Edison to Enron: Energy Markets & Political Strategies

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Book 2 Internet Appendices

Chapter 13: Robert Herring and After

13.1 Intrastate Regulation by the Texas Railroad Commission

Houston Pipe Line (HPL) and other intrastate natural-gas pipelines in Texas were not subject to public-utility regulation, whereby entry and exit were closely regulated, and rates were capped by a maximum amount of permitted revenue. (The so-called revenue requirement under public-utility regulation was the sum of allowed costs plus an assigned rate of return multiplied by the firm’s invested capital, or rate base.)

The Texas Railroad Commission (TRC) allowed negotiated rates between the seller and buyer at wholesale (the city gate) and retail (with electric utilities and industrial customers). Such light-handed regulation reflected gas-on-gas competition within the state, and no place was more competitive than South Texas where a spaghetti bowl of gathering lines and larger diameter lines connected wells to end users. Many producers had split-connect wells whereby two gathering lines were attached to gas purchasers (Lokey Interview: 8). Large gas users had multiple connects to be able to choose between rival suppliers. “Virtually 100 percent of our industrial customers had at least one other pipeline certainly, and then sometimes two,” one HPL veteran remembered (ibid.: 7).

The Cox Act of 1920, as amended, authorized the TRC to set rates but did not require the commission to employ heavy-handed, public-utility regulation (Ellig: 160). Regulation remained passive because of few complaints from producers or end users and opposition from the gas pipeline industry (an example of defensive politics within an environment of political capitalism).

The absence of cost-plus regulated ratemaking led HPL and other such companies to watch their costs and not “gold plate” their pipelines (Lokey Interview: 22—23). Extra profit, after all, accrued to the shareholders. Academic studies have found that such lighthanded regulation created a more efficient industry compared to interstate gas lines regulated by the Federal Energy Regulatory Commission (FERC). “The Texas system clearly demonstrates that utility-style certification requirements are not necessary to create orderly or efficient gas markets,” concluded economist Jerry Ellig. “Indeed, the interstate experience suggests that just the opposite may be the case” (Ellig: 166).

But regulation bit HNG hard in the 1960s when the TRC passed a rule allowing only 65 percent of increased gas costs to be passed through in affiliate sales—in this case the sale of gas by HPL to HNG’s distribution arm. As explained in chapter 13, HNG disintegrated by selling its distribution arm to Entex.

In the 1970s, a new threat to lighthanded regulation emerged in proposals to create a new public utility commission in Texas to regulate of natural gas, electricity, and telephones. For HNG, this meant an unpredictable replacement for the Texas Railroad Commission, which had regulated the same for 40 years (Foy: 1). “The worst thing the legislature could do would be to take a blunderbuss approach and create a situation where either a state commission would be overloaded and unable to function properly, or utilities would be deprived of the opportunity to maintain their credit and obtain the billions of dollars of new capital they will need in the future” (ibid.).

In any case, argued Foy,

The people of Texas should understand that the creation of a utility commission is unlikely to result in lower rates, unless it regulated in such a way as to stunt our state’s economic growth. A new commission will not produce a single new cubic foot of oil or gas reserves, or bring a single ton of coal into Texas, or simplify the building of a single new plant or transmission line.”

Leave well enough alone, in other words.

13.2 HNG and Federal Gas Regulation

Chapter 11 documented how Houston Natural Gas benefited from federal price ceilings on sales of wellhead natural gas. HNG happily accepted gas that otherwise would have gone interstate, thanks to federal price controls that did not apply to Texas gas consumed in the state. “During the 1970s,” reported the Carter Administration in 1979, “federal price controls on interstate gas had the effect of diverting up to 85 percent of new natural gas supplies to intrastate markets in which prices were increasing without restriction” (Carter: 123).

This price was almost always higher (although there were situations where a lesser price was taken to stay unregulated [Bradley, 1996a: 391]). Producers were also eager to sell to intrastates such as Houston Pipe Line so that they would not become federally regulated, thus avoiding the paperwork requirements and approval delays by the Federal Power Commission and, beginning in 1977, FERC (Bradley, 1996a: 401—403).

HPL, in a surplus gas position because of the intrastate advantage, made lucrative sales to gas-short interstate pipelines. It was a strange situation: producers could not sell to the interstate market and get a free market price, but intrastate pipelines could. So intrastates and their production affiliates made what nonaffiliated producers could not. This perverse wealth redistribution was a strange way to administratively implement the “just and reasonable” clause of the Natural Gas Act of 1938 for interstate consumers.

