Proposed modification of the small refiner entitlement purchase exemption (energy action no. 2)

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Proposed modification of the small refiner entitlement purchase exemption (energy action no. 2)
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United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce
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PRINT


OF THE SMALL
T PURCHASE
ACTION NO. 2)


ENT























COMMITTEE ON INTERSTATE AND FOREIGN COM

HARLEY 0. STAGGERS, West Virginia, Cihairman


TORBERT H. ALCDO-NALD, Massachusetts
JOHN E. MOSS, California
JOHN D. DINGELL, Michigan
PAUL G. ROGERS, Florida
LIONEL VAN DERLIN, California
FRED B. ROONEY, Pennsylvania
JOHN M. MURPHY, New York
DAVID E. SATTERFIELD III, Virginia
BROCK ADAMS. Washington
W. S. (BILL) STUCKEY, JR., Georgia
BOB ECKHARDT, Texas
RICHARDSON PREYER, North Carolina
JAMES W. SYMINGTON, Missouri
CHARLES J. CARNEY, Ohio
RALPH H. METCALFE, Illinois
GOODLOE E. BYRON, Maryland
JAMAES H. SCHEUER, New York
RICHARD L. OTTINGER, New York
HENRY A. WAX-AN, California
ROBERT (BOB) KRUEGER, Texas
TIMOTHY E. WIRTH, Colorado
PHILIP R. gHARP, Indiana
VILLIAM M. B RODHEAD, Michigan
JAMES J. FLORIO, New Jersey
ANTHONY TOBY MOFFETT, Connecticut
JIM\ SANTINI, Nevada
ANDREW MAGUIR E, New Jersey
MARTIN A. RUSSO, Illinois


SAMUAEL L. DEVINE, Ohio
JAMES T. BROYHILL, North
TIM LEE CARTER, Kentu
CLARENCE J. BROWN, Ohio
JOE SKUBITZ, Kansas
JAMES M. COLLINS, Texas
LOUIS FREY, JR., Florida
JOHN Y.' McCOLLISTER, '\N
NORMAN F. LENT, New York
H. JOHN HEINZ I1, Pennsylv
EDWARD iR. MADIGAN, Ilinc
CARLOS J. MOORILEAD, CaI1
'MATTHEW J. RINALDO, New
W. HEN MOORE u


W. E. WILLIAMSON, Clerk
KENNETH 3. PAINTER, Assistant Clerk


Professinal Staff
CHARLES B. CURTIS WILLIAM
LEE S. HYDE ROBERT 1H
ELIZABETH HARRISON BRIAN R.
JEFFREY H. SCHWARTZ KAREN N
MARGOT DINNEEN
JAN B. VLCEK, Associate Minority Counsel
(II)












tIEFING PAPER ON THE INCREASE IN SMALL RFINER BIAS AND
REVOCATION OF CURRENT SMALL REF INEREXE-3tinoN

I. EXECUTIVE SUMMARY
w Federal Energy Administration has submitted to the Congress
rendment to modify the exemption of certain small refiners from
pof c ude oil entitlements provided in section 403 of the
yPolicy and Conservation Act (EPCA).
St both revokes special rule No. 6 which currently
events the small refiner purchase exemption and adjusts the small
er bias in the entitlements program to provide added benefits to all
1 refiners with crude oil runs tnder 100,000 barrels per day.
ie current small refiner exemption creates large cornpetitive dis-
:ies among small refiners, since it provides some entiement pur-
er with larce bene but provides no benefits to entitement
rs. This results in economic hardships levied upon those inde-
lent marketers supplied by noxept refiners w they compete
mtly with other r nr supplied exemptedjrefiners.
ie FEA modification will corrct tese competitive disparities,
e at thesame time meeting the in by providing
!d benefits to all small refinersj scaed poportionately to correct for
'onomies of scale in refining.
ie following materials describe and compare the current operation
te small refiner exemption with the FEA modification of the bias.
1 materials are based upon February entitlements dfta. Effects
vary slightly each month with changes in the crude oil opera-
of affected refiners.

I1. OVE1RVIKW OF FRoQRAMN
e elements program was aoted in -November 1974 for the
ose of providing equal access the benefits of price controlled
sti oil for all domestic refiner though the purchase or sale of
elements.
ie program elininates competit inequities which would othr-
occur as a result of certain do estic refiners having dispropor
&n flower prided domestic crude oil in tlilrsupplis.'
progra provide a small rin bias whih'is
tded to preservetilcompetitive viability of this class of domestic
ers vis-a-vis laroe domesic refiners.
ie EPCA in December 1975 provided for a er exep-
under which certain small refiners with large supplies of price
rolled domestic crude oil, and therefore low eoos have either
fully or partially exempt from the requirement to purchase en-
liti'sween though may of thesesmal refiners were granted
f through the exception process.
(1)









2


The action being taken by FEA, in conformance with the EPCA, is
intended to eliminate the competitive inequities treated by the current
small refiner purchase exemption which is set forth in FEA's special
rule No. 6.



Crude Supplies for Domestic Refiners


" Domestic Refineries Use Varying
Amounts of Different Priced
Crude Oil
" Availability of Lower Tier (S 5.25)
Crude Oil is Limited (Approx. 36%)

" Remainder Composed of:

Upper Tier Oil (S 11.28)

Imported Crude Oil (S13.50)


Crude Oil Supplies




Inequities Without Entitlements Program


Imports


Upper Tier






Lower Tier


Imports



Upper Tier


Lower Tier


F~I


Upper Tier












Lower Tier


* Without Entitlements Program
Average Crude Oil Feedstock
Costs Would Differ Widely.
for Example


- Company A
= S11.87
- Company B
= S 8.21

- Company C
= S 6.59


Average Cost


Average Cost


Average Cost


* Entitlements Program Evens Ow
Their Crude Oil Cost Differenc
by Purchase and Sale of
Entitlements.


1C0-


75-




50s-


25-]




il


36%

Lower Tier
At Approx.
$ 5.25


24%
Upper Tier
At S 11.28
Approx.


40%
Imported Oil
At S 13.50
Approx.
Landed
Cost


100-










t
0L

0,


A B C-
Company







111 DESCRIPTION OF CURRENT EEMPTION (SPECIAL RULE 6)
entitlements program requires refiners with more than their
of low cost domestic crude e supplies to purchase entitlements
refiners with less than their share of domestic crude.
CA provides an exemption from entitlements purchase obliga-
for small refiners with 100,000-barrel-per-day capacity or less.
s exemption covers all purchase obligations up to 50,000 barrels
y of crude oil runs or domestic receipts.
s exemption covers a portion of purchase obligations from 100
it at 50,000 barrels per day to 50 percent at 100,000 barrels per
F crude oil runs or domestic receipts and provides no exemption
00,000 barrels per day.

IV. INEQUITIES OF CURRENT EXEMPfON
ause the amounts of price controlled oil received by different
refiners vary a great deal, the benefit of the exemption varies
0.2 to 21.4 cents per gallon. Such a range cannot be justified on
sis of refining economics.
ers of entitlements, many of whom are also small refiners, must
te in the same markets and receive no comparable benefits,
. result in large competitive advantages for some small refiners
tred to others.
present exemption places distributors and retailers who are
edby nonexempt small refiners or by large refiners at a severe
.titive disadvantage.






DISt"RBUTION OF ENTITLTEMENTFf PARTICIPA'S BY BOM RE..I. ING DISTRICTS FOR
SMALL REFINERS UNDERIo0 OOOBD
(FEBRUARY 19 6


LEGEND: Exempted Purchasers

Partiallv Exempted Purchasers


0 Entitlement Sellers
Z1. Non-Exempted Purchasers Q








KEMTIO DSTOTSTHE EXCEPTIONPRCS
"y rogamcan deal equitaly with the many dif-
in States. As a result,
side ref to firms experencing
nder the regulations.
asproram, exceptions ar handled on a cas-y-

Spurease of entitlements w d

it smalfl rfnr exemption~, -06 firms have been fully

ns or 43percento the total had never requested
)m entitlements purchase requirements durin~gth
ghSeptembr30,197
plied for exception relief which had been denied;

;ciad ruel ted full or patial exception relief
I le became effective.
Srefiner exemption clearly overlays inequities on
,achieve equity.

