 7 (of the Natural Gas Act) action by the FERC. But rather than approve MOA transportation on a case-by-case basis, regulators offered a blanket certificate to allow any transaction to be executed without pre-approval. Such blanket authority was a powerful tool in the FERC carrots-and-sticks arsenal to strong-arm interstates into “electing” to become open-access transporters. Furthermore, the companies could not un-elect their open-access status once chosen.
This contrasts with a free-market approach, under which voluntary open access would be governed by the terms of individual contracts, although conceivably a company could have a uniform open-access policy for all shippers. Even so, if open access were truly voluntary, the pipeline would be able to rescind its open-access policy for new or expiring contracts, or as a generic operating principle. This has not been the case for U.S. interstate gas pipelines in the MOA era of the last two decades.
Open Access: Not Voluntary
The initial “election” of open-access by pipelines between 1985 and 1990 was effectuated by the regulatory means. Given the choice of reverting back to certificate/abandonment regulation for each transportation contract, the interstates had to swallow hard and declare open access. As the D.C. Circuit Court of Appeals concluded, pipelines could not compete without the flexibility and market-responsiveness codified in the provisions of Order No. 436:
Refusal of the option may spell bankruptcy: inability to provide blanket-certificate transportation for fuel-switchable users may in current market circumstances cause critical load loss. Of course acceptance of the option may also be fatal. But when a condemned man is given the choice between the noose and the firing squad, we do not ordinarily say that he has “voluntarily” chosen to be hanged (Associated Gas Distributors v. FERC, 824 F. 2d 981, 1024 [D. C. Cir. 1987]).
The court also concluded that one pipeline accepting open-access would necessitate its rivals to follow suit. “Thus even if only one pipeline actually preferred to use Order No. 436 [(hanging rather than being shot)],” the court said, “competition might force others—ultimately perhaps all the others—to switch their preference” (ibid.). Hence, the program was voluntary in form only. Still, the court proceeded to uphold the commission’s authority to effectively compel access under the circumstances.
FERC Order No. 636 (1992), a remake of Order No. 436, made it illegal for an interstate pipeline to remain bundled, to not declare open-access:
Based upon the extensive record developed in this entire proceeding, as well as the Commission’s observations of the industry, the Commission finds that the pipelines’ bundled, city-gate, firm sales service is operating, and will continue to operate, in a manner that causes considerable competitive harm to all segments of the natural gas industry as described above. The Commission finds that this harm has an unreasonable impact on gas sellers and gas purchasers and is an unlawful restraint of trade…. The Commission, therefore, finds and concludes that the pipelines’ bundled, city-gate, firm sales service violates NGA sections 4(b) and 5(a). (Order No. 636, FERC Stats. & Regs. [CCH] ¶ 30,939 at 30,405 [1992]).
In 1935, the original draft of what became the Natural Gas Act of 1938 (NGA) included a MOA requirement for interstate pipelines, a provision pushed by Texas gas producers (Bradley 1996a, 862, 865fn). However, opposition from the to-be-regulated interstates prevented MOA from becoming law (Mogel and Gregg, 169). So, effective December 21, 1938, federally regulated interstates—being private carriers offering bundled carriage—became subject to service and rate regulation by the Federal Power Commission (and from October 1977 forward, by FERC).
Adoption of MOA in the 1980s was not deregulation but restructured regulation with a deregulation component. As applied to natural gas pipelines, it was a new form of public-utility regulation that repositioned the buying and selling of the commodity itself. Producers, end-users, and marketers, not the interstate pipeline as before, bought and sold gas. Under rate-of-return regulation, the interstates had not been allowed to profit from the buying and reselling of gas, but other parties—operating in what regulators deemed to be a “workably competitive” market—could now make a margin without regulatory interference.
So, while the commodity side of the gas market was not subject to traditional cost-based regulation or rigid price controls, MOA transportation rates remained controlled as a “natural monopoly” under traditional cost-of-service principles. Natural-gas local distribution companies (LDCs), making the final sale to residential and commercial customers, were regulated on the state level as public utilities.
The Natural Gas Policy Act of 1978 (NGPA) revolutionized the Commission’s jurisdiction over gas sales and gas transportation, by removing large quantities of wellhead gas supply from the FERC’s entry-and-abandonment jurisdiction, and allowing new entrants to buy and sell gas freely (Marston, 54–56). This legal change played a key role in setting the stage for the transformation of the interstate pipeline industry from merchant (purchase, sales, and transportation) to MOA status.
FERC Initiatives Leading to MOA
Chapters in Edison to Enron (Book 2) on Florida Gas Transmission and Transco Energy Company described the interstate natural gas business prior to the 1980s, when pipelines operated as their own private carriers, buying selling gas after delivery at a “bundled” price that included both expenses and an authorized return on invested capital.
During periods of gas shortage in the 1970s, the FPC encouraged the development of transportation programs under specialized NGA certificates that separated out the provision of transportation so that gas could be sold by producers directly to end users. This practice avoided the wholesale price controls that were responsible for creating the non-contractual supply curtailment.
Because these programs tended to undermine the price-control regime, they were strictly limited to end users that could qualify for access to their own gas (Willrich, 78–79). During the gas surpluses that followed enactment of the NGPA, pipelines initiated transportation programs under expanded NGA “blanket certificates,” as well as under the authority of NGPA Section 311. This form of private carriage widened with the special marketing programs (SMPs) approved by the FERC in 1983, 1984, and early 1985 (Bradley, “Distortions,” 16).
SMPs offered industrials and power plants spot gas and transportation in place of higher-priced gas contractually tied to the pipeline (system supply). By retaining these users, gas demand was kept in situations where another fuel could be burned or the industrial operations could be curtailed. Retaining gas sales (load retention) was necessary to spread the pipeline’s fixed cost over more units to reduce rates for all, even those customers not participating in the program.
Transco under Ken Lay was a pioneer of the SMP movement. By the mid-1980s, a complex patchwork of transportation programs had evolved under various NGA blanket certificates and the new NGPA programs to cover a wide variety of qualifying shippers, sources of gas, and end users. As one commentator described it, the Commission’s regulations governing transportation had become “a confusing patchwork of pigeonholes and overlapping programs, each with various qualification criteria and restrictions” (Marston, 59; see also, Means and Angyal, 21–29). Thus, while a particular transaction might not qualify under one program, it might well qualify under another.