The Emergency Natural Gas Act of 1977 and FPC Rule 2.68 allowed HNG to sell more than 200 MMcf/d to United Gas Pipeline for interstate delivery, among other sales, while remaining exempt from federal regulation (HNG, “Remarks”: 4). Sales to interstate pipelines, made under special rules that kept HNG federally unregulated, allowed large profits, because HNG was buying some of its gas cheaply under its old “legacy contracts” and selling it at unregulated prices to desperate, gas-short interstates (Stram Interview: 9—10).

Large industrial gas users also relocated their plants to Texas to avoid the supply uncertainty that came with (regulated) interstate gas (Sanders: 99). Thus to an extent, more supply was joined by more gas demand for intrastates—and higher prices for them.

HNG was two-faced regarding the complex Natural Gas Policy Act of 1978 (NGPA). Herring told analysts in mid-1977: “We felt we could live with … wellhead price [regulation] for intrastate companies such as ours…. Now the idea that we’ve got to live with Federal controls from now on, including the regulation of our [exploration and production] operation, bothers us a great deal” (HNG, “Remarks”: 13).

The problem, as discussed in chapter 13, was that HPL’s high gas costs prevented it from aggressively bidding against interstate pipelines. The interstates, whose average price was kept down by price-controlled gas, could pay top prices, even record prices, and pass through the cost to a customer base that was primarily made up of price-insensitive residential and commercial users. This was particularly true for interstates serving the cold-weather regions such as the Northeast (Transcontinental Pipe Line, Texas Eastern Transmission, and Tennessee Gas Transmission).

HNG lost its regulatory advantage when the NGPA equalized wellhead regulation for all gas producers, intrastate and interstate. But Section 311 of the NGPA allowed intrastate pipelines to continue to sell or transport gas for interstate carriers without becoming federally regulated. More than 50 such Section 311 transactions were made on HPL from March 1979 through October 1981 (Natural Gas Policy Hearings, 1982: 330). Profitable HNG sales to interstates continued into 1982 (Shook).

After the passage of the NGPA, HNG continued to favor wellhead deregulation but only with a long phase-out. In the early 1980s, company executives saw the gas surplus (or “bubble”) continuing for two or three years, so the recommended phaseout period was the same (Natural Gas Legislation Hearings, 1983: 513; HNG, 1983 Annual Report: 3).

The decade of regulatory benefit that accrued to Houston Natural Gas did not impart any modesty towardrent-seeking, or business using government to advance a profit-seeking investment (see Epilogue of Edison to Enron, 515—19). HNG did not like the legacy advantage of interstate pipelines relative to itself, no matter how much advantage it might have enjoyed prior to the NGPA. HNG now advocated strict federal regulation of interstate pipelines or marketers selling short-term gas in the intrastate market (“off-system sales”). The president of Houston Pipe Line, Jim Walzel, testified in 1983:

Off system sales by interstate pipeline companies to end users served by intrastate pipeline companies or brokers for end users should be at prices reflecting new gas replacement costs until all first sale gas prices are decontrolled and should be prohibited unless intrastate suppliers are not ready, willing and able to supply such gas requirements or unless the interstate pipeline companies obtain FERC authorization for long term commitments with a curtailment priority consistent with similar sales on the interstate pipeline’s system (Natural Gas Legislation Hearings, 1983: 514).

This position also reflected the distortion of federal price controls on gas that was located in the same area as HPL gas. HPL had “favored nations” clauses whereby it was obligated to pay higher rates should neighboring gas prices rise. Walzel explained:

As long as government regulation established some wellhead prices but not others, or has many pricing levels not related to market clearing prices, Houston Pipe Line will continue to have difficulty with contractual price redetermination provisions and with purchasing adequate supplies of gas at market clearing levels, and renegotiation of these contractual provisions by Houston Pipe Line with producers will not occur unless Houston Pipe Line can offer equal value for the price relief sought (Natural Gas Legislation Hearings, 1983: 511).

The distortions created by prior regulation created demand for subsequent regulation—an interventionist dynamic well known to political economists (Bradley, 1996b).

13.3 HNG: Transitioning from Natural Gas to Coal

Houston Natural Gas (HNG) CEO Robert Herring expected coal and coal gasification to increasingly replace depleting natural gas. In 1967, he told the Houston Chapter of the American Petroleum Institute: “We must explore the field of synthetic pipeline gas and supplemental natural gas” (1967: 2).