2ODFIATION- OF CURRNT EEPTION
,sent small refiner bias for all small refiners under

ion benefits under special re 'No. 6, which elipi-
tb1e competitive advantage oempted small

nation provides for an increaseMe bi as own
iart.

ified Small Refiner Bias


Cents per Galon
Runs $8I/D) P, 0t se w 5al nct..,e FlA Me~~d80
0-10 2.4 2 4.4
30 1.1 .9 2.0
so 0.6 .2 0.8
100 0.2 0 G.2


Runs (WB/D)





6


V1. -A-Dv TAGES OF FEA'S AC1IOX OVER CURRENT EXEM=rION

Comparison of total value of added benefit8 between current small
refiner exempt;in and EA modification

One hundred and twelve small refiners would benefit, rather than
just 56.
This will assure competitiveness among small refiners.
It would provide additional advantages to small refiners vis-a-vis
large refiners.
While the total value of current additional benefits would be reduced
under the FEA modification, small refiners with runs of less than
30.000 barrels per day would receive three-quarters of the benefits .
Under the current exemption, these firms receive only one-half of the
benefits.
TOTAL VALUE OF ADDED BENEFiTS

EPCA exemption FEA modificaon
Refiner runs (million Number of Percent of Number of Percent of
barrels per day) firms Value total value firms Value total value

0 to 10 ----------------- 27 $7,432,357 18.9 58 $4,954,791 29.1
10 to ---------------- 15 12,861,141 32.7 30 8,280,524 48.6
30 to 50 ---------------- 9 12,871,19 32.7 12 2,942,538 17.3
50 to 1 O--------------- 5 6,191,55. 15.7 12 858,745 5.0
Total ------------- 39,355,250 100.0 112 17,036,598 100.0


Additional benefits to a greater number of s refers

FEA modification results in:
Fifty-six more small refiners receiving additional benefits: Thirty-
one-055.4 percent--of these 56 refiners have crude oil runs of les
than 10,000 barrels per day.


Numbers of Small Refiners Receiving Benefits Under Exemption and
Under FEA's Modification


The FEA Pr ides Aditional Benefits to a Greater Number of Small P.feres.
Refier Run s Numbet Receiving Benefits
pe-el s h,-e A:Ild S as ae-efs oi


27
9
5


L W
~Li-


C
-2


9
C

C0U


33-50
Refiner Runs. MBSiD


12


51


& _ _


0-10
10-30
30-50


58
30
12
12


0
0
0
0









a~ distributes added 'value of benefits ev)en7/ among
?irs in prprto totersze

iodilication rmffuers with runs less than 10,000 barrels
iier average added benefits compared to the current
spared to 6.9 cents per gallon. However, a larger
.efiners-58 compared to 27-receive such benefits.
runs 50,000 to 100,000 barrels per day receive less
der FEA's modification than under current exemp-
d to 1.5 cents per gallon. However, a larger number
-12 compared to 5-receives such benefits.


s(per Gallon Under Current


The Modification Restores Competitive Crude Oil Costs
Among Refiners by Reducing Inordinately High Unit
Benefits for Those Refiners Eligible for exemptionn
Restores Competitive Costs
Removes Unjustifiably High Benefits
Eliminates Competitive Distortions


3.8


1. 2


0.10


Runs. MAJID


bene fit


avoids extremely large benefits to a few refiners.


Go I


10-30







ADDED BENEFITS UNDER FEA MODIFICATION
[In cents p gallon]

Refiner runs (million barrels
perday) Over 0 5 to 0 2 to5 to 2 No benefits I

0 to 10 ----------------------------- 0 0 57 0 1 1 5
10 to 30 ---------------------------- 0 0 0 30 0
30to 50- ---------------------- 0 0 0 12 0 12
50 to 1 --------------------------- 0 0 0 12 0 12
Total number of refiners------- 0 0 57 54 1 112

1 refiner had no runs in February, but received exemption benefits.

Impact of FEA mo lcatkm oni ineqties among smlli refiners
The FEA modification corrects inequities in the range of benefits
provided to small refiners under the exemption.

RANGE OF BENEFITS PROVIDED

[Cents per gallon]

Refiner runs (million barrels per day) Current exemption FEA modification

0 to 10 -------------------------------- 0 to 21.4 ---------------------------- 2.
10 to 30 ------------------------------ 0 to 12.7 ------------------------- ?-- 0.9 to 1.9.
30to50 ---------------------------- 0to7 ------------------------------- 0.2 to 0.9.
50to 100 ----------------------------- 0 to 3.1 ----------------------------- 0 to 0.2.


Totad be mits to small refiners uder c current and modified bia'
The total value per month of the current small refiner bias and the
added benefits of the small refiner exemption and FEA's modification
are compared below:


COMPARISON OF TOTAL BENEFITS (INCLUDING CURRENT BIAS)
OF BENEFITS


TO SMALL REFINERS-TOTAL VALUE


EPCA exemption FEA modification
Percent of Percent of
Refiner runs (million total tota
barrels per day) Firms Value value Firms Value value

0 to 10 ---------------- 58 $12, 54-4, 505 20.0 58 $10,064,739 25.0
10 to 30 --------------- 30 22, 581,269 36.1 30 18,000,652 44.7
30 to 50 --------------- 12 17,357, 599 27.7 12 7,428,939 18.4
50 to 100 --------------- 12 10,145,391 16.2 12 4,812,585 11.9
Total ---------- 112 62,628,764 10(.0 112 40,306,915 100.0


VII. CONCLUSIONS

FEA's modification of current small refiner bias and revocation of
current small refiner exemption results in:
Elimination of competitive disparities among small refiners created
by current exemption.
Receipt of benefits by 112 small refiners not jut 56.
Equitable distribution of added benefits among all small refiners,
scaled in proportion to their size to correct for diseconomies of scale
in refining.
Restoration of fair competition among dependent marketers sup-
plied by small refiners.






S E T OF FRANKG. ZAR, A I8TRATOR, FWEAL ERGY

C rman and members of te subcommittee, thank you for the
oyto appear today and discuss the FEA modifiation of the
R er Exemption in tfeiergy Policy and Conservation Act
aes that bave been r since the promulgation of FEA's
e No. 6 for subpart C to implement section 403(a) of the
Eon December 31, 1975. First, 1 would like to provide a brief
dof the entitlents program, including the current small
rSecond, I will devote a portion of my discussion to the
ser exemption, including a review of FE actions to date
special rule No. 6, a sumary of comments from our public
bring on the rule, and analyses undertaken by FEA since the rule's
ulgation. Las, I would like to discuss FEA's proposed modi-
at of the small refiner bias under the entitlements program and
v es over the current exemption.
T enti ents prr i designed to substantially reduce dis-
parities in the average costs of crude oil among domestic refiners and
to enable refiners who depend heavily upon upper tier, high cost
do ic or imported crude oil to remain competitive with those hav-
inag to lower cost, lower ti domestic crude oil. The program
that refiners who have more than the national average of
lwrtie oil buy entitlements frmfiners who have more than the
average of upper tier and imported oil. In this way all Ameri-
can umers are enabled to share equitably in the benefits of price-
cdomestic crude production, regardless of which refiner they

Under the entitlements pr m, small refiners have always been
gi special consideration. Aias provides for issuance of incre-
mental entitlements over and above those earned under the regular
p m to refiners whose crude oil processing capacity is less than
175,00 barrels per day.
Isance of these entitlements is desired to compensate for dis-
eo ies of scale among small reflneis. Accordingly, the greatest
bgoes to the smallest refiners. Refiners whose runs are 10.000
barrels er day or less receive added benefits undr the current bias
ofper gallo on each barrel of crude runs; this per
g benet declines as' the refiner's increa and drops to zero
wen rtns are over 175,000 barrels per day.
Any program which attempts to apply a general set of to about
140 refiners will have to deal with exceptions to th~ general rule.
Those refiners who find that the prora cre .tes or fails to mitigate
hardship or gross inequity ma y f relief to the FEA's
i of Exceptions and Appeals If this office finds that relief is justi-
fe.it is provided in the form of eihr'ai exemption ftrn the require-
men to purhs all or part of thie fr's entitlement 6hlig-ation for
buyers of entitlements or the award of addtional entitlements to re-
fnr sellers. Action on a requstfor exception generally takes r30 to 4.5
days,'tlhuh h eidmyblne rsotrd'ednro h
coplexity of te case. Relief is' gated~ for a flet period of time. nor-*
faly 90ays, andi *fim, may, of mors, apply for further relief if






