The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (18 page)

Wulff has shown that many pipelines pay enormous “performance” fees to the general partner, typically more than the pipeline profits and often even greater than the pipeline’s cash flow. Wulff analyzed one pipeline deal by the Williams Companies and concluded that it was based entirely on borrowing more and more money. “All the GP [general partner] has to do is borrow to finance the acquisition of another asset,” Wulff explains. “Then like a Ponzi scheme, the distribution would be paid from future financing.” And like a Ponzi scheme perpetrator, Wulff notes, the general partner would be paid oodles of money “for little fundamental contribution” to the business.

What if the pipeline had trouble paying off loans whose proceeds had
been siphoned off by the general partner? Wulff noted that fine-print contract terms provide that the general partner “would have almost no liability for debt repayment.” In other words, if a pipeline company borrows until it collapses, it likely will be the lenders and the little investors who take the losses, while the corporate parent keeps control of the pipeline and the borrowed cash.

Another warning comes from Gooch, the former FERC general counsel. Gooch wrote to FERC in 2007 that, since master limited partnerships extract capital from their pipelines rather than building up capital, they are at risk of collapse if the flow of cash slows from customers or new investors. He pointed to the collapse of the Insull Trust—the Enron of the 1930s—and warned of dire consequences. It was the Insull Trust’s collapse that plunged the economy into its darkest days in 1932, three years after the stock market crash of 1929.

We met Sam Insull earlier. He bought a small electric utility in Chicago at a time when multiple electric companies served neighborhoods, not cities or regions. Insull created an intricate legal structure through which he controlled electric utilities in thirty-two states. He financed it all with layer upon layer of debt that tied seemingly unrelated utilities together in a financial web that no one, perhaps not even he himself, understood. While today’s electric utilities are typically half shareholder equity and half debt, Insull had just 6 percent equity and 94 percent debt, making his company highly vulnerable because it had to spend most of its profits paying interest on loans. With the stock market collapse in 1929, many people struggled to pay their electric bills; three years later enough of them failed to pay Insull’s companies that he lacked the cash to pay his six hundred thousand bondholders their interest, plunging the entire nation further into the depths of the Depression. Insull became the most hated man in America, the Ken Lay of his day.

Gooch warned FERC that such a disaster could recur. The money paid out to pipeline master limited partnership investors, he wrote, is “raised by higher rates (and perhaps skimping on maintenance), by extensive borrowing, and by sales” of new partnership shares that dilute the interests of existing shares.

“How long can such schemes last before there is an implosion that will make Samuel Insull and his pyramid holding companies’ implosion look innocuous by comparison?” Gooch asked the commissioners. His letter went unanswered.

Gooch also noted that in the past decade many private equity funds had bought electric utilities so they could “strip, flip and skip” out of
town, leaving behind not a reliable provider of power, but a hollowed-out corporation. A pipeline, or any utility, stripped of assets lacks the money needed to invest in reliability and to prevent explosions, fires, toxic spills and other disasters.

Even if you never buy a partnership unit and no one in your family does, you will still be hurt when a pipeline is bankrupted. Why? Because the general partner is sure to ask the Federal Energy Regulatory Commission to approve new, higher rates. After all, if the pipeline went broke, then it must not be charging enough.

The net result? You pay for someone else’s taxes at the gas pump and when you boil water. You pay for profits that are wildly beyond “just and reasonable.” And if the pipeline is bankrupted you will pay new, even higher rates. And on top of all that, because the government never gets the corporate income tax money you pay, you will have to pay higher taxes, accept fewer government services or pay more interest to finance government borrowing.

10.
Among fly fisherman
in the Pacific Northwest, Liam Wood was a wunderkind. He started casting at age nine and was soon tying his own flies. Still in school, he got a part-time job at a sporting-goods store that outfitted fly fishermen. Five days after graduating from Sehome High School in 1999, Wood grabbed his waders and headed for Whatcom Falls Creek, hoping to hook rainbow trout. It was a perfect day for doing what he loved best. Until, that is, he took a deep breath of cool June air. Liam Wood, eighteen, collapsed and drowned.