A year later, Herring fretted about natural gas supply in Harold Hotelling-like terms: “As we drill deeper and go offshore, the higher costs will require a greater wellhead price or the industry cannot continue” (“Price of Natural Gas to Escalate, Says Houstonian”). Herring expected gasified coal to be supplying Houston Pipe Line “within 10 years” (ibid). Such gasification required oxygen, one reason why Herring was bullish about Liquid Carbonic Corporation, purchased by HNG in early 1969 (HNG, 1971 Annual Report: 5).

In the same year (1968), Herring excitingly looked to shale oil as another energy supplement (9). Coal, too, could back out oil imports (Herring, 1979: 5) Herring was partial to nuclear too to help energy ends to meet (Herring, 1980: 3).

In early 1971, Herring called coal gasification “the real answer” to the nation’s natural-gas-supply problem (Collins). Herring demoted liquefied natural gas (LNG) imports as a “supplementary source” (ibid.). He considered El Paso Natural Gas Company’s LNG strategy as too capital intensive and uncertain at the source (foreign gas field). (El Paso’s project also required government support [Bradley, 1996a: 1007]).

Herring’s alternative to LNG was methanol (wood alcohol), which would be made from flared natural gas from the Middle East. Their gas surplus, estimated to be as much as 7 Bcf/d (Foy Interview: 20), would be shipped to the Gulf Coast and East Coast for use in power plants and industrial boilers in place of natural gas. Herring made twelve trips to Saudi Arabia in three years, proposing a fifty-fifty partnership with the Kingdom for a $150 million methanol plant (”Texas Isn’t Big Enough for HNG’s Herring:” 103).

The venture never materialized. Remembered Joe Foy: “I made several trips to Saudi Arabia but finally gave up because every time we would meet with them, they would have a different proposition. I finally advised Bob Herring: ‘Let’s just forget about it’” (Foy: 21; Foy to author, November 1, 2006).

Herring’s purchase of two coal companies, Zeigler Coal Company in 1973 and Empire Energy Corporation in 1976, was indicative of where he saw energy markets going. Herring stated at a meeting of stock analysts: “Properly handled under free market conditions, we’ve got enough [natural] gas for many years to come” (HNG, “Remarks”: 13). “Properly handled” meant using gas in certain markets and not others.

In the same meeting, president and COO Joe Foy commented, “We are entirely in sympathy with the national movement toward coal as a basic national industrial fuel” (HNG, “Remarks”: 5). Herring himself took it as a fait accompli that “the gradual elimination of natural gas as a boiler fuel, through either market price incentives or taxation, will ultimately affect a substantial part of our current natural gas sales to electric utilities and industries” (HNG, “Remarks”: 2).

Major Texas customers such as Amoco, Dow Chemical, Monsanto, and Union Carbide were making plans to switch their boilers from natural gas to coal (“The Black-Tie Executive”: 36). So was Houston Power & Light, whose turn to nuclear and coal/lignite began with interstate gas shortages in 1971 (Beck: chapter 28).

HNG certainly did not oppose the Powerplant and Industrial Fuel Use Act of 1978 (Fuel Use Act), a federal law premised on the increasing scarcity of natural gas. Seeking to preserve supply for the residential and commercial market, the law limited existing plants to their current gas usage and banned new plants from burning natural gas or oil (Bradley, 1996a: 940, 1267).

Coal was to serve the boiler-fuel market, and HNG had plenty of coal to sell. With its purchase of Pott Industries in mid-1977 and Alamo Barge three years later, both with enlarged fleets from liberal government subsidies under Title XI of the Merchant Marine Act, HNG also had plenty of marine services transporting coal. The Fuel Use Act was perceived as profit-maximizing for the corporation even after calculating the earnings loss on HPL’s side (Foy to author, November 1, 2006).

Herring’s vision of a transition from natural gas to coal did not wane in his final years. “The big impact for our [company’s] future is going to have to be coal,” he told the Los Angeles Times in early 1980 (Flanigan: 13). Herring had an ally in the brother of HNG board member John Duncan, Charles Duncan, who became Secretary of the Department of Energy in the Carter administration. “[Charles] Duncan and [Environmental Protection Agency Administrator Douglas] Castle have obviously got together and agreed that we’ve got to go back to coal for power generation,” Herring added (ibid.).