10


In addition to the standard small refiner bias, section 403 (a) of the
EPCA exempts all refiners whose capacities did not exceed 100,000
barrels per day from the requirement to purchase entitlements for the
first 50,000 barrels per day of crude oil runs or receipts. As required
by the law, FEA promptly issued special rule No. 6 for subpart C to
implement section 403(a), effective December 31, 1975. The rule was
issued as an emergency amendment and exempted all small refiners
whose total refining capacities on January 1, 1975, or any day there-
after, did not exceed 100,000 barrels per day from any purchase re-
quirements they would otherwise have regarding their first 50,000
barrels per day crude oil runs to stills. For small refiners with crude
oil run levels between 50,000 and 100,000 barrels per day, the special
rule provides for partial exemption from the purchase of entitlements,
with a limit of 50,000 barrels per day on the total amount of the
exemption.
A public hearing soliciting comments and testimony on special rule
No. 6 was held on January 22, 1976. A total of 54 organizations and
individuals submitted written comments or presented oral testimony
on the subject. Thirteen participants supported the exemption, 40 op-
posed it, and 1 reserved the right to comment in the future.
Those who supported the rule were generally small refiners exempt
from entitlement purchase obligations underjthe rule. These firms
said that the exemption was necessary to enable them to continue to
compete, that it removed the burdensome requirements and uncertain
results of the exceptions and appeals process, and that it did not give
them a special advantage in the market, but rather allowed them to
compete equitably with the major oil companies. This group also sup-
ported extending the same benefits to small refiner sellers of entitle-
ments through an increased entitlement bias.
Opposition to this rule was primarily based on arguments of com-
petitive inequity. The major refiners argued that the exemption was
excessive and too broad and that as a result product prices paid by
independent marketers supplied by the exempt small refiners would
be substantially below those of marketers supplied by nonexempt firms.
The rule was said to adversely affect the ability of the branded inde-
pendent marketers to compete effectively, which is counter to the
intent of the EPAA.
Numerous small refiner sellers of entitlements also opposed the rule
on the grounds that they should be granted a corresponding change in
the small refiner bias to keep them on a competitive basis with the
exempt small refiners. There was also general concern about the use of
the cutoff at 100,000 barrels per day as this might serve as a severe
disincentive to expanding capacity above that point. Opponents of the
rule said that FEA's Exceptions and Appeals Office was a more effec-
tive mechanism for assuring the competitive viability of the small re-
finers than the blanket exemption because each case could be treated on
its individual merits rather than trying to frame a single solution to
a complex series of individual circumstances.
On the basis of the evidence obtained from the January 22 hearing,
as well as hearings conducted by FEA as to the general reevaluation of
its regulations in various regions on February 17, 18, and 19,1976, and
proprietary data FEA has on each refiner, FEA has tentatively de-
termined that the exemption from payments for certain refiners does








e avan with respect



Seiner an doe serious iompi
eguatinsfor the attainment of the
(b) (1) of the EPAK. Specifically,
i 6 does not conform with the objec-
e~rainsmal rfinrsbenefits dispro-
t y proiincu in
,age over ot r (incdig
rent as to be inconsistent with the
1 o theEPAA.
artes place independent marketers
m1 and large, at a serious conpeti-
trs suppiedby exempt refiners.
:r smll refiners benifting from the
runs in certain marketing situations
upper tier and imported crude oils,
Ability of certain products in certain
re for small refiners to expand their
of 100,000 barrels per day set forth

t;the FEA to muodify the exemnption,
wyai1 where this exemption is deter-
ernie or competitive advantage with
e to have the effect of ser-
to meet the objectives of the EPAA.
,.fi9 impact of the exemption, FEA
oil costs for small refiners prior to
the entitleents program data for
first month of the exemption), FEA
rude oil costs under the exemption of
%rrels per day in each of the Bureau
iirprisingly, we discovered wide dif-
Trud~e oil costs of small refiners. These
) per barrel to a high of $13.52 per
feedtock ecstson the order of those
Ioethe. entitlements program was
itt, the .difference between the
was$1.3 pr brre,eor 2.7 cents per
latdifrene, and $7.47 pr barrel
hwgute greacost diffrence.
thegoscueolcs iprte


views








result of FEA regulationc. Testimony and comments on this pr l
were mixed, with proposals by certain small refiners that the value of
the exemption should be increased and strong arguments by no
emupt refiners that it should be decreased or eliminated entirely. The
testimony was. however, convincing on three points: (1) the xemp-
tion provided by Special Rule No. 6 was inequitable: (2) any metho
of providing added advantages to small refiners would have to apply
to all small refines,. Fellers and buyers of entitlements alike, on the
same basis, to avoid these inequities: and (3) the FEA proposal pro-
vided benefits which were potentially too high for the larger of the
affecte(l small refiners-especially those whose runs exceeded 50.0
barrels per day and over. where diseconomies of scale in refining tend
to disappear.
Furthermore,. FEA's analysis dicloss that many of those firms
which have been fully exempted from entitlements purchases by
Special Rule No. 6 have not even requested exception relief, and a
number who have requested exception relief have been unable to
justify such relief. Of the 56 firms exempted from entitlements pur-
chases on the entitlements list issued in April for February crude
runs:
Twenty-four firms or 3 percent of the total had never reoneed ex-
ception relief from entitlements purchase requirements during the
period April 1 throuTh September 30, 1975:,
Six firms had applied for exception relief which had been denied;
and
Twenty-six firms had been granted full or partial exception relief
prior to the time Special Rule No. 6 became effective.
These exceptions and appeals decisions were the result of careful
and comprehensive analyses of the competitive position and earnings
situation of each firm. These analyst focused especially on the rate
of profitability as a percentage of sales volume and cash flow positions
of the firms concerned.
Moreover. each decision was made only after parties likely to be
aggrieved by the granting of relief had lben notified of the possibility
of relief and given an opportunity to comment on its impact on their
own operations.
These matters canot be taken lightly, nor should they be dealt with
in an arbitrary manner when the prosperity and ver-y survival of the
affected refiners and the marketing firms they supply are at stake,
particularly when small changes in product prices can dramatically
affect market shares among the firms concerned.
The FEA modification of the exemption would increase the small
refiner bias for all small refiners whose crude runs average less than
100,00 barrels per day for any given month and revoke special rule
No. 6. The FEA modification will increase the bias by 2 cents per
gallon to a total of about 4A cents per gallon for the smallest refiners
having runs of 10.000 barrels per day or less and will decrease rapidly
as the refiner's runs approach 50,000 barrels per day. where economies
of scale improve. At 100,000-barrels-per-day runs, thre is no addition
to the existing bias of about one-quarter cent per galon.
The FEA modification to the small refiner bias is intended to
achieve equity' by providing ed benefits to all 112 sa refiners
rather than to just the 56 firis exempted under the EPCA. Moreover,