Despite the complexity of the regulatory framework governing transportation services, transportation volumes soared from 1982 to 1985, and income from transportation took the place of gas sales formerly made by the pipelines. By mid-1985, the amount of transported gas reached the level of the gas sold by the pipeline itself. The lure was cheaper spot gas in place of pipeline system supply.
While some FERC programs allowed transportation to compete against traditional pipeline sales, other programs (especially the SMPs of the pipelines themselves) did not. In addition, some pipelines began to impose restrictions on their new-found services by refusing to transport supplies that competed against their own sales. In other words, although the FERC’s earlier blanket certificate program allowed a pipeline to transport all categories of gas (regardless of whether the gas competed against a pipeline’s own [system] sales supply or was for a noncompeting markets), the pipelines implemented the authorization in a “discriminatory” fashion by opening up their systems only for gas that did not displace their own sales.
FERC’s failure to address such discrimination against outsiders was challenged successfully in federal appeals court. In twin decisions handed down on May 10, 1985 (Maryland People’s Counsel v. FERC, 761 F. 2d 768 [D.C.Cir. 1985]; 761 F. 2d 780 [D.C.Cir. 1985]), SMPs were found to be unduly discriminatory because the captive customers of the LDC or municipalities (that is, residential and commercial users not able to shop for gas) were not part of the programs. The court similarly rejected a pipeline’s implementation of comparable restrictions while operating under a blanket NGA transportation certificate.
In response, the FERC on May 30, 1985, proposed a generic transportation program with identical qualifications by all classes of customer so that each could access cheaper spot gas and arrange for transportation whether or not the displaced gas was sold by the pipeline. The LDCs could now buy spot gas and turn to transportation for all their customers just as the price-sensitive industrial or power-plant customer did under the SMPs (Stephen Williams).
MOA was driven by (cheaper) spot gas replacing pipeline system gas. This shift resulted in large part from FERC Order No. 380 (May 1984), which set into motion a series of regulatory decisions that eliminated minimum bill (required take) contracts between interstate pipelines and their distribution customers. In conditions of shrinking demand, as faced by the gas industry in the first half of the 1980s, the minimum commodity bills operated to prorate the market decline among suppliers, foreclosing competition.
Elimination of the minimum bills in 1985 thus greatly enlarged the national spot market for competitively priced gas, as well as the transportation services to access such gas—all in place of bundled sales of pipeline gas. With the gas distribution companies allowed to “swing” their purchases from one pipeline to another, based on which pipeline offered the more attractive price or service, supply competition began for the pipeline’s system supply (merchant sales) as well. After Transwestern Pipeline and El Paso Natural Gas Pipeline Company (El Paso) lost their minimum bills, set at 91 percent of their contract capacity, Southern California in 1985 became the largest spot market for gas in the country (Bob Williams, 28).
Order No. 380 caused a disconnection in the non-integrated producer-pipeline-distributor chain. Pipeline-distributor contracts were altered, while pipeline-producer contracts were not. Fewer takes by the pipeline at the contractual price put the interstate in violation of its contracts with producers, giving rise to take-or-pay liabilities: those costs paid to producers for contract nonperformance. Yet No. Order 380 made no provision on how such upstream contract issues would be handled. In this sense, FERC’s action was pro-consumer and anti-industry, given cheaper spot prices.
“Voluntary” election to mandatory open access began with Order No. 436 (October 1985), which, as revised and expanded by Order No. 636 (April 1992), became the underlying “constitution” for the new industry. Order No. 451 (July 1986) and Order No. 500 (August 1987) set forth rules for pipelines to partially recover their take-or-pay liabilities from end-users. Such costs were a major issue surrounding the FERC transportation orders.
The final result, universal MOA, would allow partial cost recovery of producer-pipeline contract costs and thus partially placate the concerns of the upstream and midstream natural-gas industry, while allowing price signals to flow from the wellhead to the burner tip, a stated aim of the FERC (FERC Contract Carriage Proposal, 8). But pipelines, which had acquiesced to public utility regulation in the 1930s, were losers in the process.
Political Capitalism
MOA had political muscle from the beginning as large end-users sought to expand their access to spot gas, which was substantially cheaper than pipeline system supply in virtually every gas market in the country (“FERC’s NOPR Draws Fire”). The parties aligned behind Order No. 380 were also behind MOA on interstate pipelines.
LDC support was more mixed toward a program that 1) needed to be revamped to allow spot gas and transportation to reach them; and 2) would not necessarily increase profit under public-utility regulation. In 1983 congressional hearings, the American Gas Association was less interested in MOA than in repeal of the Powerplant and Industrial Fuel Use Act (which favored coal at the expense of gas) and action to reopen producer gas contracts (FERC, 1983, 888).
Interstate pipelines who were members of the downstream-dominated AGA drove this mixed position. “The regulators will have to make all kinds of planning and operating decisions about whether capacity exists, how you’re going haul the gas, where you are going to drop it off, how you are going to bring it in and out of storage–all abdicated to some unknowing federal employees who are going to be pulled in a bunch of different directions on every issue,” predicted AGA president George Lawrence. “It’s going to be a mess” (Mack, p. 82).
But east coast LDCs, organized as the Associated Gas Distributors (AGD), took the lead in trying to participate in the spot gas/transportation game. AGD arranged for gas transportation for certain gas distributors in 1976 and worked on a pro-transportation policy as far back as 1977.
Another early transportation program for LDCs was Ohio’s “self-help” plan by Yankee Resources Inc., one of the first (if not the first) independent natural gas marketing company in the nation. In 1988, Yankee Resources became Access Energy, which was purchased by Enron in 1992 and renamed Enron Access.
Generic, across-the-board MOA for interstate gas pipelines was first proposed by the FERC in a May 30, 1985, Notice of Proposed Rulemaking (NOPR). The “mega-NOPR” was to create a broad program for open access transportation, while providing the means for industry participants to adjust their contractual relationships to embrace a transportation-only regime.
The NOPR also proposed a bifurcation of the pipeline’s producer contracts into two separate components or “blocks,” with the higher-priced contracts all grouped in the second block rather than rolled in with the lower-priced contracts. The intent of block billing was to concentrate competitive pressure on the higher-priced supplies.