Just upstream, Stephen Tsiorvas and Wade King were doing what many ten-year-old boys do, playing with fire. They had a blue butane cigarette lighter. It was spent, but when they flicked the flint, a tiny spark ignited 237,000 gallons of gasoline, killing every living thing for a mile and a half along the banks of Whatcom Falls Creek.

“It looked like a napalm drop,” one resident said.

The explosion came minutes before the gasoline, gushing from a ruptured pipeline managed by Royal Dutch Shell, would have flowed under Interstate 5. A few minutes later it would have reached downtown Bellingham, where a high-rise apartment tower for the elderly and disabled stands just seventy-five feet from the water’s edge. Because their normal boyish play saved hundreds of lives by igniting the gasoline before it reached downtown, Mayor Mark Asmundson called Stephen and Wade, badly burned and in agony, “unwitting heroes.”

Outside the state of Washington, the blast was reported as a freak accident, worthy of a single sentence on the ABC
World News
, which reported a dead teenager and two boys with burns. Stephen and Wade died soon after the broadcast ended. Within days the boys were largely forgotten by the media, which focused on a sudden spike in gasoline prices, a consequence of the ruptured pipeline that was no longer delivering fuel along the I-5 corridor in Washington and Oregon.

A little more than a year later, the New Mexico desert erupted just before dawn. The blast awakened people twenty miles away. When Carlsbad firefighters reached the scene south of town, they found what appeared to be a gigantic blowtorch, as natural gas under high pressure shot from a thirty-inch-wide pipeline. During the fifty-five minutes it took for El Paso Natural Gas to shut off the flow of natural gas, the roar from the flames was so loud that firefighters could barely hear orders shouted directly into their ears. But the silence that followed was punctuated by the sound of wailing.

Rushing down to the Pecos River, firefighters found six horribly burned members of an extended family of twelve. Those not killed in the blast sought refuge in the waters after flames engulfed their campsite. One begged to be shot.

This second pipeline disaster also made a brief appearance in the national news, covered as the sad story of an unlucky family that happened to be in the wrong place at the wrong time. Within days, all twelve campers would be dead; along with the causes of the rupture, their story was lost in the rush to talk about how electricity prices in California soared because there was no fuel for the modified jet engines that generate electricity to meet peak demand on hot August afternoons. The pipeline repairs took nearly a year.

A decade later, on September 9, 2010, another thirty-inch natural-gas pipeline exploded, this time on the San Francisco Peninsula. This pipe operated at 1,000 pounds of pressure per square inch. A wall of flames hundreds of feet high shot skyward as evening fell on suburban San Bruno. To reach manual shutoff valves, Pacific Gas & Electric crews had to negotiate rush-hour traffic. One valve was more than thirty miles from the blast, and it took the crew an hour and a half to get there. The explosion—which left a crater forty feet deep—killed eight people, injured sixty more, and severely damaged or destroyed 120 homes.

Among the dead were Jacqueline Greig and her thirteen-year-old daughter Janessa. Ironically, Greig had worked for the Division of
Ratepayer Advocates at the California Public Utilities Commission in San Francisco as a natural-gas analyst for more than two decades. Her last assignment: investigating whether PG&E was spending enough money maintaining and inspecting its high-pressure transmission pipelines to make sure they would not explode.

These are just three incidents out of many, but the explosions in Bellingham, Carlsbad and San Bruno should serve as warning signs about an increasingly dangerous future, one in which an immensely profitable industry too often works quietly to thwart safety regulations.

IS ANYBODY WATCHING?

If you live in an urban or suburban area, you probably spend part of your day above or near a pipeline that moves massive amounts of pressurized natural gas, scalding hot diesel, jet fuel or gasoline. Due to the potential impact of a rupture, these areas are officially known as “high consequence areas,” a euphemism for what might more accurately be called
death zones.