13


d ps a wider distribution of benefits to similar-
hle it s gving extrely large benefits to a
w rs as d the current exemption. The total value of
befits for small refiners having crude runs of 30,000 barrels
o under the FEA modification amounts to 60 percent of
othe nt FPCA exemption. However, for refiners
over this amount, the value of the additional benefits
o ay much less under the FEA modification, and we be-
ithis is essential to fair com etition at levels at which dis-
sof scale aye si nificantly reduced.
it licable to both small refiner sellers and purchasers
1 tsthe EA modification to the present small refiner bias
t competitive disadvantages created among small refiners
EPCA exemption. Under the exemption, certain refiners under
bper day receive benefits of as much as 21.4 cents per
mother refiners of the same size. This disparity is
bible over any length of time and could lead to the financial
of nonbenefiting s refiners, and the erosion of small refiners
apetitive nflu he market.
u hFEA modification is scaled to provide the greatest
e ts to the smallest refiners, it will sharply reduce any com-
dthey may still have vis-a-vis the larger ide-
t a ajor refiners. Through this, the intent of Congress to
acomptivemarktsenhanced.
dculties are now being faced by independent marketers
b refiners who do not benefit from the exemptions when
e in direct competition with marketers supplied by refiners who
heavily from the exemption. The FEA modification will alle-
iese difficulties and restore fairer competitive conditions in the

value added by the FEA modification over and above
3ting small refiner bias will be about $17 million per month.
s what less than the value of about $39.4 million added by
CA ption, but it is far more fairly distributed amon
3 As shown in table 1, all categories of small refiners will
compard to the existing small refiner bias, with over three-
oft total amount of the benefit accruing to small refiners
u 30,000 barrels per day. The EPCA exemption results
ers of this size receiving only half of then added benefits, and
n half of the meters of this class receive any benefit at all
the IPCA exemion. The modification thus provides for
equity among small refiners as well as between small and large


DIlnK 01








covered product costs can undersell his competitors by 3 to 4 cents
per gallon, enough to attract all the business he can handle, and
use the rest of his advantage to recover maximum margins and all
his allowable increased costs.
We believe that the facts that we have already presented make it
evident that severe distortions are occurring which will continue to
run counter to the objectives of the EPAA if the exemption is allowed
to stand. The FEA modification of the small refiner bias will, on the
other hand promote the continued achievement of these objectives
and will insure that small refiners remain an increasingly viable com-
petitive force in the petroleum industry.
That concludes my remarks, Mr. Chairman. If the subcommittee has
any questions, I will be happy to attempt to answer them.
COMPARISON OF TOTAL VALUE OF ADDED BENEFITS BETWEEN CTRENT
SMALL REFINER EXEMPTION AND FEA MODIFICATION
112 small refiners would benefit rather than just 56.
This will assure competitiveness among small refiners.
It would provide additional advantages to small refiners vis-a-vis
large refiners.
While the total value of current additional benefits would be reduced
under the FEA modification, approximately three-quarters of the
small refiners-those with runs of less than 30,000 barrels per day-
would receive three-quarters of the benefits, whereas under the cur-
rent exemption, firms under 30,000 barrels per day, receive only one-
half of the benefits.
TABLE 1.-TOTAL VALUE OF ADDED BENEFITS 1
EPCA exemption FEA modification
Refiner runs (million Percent of Percent of
barrels per day) Firms Value total value Firms Value total value
0 to 10 ----------------- 27 $7,432,357 18.9 58 $4,954,791 29.1
10 to 30 ---------------- 15 12,861,141 32.7 30 8,280,524 48.6
30 to 50 ---------------- 9 12,871, 198 32. 7 12 2,942, 538 17.3
50 to 100 --------------- 5 6, 191, 554 15. 7 12 858, 745 5.0
Total ----------- 56 39, 356, 250 100. 0 112 17, 036, 598 100.0
I From April list, based on February data.
STATEMENT OF ROGER G. MCGRATH III, VICE PRESIDENT,
SOUIITHLAND Om CO.
My name is Roger G. McGrath and I appear here to support the
plea of other small refiner-buyers like Southland Oil Co., of which I
am vice president, for some action to prevent FEA's proposal regard-
ing the small refiner exemption from going into effect as it is now
designed.
Southland operates three small refineries at Lumberton, Sanders-
ville, and Yazoo City, all in the State of Mississippi. These have
combined capacity of 21,000 barrels per day; however, due to the
shortage of crude we have only been able to operate at approximately
60 percent capacity. For example, during January 1976, our total







ly throughput for all three plants was only 12,901 barrels
e market our petroleum products primarily in State
pi, selling to in ent marketers flying the "Southland"
11 as other independent marketers, industries, utilities, and
its.
with most other independent refiners that the p resent
emotionn needs to be modified, but FEA's proposed modi-
Lotally inadequate. We had hoped, with the wealth of
mmexnt furnished to FEA and the existence of a wide-
ensu among independent refiners on the direction and
n adequate solution to this problem, that FEA would have
h something better-but it did not do so.
if some compromise solution can be reached between the
presently before the Congress, we would encourage all
.c1h a compromise. But time is short and this may not be
May 27. If a compromise cannot be reached, we most
a congressional veto of FEA's proposal. This will permit
Yotiations and then consideration of a revised FEA

like to add that a great deal of the testimony against the
r exemption from certain branded marketers, claiming loss
positionn and unfair competition, is simply not in accord
s in our marketing area. In iy testimony before the FEA
I tried to debunk some of the testimony from these
ihich I heard at the hearing in Atlanta on this subject.
aony was fulil of allegations and completely devoid of
wrong, all wrong. A copy of my statement to FEA on this
be made available to this committee.

KENT OF ROGE G. McGRATU III, VICE PRESIDENT,
SoTN D OI CO.
rman and officials of Federal Energy Administration: My
rer G. McGrath and I appear here on behalf of Southland
,h I am vice president. The subject of this hearing is one
Ice to outhland Oil Co. and other independent
iladly situated.
I operates three small refineries at Lumberton, Sanders-
azoo City, all in the State of _ississippi. These have com-
ity of 21,000 barrels per day; however, due to the shortage
have only been able to operate at approximately 60 percent
or example, during January 1976, our total average daily
f or all three plants was only 12,901 barrels per day. We
petroleum products primarily in the State of Mississippi,
dependent marketers fying the "Southland" brand as well
dependent marketers, industries, utilities, and farm

iere todiav to protest the plans of the FEA to seriously


71-S i-7 --3





16


FEA made their decision to amend the program based upon erroneous
assumptions rather than on facts, as follows:
Item 1: The Special Rule--"provides incentives for small refiners
benefiting from the exemption to curtail their crude runs by reducing
purchases of domestic upper tier and imported crude oils * *."
In this case, the FEA is proposing drastic changes in the old oil
entitlements program based upon FEA's assumption of actions that
a small refiner could take. Southland's position is that the FEA, on
a monthly basis, obtains information from each refiner, small and
large, as to their purchases of crude oil, both lower and upper tier
domestic and imported, and should there be any change in a small
refiner's pattern of crude oil purchases, then, and only then, should
the FEA make adjustments to prevent abuses in the program. This
could be done on a case-by-case basis, if abuses appear.
Item 2: The FEA states that the Special Rule-"provides incentives
for small refiners benefiting from the exemption-not to expand their
refining capacity beyond the limit of 100,000 barrels per day *
so as to not lose the benefit of the special exemption.
Again FEA is proposing drastic changes based upon theories and
we could also dream up numerous theories but we feel regulations
should be implemented only as needed in order to prevent actual abuses
and that FEA should not propose regulations based merely upon
theories.
Item 3: In the Notice of Proposed Rulemaking and Public Hear-
ings, the FEA states "firms benefiting from the exemption possess an
inherent competitive advantage over other refiners and thus may lose
certain incentives to operate their refineries in an efficient manner."
Quite frankly, this reason is so ridiculous that it does not deserve
comment except to say once again that the FEA is proposing sweeping
changes in Government regulations based upon an assumption that
refiners may-and we repeat, may-lose their incentive to operate in
an efficient manner. Quite frankly, this appears to be "grasping at
straws" in an effort to justify taking the action FEA desires and
which action senior officials of FEA announced they would take
shortly after EPCA was enacted into law.
Item 4: In the Notice of Proposed Rulemaking, FEA states that
their preliminary analysis as to inequities as the result of Special Rule
6 has been substantiated by numerous comments received from refiners
and independent retail and wholesale marketers, and in particular, at
the hearing on Special Rule 6 held on January 22, 1976, and in the var-
ious regional meetings held on February 17, 18, and 19, 1976. We
would like to examine some of the comments received in those meet-
ings and question the FEA as to how thoroughly they have investi-
gated the source and reliability of the comments which they say sub-
stantiated FEA's position that the benefits of Special Rule 6 are of a
discriminatory nature.
As regards the oral comments received at the January 22, 1976, hear-
ing, it is interesting to note that the majority of those complaining
about the exemption were representatives of the major oil companies
who pefhi-aps were concerned that, for the first time in recent years,
small independent refiners might be in position to price their product
competitively with the major oil companies. We agree that certain
small refiners did make oral comments indicating their objection to