The NOPR was greeted harshly by most segments of the natural gas industry. First Boston Research warned its investor clients:
The FERC’s May 30 Notice of Proposed Rulemaking (NOPR) is a document of sweeping, even disquieting scope…. Unmodified, the NOPR holds most immediate and most serious negatives for pipelines. It also has gas supply-related features that are harmful to producers. Its first impact would favor distributors (LDCs), but longer term, the effect is more negative than positive.
“Earnings and cash flow will be more volatile as regulatory protection is increasingly excised from pipeline rates,” the study continued, making “further industry consolidation … inevitable since access to multiple supply sources, as well as to a diversity of markets, becomes a defensive necessity after the NOPR’s implementation” (Baldwin and Christensen, 1).
Block billing was trenchantly opposed by gas producers who otherwise supported the NOPR’s MOA component. Wellhead interests feared that block billing would cause the marginal price of gas to fall to marginal operating costs—and thereby preclude the recovery of their capital costs. This concern extended to upstream trade associations such as the Petroleum Equipment Suppliers Association (FERC, 1985, Broun) and the International Association of Drilling Contractors (FERC, 1985, Hogan). Oscar Wyatt’s Coastal Corporation, a company that had many wellhead-gas contracts with pipelines, called the NOPR “one of the greatest producer disincentives in history” (“Coastal’s Wyatt “).
Interstate pipelines, fearing growing take-or-pay liabilities from replacing their system sales with transportation, did not see block billing as the solution. And these companies were not yet banking on the possibility of forming gas marketing companies to gain new profits outside of FERC regulation. The chairman of Interstate Natural Gas Association of America (INGAA), the interstate pipeline trade association, told Congress in an NOPR hearing:
INGAA shares the Commission’s goal of assuring consumers the lowest reasonable rates consistent with reliable long-term service…. But the transportation program proposed in the rulemaking does not recognize the service obligations and long-term supply commitments upon which the pipeline systems have been designed…. I believe that the existing regulatory system [of voluntary transportation] would serve the public interest better than the NOPR has proposed (FERC, 1985, King, 175–76).
INGAA had argued the same before Congress two years earlier, in 1983 (Proposed Changes, McGrath).
While gas distribution companies were lukewarm about the NOPR, industrial gas users welcomed spot gas and transportation in place of the status quo. The Process Gas Consumers Group, for example, warned against “delayed implementation of the NOPR” as “counterproductive” (FERC, 1985, Vlcek, 415).
As it turned out, the Commission chose to drop the Block Billing proposal (over the dissent of Commissioner Charles Stalon, a Ph.D. economist) and to implement the MOA components in the new rule. But Stalon had done much as an early FERC champion of MOA, following the lead of FERC Chairman Raymond O’Connor, to take credit for the final product.
Academic Interest
How did the NOPR (minus the block billing provision) become law with so much opposition from the natural gas industry? As it turns out, MOA was a developed concept in the field of industrial organization by the time FERC embraced it. A notable essay in 1981 in the American Economic Review sought to redefine public-utility control of natural monopoly by separating out access regulation from rate regulation itself (Bailey, 179).
So-called “contestability theory” undergirded the thinking behind FERC’s 1980s agenda of unbundling sales from transportation, and requiring fair access, while continuing to regulate the rates charged for using the sunk-cost asset (Ellig and High, 39). By the 1980s, the appropriateness of transforming the pipelines from merchants to transporters was being debated on the pages of the professional journal of the energy bar as well as on Capitol Hill (Mogel and Gregg, 1983; Means and Angyal, 1984).
The rationale for Order No. 436 was clearly stated by FERC’s O’Connor:
Our goal in this landmark rule is to give natural gas consumers more options for gas supplies. If pipelines choose to participate in this new program, consumers and their local utilities, for the first time, will be able to shop around for the cheapest and most reliable gas supply. In turn, producers, for the first time, will gain access to pipeline capacity to market their supplies directly to consumers and new markets (quoted in FERC, “Commission Approves”).
Leading energy economists embraced MOA for the midstream gas industry to get price signals to end users from the “workably competitive” upstream industry, the gas producers (Hogan, 72; Kalt, 97–99; Kalt and Schuller, 3). The academics did not consider interstate pipelines to be sufficiently “workably competitive” to escape cost-of-service regulation—an idea held even more strongly with regard to LDCs (FERC, 1985, Hogan, 73–74; Kalt, 97–101).
MOA was also championed by consumer-oriented officials who wanted cheaper “spot” gas to reach consumers and knew that unbundled commodity markets, in place of the FERC-regulated pipeline, were necessary to achieve that end (FERC Contract Carriage Proposal, 4). Had spot prices been above prices for a pipeline’s system supply, however, regulators would have been less interested in MOA.
The role of intellectuals and ideas was acknowledged in the statement of Wendell Ford (R- KY), who opined at the beginning of a NOPR congressional hearing:
What troubles me is that such a radical change is being proposed by the regulatory agency. We in Congress are the ones ultimately responsible for ensuring that adequate supplies of gas are available at reasonable prices. I am sure that those at FERC who drafted the NOPR, and I am told that it was conceived primarily by economists, were well intentioned, but often the world envisioned by theorists has little to do with the real world. In fact, almost all of the written and oral comments made to the FERC indicate little public support for the proposal in its current form (FERC, 1985, Ford).
The intellectual godfather of Order No. 436 was Charles Teclaw, the director of the economics office at FERC and a PhD economist (Malloy interview, 4, 16, 22, 25; Marston interview, 6, 26; Philip Marston, email communication to the author, April 1, 2007). But Teclaw got going on the issue in early 1983 when he was with the Illinois Commerce Commission (ICC), chaired by Philip O’Connor (a PhD political scientist—and no relation to Raymond O’Connor). As head of the ICC’s Policy and Research division, Teclaw prepared the Consumer Access Plan as a means of addressing rising gas prices at the city gate (wholesale gas delivered by interstate pipelines to distribution companies).
The next year, the State of Illinois brought an antitrust suit against Panhandle Eastern Corporation, an interstate gas pipeline, for refusing to provide contract carriage (transportation service) for state buildings. So on two fronts, Illinois laid the groundwork for regulatory reform that FERC would bring to fruition for the whole interstate transmission industry. And beginning with natural gas and telecom, the ICC in late 1984 became the first regulatory body to advocate MOA with electricity, which would take effect after such reform with natural gas (Philip O’Connor, email communication from to author, April 1, 2010).
