Steffy: Competition is history’s solution to natural gas prices

CenterPoint Energy and the city are squaring off over claims that the company is overcharging some natural gas customers by more than $15 million a year.

The two sides will likely settle before the dispute goes much further, but the allegations of overcharging raise questions of whether the city should have a single gas supplier, and a chapter from Houston’s own history may provide the answer.

These days, the city awards a franchise to one company, CenterPoint. But it wasn’t always that way. In the early part of the last century, Houston was one of the few major U.S. cities that had more than one gas company.

“Competition did happen, and rates went down about 20 percent,” said Rob Bradley, chief executive and founder of the Houston-based Institute for Energy Research, whose book, “From Edison to Enron: Energy Markets and Political Strategies,” details what happened.

In the 1920s, natural gas as a residential fuel was just taking hold, and the city awarded a franchise to the Houston Gas & Fuel Co. Just months later, the company used its monopoly status to raise rates, with the city’s blessing, by 28 percent.

Meanwhile, the discovery of a natural gas field in South Texas prompted another company, Houston Oil Company of Texas, to get into the gas business.

Houston Oil had been founded in 1901 by John Henry Kirby, of Kirby Drive fame, and it was among the city’s most prominent companies. After a bitter boardroom dispute – four of the company’s 13 directors resigned in protest – it decided to build a pipeline from South Texas to Houston to transport its new-found gas. There was a catch: It had no agreement from the city to distribute the gas to homes and businesses.

As a result, it wound up with a $3.6 million gas line that dead-ended at the city limits. So the company built a network of lines around the city and began serving what were then outlying suburbs, such as Bellaire, River Oaks, Pasadena and West University Place.

Charging less

In 1927, Houston Oil’s newly formed Houston Natural Gas unit petitioned for a competing franchise in Houston, offering to sell gas at the same rate as in the suburbs – as little as 50 cents per thousand cubic feet. In Houston, Houston Gas & Fuel charged as much as 80 cents.

“Houston Natural Gas was charging a cheaper rate in the suburbs, and they wanted to charge a cheaper rate in Houston,” Bradley said.

The offer pitted the city council against many Houstonians, who preferred cooking with the fuel and opposed the rate increase.

Then, Chronicle “Our City” columnist M.E. “Mefo” Foster joined the fray. He opposed the idea of a gas monopoly and addressed a column to Mayor Oscar Holcombe:

“Why not do something to bring to the city that fuel that will add factories, that will mean more labor employed and millions of more dollars spent here?”

Eventually, the city council rescinded Houston Gas & Fuel’s rate increase and let the two companies compete for decades. Houston Gas & Fuel later became Entex and bought Houston Natural Gas’s pipeline system before ultimately becoming part of what’s now CenterPoint.

Meanwhile, in the 1980s, under rising-star chief executive Ken Lay, Houston Natural Gas merged with the pipeline company InterNorth to become Enron.

Hasn’t lowered prices

Enron, of course, led the charge to more disastrous forms of monopoly-busting, such as the state’s deregulated electricity market. I’ve been critical of electric deregulation because it wasn’t properly designed to do the one thing that competition ought to do: lower consumer prices. But Bradley raises some interesting points about a city’s decision to pick one gas supplier.

Cities issue franchises to create uniformity in delivery systems such as pipelines, to enforce safety standards and to ensure that suppliers of vital resources remain financially sound and reliable.

Bradley, who once worked for Lay at Enron, isn’t convinced a city franchise is the only way to address such concerns. He argues that franchise agreements are simply protectionism and that the sort of competition Houston enjoyed in the last century would avoid the overcharges like those for which the city now blames CenterPoint.

Of course, a new entrant may be unwilling to invest the capital needed to build a new gas network across a city as vast as Houston, especially with natural gas prices as weak as they are now.

Still, Houston could take a lesson from its own history and allow the power of competition to police the markets, rather than the city.