Herring’s final coal plays came in 1980. One was the formation of HNG Synfuels, created around a $3.26 million grant from the U.S. Department of Energy to HNG and Texaco, Inc. Each company put in $500,000 of stockholder money to study the feasibility of turning Zeigler coal into gas and methanol (HNG, 1980 Annual Report, 3). This investment ended short of commercialization, one of the “supplemental-gas boondoggles of the 1970s” (Tussing and Tippee: 156).

Herring’s second play was a $35 million investment in a coal-loading facility on the Mississippi River. The 15 million ton per year facility would never operate at more than a small fraction of its capacity (Flanigan: 13).

Herring foresaw Zeigler’s coal traveling on HNG-owned ships to power plants that converted to coal from gas pursuant to federal law. He went so far as to offer a bundled product of Zeigler coal and Pott transportation, selling both at one price (Foy: 15). This integrated strategy, which Joe Foy opposed from the beginning, was problematic. The market had too many alternatives and could choose à la carte (an unbundled approach).

Beginning in 1981 (the year Herring died), coal became a perennial money-loser for HNG. This led to a decision in March 1984 to dispose of the coal and marine assets, which Ken Lay executed after he became the new CEO of HNG in June 1984. This was just the beginning of Lay’s natural gas strategy, which included a strong gas-for-coal marketing component.

Politically, Lay worked with gas interests to repeal the Fuel Use Act, which was largely accomplished in 1987. At the same time, Enron entered into long-term gas contracts to displace electricity (coal-by-wire) purchased from out of the state (in the Florida market) and forestall the construction of new coal plants in markets around the country. In all, Lay became the nation’s leading voice for natural gas from the mid-1980s through the 1990s.

13.4 HNG and High-Sulfur Coal

HNG purchased two coal companies, Zeigler Coal in 1974 and Empire Energy in 1976. About the same time, surging coal usage made increased sulphur dioxide emissions a national issue. Debate began in 1975 to amend the Clean Air Act of 1970 to address the issue.

Joe Foy, president and COO of Houston Natural Gas, shared the end result to the New York Society of Security Analysts on the eve of enactment of the Clean Air Act Amendments of 1977, which would require installing scrubbers at coal-burning plants regardless of the sulfur content of the coal being burned:

The 11 million tons per year [for anticipated HNG coal production in 1980] is basically an Illinois and Kentucky figure, it is all from underground mines, and it is all relatively high sulphur coal, in the range of 2% and 3%. If the Carter energy program is adopted in its present form, because of the best available control technology requirements, Middle West and Eastern high sulphur coal will have a competitive position equal to low sulphur Western coal (HNG, “Remarks”: 17).

Empire Energy had western coal (Colorado) that was low-sulfur, but that accounted for 10 percent of the company total, and Empire was sold to Amoco Minerals Company in early 1980 (HNG, 1980 Annual Report: 32). HNG’s participation in a plan to transport coal via a coal slurry pipeline from Colorado and Utah to Texas—the $2 billion Energy Transportation Systems, Inc., (ETSI) project—would have involved low-sulfur coal. But the project was terminated in part because eminent domain rights were not received in Colorado as in Texas.

13.5 Joanne King Herring

Robert Herring’s first wife, Sylvia, whom he met in Australia during World War II and married shortly after Germany’s surrender, died tragically in a swimming pool accident in 1971, just two days after their twenty-sixth wedding anniversary. Two years later, Joanne King, a local television personality, divorced the man she had married during her sophomore (and last) year at the University of Texas at Austin. Two years after her divorce, Robert and Joanne went out on a date and soon became engaged. Their honeymoon was spent in Saudi Arabia.

Sylvia was lovely, intelligent, and an inspiration to Robert in her own way. She was active in civic projects but assiduously stayed out of the corporate spotlight. Robert and Sylvia had three children and were very devoted to each other.

Joanne was intelligent, extraordinarily attractive, vivacious, worldly, and passionate about her causes. She always wanted to make a difference. Her new cause was helping Houston Natural Gas in her role as the CEO’s wife. Robert was appreciative of Joanne as wife and worker.

Robert Herring summarized Joanne’s impact on HNG business:

We were not getting the representation in Washington that I wanted from our lobbying organizations. Joanne turned all that around with her first dinner party. She gets people to talk, to relax, to enjoy themselves. One of the statesmen turned to me after he met her and said, ‘Bob, what do you mean, bringing a secret weapon like Joanne to Washington?’” (quoted in Maurice: 4-4).