Still, in the tradition of political capitalism, regulatory reform from the intellectual/political side needed a well-defined, major, supportive industry constituency to reach the finish line. INGAA’s Skip Horvath, who participated in the negotiations, remembers how the interstates needed three things to move to open-access transportation from private, bundled carriage.
One was the elimination of their mandatory three-year rate review. A second was the termination of the obligation-to-serve requirement, with responsibility for supply shifting to the title holder of the gas commodity. The third was maintaining operational control of their system, relative to marketers, to assure that receipt and delivery procedures would continue as before. “At the end, Horvath remembers, “it was this [three-pronged] bargain that solidified the deal for open access” (Horvath to Bradley, February 1, 2007).
The Role of Enron
One company, HNG/InterNorth, soon to be Enron, supported the policy wonks at FERC and the Department of Energy who were behind Order No. 436 (Doan interview, 8–9, 16). In congressional hearings on the May 1985 NOPR, the following exchange occurred between HNG/InterNorth’s Dan Dienstbier and Senator Don Nickles (R-OK):
Senator Nichols. Mr. Dienstbier, your comments were more supportive of NOPR from any of the previous panelists that I have heard to date or for the last month….
Mr. Dienstbier. We’re trying to take the position of saying there is a rightness, is a purpose in what FERC is doing. We’re trying to be supportive of that purpose (FERC, 1985, Dienstbier, 276–77).
Ken Malloy, who was in the Department of Energy, remembered the effect of Enron’s support for MOA:
I didn’t know who Ken Lay was [and] didn’t understand what Enron’s market power play was. I understood one thing: that there was a big player out there that supported what we were doing. It gave us, I would say, moral courage maybe more than anything else.
I never had very much contact with Enron’s people. But I knew what they stood for. I certainly had lots of scholarly and technical coverage. But it was very reassuring in a commercial sense to have Enron whose CEO was a PhD economist and had once worked at the Commission. It didn’t give us a political cover, but it gave us an ability to sleep at night because we had people coming in on a daily basis telling us we were going to injure the country (Malloy interview, 23).
Other interstates, including El Paso, saw the handwriting on the wall and embraced spot gas and nondiscriminatory transportation—with a quid pro quo of take-or-pay cost recovery in rates (Vietor, 155). But no company was as far out in front as InterNorth, then HNG/InterNorth, and finally Enron.
Ken Lay’s growing embrace of MOA reflected two factors: optimism about profit-making in a bifurcated sales/transportation world (particularly after he gained InterNorth Gas Marketing through merger), and the growing inevitability of the new regulatory regime.
Prior to the merger, HNG’s optimism toward a transportation world was reflected in the company’s 1984 10-K filing with the Securities and Exchange Commission, which considered the potential effect of the impending termination of Transwestern Pipeline Company’s minimum bill contract with Southern California Gas Company. The filing stated, “The total loss of this customer could have a material adverse effect on HNG, but Transwestern has no reason to expect such occurrence” (5). Indeed, so long as the underlying demand was strong, Transwestern could expect to attract a high level of throughput in the changed contractual world.
This approach was very different from the earlier comments of Transwestern when it was owned by Texas Eastern Corporation. At that time, Transwestern had told the Commission that adoption of the minimum-bill rule would severely hurt the pipeline (Marston interview in Doan, et al, 23).
Ken Lay was not averse to gas-on-gas competition and transportation for interstate pipelines with good reason: it created two profit centers where there had been only one. As Stan Horton, Enron’s top interstate pipeline executive from 1993 forward, recollected:
Ken [Lay] believed from day one that we could make as much money in the pipeline business being transporters as we could being bundled merchants because we didn’t make any money buying and selling gas. And then, on top of that, we could make money buying and selling gas. So we could increase our profits and our rate of returns by having the commodity unbundled from the transportation. That was the clear direction, and everything that we did was geared to the accomplishment of that goal.
We were, consequently, leaders in the natural gas restructuring process. We tried to be first in everything that we did. We tried to get our take-or-pay [liabilities] behind us as quickly as possible. That vision was out there from day one because of Ken (Horton interview, 19).
“There is no reason that pipelines can’t be as profitable as transporters as they were as merchants,” Lay told the press in early 1986 (Shook, 11). But Ken Lay knew more. There was no reason why an owner of a pipeline could not make the same profit with the pipeline and move the merchant function to an unregulated (nonjurisdictional) subsidiary to make a profit that was previously precluded under FERC rules. Gas commodity sales, after all, was considered by regulators to be competitive versus transportation by interstate pipelines.
HNG/InterNorth, like all parties, provided comments on the FERC’s May 1985 NOPR. And the company succeeded in getting much of what was desired. As a memo from its legal and rate departments reported regarding Order No. 436:
Many of the proposals advocated by HNG/InterNorth in our written comments are incorporated into the Final Rule. The Commission continues to take the position that the Final Rule is voluntary. If however pipelines are to continue to have any flexibility in offering exchange and backhaul service, they must accept a blanket transportation certificate (Interoffice Memorandum, October 15, 1985 [copy in the author’s possession]).
And beginning in the late 1980s, Enron’s unregulated marketing arm, the largest and most sophisticated in the industry, would become a major profit center to validate the expectation of Ken Lay and Enron.
Enron’s interest in MOA was pecuniary, not philosophical. Florida Gas Transmission, for example, half owned by Enron, would not open under Order No. 436 until August 1, 1990, one of the last major interstates to do so. Enron would also resist open-access on Houston Pipe Line in the 1990s imposed by the Texas Railroad Commission. As discussed in Enron Ascending (pp. 34–35), a changeover to transportation would have disrupted a lucrative purchase contract with gas-distributor Entex.
The (Neglected) Free Market Alternative
The “deregulation” debate for interstate natural gas pipelines beginning in the mid-1980s was between the status quo and MOA (Gallick, 5). Repeal of the Natural Gas Act—and thus the end of FERC oversight and regulation of natural gas—was never part of the political debate. The interstate gas pipelines’ trade association reported to a Senate Committee in the same period:
INGAA has perceived no significant interest among its membership in ‘deregulating’ pipelines, at least up to the present time…. Congress should not expand the scope of its inquiry more than necessary (INGAA, Natural Gas Legislation, 1179).
