Edison to Enron: Energy Markets and Political Strategies
|
Book 2 Internet Appendices Chapter 9: Transco Energy Company
9.1 Politics and the Origins of Texas Eastern Transmission CorporationThe formation of Texas Eastern Transmission Corporation has interested historians because of the close political connection between the company’s principal organizers and President Lyndon Johnson. “A company established by Herman and George Brown, Texas Eastern Transmission,” Robert Caro wrote inThe Years of Lyndon Johnson: Master of the Senate, “was allowed to purchase the Big Inch and Little [Big] Inch—thanks to Lyndon Johnson’s intervention—for a cash investment of $143 million, a fraction of what it had cost to build them” (Caro: 247). The insinuation was that political cronyism was at work with the privatization of the War Emergency Pipelines by the War Assets Administration (WAA) in 1946. Caro’s critical interpretation of the purchase price is contradicted by historians Joseph Pratt and Christopher Castaneda. Their review of the “highly politicized” bid process (106) concluded: “Texas Eastern’s winning bid of $143,127,000 was only $2.5 million less than the Inch Lines’ original construction cost; and it was more than $12 million above the second highest bid, which had been submitted by a group representing the Transcontinental Gas Pipe Line Company. Tennessee Gas and Transmission’s bid was third highest at $123,700,000” (112). There was a good deal of political maneuvering that led to a WAA rebid, and the winning submission by Texas Eastern turned out to be very lucrative for the new owners, led by the Brown brothers. But the process and outcome were hardly sinister. While the full story may never be known, lobbying by and political help for Texas Eastern in the privatization process was mainly to undo (neutralize) special-interest political favoritism—namely, an initial requirement that the bidders continue to carry oil products, not convert the lines to carry natural gas. The highest and best use of the pipelines was transporting natural gas, not petroleum, as the second bid process confirmed. Thus a political counter-offensive was necessary to allow a level playing field for the bidders, which benefited taxpayers and energy users—although not rival fuel interests (coal in particular). In an interview in April 1962, historian Alan Dabney queried Ray Fish, who was very close to the pipeline players involved in the bid:
This is not to deny that the Brown brothers were politically connected, politically able entrepreneurs. They certainly were. Nor is it to say that Brown & Root did not opportunistically exploit a regulatory gap in the FPC regulation of interstate gas transmission by earning unregulated returns from a client that, under public-utility ratemaking, could pass through costs to captive consumers. Brown & Root did $1.3 billion of business with Texas Eastern between 1947 and 1984 in more than 80 separate projects (Castaneda and Pratt: 104). Regulators recognized the tie-in between Texas Eastern and Brown & Root and put the burden of proof on the former to show that their contracts were fair (104). Still, it was a very good situation for Brown & Root, even if Texas Eastern “walk(ed) a narrow line under the hostile eye of regulatory authorities” (105). The benefit went both ways: “Texas Eastern enjoyed the luxury of having a major construction company that would pay close attention to its special needs” (141). So the incentive was to do a good job, and even gold plate, yet avoid costs so high as to unsettle customers or alarm regulators. Texas Eastern needed its political muscle on another matter: securing an eminent-domain law to complete the funding of its winning bid. Insurance companies threatened to back out of the financing unless Texas Eastern received condemnation rights to ensure an economical expansion of its line to the nearby Philadelphia market. Pennsylvania did not have an eminent-domain law because of the strong coal lobby in the state, including obstructionist railroads whose rights-of-way were often in the path needed by the pipelines. So a federal statute became the way to go (Castaneda: 5, 103). Eminent domain rights allowed natural gas pipelines to use the powers of government to have private property condemned if voluntary negotiations failed to adequately lower rights-of-way costs and allow direct (less costly) routing to reach markets (Castaneda and Pratt, 68—70). The new law, a 1947 amendment to the Natural Gas Act of 1938, was a victory for Texas Eastern and the interstate gas industry and a defeat for coal interests. The quickly enacted statute reflected impressive lobbying, but Congress was also under pressure to wrap up the privatization and enact a measure that would reduce the cost of natural gas to distribution utilities and consumers (Bradley, 1996: 880—81). 9.2 FPC Curtailment PolicyThe vagaries of public-utility regulation protected Transco Companies between 1971 and 1977 when Transcontinental Gas Pipe Line (TGPL) could not honor its contractual obligations to deliver specified volumes of natural gas to local distribution companies (LDCs). Such firm (wholesale) customers paid a demand or standby charge in addition to a volumetric charge for gas actually received, unlike interruptiblecustomers who paid only for the gas received. LDCs were not assessed demand charges for the gas they did not receive in the current billing period. But these charges were accrued and added to the pipeline’s cost-of-service in the ensuing period in order to allow the pipeline to receive its full revenue requirement (defined as prudently incurred costs plus a “reasonable” return on invested capital). FPC policy did not find Transco’s gas purchases (or other costs) imprudent, which would have precluded such recovery. Transco explained the procedure in the back of an annual report:
The same practice continued with TGPL curtailments in 1975 (34 percent), 1976 (40 percent), and 1977 (46 percent). The accounts receivable for uncollected demand charges in 1977, for example, was $12.8 million (Transco 1975 Annual Report: 11; Transco 1977 Annual Report: 30). Thus, although the payment was delayed, residential and commercial customers behind the LDC paid for a service they did not get, thanks to FPC policies that created the shortage and then forced them to pay for it. 9.3 Jack Bowen as Political CapitalistPaul Samuelson, America’s foremost Keynesian economist, advocated an overarching role for government intervention to address the 1970s energy crisis. Amid the gasoline shortages of summer 1979, and on the premise of a “genuine scarcity” of oil going forward, the Nobel Prize–winner asked:
Jack Bowen was not an economist, but his engineering mind envisioned a similar role for government to manage the reins of supply and demand. Some of his preferred policies were market oriented, but many were not. In 1988, as chairman of Transco and first vice chairman of the United States Energy Association, Bowen wrote:
Bowen supported mandatory conservation measures, as well as a $0.50 per gallon increase in the gasoline tax to reduce oil usage. (The federal tax at the time was $0.091 per gallon, which had been increased in 1983 from $0.04 per gallon [Bradley, 1996: 1742–743]). As discussed in chapter 9 (343), Bowen also supported a federal Energy Mobilization Board to expedite large infrastructure projects. Bowen would agree with Samuelson’s wish not only to run the energy economy by price but also to, in part, “run it by command: rational allocations according to an informed plan” (Samuelson). 9.4 Reconstructing Markets under Natural Gas Price ControlsThe qualitative science of economics explains why government price controls create shortages if the price is set too low and surpluses if the price is set too high. Natural gas shortages during the winters of 1971/72 and 1976/77 were examples of artificially low prices discouraging supply and encouraging demand. The distortion was transparent because the unregulated intrastate market generated different prices and had enough gas supply to meet demand, quite unlike interstate markets. At times, intrastate prices were several times that of the capped interstate price (Bradley, 2009: 328). This dichotomy inspired Congress to enact the Natural Gas Policy Act of 1978 (NGPA) in order to equalize prices and supply in intrastate and interstate markets (Bradley, 1996: 1783). With political constraints blocking price deregulation to end the shortages, Transco and other interstate gas pipeline companies worked to circumvent regulation and/or introduce producer incentives through the back door. Pre-payments by interstates to drillers in return for a call on any found gas was one such device. Transco’s cutting-edge strategies were an efficient response given the regulation, but an unregulated situation would have wasted fewer resources. When gas shortages turned to a gas surplus, itself the result of long-standing government intervention creating market rigidities (Bradley, 1996: 444–47, 951–52), financially threatened Transco again got to work. Special marketing programs (SMPs), pioneered in Transco’s Ken Lay era, were attempts to recreate a market within regulatory constraints. “By giving our producers flexible options,” TGPL’s president Brian O’Neill stated, “we have made substantial progress toward establishing a free market, despite the absence of effective legislative relief” (quoted in Gray: 10). However, only price and entry deregulation can really establish a free market, in which mutually agreeable prices emerge between producers and consumers. Counteracting a regulated situation, in contrast, is “market-conforming,” at best. Transco’s SMPs were second-best strategies, a form of superfluous entrepreneurship, defined as profit-maximization under regulatory constraints (Bradley, 1996: 709; Bradley, 2005: 311). But given the regulation, Transco’s innovations were efficient compared to their absence. Such was also the case with the regulation-induced oil reseller boom. (Bradley, 2009: 260–62. 9.5 Ken Lay on Coal and Coal GasificationEnron’s Ken Lay became Mr. Natural Gas in the energy world, but during his Transco years he was very bullish on coal and Transco’s Great Plains Coal Gasification Project in particular. Lay was certainly more optimistic about coal than about natural gas from a reserve/production perspective. In Transco Companies’ 1981 3rd Quarter Report, Lay gave his perspective regarding coal and synthetic gas:
Lay was less bullish on natural gas than others in the gas industry. “Many people, particularly in the gas producing segment of our industry,” Lay said, “think we’re going to be able to find adequate domestic supplies of gas to meet our needs at prices which are much less than what it cost to make synthetic gas from coal. Obviously, we believe the odds of this occurring are low” (18). Lay and Transco pitched manufactured gas (coal gas) as a first-mover opportunity, a situation where the early adopter would reap extraordinary gains:
Government subsidies were necessary for synthetics, noted Lay.
Lay’s bullish view of coal and synthetic gas from coal were reiterated in Transco’s 1982 1st Quarter Report:
In Transco’s 1982 annual report, dated February 16, 1983, Jack Bowen and Lay stated:
Bowen and Lay reiterated their call for coal-based energy independence in Transco’s next annual report for 1983 (5). This would be Ken Lay’s last annual shareholders report at the company. He left not only Transco but also Transco’s troubled Great Plains project for Houston Natural Gas, where Lay would soon implement a pure natural gas strategy. Bibliography: Chapter 9 Internet Appendices Bowen, Jack. “50-cent Gasoline Tax Would Help,” Houston Chronicle, May 16, 1988, 11. Bradley, Robert. Capitalism at Work: Business, Government, and Energy. Salem, MA: M&M Scrivener Press, 2009. Bradley, Robert. Oil, Gas & Government: The U.S. Experience. Lanham, MD: Rowman & Littlefield, 1996. Bradley, Robert. “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—34. Special Issue of Advances in Austrian Economics 8 (2005). Caro, Robert. The Years of Lyndon Johnson: Master of the Senate. New York: Alfred A. Knopf, 2002. Castaneda, Christopher. Regulated Enterprise: Natural Gas Pipelines and Northeastern Markets, 1938—1954. Columbus: Ohio State University Press, 1993. Castaneda, Christopher, and Joe Pratt. From Texas to the East: A Strategic History of Texas Eastern Corporation. College Station: Texas A&M University Press, 1993. Fish, Ray. Interview by Alan Dabney, April 30, 1962, Tenneco, Inc., History Collection. Gray, Steve. “Forging a Fair Deal,” HotTap, July 1984, 8—11. Pratt, Joseph, and Christopher Castaneda. Builders: Herman and George Brown. College Station: Texas A&M University Press, 1999. Samuelson, Paul. “Tragicomedy of the Energy Crisis,” Newsweek, July 2, 1979, 62. Transco Companies. Quarter Report (1981—82). Transco Companies. Transco 1974 Annual Report. |
 |