Joanne remembered:

When I was married to Bob Herring, we entertained for business. We tried to mix people who would not necessarily have come in contact with each other. A party is a neutral ground. When you go to somebody’s office, one person is seated behind a desk. The other is a supplicant, so to speak. What happens at a party is that people can come up and talk to each other. Nothing they say is binding. It is totally unofficial. Bob Herring used to do more business at parties in two minutes than he ever did at offices (quoted in Sheehy: 59).

Knowing the public-policy rationale behind the issues was requisite, Joanne continued,

So, on the airplane going up to Washington, Bob would brief me and then, that night, I would give my little spiel to whomever—the senator or the ambassador or the secretary or whoever it was I was seated next to. It might be energy regulators such as James Schlesinger or William Simon, or Democrats such as John Dingell and Republicans such as Jacob Javits (J. Herring interview: 9; Joanne King Herring communication to the author, March 29, 2006).

Joanne received a crash course in the natural gas industry. And when she did not understand the rationale for a policy decision, she challenged Robert to explain and justify it. That way, she was able to make a case for a public policy in a nonparochial way (J. Herring interview: 10).

Averaging a Washington trip every ten days during one stretch in 1978, the Herrings developed a can-do reputation. “A Houston hostess, oddly enough,” wrote the Washington Star social columnist in 1978, “is causing more social activity in the capital than almost anyone on the local scene” (Beale). The Herrings came to Washington at least once a month, and twice a month during busy legislative times (Quinn, 1978a: F2).

Joanne’s skill was once described as being able to “turn a talk with kings and queens into a chummy chat between next-door neighbors” (“Her Name Is Joanne”). Her skill was honed during fifteen years (1959—75) as the host of the noontime Joanne King Show on television. “Houston’s First Lady of TV” (Hodges: 5)—who took the chair of another well-known local television personality, Ron Stone—became very learned as she tackled a variety of issues. With a 50 percent share of the local market, and the sixth largest such program in the country, Joanne was able to attract such guests as George H.W. Bush, King Juan Carlos, John Connally, Francisco Franco, Billy Graham, and John Tower. It was a five-day-a-week, twelve-hour-a-day job, but one that satisfied her social side and her interest in people and events. After marrying Robert Herring, her travel and entertaining schedule did not permit her to continue the show.

Joanne did not see herself as a socialite. She emphasized the practical nature of her parties and did not hide the fact that this was good business too.

I am so thrilled when somebody talks business because that’s why we have parties. You know Bob is in 28 countries and these things are necessary. When someone makes a deal, I’m delighted. And when Bob makes a deal, I’m even more delighted.

She added,

I don’t consider myself a social person. I really don’t think Houston is a social town. It’s much more a town where people want to accomplish something (quoted in Hodge: 3AA).

Joanne King Herring’s Washington work and legendary Houston parties—where guests were instructed to change chairs after each course and sit next to someone new, and where a surprise celebrity guest would sometimes be announced—was just another chapter in her activity-filled life. She held numerous board memberships in the Houston arts community and passionately advocated capitalism over totalitarianism. “I want badly to export free enterprise,” Joanne once said. “If we don’t export free enterprise, then we can’t blame third world countries for listening to other voices” (quoted in Sheehy: 64).

Joanne developed a conservative, free-market worldview as a teenager and learned business by working at a large real estate company owned by her first husband. She never ran for public office, but politics was always of great interest to her. Shortly after Robert Herring’s death, Joanne was lifted from depression by a Texas congressman she met and dated, Charlie Wilson. Joanne interested him in the plight of the Afghan rebels fighting the Russian invaders. This was the beginning of events that climaxed with a covert CIA operation, the story chronicled in the book and movie Charlie Wilson’s War (Crile: chap. 4).

Most recently, a biography of her life, Diplomacy and Diamonds: My Wars from the Ballroom to the Battlefield (New York: Center Street: 2011) was published.

13.6 Robert Herring: Civic and Professional Associations and Awards

Robert Herring, a Houstonian for the last 32 years of his life, led a very active civic life. A high-profile, socially inclined CEO was part of the job description for a gas distribution company with hundreds of thousands of customers, but Herring did not slow down after that part of HNG was sold to Entex in 1976. Moreover, “Dad worked hard for everybody,” Diane Herring recalled. “And he was not just a figurehead on all the boards he sat on” (Diane Herring).

A summary of Herring’s extracurricular activities and honors follow.