However, some academic interest in entry-and-rate deregulation of interstate gas pipelines emerged in the 1990s, as evidenced by this sampling of arguments and conclusions:
- “The only ‘right’ regulator of rates, entry, and exit are freely bargained contracts and other forms of mutual decision-making, not a ‘fair’ return on embedded cost and what the authorities interpret the public convenience and necessity to be” (Bradley, Reconsidering, 49).
- “Private contracting … offers superior control over the contract administrator, because it removes the Federal Energy Regulatory Commission’s monopoly on contract administration” (Ellig and High, 39).
- “Open access policy also implicitly sacrifices any economies of scope that may exist between the gas transportation function and other services” (Ellig, 283).
- “Based on our sample of 148 entry markets, a strong case for complete federal deregulation in entry markets can be made” (Gallick, 89).
- “Fundamental economic imperatives cannot forever be denied, and so one might hope that regulators will eventually step away from the gas pipeline industry and completely deregulate it” (Teece, 79).
- “The network is not a public utility; do not treat it as one…. Release the hostages—these include the industry and its customers—by making regulation voluntary” (De Vany and Walls, 113).
- “An alternative to the regulatory covenant is the ‘social compact’ where long-term contracts among the affected parties set price and service terms” (Stram and Thorn, 19).
Within the industry, United Pipeline (Koch Industries Inc.) fell short in a determined effort to obtain a workable competition finding before the FERC (Grenier).
Politically, however, there was no concerted effort to repeal the Natural Gas Act of 1938 (NGA), as there had been to deregulate wellhead prices regulated pursuant to the NGA. Interest in full deregulation as opposed to open-access “competition” has been relegated to libertarian analyses from the Cato Institute (Washington, DC).
1.3 Ken Lay’s New Team
Perhaps the most memorable term from the Enron lexicon is the title of Bethany McLean and Peter Elkind’s book, The Smartest Guys in the Room. An early indicator of the “smartest” phenomenon that would engulf Enron was when a 31-year-old new hire at Florida Gas Company in 1974 asked to be called Dr. Ken Lay, not Mr. Lay (Bradley, Edison to Enron, 296). In the next years, Lay would attract some very smart, well-credentialed talent in the natural gas industry at Florida Gas Company/Continental Resources Group and at Transco Energy.
When Lay was hired as CEO of HNG in mid-1984, a parade of academically credentialed individuals began arriving at 1200 Travis, giving a new flavor to the engineer- and lawyer-dominated gas industry. Within months, more Ph.D. economists were at HNG than at any other natural gas (or energy) company of comparable size.
The original number two man to Ken Lay at HNG in 1984/85, Jim Walzel, remembered his strained organizational fit:
Ken and I never had any cross words that I recall. We helped each other on a number of things. But I knew that I was never going to be Ken Lay’s right-hand man. I was a blue collar pipeline guy who had been doing the same thing for a long time. Ken is more on the intellectual side. He likes guys like Jeff Skilling and Andy Fastow—guys that are brilliant, have MBAs or other advanced degrees, and have a new idea every minute.
That really was not my style, and I could see that even though I was number two in the company, Ken relied a lot on people like John Wing, an MBA who was very good with numbers and concepts. There was not any tension in all of that, but when the company got bought out [by InterNorth], it was not a difficult decision for me to leave (Walzel interview, 10–11).
The question of talent and education became debated in the wake of the Enron collapse, as it had after the demise of Long-Term Capital Management. The favorite book of Enron executives in the company’s final weeks was When Genius Failed by Roger Lowenstein, the story about the failure of a $100 billion hedge fund, directed by leading Wall Street and academic minds, including two Nobel laureates. As it turned out, Enron’s bad bets were much broader than errant computer programs, as with Long-Term Capital Management.
1.4 John M. ‘Mick’ Seidl
Mick Seidl—like Jack Bowen, John Wing, and others in the grand Enron story—graduated from West Point. After his tour of duty with the Air Force, Mick enrolled at Harvard and received a Ph.D. in political economy and government, writing his dissertation under Thomas Schelling, who would go on to share the Nobel Memorial Prize in Economics in 2005. Seidl taught at Stanford Business School where he consulted for the CEO of Natomas Company, Dorman Commons (Seidl interview, 1, 3, 18). (Seidl’s colleague Robert Jaedicke would join Enron’s board in 1984.)
Natomas had large oil reserves in Indonesia and when energy prices took off, so did the company’s cash flow, which financed investments in coal mining, a geothermal plant, and domestic oil and gas drilling. Seidl joined the board as its youngest member and six months later was appointed to the executive committee.
Commons, looking for a successor, asked Seidl to work for Natomas, beginning as vice president of corporate development. Seidl, who had been introduced to energy while working at the Department of Interior prior to his Stanford appointment, was now visiting drilling rigs, coal mines, and geothermal plants. And in 1981, Seidl relocated to Houston to head Natomas’s North American operations. But when Diamond Shamrock bought his company in 1983, Seidl left with a seven-figure golden parachute (ibid., 5).
Seidl met Lay in 1973, when they both worked for the Department of Interior. Lay was deputy undersecretary for energy; Seidl was deputy assistant secretary for the budget, environmental policy, and policy analysis (ibid., 19). The two parted when Lay went to Florida to join Florida Gas Transmission and Seidl went to California to teach at Stanford University. They paired up again after Seidl left Natomas and was in the job market in Houston, where Seidl actually was hired by HNG ahead of Ken Lay (Bradley, Edison to Enron, 475).
Mick Seidl would go on to be Ken Lay’s first number-two man at Enron, serving from May 1986 until January 1989. The verdict on Seidl as president and COO was that his personality was too much like the pleasant Ken Lay, thus leaving the company without a top tough-guy. Stated Bethany McLean and Peter Elkind:
[Seidl] had a terrible time making decisions that might anger somebody. And he was far more interested in the glamour of being a corporate executive than in the hard work of making the company profitable. He wanted to be Mr. Outside, but Enron already had a Mr. Outside: Ken Lay himself (24).
The ascension of Richard Kinder as Lay’s number two man in the late 1980s was a turning point for Enron, finally allowing it to get past its problems after the merger with InterNorth, as discussed in Enron Ascending, chapters 3 and 4.
