In 1978, President Jimmy Carter stripped away the price controls to unleash market forces that might encourage new supplies. But Carter’s “deregulation” was hardly a libertarian dream. It created a wildly complex set of rules and price controls that sought to let the wholesale price rise and fall while protecting consumers from the highest price spikes. This was a Faustian bargain that would play out repeatedly in US policy making from the 1980s on. Lawmakers repeatedly passed deregulation measures that only went halfway, stripping away some controls while trying to shield average people from the true volatility of the market. The ensuing market structures were usually defined by complexity and dysfunction, and the natural gas industry was no different.
The Federal Power Commission was replaced by the Federal Energy Regulatory Commission, which held hours of hearings and collected reams of public comment to parse out the minutiae of when companies could raise prices and when they could not. The regulatory state could never get the porridge just right. High prices in the late 1970s were replaced by supply gluts and falling demand in the 1980s.
George H. W. Bush tried to tear the system up and start over in 1991. The FERC issued a regulation, called Order No. 636, that broke apart the existing natural gas companies. This single order redrew one of the nation’s largest industries, and an energy system on which millions of people relied for heat and electricity.
Under the new regulatory scheme, the natural gas industry was divided into three components:
1) Gas drillers who sold natural gas
2) Pipeline companies that transmitted the gas
3) Consumers who bought the gas
The pipeline companies that transmitted the gas became like railroads—they didn’t own gas like they did in the old days, they just shipped it. Anyone could book space in a pipeline to have gas shipped. This created a new market. Now there was feverish buying and selling of gas at every node of a pipeline. A new class of merchants arose to traffic in this market, chief among them being Koch Industries and its neighbor in Houston, the energy giant Enron.
Senior managers at Koch Supply & Trading saw the potential profits to be made in the growing natural gas marketplace and rushed in to capture it. Koch followed the lead of Enron in cutting deals to manage the nation’s natural gas infrastructure on behalf of the gas consumers. The infrastructure had originally been built with a focus on reliability, ensuring that there was enough gas to meet demand. The big pipeline companies built underground domes in which to store gas—surplus supplies that they could then dole out in times of scarcity. In the age of deregulation, this infrastructure was used like a casino gaming table, every niche explored for ways in which it could turn a profit.
In the old days, an underground gas dome might be filled up and emptied about once a year. Under Koch’s management, the domes were filled or emptied eight or nine times a year. Customers who bought the gas were promised that they would have supplies when they needed it, and Koch’s traders were free to buy and sell supplies from the underground domes in the meantime. Deals like this were called “origination” deals because they essentially originated new markets for gas. As was often the case at Koch, the company wasn’t just interested in the revenue from deals like this. It was more interested in the real-time window that origination deals could provide into the natural gas markets. Just as in the early days of the crude oil markets, information about prices was both scarce and incredibly valuable. There were not yet electronic exchanges that showed a visible price of natural gas, and government data on sales were irregular and relatively slow to come. Every origination deal provided fresh and precise information about prices, supply, and demand.
Koch went so far as to fold its origination group into its trading group, to encourage information sharing: “Now it’s all one company. There’s one trading book,” a former senior executive recalled. “There’s no more origination profit and trading group profit. There’s one profit.”
This profit flowed from inside information. “The most important thing you can have as a trading company is deal flow. The more flow you see, the more knowledge you have,” according to the former senior executive. “And sometimes you don’t mind even if the [deal] flow just breaks even for a while. That’s okay. Because that gives you new knowledge on price direction and all that. You’ll ultimately make much more money long term.”
This gave traders like O’Neill an advantage in the trading markets—Koch’s pipelines and origination teams were an information-generating machine. The United Gas Pipe Line system, which was renamed Koch Gateway, included 120 connections with other pipeline systems, each one a node that could yield information about natural gas prices.
O’Neill spent his day on the phone, calling around to brokers and other traders and customers, feeling out where they might be on price. He also called other Koch traders to find out what they were hearing. One of his favorite colleagues to call was Jeff Stephens, who traded at Koch Gateway’s connection to the “Henry Hub,” a Louisiana pipeline distribution complex that became a major market for gas sales. The Henry Hub was one of the industry’s price setting markets, and in the late 1990s Stephens seemed to be single-handedly brokering most deals on the hub. “He was the Henry Hub cash market,” O’Neill recalled. Stephens berated and cajoled other brokers and customers. When they said they didn’t want to place an order because the low market might “bounce,” Stephens would scold them by saying “Eggs don’t bounce!” Before the era of the electronic exchange, Stephens was a living, breathing market ticker, and O’Neill made full use of his services.
At the end of his first year of trading, O’Neill produced promising results. His trading book yielded $7 million in profits. Of course, that was back in the quaint and early days of the gas market, before things really picked up steam.
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Koch’s traders often got off work early, between four thirty and five o’clock in the afternoon, after US market trading ceased. The traders were mostly in their late twenties or early thirties, and they enjoyed going out for drinks after work. They didn’t party hard, in the way that later became synonymous with the hard-charging world of Wall Street traders. The Koch people didn’t snort cocaine and visit strip clubs. In fact, their drinking sessions might have seemed disappointingly dull to outsiders: a bunch of engineers sitting around in golf shirts sipping craft beers.
One of their favorite gathering places was a pub called the Ginger Man, located near Rice University, not too far from 20 Greenway Plaza. The pub was located on a quiet side street, set back behind a grassy patio area. It was a small, wood-framed bungalow that was obscured from view during summer months by leafy trees that sheltered picnic tables and a large front porch. Customers walked past a small picket fence to enter the patio and then up a set of rickety wooden steps. A small placard by the front door announced drink specials on a hand-written menu scribbled in brightly colored chalk.
Inside, the bar was pleasingly dim and cave-like. Although the Koch traders were unaware of the fact, the bar was a near replica of the Coates Bar in Minnesota, where the union workers used to gather in the 1970s after their shifts at the Pine Bend refinery. The layout of the two establishments was virtually identical, with a long bar extending along the left side of the room and wooden tables clustered along the right side. The ceiling was low in both places, and the wood-paneled walls seemed to be stained the same honey-blond color. But the Ginger Man was more refined—it was like the Coates Bar reimagined by an interior designer who kept the charming elements and jettisoned the unseemly parts. While the Coates Bar served Miller Lite or its equivalent, the Ginger Man had a menu of dozens of craft beers that were arrayed along the bar with their own custom taps. The Koch Industries traders didn’t drink like their blue-collar counterparts up in Minnesota—they didn’t line up shots of hard liquor to be pounded one after another, as the OCAW president Joseph Hammerschmidt had done.