17


but in the ority of ce it due to the fact that
-recty inerprtt* wishes and intention of Congress
1 amount of entitets wh small refiners were per-
,s a result of the smaller number of entitlements being
rreat deal of evidence has furnished to the FEA,
scripts of the Cong ional Record, which indicated
lid not intend to re e the small refiner/seller's rights
special Rule 6 bei implemented. Had FEA correctly
nation of Coneft is quite possible that certain small
not yae objected to Special Rule 6.
i also based the need to revise the entitlement relief
rived at the public hearing held on February
.976. We quote from the notice of pro rulemaking:
L h pro s the exemption has already
ye pricing effect at the retail level." We do not know
y was received in all of the regional meetings but we
ance th hout the hearing in Atlanta, Ga. on Feb-
8, 1976 We would like to analyze some of the testimony
hat time on which FEA is not basing the need to make


rry17, 1976, in Atlanta, Ga. a total of
iade. Of these eight, one was made by an
i pany jobber and five were made by
company retailers. Almost without ex-
hat these individuals were appearing as
il companies they represent and were not
ecifle items which FEA had requested be
in the FEA notice in the Federal Register
1976. We realize that the FEA has a tran-
but would like to quote from certain pres-


)r was a ma'or oil cc


remarks were made by the
mpany jobber from a town
a. He spent a great deal of
se affects of Special Rule 6
program. I quote in part
f refiners in the south who








(D) We were quite interested that although this gentleman repre-
sented himself as a jobber for Union Oil of California, he advised, as
a result of cross examination from Mr. F. Edwin Hallman, FEA Re-
gional Counsel for Region IV, that the information that he had used
in his testimony was supplied to him by American Oil Co.
To further point out Southland's position that the comments re-
ceived were, in many cases, prompted by major oil company action, we
note that the next gentleman to appear that morning opened up like
this: Sentence one--gave his name; sentence two-advised he had been
a major oil company dealer for 25 years and then in sentence three
stated "first let me convey my appreciation for the opportunity to tes-
tify before you today and to share with you my concerns about the
crude entitlements program * * How in the world can this retail
dealer have any real concerns, or indeed knowledge, about the refiners'
crude entitlements program except as it was fed to him by his major
company source?
Another gentleman who appeared that same morning entitled his
presentation as an appearance "before Federal Energy Committee on
Entitlements."
The next gentleman, who operates a major oil company service sta-
tion in Nashville, Tenn., came directly to the point. The second sentence
of his prepared remarks was as follows: "I appreciate the opportunity
to come before you to present my views as to why I am against the
Small Refiners Entitlements Act." Again, in both these cases, where
did these gentlemen get their basic opposition to the Entitlements pro-
gram except from their major company suppliers?
I could go on and burden you with more direct quotations from the
testimony introduced in the Atlanta meeting however, I think my
point should be very clear by this time. Namely, that the comments
received in these hearings were not, in numerous cases, complaints by
independent marketers but merely the position of the major oil com-
panies as voiced by their dealers and jobbers. I must compliment the
major oil companies-they prepared their homework exceptionally
wel. But there is one defect which they couldn't cure-any factual
data as to specific anticompetitive impact, and any real tie-in to the
Entitlements program, is typically very generalized or completely
missing from these statements. There is no showing whether or not the
cited competitors were perhaps pricing to meet prices set by other
dealers-'perhaps by other major branded dealers or major companies'
secondary brands. There is no showing whether the cited competitors
were in fact providing similar services-and indeed in the case of the
unbranded pump at the liquor store and drive-in market (cited by the
third witness to whom I have referred) it is obvious that entirely dif-
ferent types of dealers and services were involved. There is no showing
that the cited lower prices are due to the claimed subsidy or just lesser
dealer services and resulting lesser costs-at the dealer level.
We would like to know where these people were last year when in-
dependents such as Southland Oil Co. were priced out of the market
due to prices being quoted by major oil companies. We request that
this FEA panel and others who will be drafting the final rules for
submission to Congress carefully examine the competitive price posi-
tion of Southland Oil Co. and others who requested relief versus major








e~s as cotaned in nuerous exhibits submte to the Office
bs and Appeals. From time to ti during 1975 Southland
[ed, by reson of cost beyond Southland's trol, to charge
, mers as m s 3 cents, 4 cents or 5 cents per gallon
Lhepries ein chr 'ed y Suthan's competitors. No
ngrul chnge wee rcomended by FEA at that time.
hnd was told "You have no recoume, go see the Office
kns nd Apeal." ow tat te mjors, both directly and
3ir dealers and jobber spokesmen, are crying .foul" let's
their atbwithMr. Goldstein et al. His ocewas
ona e in dea with my company and I am sure that if
others really he a serious problem which they can
hisa result of the special rule and if these companies
- ecial will destroy the economic viability and
rect their multinational operations, then the Office of Ex-
d Apas will certainly grant the relief necessary on a
Basis, which is what they did for Sothland and others.
stated that sion 455 of EPCA amended EPAA so
t FEA to modify the small refinery purchase exemption
determin that the result of the special rule has been to
oir o r petitive advantage with respect to
r ers. In the Atlanta hearing on February 17 and 18,
small refnr s he was being adversely affected by the
,ny other small refiner as a result of the special rule. The
saints were fo major oil companies or their puppets,
I from major company headquarters and singing the major
ne.
ises ta it has deter that "it is under obligation to
eon." The only obligation I can find is based on
onmade solely on umptions. Is the PEA now writing
- for congressional approval based on assumptions or

nut the posed making the FEA speaks of the
of benefits accruing to the refiner as a result of the
S ly the FEA hows that any benefits do not accrue to
btrather direc tlo the customers of the affected

and o oppose the exemption leave the impression
tall exempt refiner will use his fantastic competitive ad-
dI three words) to take customers away
aforc in the marketplace.
xl ridicuus. If Southland O decided to lliprod-
xe oly avea lmitd aoun ofrefined product to sell and

ode oil purchases and runs
Id e rlaivey smpe t wachfor any deviations from a

,.orrective action is required, once again on a case-by-cas






20

area. For instance, during the month of December 1975, the one
refinery at Pascagoula, Miss., operated by Standard Oil of Kentucky,
and which markets as Chevron refined more crude oil every 33 minutes
than Southland Oil Co., refines at all three of its small refineries co-
bined during a 24-hour period. Surely the FEA does not feel that
Southland, and other small refiners similarly situated, will take the
small benefits derived from this special exemption and force these
large integrated oil companies to become noncompetitive. If South-
land is only refining 12,000 barrels of crude oil each day at its re-
fineries, then that is, all of the finished petroleum product we have to
ship from these refineries. I will be the first to say, however, that if
we used the benefits received by the special rule to increase our plant
capacity then certainly action should be taken by the FEA, but FEA
would have knowledge of this action under its normal reporting
procedures.
If however FEA is determined, as their top officials have publidy
stated for several months, to totally or partially neutralize the relief
granted by Congress, then Southland Oil Co., requests that the follow-
ing be considered:
(1) Another Federal agency (Small Business Administration)
only last year determined that the proper level at which a small refiner
should be determined as needing special consideration, as regards
access to crude oil, is a refiner whose capacity is at or below 45,000
BPD.
Southland recommends that the FEA exempt refiners whose refin-
ing capacity did not exceed on January 1, 1975, and does not there-
after exceed 45,000 BPD from the entitlement purchase obligation of
the FEA old oil allocation program as to only the first 10,000 BPD
per refinery of old oil inputs or receipts, or both. We feel certain that
if the FEA will adopt this size standard they will rapidly determine
that the small number of barrels so exempt and the small refineries
who benefit from the exemption do not constitute a significant factor
in the market and that this greatly reduced exemption will have no
adverse competitive effect upon other marketers.
(2) Southland Oil Co., also recommends that the regulations which
implement the exemption be modified so that the same benefits are
extended to all small refiners whether they be buyers or sellers of en-
titlements so long as they meet the size standards recommended in
paragraph (1) above.
(3) The FEA has advised they intend to continue the use of the
small refiner bias as presently implemented and in this we concur.
(4) We appreciate FEA's concern that certain refiners who are
beneficiaries of the exemption program might enter into processing
agreements with other refiners who are not receiving the same relief
in an effort to circumvent the intent of the program. Rules should be
adopted and the language clearly written to leave no doubt that such
agreements are contrary to the letter and intent of the exemption and
will not be tolerated by FEA.
(5) FEA has advised that all firms who desire exception relief
must file a request for this relief by April 1, 1976. Fims are instructed
that they should consider what relief they will require if the proposal
is adopted. The proposal however contains numerous alternates which
the FEA advises they are considering adopting which make it ex-
tremely difficult and practically impossible for a firm to determine