Houston Civic Activity
President, Texas Heart Institute (1967–81)
President, Houston Chamber of Commerce (1970)
Director, Houston Chamber of Commerce
Director, Houston Symphony (1968—81)
Trustee, Ray C. Fish Foundation (1967—81)

National Civic Activity
Director, Salvation Army
Director, Boy Scouts of America
Director, Institute of International Relations
Board of Visitors, U.S. Air Force Academy

Medical Associations
Executive Committee, Medical Research Foundation of Texas (1966)
Chairman, Texas Heart Institute
Director, Texas Medical Center
Director, Family Service Center
Trustee, St. Luke’s Episcopal Hospital

Education Associations
Trustee, Rice University Board of Governors (1972—81)
Chairman, Rice University Board of Trustees (1981)
Trustee, University of Houston Foundation

Industry Associations
Director, American Gas Association
Director, Texas Midcontinent Oil and Gas Association
Director, Independent Petroleum Association of America
Trustee, Institute of Gas Technology
Director, Energy Research & Education Foundation

Business Directorships
Director, Cameron Iron Works
Director, Proler Steel Corporation (Proler International)
Director, Prudential Insurance Company of America
Director, Rio Grande Industries, Inc.
Director, Southern National Bank
Director, Texas Commerce Bank—Houston (1970—81)
Founding Director, Texas Commerce Bancshares, Inc. (1971—81)

Awards & Honors
Gold Good Citizenship Medal, Sons of the American Revolution, Houston Chapter
Top Ten Chief Executives of the Year, Financial World (1981)
Distinguished Alumnus, Texas A&M University (1974)
Distinguished Alumnus, Tarleton College (1970)
Houston Cultural Leaders of the Year (1980, with Joanne Herring)
Gold Medal for Distinguished Service, Rice University (1981)
United States Treasury Medal of Merit
“Outstanding Service to Mankind,” Leukemia Society of America, Gulf Coast Chapter (1981)
Dedication, Robert R. Herring Professorship in Clinical Research, M.D. Anderson Cancer Center (1980)
Dedication of Herring Hall, Rice University (1984)

Other
President, River Oaks Country Club (1967)

13.7 HNG as a “Fortune 500” Company

The Fortune magazine listing of the top 500 U.S.-based companies in terms of annual revenue began in 1993. Prior to that, different categories of company were ranked separately, not in one list.

HNG’s revenue in fiscal-year 1981 was $2.9 billion, which in Fortune’s 1982 listing of the top 500 Industrial Corporations would place the company around 145 (issue of July 12, 1982). This is imputed, not actual, however, because HNG was not classified as an industrial corporation. Instead, HNG was in Fortune’s listings of services companies, which at that time were broken down into eight lists of 50 companies each: Diversified Service, Commercial Banks, Savings Institutions, Life Insurance, Diversified Financial, Retailing, Transportation, and Utilities.

Several of these, including Utilities, were ranked by assets, and several of them did not list sales or revenues. Since the Fortune 500 (industrials) is ranked by revenue, it is thus impossible to re-create a unified past list by revenue without researching the revenues of the companies listed and unlisted.

HNG was not on the asset-ranked list of the Top 50 Utilities. And while only 20 of the 50 utilities that were on the list had revenues larger than HNG, there could have been unlisted utilities with revenues larger than that of HNG. (One of the 20 that exceeded HNG was number 50, Enserch, and others below the 50 cutoff might also have exceeded it.)

Had the Fortune 500 of 1982 ranked all American companies by revenue (as it does now), HNG would have been at roughly the same level as such well-known corporations as Merck, Campbell Soup, Levi Strauss, and Kimberly-Clark. Thus it is a mischaracterization that Houston Natural Gas Company was a backwater energy company that Ken Lay transformed into something much bigger is typified by this statement: ““Enron began life in 1985 as a sleepy Houston utility that dealt almost exclusively with natural gas” (Fusaro and Miller: xi).

13.8 Robert Herring and Ken Lay: Parallels

Robert Herring can be compared and contrasted with Ken Lay in several ways. In addition to Lay’s becoming CEO of HNG in 1984, Ken and Linda Lay purchased Herring’s last residence, 3195 Inwood Drive.

Local and state politics occupied Herring’s attention as it did Ken Lay’s. At the request of Harris County Judge Jon Lindsay, Herring headed a committee supporting a $150 million bond issue. As chairman of the (misleadingly named) Tax Limitation Committee at the time of his death, he worked the mayor’s office to defeat a tax limitation bond issue (“Civic Leader …”: 1). This pragmatism toward the tax base needed for more city services was akin to Lay’s support for taxpayer-financed sports stadiums and downtown redevelopment.