1.5 Public Utility Regulatory Policies Act of 1978 (PURPA)
Rapid technological change (in this case the improving efficiency of turbines to generate electricity from natural gas), combined with regulatory change, created a once-in-a-generation business opportunity. General Electric (GE) was the first mover, but Enron raided Jack Welsh’s talent by hiring John Wing and Robert Kelly to become a first mover. Alas, for reasons described in chapter 3, Enron’s early advantages were diluted by management issues that opened the door for Robert McNair’s Cogen Technologies and Tenaska, Inc., founded by Enron refugee Howard Hawks.
Background
The Public Utility Regulatory Policies Act (PURPA), part of the Carter Administration’s National Energy Act of 1978, provided special incentives for projects by independent power producers (IPPs) that either used renewable technologies or used oil or gas in a specific new technology, cogeneration. The IPPs were exempt from a 1935 federal law, the Public Utility Holding Company Act, which limited a gas or electric company’s operations to one integrated public utility system (49 Stat. 803 at 820). So whereas an electric utility could not have noncontiguous operations in different states, an IPP could. The Federal Energy Regulatory Commission (FERC) was placed in charge of PURPA determinations pursuant to the 1978 law.
Cogeneration is a sequential process producing electricity and then using residual heat to produce steam—or to generate more electricity, which is called combined-cycle generation. Viewed as the most efficient method of power generation at a time of energy shortages, cogeneration was part of the law’s goal to “significantly promote the efficient use of facilities and resources” (Public Law 95–617, 92 Stat. 3117 at 3137).
Electricity and steam are valuable commodities to use on-site (industrial cogeneration) or to sell to the outside market: steam to industrials and power to utilities. But electric utilities self-produced power from their own facilities, which constituted the rate base upon which a rate of return could be applied. They had little or no incentive to buy electricity from an independent, where the cost could be passed through but no profit made. And rates and other terms were hardly generous given that a small power producer was negotiating against a monopsony utility buyer. For these and other reasons, there was little or no independent power sector (Hirsh, 81–82).
PURPA created an IPP (nonutility) market by requiring electric utilities to buy offered electricity from “qualifying facilities” (QFs) at an “avoided cost” as determined in state regulatory hearings. Avoided cost was defined as the foregone cost of the next best opportunity of the utility, whether it was building its own generation capacity or buying another generator’s surplus power. Cogenerated power fueled by natural gas or oil had to meet a minimum energy efficiency standard to qualify. And natural gas, because it was generally the cheaper of the two, became the fuel of choice for this technology.
Aside from cogeneration, the law sought to promote fuel diversity from smaller sources (under 80 megawatts per site), namely wind, solar, biomass, hydro, and resource recovery. As these smaller sources were qualifying facilities, utilities were also required to purchase from them at an avoided cost as well.
To be able to deliver the electricity, a QF could petition the FERC to issue a “wheeling order” whereby the utility had to provide transmission services over its wires, not only buy the power. A forced interconnection could even require the utility to expand the capacity of its line to take the power offered by the QF. At least in the generation sector (but not in the transmission sector, which remained monopolized), utilities had to step aside and make room for competition from IPPs.
PURPA Politics
PURPA added federal control to an industry that was heavily state-regulated. To an extent, the new intervention was the result of the distortions created by prior intervention: mal-incentives under cost-of-service, rate base regulation that increased rates. As one federal energy official concluded:
PURPA had won congressional favor as a result of a decade of poor economic and technical performance by traditional utility generators. Electric utilities’ cost overruns on construction of excess coal and nuclear generating capacity in the 1960s, consented to by their state public utility commissions (PUCs), had reached disastrous proportions in the 1970s.
“To address ratepayer discontent,” he concluded, “Congress enacted PURPA to open the door to non-utility construction of power plants, especially plants that cogenerated heat for industrial processes and electricity for local markets” (Stagliano, 120–21).
Federal price-and-allocation controls in the 1970s created the energy shortages that PURPA was intended to alleviate by “decreas[ing] reliance on scarce fossil fuels, such as oil and gas,” as well as promoting “the more efficient use of energy” (FERC, 45 Fed. Reg. 12214 at 12222 [1980]). Thus federal price-and-allocation regulation and state public-utility regulation formed the initiating intervention that led to further or consequent intervention—PURPA (Bradley, “Interventionist,” 302–304, 311–13).
PURPA did not emerge full blown from federal energy bureaucrats. It was fashioned by special interests, particularly existing and would-be providers of QF power. Solar, wind, biomass, and hydro interests were at the forefront. As two representations of the 48,000-member Solar Lobby testified before Congress in 1982, “The Solar Lobby has been involved in the development and implementation of Section 210 of PURPA since its inception” (PURPA, Stambler and Enfield, 371). One member was Solarex Corporation, an Amoco subsidiary, which in 1995 became 50 percent owned by Enron (with Amoco).
Environmentalists had a direct line to the political system through Charles Percy, (R-IL), a cofounder of the Alliance to Save Energy, who championed renewables as “the beginning of a new era in electric power production” (quoted in Hirsh, 83). Percy’s amendment reintroduced a previously deleted provision in the bill to include small renewables generation along with cogenerators (Hirsh, 83).
Specific input to the draft that became PURPA came from Wheelabrator-Frye Corporation, a waste-to-energy pioneer that was unable to reach a contract with a utility to purchase power (Hirsh, 83–84). Wheelabrator-Frye needed and desired a mandate when voluntary negotiation failed.
PURPA was opposed by the electric-utility industry, which naturally wanted to generate its own power from its profit-making rate base. At various points in the debate, individual utilities lambasted obligatory contracts with independent power providers as “an attempted power grab by Washington” and “an energy famine plan.” The hyperbole could get thick. “The very survival of the United States as a free nation is threatened by the administration’s so-called National Energy Act,” complained Mississippi Power & Light (Congressional Record–Senate, October 5, 1977, 32440). On the other hand, the Consumer Federation of America supported the law’s aim of creating an IPP market and urged mandatory wheeling, pooling, and interconnect provisions to make the law work (ibid., 32439).
But with other contentious issues in the multifaceted Energy Policy Act, the Edison Electric Institute (EEI) and other investor-owned utility groups did not focus their main guns on PURPA (Hirsh, 80–81). They woke up only when FERC’s implementing regulations strongly favored IPPs over utilities in the contract process (Hirsh, 89). One suit was filed in April 1979, only five months after PURPA took effect, and another lawsuit was filed in July 1980. One regulator testified before Congress in April 1982:
Although PURPA is now 3½ years old, the first generation of contracts between utilities and qualifying facilities are still being negotiated. The implications of utility-owned or utility-affiliated qualifying facilities must be even more a matter of speculation (PURPA, Butler).