21


caption relief based upon the rules as finally

ragraph in the FEA proposal it is stated that
ry exception applications increases "to a sig-
acies burdens in administering the program."
tremendous burden, particularly upon small
1.xtensive filing requirements of FEA's Office
peals. We urge the FEA to revise the schedule

in final form;
to Congress;
~ay waiting period;
I by Congress, grant an additional 15 days to
ption relief.
the resolution of the matter approximately 30
relieve what may prove to be an unnecessary
involved and FEA's Office of Exceptions anid
iess numerous applications that might be re-
m the program FEA adopts and ongress


unity to
tter and
.ty.


present Southland Oil Co.'s views
will be pleased to answer any ques-


TESTMONY OF JAMES T. YoUNG


vof 5


of


No. 2. 1
i will re,%


1y short given the enormous impact
y. In addition, I note that the sole
ted revocation of the small refiners
- A _-


L why Ener gy Actijon' No. 2
esentatives is that FEA's in-


per
and


~,I


.I


the
exD


I






22


tended revocation of the small refiners exemption will throw cm-
panies like ours back into FEA's Office of Exceptions and Appes. In
our particular case, this office has been fair in the level of relief it has
granted, although I am informer by some of my small refiner friends
that our experience is not necessarily representative. However, even
though the level of relief this office has provided us has been sufficient,
the very process by which the relief is conferred constitutes a bureau-
cratic nightmare that creates havoc in our business. We are a small
company. We do not enjoy the extensive management, data collection,
financial, and accounting resources that are commonplace fixtures in
the offices of the Nation's major oil companies. In our case, as with most
small refiners, the exceptions and appeals process reaches right to the
top of the organization and paralyzes it for excessively long periods of
time.
For example, on May 5, 1976, we received a letter from the Excep-
tions and Appeals Office requiring 16 different pieces of financial data
from our company. Some of the data was extremely complex, yet FEA
required that the material be returned to the Exceptions and Appeals
Office no later than May 27. Although this request was burdensome, it
was surpassed by another letter from Exceptions and Appeals which
we received about 2 weeks later. This letter required us to submit nine
more highly complex pieces of financial data which the agency de-
manded to be filed only 4 days after our receipt of their letter.
Another major problem which the exceptions and appeals process
imposes on small refiners is that the system creates vast uncertainties
in operating our businesses. FEA's proposal to extend exceptions and
appeals relief through 6 months rather than 3 months will not alleviate
this problem. Only recently, exceptions and appeals sent data requests
to every company which had ever received entitlement relief from their
office indicating that it intends to reevaluate the level of relief granted
for the years 1974 and 1975. It is absolutely impossible to make mean-
ingf ul business decisions when the staff of a government agency is
allowed such wide-ranging discretion to modify its decisions 18
months and more after the fact.
But beyond the practical problems of being held hostage, to a govern-
ment staff in Washington, there is a significant public policy problem
inherent in Energy Action No. 2 which I would like to mention in con-
cluding. I find it repugnant to my notions of democracy and fair plmn
that a government agency should be allowed to dictate profit levels for
scores of small refiners while the profits of major oil companies are al-
lowed to escalate wildly without r int A ressional veto of
Energy Action No. 2 will do nothing about the profit levels of the ma-
jors. But it will help reduce the bureaucratic harassment to which small
refiners are subjected, and thereby enhance their ability to compete
with the larger oil companies.

TESTI-ONY OF JACK P. RI~In, NAVAJo REFINING Co.
My name is Jack P. Reid. I am chief operating officer of Navajo
Refining Co. Navajo Refining Co. operates a refinery located in Artesia,
'N. Mex., with a rated capacity of 29,930 barrels per day. In addition
to operating the refinery, Navajo operates a crude oil pipeline gather-
ing system and a crude oil trucking company which gathers crude oil
at the lase and transports the crude to the refinery. The products






23


, and Arizona
er. avjoowns n


from


cpnded refinery (and to offset the ap-
decline in production being ex p ned
s been obtained by an intensive effort of
dentt producers at the lease and by ob-
kr day of State and Federwl royalty oil.
le oil refined by Navajo has been obtained
program. Through this aggressive crude
has developed an increasingly higher
lien compared to the national average).
ir indicate that Navajo's crude oil pur-
nt upper tier crude and 40 percent lower
a the other hand consists of 40 percent
rer tier. Thus, Navajo has engaged in an
on program and has not ht to rely
ses to gain competitive advantage, nor
y-sell program. It is in this context that
mr committee is considering, seems most
vng to purchase entitlements over the
rate of between ,000 and $1 million.
kly review the history of the exemption
,ncy Petroleum Allocation Act contained
aat the FEA make proper allowance for
naall and independent refiners. Yet, in the
of the EPAA, small refiners were forced
r t the FEA's Exceptions and Appeals
from the adverse impact of FEA rules


hall
in,"


e the full impact of numerous
FEA proposed to abolh the
I we submit that the YEA's
the exemption, but is rather
ontrary to section 455(g) of

jo has for objecting to this


en-


-811-76---4


3 -


's bu


nid-





24


(3) This FEA action abolishes the small refiner exemption, con-
trary to the EPCA as pointed out above, both as to small refiners in
general and as to Navajo in particular.
(4) The abolition of this exemption imposes a substantial adminis-
trative burden on small refiners.
I will elaborate upon each of these points.
(1) The FEA's action is premature. It is physically impossible for
the FEA to differentiate at this time between the effects of the small
refiner's exemption -and the effects of the numerous other changes re-
cently made in the regulations. There have been substantial changes
in banking rules, cost allocations, buy-sell costs, retailer-reseller cost
allocation rules and crude producer rules. In addition, residual fuel
oils have been decontrolled, distillates may be decontrolled and fur-
ther decontrols are anticipated. Thus, to conclude that changes in
market conditions facing small refiner sellers are due to an exemption
for approximately 7 percent of domestic refining capacity and not to
the myriad other changes is insupportable. As an example FEA an-
nounced it would conduct a "generic review" of Navajo's entitlements
exemption as of January 31, 1976. To date this review has not been
completed nor has Navajo's crude costs for the 3 years ago been deter-
mined. If Navajo doesn't know whether it has lost money for 1975 and
FEA can't tell us, how could FEA possibly know the effect of a na-
tionwide exemption in less than 2 months. Given the short period of
time the exemption has existed, it is impossible to say what the effect
has been. Consideration of the termination of this exemption should
be deferred for at least a year.
In addition, the FEA's proposal to abolish the small refiner exemp-
tion is premature since there has been no showing that there have been
any significant changes in the posture of small refiners since the time
of the passage of the EPCA by Congress. Consequently, the proposed
termination is contrary to the intent of Congress in passing section
403 (a) of the act.
(2) The FEA has failed to analyze the impact of the full scope of
its regulatory scheme as it relates to the small refiner exemption.
Specifically, the FEA has failed to consider the following:
(a) It has given a competitive advantage to foreign oil which is
simply exacerbated by the abolition of the exemption.
(b) The three-tier pricing system and the issuance of entitlements
on imports of fuel oil substantially increased the burden of entitle-
ments on the small refiners.
(c) If a competitive advantage exists, it results in lower prices to
consumers.
Specifically, the FEA has not considered the competitive advantage
of foreign crude. When the FEA established "upper tier" and "lower
tier" crude pricing, it reduced September 1975 crude prices by $1.32
per barrel. In December 1975, the $2 import tariff was abolished. Thus
the average imported price in a true economic sense dropped 68 cents
more than the average upper tier domestic price. Consequently, for-
eign oil had been granted a competitive advantage over domestic
crude. No allowance for this competitive advantage has been included
in the proposed abolition of the small refiner exemption. That such
an advantage exists can be seen from the current sour crude market
where refiners would rather import crude than use domestic sour crude.