Herring worked closely with Texas Senator John Tower and was head of the Houston campaign of Nixon for President. But there would never be an issue of the size of taxpayer funding of sports stadiums. Neither would there be a Houston-based opportunity as big as the 1990 Economic Summit, of which Ken Lay was co-chair. The gathering of the heads of the industrialized nations utilized, among other places, the Kirby Mansion in downtown Houston and Herring Hall at Rice University (Economic Summit: 73, 80).

Robert Herring had an economics background, although he did not have an advanced degree in the subject as did Lay. Still, Herring was a master of industry facts and understood causal economic relations every bit as well as Ken Lay, who was widely respected for his knowledge of energy data. Lay’s grasp of industry minutiae began to slip, however, as Enron morphed, unsuccessfully, from an energy company into a water, broadband, and commodities company.

Even amid an energy boom, Herring knew the limits of his company. When asked by stock analysts in 1977 why HNG was not spending more capital on exploration and production, an area where the company was showing great success, Herring responded: “I wish we could believe that we could spend $150 million a year [versus $50 million budgeted] and have the same good results. When you start exceeding the capacity of your organization, you begin to reduce the kind of results you normally obtain. We’re very conscious of this point” (HNG, “Remarks”: 14).

Herring was a risk taker, particularly when he was on his own with Ray Fish. “I told my partner once I would have to work for 72 years giving half of my salary to pay the borrowed money back if I lost on one deal,” he said. To which Ray Fish responded, “Don’t lose.” (Quinn, 1978a: F3). But with hard assets backing up debt, there was a backstop, something that Lay and Enron forgot with their intellectual-capital-intensive company.

Ken Lay had few hobbies. He did not have time, given his superhuman effort to make Enron (chronologically, in terms of his visions) the leading natural gas company in North America, the world’s first natural gas major, the world’s leading energy company, and the world’s leading company. He certainly exercised physically with the idea of being more productive and alert and living longer. He played tennis in his younger days and played some golf around business. But spare time was devoted to his growing family, not to personal endeavors such as art or an intellectual pursuit.

Robert Herring was more multi-faceted. As described by his daughter Diane, Robert “loved his family and friends, travel, reading, cross-words, cooking, golf, his pecan trees, photography, architecture (he designed two of our homes), and sculpting” (Diane Herring). He was also not particularly materialistic and actually underpaid himself as head of HNG, which was a problem because his salary limited the salaries beneath him (Communication from Joe Foy, November 7, 2006). “Bob doesn’t care a lot about money,” Joanne once said. “He doesn’t want much for himself. It’s impossible to buy him Christmas presents” (quoted in Quinn, 1978b: C2).

Diane Herring compared her father with Lay as follows: “Looking for things Ken Lay and Bob Herring have in common I found three: humble origins, aggressiveness, and an unwillingness to turn over the reins when it was time” (Herring, D., letter to author, January 18, 2002: 2). Her letter, written just weeks after Enron’s bankruptcy, protested the media’s characterization of HNG as “an ‘obscure,’ ‘old pipeline company,’ ‘a utility’.” She added (ibid: 1—2):

What’s happened at Enron would have been simply unthinkable twenty years ago. And its rank-and-yank culture, with no regard for fellow employees, or for shareholders. The well-being and esteem of one’s colleagues and of the community used to be the highest value, not money or power….

Someone at Enron was quoted as saying, “Hard assets are a liability.” Ironic that at the end, it was a hard asset Enron was scrambling to hold on to (the InterNorth pipeline). Is ethics dying with our parents’ generation? Do we have to legislate it? What a sad day.

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Economic Summit of Industrialized Nations, The Economic Summit: A Pictorial History of the Economic Summit of Industrialized Nations, 1975—1990. Houston: Thomasson-Grant, 1990.

Ellig, Jerry. “Intrastate Pipeline Regulation: Lessons from the Texas Experience.” In New Horizons in Natural Gas Regulation, edited by Ellig and Joseph Kalt, 159—73. Westport, CT: Praeger, 1996.

Flanigan, James. “There Will Be Plenty of Natural Gas if It’s Used Wisely, Energy Expert Says.” Los Angeles Times, January 8, 1980, sec. IV: 1, 13.