FERC’s authority was upheld by the U.S. Supreme Court in June 1982 and May 1983 decisions, but the legal uncertainty stalled as many as 200–300 projects (Hirsh, 91–93).
IPP political entrepreneurs secured favorable long-term purchase contracts from utilities under PURPA. Explained one analyst:
The concept of avoided cost was sufficiently vague in the legislation as to be very liberally interpreted by rate setters in state proceedings. Over time, the costs avoided proved prohibitively burdensome to consumers, but PURPA provided the foundation for the subsequent restructuring of the electric industry (Stagliano, 38).
California would be at the forefront of the PURPA gold rush, with 9,412 MW of capacity built by 1990, 17 percent of the state’s total capacity additions in the 1980s (Hirsh, 93). The nascent windpower industry took off under PURPA subsidies, as well as state and federal tax breaks. Along with U.S. Windpower Company, Kenetech Corporation, and FloWind Corporation, a major new player in California’s wind industry was Zond Systems, which would be purchased by Enron in 1997.
Enron and PURPA
HNG, then HNG/InterNorth and later Enron, would become an important player in the cogeneration market beginning in 1984, a time when legal uncertainties began to moderate and the cogeneration boom was getting underway. By the early 1990s, nearly 500 PURPA-qualifying projects totaling 16,500 megawatts had been constructed in the United States (Stagliano, 121). Enron’s ownership interest was in the range of 800–1,200 megawatts, or 5 to 7 percent of the national total (John Wing, email communication to author, August 2, 2006).
Enron would re-enter this market in 1999 when it purchased Cogen Technologies Inc. (CTI), from Robert McNair. Founded in 1983 on the strength of PURPA contracting, CTI became the largest privately owned cogeneration company in the world, with aggregate capacity of 1,400 megawatts.
The term “deregulation” has been applied to PURPA-driven competition that challenged the monopoly electric utility industry. “When the industry was deregulated,” McNair said, “it made it easy for new people coming in. I recognized that the advantage is to the new entrant because they don’t have the overhead costs that had accumulated over the years, so you can go in lean and mean” (http://www.houstonhistory.com/whoswho/history30hof.htm).
But PURPA was not deregulation; it was a new federal statute strong-arming a regulated industry toward competition, with collateral damage. The law’s effect on electricity consumers was not necessarily positive, was even very negative, as future experience indicated (Baily). Only deregulation is deregulation; that is, the repeal of entry and exit restrictions, and rates set by seller/buyer negotiation.
1.6 InterNorth and Interstate Pipeline Deregulation
InterNorth CEO Sam Segnar’s view of the future of the natural gas industry, which he shared with Ken Lay in their Fall 1984 meeting at HNG in Houston, can be gleaned from an interview he gave two and a half years earlier in the Oil & Gas Journal, as well as in an April 1983 position paper by Northern Natural Gas Company (Northern Natural Gas Co., “Position Paper”). Segnar and Lay shared similar outlooks, even some personality traits, a generation apart. The difference was that Segnar was eyeing his exit from professional life, while Lay was envisioning his way to the top of the natural gas industry.
Segnar forecast the continued penetration of oil in natural gas markets, an “unregulated marketplace” by 1985 (mandatory open access), and the gas surplus continuing for at least several more years. “I had felt in 1980 that it would take 3–5 years to work through the so-called bubble, and I think I’d have to say that we’re still [in 1982] looking at 3–5 years,” he said (Wheatley, 329). Segnar also saw the future in gas purchase contracts tied to market conditions (“producer … but also buyer protection”) and greater emphasis on gas marketing (ibid). Describing himself as “idealistic,” Segnar saw the need for the industry to court public opinion in a time of rising retail gas rates (ibid.).
On the regulatory front, Northern Natural saw the advent of “a price competitive market” as reason to end “the rigid regulation embodied in the Natural Gas Act [of 1938]” (Proposed Changes, White, 199). As the company testified before Congress in 1983:
We believe the realities of the market are pushing the pipeline industry rapidly toward deregulation. As we continue toward that point, the concepts of a national natural gas pipeline grid system and contract carrier status become more feasible for the transmission segment of the industry (ibid.).
Northern Natural proposed to amend the NGA, replacing pre-implementation approval with post-implementation review. Specifically, it sought repeal of FERC’s Section 7 certification authority, which regulated entry and exit before the fact (ibid., 200). In effect, this would have largely restored the NGA to its original 1938 version, under which the regulator exercised rate regulation, but under which the pipelines had far greater flexibility to institute new services. Under such self-implementation authority, a pipeline could make any service change and be subject only to after-the-fact oversight, shifting the burden of proof from the pipeline to the complaining party. Thus, adversarial proceedings lasting up to two years would be ended (Northern Natural, “Proposal to Amend”).
Part of Northern’s “maximum service flexibility” proposal was to introduce incentive rates (a higher rate of return awarded for meeting a performance standard) and “rates based on true market value of the service provided” (“Proposal,” 2). However, the pipeline would still retain eminent domain rights, a government subsidy for the pipeline industry. Northern Natural’s partial deregulation proposal did not attract significant industry support, much less congressional action (INGAA, Natural Gas Legislation, 1179).
InterNorth was not philosophically opposed to regulation, however. In congressional testimony in October 1983, the company favored a federal bill proposing to regulate gas takes from producers based on “market demand” (Proposed Changes, Hancock, 285, 297). Northern Natural Pipeline (NNP) was in a surplus gas situation where it could not take all the gas it had under producer contracts, and such intervention would relieve it of take-or-pay liabilities.
Earlier in the same year, however, NNP testified against federal legislation to resolve take-or-pay contracts, preferring to continue with voluntary negotiations given its manageable problem relative to the competition (Natural Gas Contract Renegotiations, 397–99).
References for Chapter 1 Appendix
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Bradley, Robert, Jr. “The Distortions and Dynamics of Gas Regulation.” In New Horizons in Natural Gas Deregulation, edited by Jerry Ellig and Joseph Kalt, 1–29. Westport, CT: Praeger, 1996.
Bradley, Robert, Jr. Edison to Enron: Energy Markets and Political Strategies. Hoboken, NJ: John Wiley & Sons; Salem, MA: Scrivener Publishing, 2011.