be to exclde tiper-tier crude from the entitle-

enis of, the three-tier pricing program result in
ithe sml refiner bias, even though the FEA
mse th bis. ased upon March 1976 figures,
crude is incthdecin alculation at a rate of
,aeSince our ntage of upper-tier crude
hases, the effect of the three-tier system would be
Iementp obligations by l3 percent of total crude
ly touted increase in the small refiner's bias, how-
than 4.8 percent as to Navajo, thus resulting in an
Sobligations of more than 6.5 percent of total
t the purchase obligation would have been before
ee small refiner exemption by Congress. On top
) imported purchased product entitlements which
imestic oi supply ratio, or DOSR. This results in
iase obligation for Navajo.
figures might be helpful. Even though Navajo
ben a net seller of entitlements to a limited
-even point dring the fall and winter
tewas e anticipate having to
illion of enttments fr April of 1976 and ap-
) in etit ents for May of 1976. It is clear that
inall refnrbias is nothing but a myth.
t f th of the small refer exemption on
bencsidered by the FEA. In every instance
rrdto competitive disadvantaged, what it meant
fners were delivering petroleum products to
es t were lower than the majors or the branded
iftht w he case and as stated above, Navajo
!r i sffcintdata to so conclude-the proper
o provide exception relief, if
r to retain the lower prices produced by the

atrary to the specific language of
4lish, not modify, tesalrefiner exemption. As
he net effect of the mdfcationi of the exemption
Lvajq to purchase more entitlemet than it would

;aeof th *CLikewise, the inclusion of an
se obligation fr upperier crude will have a
3t al ll refiners beas2enerallv the increase






26


FEA compliance. We estimate that approximately 65 to 70 percent
of such executive time was spent on FEA-related matters before Con-
gress granted the exemption to small refiners. The FEA is the fastest
growing Federal bureaucracy, employing more than 3,400, making it
one of the largest Federal agencies. Frequently, the personnel are
poorly trained and are ill-equipped to deal with the complicated
technical questions involved in refinery operations. Navajo, unlike
the major oil companies, is simply unable to provide the
education to them. A continuation of the small refiner exemption is
imperative for the continued viability of the small and independent
refiners.

TESTIMONY OF W. W. GREsHAM, OFFERED INI BEHALF OF TrE NATIONAL
OIL JOBBERS COUNCIL ON TiIE Fwxm4L ENERGY ADMINISTRATION
PROPOSED REvOCATIONT OF SPECIAL RULE No. 6 AND ADJUSTMENT TO
SNALI REFINER BIAS UN-DER THEExTITIMNTS PROGRAM

PREFACE
The National Oil Jobbers Council is a federation of 42 State and
regional trade associations representing thousands of independent
small business petroleum marketers. Members include gasoline and
diesel fuel wholesalers, commissioned distributors of gasoline, g
reseller-retailers, and a large number of retail fuel oil dealers. Members
also wholesale or retail many other petroleum products, including
kerosene, LP gas, aviation fuels and motor oils, as well as residual
fuel oil. Together our members market approximately 75 percent of
the home heating oils and 25 percent of the gasoline sold in America
under either their own private brand or the trademark of their
supplier.
Good afternoon. Mr. Chairman, I an W. W. Gresham, general
manager of Gresham Petroleum Co. of Indianola, Miss. Gresham
Petroleum markets gasoline, diesel fuel, and LP gas, principally to
agricultural end users but approximately 25 percent of our sales are
through small country stores and the seven service stations we supply.
I have been active for many years in both the Mississippi Petroleum
Marketers Association and the National Oil Jobbers Council, and am
privileged to serve as this year's chairman of NOJC's LP gas com-
mittee. I am grateful for the opportunity to address the subcommittee
this afternoon on a matter which threatens the survival of my business
and those of many of the thousands of independent small business oil
marketing members of NOJC.
The Federal Energy Administration proposal before the subcom-
mittee today states that "branded independent marketers, and the
national and regional associations representing them, cited substantial
competitive difficulties attributable to the exemption and advocated
its complete elimination." If I may attempt to translate this into more
meaningful language, NOJC believes that special rule No. 6 gives
many small refiners much more than the ability to compete equally
with large refiners desired by the Congress. Instead, the special rule
gives many of those small refiners an unfair competitive edge that
forces independent marketers not lucky enough to be supplied by them
into a situation where they are priced out of the market.






27


his position is best understood by example, and my own company's
s ould serve this purpose. Gresham Petroleum is supplied by
Amoco. We compete directly with other companies supplied by South-
lan Oilo. Earlier this month, Southland's rack prices for pur-
ei transport lots were as follws: Cent

Nola rglr-------------------------------------------- 2
Leaed egar------------------------------------------------------- 28
Diell------------------------------------------------ 25
s rack price was: Cents
~34
N lr------------------------------------------------------ 35.9
Leaedregular----------------------------------------------33.4
........ ........ -------------------------------------- 31. 25
A u can see from these prices, Southland's price advantage
runs from 5. cents on leaded regular to 7.4 cents on premium. All re-
s, of course, must price their product in accordance with the FEA

Wen the N&J? staff asked the FEA if Southland was receiving
befits from Special Rule No. 6 which would explain this price differ-
ential, they were told that the individual benefits of each refiner are
p i but that such benefits were very much within reason. In
fJC was told that the small refiner receiving the greatest
b t from Special Rule No. 6 received in excess of 21 cents a gallon
on its product.
It is obvious that independent marketers in direct competition with
all" refiner marketers cannot survive long if this situation con-
ues. This, as FEA points out, directly contravenes the agency's
mandate under section 4(b) (1) (d) of the Emergency Petroleum
Allocation Act to * preserve the competitive viability of inde-
pendent refiners, small refiners, and nonbranded independent market-
ers and ed independent marketers."
ks NO3C's executive vice president Doug Mitchell said in his testi-
mony on Special Rule No. 6 in January (app. A), "It may be
t that some small refiners suffer diseconomies of scale or other
blems for -which they are not fully subsidized b other programs."
Whie NOJ wishes to maintain the viability of the small refiners,
w o not believe it is desirable or proper todo more than make-up for
tomies. member, while the small refiner appears small
toa large refiner, it appears very large indeed to the average jobber
or etile wthwhich it competes.
Iis the desire to complete small refiners when needed without
them in a p tion to endanger other competitive segments of
inustry that leads to NOJC's proposal to abolish Special Rule
No. 6 and continue specially modified individualized exception relief.
As appendixes A and B to Mr. Mitchell's attached testimony show,
small refiners have proven themselves large enough to make use of
the FEA exception procedure. We have examined the rulings of
EEA's Ofic of Exception and Appeals on exception applications
filed pursuant to PEA's invitation in Special Rule No. 3. We find that
only 28 of them were actually applications by small or independent
refiners seeking exemption from their obligation to purchase entitle-
ments. Sixteen of these applications were at least partially granted,