Compared to automobile or even plane crashes, very few people have died from pipeline ruptures in the past two decades. A pipeline blast kills someone about every three weeks on average, while someone is burned every few days. Most of these are the result of preventable accidents, often due to a mistake by a pipeline worker or a backhoe operator hitting a pipeline. Though the numbers are small, as the pipeline industry emphasizes, this reflects luck more than serious safety planning. Open spaces where pipelines were laid decades ago are now being developed, but aging pipelines in the vicinity remain in use. The political push for less government means fewer inspections, increasing the risk of a deadly blast that one day might wipe out a block of homes, offices, stores or even a hospital or an elementary school.

High-pressure natural-gas lines run in to every big city in America. In Manhattan alone, high-pressure gas lines enter Battery Park at the southern tip of the island, at the mouths of the Lincoln and Holland tunnels, near the George Washington Bridge, on the Lower East Side, and near the vast apartment complex on the East Side known as Tudor City. That is a partial list.

Vincent Dunn, deputy chief of the New York City Fire Department from 1973 to 1999, says what no one wants to hear: when it comes to high-pressure pipelines, profits trump safety. “Industry and big business run the city,” Dunn told me. “So if a fire department was asked how to
control high-pressure gas lines, we would say don’t run it through the big population centers, but we would just be overruled. We have to clean up and wipe up whatever the results are when things go wrong.”

A gas industry study, adopted by the federal Department of Transportation, defined “high consequence areas” and estimated the damages from an explosion in an open area, like the desert death zone in New Mexico. The study considered a thirty-inch pipeline operating at 1,500 pounds of pressure per square inch of the pipeline wall and concluded that the likely death zone in the event of an explosion would extend 660 feet in every direction. Experience shows that the estimate is woefully inadequate. The El Paso Natural Gas pipeline that killed the Heady, Smith and Sumler families in August 2000 operated at just 675 pounds of pressure, so the consequences should have been felt in a much smaller area than 660 feet from the blast. The family members were 675 feet from the rupture.

In a city, buildings could help contain the blast zone, but that presents another problem: streets are flush with secondary fuel sources. Gasoline, diesel and compressed natural gas fill the tanks of cars, trucks and buses. Fuel oil tanks lie under buildings. Sidewalks feature canopies made of canvas and people wear clothes that would add more fuel.

Chief Dunn praised Consolidated Edison for its annual training of FDNY crews, but still warned that the rupture of a large natural-gas line in a densely developed city would likely cost many lives and many billions of dollars in damage. “The gas would burn until the gas company could shut it off from two directions,” Chief Dunn said. “The heat would radiate up five or six floors and go through the windows, which don’t stop the heat.” Fires would start inside offices and apartments.

Once the electric power went off, either from the fire or a deliberate shutdown to prevent sparking, those in elevators would be trapped. People fleeing tall buildings would have to navigate emergency stairwells, a difficult-to-impossible task for the elderly and disabled. Even in buildings that did not catch fire, the smoke and heat from the streets could kill many.

Professor Glenn Corbett, a New Jersey fire captain who teaches fire safety management at John Jay College in Manhattan, told of a pipeline explosion in Edison, New Jersey, in 1994. More than six hundred manual turns of a valve were required to shut off the gas, a process that took six long hours. “There is no question you will ignite some surrounding buildings,” Professor Corbett said about a natural gas-fueled fire burning for hours in an area of office or apartment towers. “The chance of this happening is very
small, but if it does happen, the costs in life, in services being shut off for weeks or months, and in reconstruction would be enormous.”

HOW SAFE IS SAFE ENOUGH?

No law required that any pipelines be inspected until 2002. Even now, with an assist from government officials whose job is to ensure safe operation of pipelines, the industry regularly obscures pipeline locations.

Most troubling of all, segments of pipeline are being given waivers from the very limited safety inspections required under the Pipeline Safety Improvement Act of 2002. The exact locations of these segments are treated as secret, although with enough determination and a surveyor’s transit and chain, they can be identified. The industry also benefits from rules it promoted, rules that discourage repairing or replacing old, corroded pipelines. The corroded pipe that exploded near Carlsbad hadn’t been tested for integrity since it was laid back in
1950,
when Harry Truman was president.