Bradley, Robert, Jr. “Interventionist Dynamics in the U.S. Energy Industry.” In The Dynamics of Intervention: Regulation and Redistribution in the Mixed Economy, edited by Peter Kurrild-Klitgaard, 301–33. New York: Elsevier, 2005.
Bradley, Robert, Jr. Oil, Gas & Government: The U.S. Experience. Lanham, MD: Rowman & Littlefield, 1996.
Bradley, Robert, Jr. Reconsidering the Natural Gas Act, Southern Regulatory Policy Institute, Issue Paper No. 5, August 1991.
Broadman, Harry, and W. David Montgomery. Natural Gas Markets after Deregulation. Washington, DC: Resources for the Future, 1983.
Bryce, Robert. Pipe Dreams: Greed, Ego, and the Death of Enron. New York: PublicAffairs, 2002.
“Coastal’s Wyatt Slams FERC for ‘Producer Disincentives,’” Natural Gas Week, October 7, 1985, 4.
De Vany, Arthur, and W. David Walls. The Emerging New Order in Natural Gas: Markets versus Regulation. Westport, CT: Quorum Books, 1995.
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Ellig, Jerry, and Jack High. “Social Contracts and Pipe Dreams.” Contemporary Policy Issues 10, no. 1 (January 1992): 39–51.
Enron. 1990 Annual Report. Houston, TX: 1991.
Federal Energy Regulatory Commission. “Commission Approves Final Rule on Open Access to Natural Gas Pipelines,” Press release, Docket No. RM85-1, October 9, 1985. (Cited as FERC, “Commission Approves”).
Federal Energy Regulatory Commission’s Natural Gas Pipeline Regulation (FERC, 1983). Hearing before the Senate Committee on Energy and Natural Resources, 98th Cong., 1st sess., 1983 (Statement by George Lawrence), Part I, 887–927.
Federal Energy Regulatory Commission’s Natural Gas Pipeline Regulation. Hearing before the Subcommittee on Energy Regulation and Conservation, Senate Committee on Energy and Natural Resources, 99th Cong., 1st sess., 1985 (Statement by E. C. Broun), 149–56 (Cited as FERC, 1985, Broun).
______ Testimony of Dan Dienstbier, 263–75 (Cited as FERC, 1985, Dienstbier)..
______ Statement by Wendell Ford, 4 (Cited as FERC, 1985, Ford).
______ Statement by Thomas Hogan, 147–48 (Cited as FERC, 1985, Hogan).
______ Statement by Peter King, 175–97 (Cited as FERC, 1985, King).
______ Statement by Jan Vlcek, 410–24 (Cited as FERC, 1985, Vlcek).
FERC Contract Carriage Proposal. Hearings before the Subcommittee on Fossil and Synthetic Fuels, House Committee on Energy and Commerce, 99th Cong., 1st sess., 1985. (Statement by Raymond O’Connor), 7–27;
“FERC’s NOPR Draws Fire, Although End-Users Like It.” Natural Gas Week, July 15, 1985, 1, 5.
Gallick, Edward. Competition in the Natural Gas Pipeline Industry: An Economic Policy Analysis. Westport, CT: Praeger, 1993.
Grenier, Edward, Jr. “No Market-Based Rates for Koch Gateway,” Natural Gas 15, no. 4 (November 1998): 30–32 .
Hirsh, Richard. Power Loss: The Origins of Deregulation and Restructuring in the American Electric Utility System. Cambridge, MA: MIT Press, 2001.
Hogan, William. “The Boundaries between Regulation and Competition.” In Drawing the Line on Natural Gas Regulation, edited by Joseph Kalt and Frank Schuller, 69–85. New York: Quorum Books, 1987.
Kalt, Joseph. “Market Power and the Possibilities for Competition.” In Drawing the Line on Natural Gas Regulation, edited by Kalt and Frank Schuller, 89–121. New York: Quorum Books, 1987.
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Mack, Toni. “This Is Deregulation?” Forbes, January 2, 1984.
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McLean, Bethany, and Peter Elkind. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio, 2003.
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______. Statement of Jerome McGrath, vol. 2, 285–321. (Cited as Proposed Changes, McGrath).
______. Statement by Othol White, vol. 3, 199–211 (Cited as Proposed Changes, White).
Public Utility Regulatory Policies Act Amendments. Hearing before the Subcommittee on Energy Regulation, Senate Committee on Energy and Natural Resources, 97th Cong., 2nd sess. (1982) (Statement by C. M. Butler), 30–43. (Cited as PURPA, Butler).
______. Testimony of Barrett Stambler and Sam Enfield, 370–87. (Cited as PURPA, Stambler and Enfield).
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Tussing, Arlon, and Bob Tippee. The Natural Gas Industry: Evolution, Structure, and Economics. Tulsa, OK: PennWell, 1995.
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Vietor, Richard. “El Paso Natural Gas.” In Contrived Competition: Regulation and Deregulation in America, 91–166. Cambridge, MA: Harvard University Press, 1994.
Wheatley, Richard. “Cost Competitive Fuels Seen Eroding Natural Gas Markets,” Oil & Gas Journal, September 27, 1982, 329–30.
Williams, Bob. “Struggle Develops over Potential EOR Gas Market in California,” Oil & Gas Journal, August 26, 1985, 25–30.
Williams, Stephen. The Natural Gas Revolution of 1985. Washington, DC: American Enterprise Institute, 1985.
Willrich, Mason, et al. Administration of Energy Shortages: Natural Gas and Petroleum. Cambridge, MA: Ballinger, 1976.
Interviews
Doan, David. Interview by Robert Bradley Jr. Washington, DC, March 1, 2001.
Duncan, John. Interview by Robert Bradley Jr. Houston, TX, February 26, 2001.
Horton, Stan. Interview by Robert Bradley Jr. Houston, TX, February 21, 2001.
Lay, Ken. Interview by Robert Bradley Jr. Houston, TX, April 28, 2005.
Malloy, Ken. Interview by Robert Bradley Jr. Washington, DC, March 1, 2001.
Marston, Philip. Interview by Robert Bradley Jr. Washington, DC, March 1, 2001.
Seidl, Mick. Interviews by Robert Bradley Jr. Houston, TX, September–October 2006.
Walzel, Jim. Interview by Robert Bradley Jr. Houston, TX, March 14, 2006.