Foy, Joe. Memorandum to the Texas Associated Press Managing Editors Association (March 21, 1975). Woodson Research Center, Fondren Library, Rice University. Robert Ray Herring Speeches, 1957—1980, M 395. Series I, Folder 43.

Fortune, July 12, 1982.

Fusaro, Peter and Miller, Ross. What Went Wrong at Enron. Hobokin, NJ: John Wiley & Sons, 2002.

“Her Name is Joanne.” Houston Post, May 15, 1978, 1B.

Herring, Diane. Letter, note, and materials to Rob Bradley, January 18, 2002. Copy in author’s files.

Herring, Robert. “Remarks before the American Petroleum Institute, Houston Chapter” (May 2, 1967). Woodson Research Center, Fondren Library, Series I, Folder 4.

Herring, Robert. “Speech to the Natural Gas Processors Association” (March 20, 1968). Woodson Research Center, Fondren Library, Rice University. Robert Ray Herring Speeches, 1957—1980, MS 395. Series I, Folder 5.

Herring, Robert. “Address to the Downtown Kiwanis Club” (May 2, 1979). Woodson Research Center, Fondren Library, Rice University. Robert Ray Herring Speeches, 1957—1980, MS 395. Series I, Folder 36.

Herring, Robert. “Synthetic Fuel and the Southwest” (October 28, 1980). Woodson Research Center, Fondren Library, Rice University. Robert Ray Herring Speeches, 1957—1980, MS 395. Series I, Folder 40.

Hodge, Shelby. “At Home: Joanne King Herring.” Houston Post, August 11, 1979, 1AA, 3AA.

Hodges, Ann, “Houston’s First Lady of TV Quitting Daily Show.” Houston Chronicle, August 5, 1975, sec. 6: 5.

Houston Natural Gas Corporation. Annual Reports, various years.

Houston Natural Gas Corporation, “Remarks before the New York Society of Security Analysts,” July 20, 1977. (HNG, “Remarks.”)

Maurice, Beverly. “The Bob Herrings: Constant Hosts Have Charity Event Formula: Food, Fun, and Fast.”Houston Chronicle, December 5, 1979, sec. 4: 1, 4.

Natural Gas Legislation, Hearings before the Committee on Energy and Natural Resources, United States Senate, 98th Cong., 1st sess., 1983 (Statement of James V. Walzel, President, Houston Pipe Line Co.), 491—519. Cited as Natural Gas Hearings, 1983.

Natural Gas Policy and Regulatory Issues, Hearings before the Committee on Energy and Natural Resources, United States Senate, 97th Cong., 2nd sess., 1982 (Statement of James V. Walzel, President, Houston Pipe Line Co.), 321—49. Cited as Natural Gas Hearings, 1982.

“Price of Natural Gas to Escalate, Says Houstonian.” Houston Chronicle, March 20, 1968, sec. 4: 3.

Quinn, Sally. “Blond Bombshell from the Texas Boom Town.” Washington Post, December 17, 1978, F1—F3 (Quinn, 1978a).

Quinn, Sally. “The Glamorous Consul: Joanne Herring Lending Glitter to Third-World Politics.” Washington Post, December 18, 1978, C1—C2 (Quinn, 1978b).

Sanders, M. Elizabeth. The Regulation of Natural Gas: Policy and Politics. Philadelphia: Temple University Press, 1981.

Sheehy, Sandy. Texas Big Rich. New York: William Morrow and Company, 1990.

Shook, Barbara. “NGPA Created More Problems than It Solved, Gas Execs Say.” Houston Chronicle, May 16, 1982, sec. 10: 4.

“Texas Isn’t Big Enough for HNG’s Herring.” Business Week, May 12, 1975, 103—04.

Tussing, Arlon, and Bob Tippee. The Natural Gas Industry: Evolution, Structure, Performance. Tulsa: PennWell, 1995.

Interviews (copies in author’s file)

Duncan, John. Interview with Robert L. Bradley Jr., Houston, Texas, February 26, 2001.

Foy, Joe. Interview with Robert L. Bradley Jr., Houston, Texas, May 28, 2003.

Herring, Joanne. Interview with Robert L. Bradley Jr., Houston, Texas, May 5, 2003.

Lokey, Teb. Interview with Robert L. Bradley Jr., Houston, Texas, February 1, 2001.

Stram, Bruce. Interview with Robert L. Bradley Jr., Houston, Texas, May 3, 2001.

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