28


and 12 were denied. Among those granted, the average time elapsed
between filing and final dsposition was about 5 weeks. Considering the
phase in schedule in Special Rule No. 3 this hardly seems an unreason-
able period for deliberation.
It is important to note that where partial relief was granted, that
relief was fashioned individually to limit the subsidy to a level which
would permit a net profit or return on investment approximately
equal to the average net profit or return on investment earned in a
recent base period such as the best 4 of the last 7 years. Moreover,
among those cases in which relief was denied, seven cases involved
firms which would experience profits at or above historic levels even
with their entitlements purchase obligations. The other five denials
consist of two cases in which the financial data made available to FEA
was inconclusive on historical or current profit levels, two cases in
which the applicant refiner was, in fact, selling rather than buying
entitlements, and one case in which the refiner had just replaced its
new crude oil supply with an old crude supply. In other words, in
every case, FEA fine-tuned the individual exceptions so that they
compensated for extra costs to the extent necessary to bring a refiner's
prices to the average level without overcompensating by awarding a
windfall profit or permitting such low prices that market shares would
be distorted.
The FEA proposal before this subcommittee today would remove
special rule No. 6 and replace it with additional benefits in the small
refiner bias. As appendix B shows, small refiners are already the re-
cipients of a number of special subsidies. Our experience with the
effects of special rule No. 6 combined with these already existing sub-
sidies leads us to fear that another effort at general rather than par-
ticularized relief may result in additional unnecessary benefits to the
detriment of competition.
For this reason, NOJC believes that the only mechanism which can
reconcile the goals of both the Emergency Petroleum Allocation Acts,
sections 4(e) and 4(b) (1) (d) is a special case by case exception pro-
gram using the regular exceptions procedures but initially raising a
presumption of need for refiners covered by special rule No. 6. The
presumption could be rebutted by FEA and should be lost if a refiner
fails to provide any data specified by the regulations stating the pre-
sumption or, if the refiner fails to seek an exception, with a brief
period such as 3 weeks. It is only with such case by case relief that
FEA can assist those refiners who need additional subsidies without
oversubsidizing other refiners.
Thank you once again for the opportunity to testify. If you have
any questions, I would certainly be happy to answer them.
















.CE

I is a federation of 42 State and
ating thousands of independent
;. Members include gasolne and
Distributors of gasolie, line
r of retail fuel oil dealers. Mem-
. petroleum products, including
motor oils as well as residual1 fuel
approximately 75 pe t of the
ine sold in America under
the trademark of their supplier.
,o explain the extreme displeasure
.rs with section 4 (e) of the Emer-
mended by the Energy Policy and
is public hearing, FEA expr
making on the entitlements pro-
ition of alternative regulations to
itive advantages caused by the
Our aSociation looks forward to
before FEA makes anv p osal,






30


(A) Transfer payments from small refiners to large refiners
Members of both the House and the Senate were alarmed because
refiners characterized as small were required to make payments to
multinational fully integrated oil companies. These payments appar-
ently averaged $25 million per month. The magnitude of the payments
surprised many Senators and Congressmen because FEA's proposal
and hearings on the entitlements program had left them with the
impression that almost all the payments would be made by big refiners
to small ones. Big refiners were presumed to control access to most of
the "old" crude oil, and small refiners had been considered leading
advocates of the entitlements program, so the Congress apparently
concluded that FEA had somehow distorted the entitlements program
to rob the intended beneficiaries.
This perspective, which is apparent throughout the legislative his-
tory, manifests lobbying which misled the Congress by focusing upon
only one part of a complicated program. The Congress apparently
was pursuaded (1) that entitlements were devised primarily to sub-
sidize small refiners, (2) that small refiners made their $25 million per
month payment from their own pockets, and (3) that large refiners
kept the $25 million per month payments. All three assumptions are
completely incorrect.
The entitlements program results from the Cost of Living Council's
crude oil price regulations. In 1973 price regulations created two tiers
of crude oil prices. As an incentive the price of new, released, and
stripper crude oil could rise to the world level while "old" crude oil
was frozen at a lower price. This rule had a disasterous effect on many
refiners and upon the independent branded and nonbranded marketers
those refiners supplied.
For example, under the most recent crude oil price regulation, a
refiner dependent entirely upon new domestic crude oil experiences
acquisition costs of $11.28 per barrel while a refiner using only old
crude oil would pay $5.25 per barrel. The crude price regulation there-
fore introduces an arbitrary price differential of about 14.4 cents per
gallon. Of course, this is an extreme case;:' most refiners have a mix
of old and new crude. But every refiner has a different mix, and,
therefore, would have a different price somewhere in a spectrum of
prices about 15 cents per gallon wide.
As the artificially Induced price disparities appeared, consumers
who could change suppliers bought from the least expensive sup-
plier. As a result, refiners and marketers tied to that refiner by allo-
cation regulations experienced a serious decline in market shares.
Independent branded and nonbranded marketers suffered as much as
or more than any independent or small refiner and marketers pressed
as hard or harder for a single price of crude oil.
The entitlements program eliminates most of the artificial price
disparities created by two-tier crude price regulations. It does this in
three steps.
(1) Refiners with more than the average amount of old crude oil
must buy entitlements from refiners with less than the average amount
of old crude oil.
IThis is not the most extreme case. That consists of a refiner dependent entirely upon
imported crude oil at a world price well in excess of $11.28 per barrel.





31


iers selling entitlements must reduce their product prices
mt equal to the value of the entitlements they sell
iers buying entitlements may increase their product prices
mt equal to the value of the entitlements they buy.
three steps are completed, the artificial advantages and
OeS of the two-tier crude price regulation are largely can-
5one refiners raise their prices and other refiners lower
to reach the equilibrium which would prevail if all crude
1re themselves uniform.
of these three steps is the one on which proponents of
focused. It requires payments by rs enjoy-
a Iow price advantae as large as 15 cents per gallon.
hese refiners do not take the money for the payments from
Bsources. Rather they include this amount in the price of
et, so that their finished product prices will rise by as
ents, or 8 cents per gallon to the equilibrium price. Sim-
efiners who receive the payments, by they large or small,
'the payments. Regardless of whatever arguments some
of the entitlements program may have used, the main
in no sense a subsidy to any refiner because the payments
3Sed on to consumers as price reductions of as much as
cents per gallon to reach the equilibrium price.
Yress been fully apprised that no subsidy of small refiners
I in the main program, that ending market disruption was
)al of the entitlements program, that payors were easily
in their prices and that payees could not keep the pay-
wns highly unlikely that entitlements payments by small
]rge refiners would have been used to justify section 4(e).
r-eeptions for -small refiners
really only two problems associated with the inclusion of
n the entitlements program. First, there may be a sudden
flow problem for refiners with a large proportion of old
ause they must pay for entitlements before they can recoup
sin higher prices. Second, because the program cancels out
I benefits of a disproportionate supply of old crude oil,
.nt refiners will find that they are now priced above the
3y at pt to roup all of their costs. The diseconomies of
gmost of refiners in this predicament

rof
S
oin testimony on S 861 the ursor of section 4 1(),
ssare argued that the Offce of Ecptions and ApeaIs
serious hrsipj or gross inequity. Refinersoese n
W7EA was moving too slowly and CJongesseeoare
lie congesonal solution 'did not become available until
ad by the FEA Office of Exceptions and Appeals had
good record in dealing with the small refiners'% problems
demosrtsta E adopted procedures and granted
hielsoved these refiner problems. moreover, an examina-
r applications for exceptions shows that individual relief
xever, a secondary asect nf the entitlements program called the "small
_'k 4- .~ -a _a -


71-811-76----5





32


is far more consistent with the public interest than the general exemp-
tion granted in section 4(e).
(1) Cash flow problem.-Small and independent refiners with lim-
ited access to cash would have difficulty buying entitlements in the first
month. because the cost of those entitlements could not be completely
recouped until 1 month after payment. Once the cycle is in operation,
the recoupment for the prior month can be used for the current pay-
ments, although that still leaves the cash for thhe initial payment
unrecouped.
FEA eased this start-up burden by at first exempting and then grad-
ually phasing the small and independent refiners into the entitlements
program. Special Rule No. 3. as amended, and Special Rule No. 4 com-
pletely exempted refiners with a capacity of less than 30,000 barrels
per day from all entitlements purchase obligations in January and
February, and required these refiners to purchase only one-third of
their obligations in March, two-thirds of their obligations in April,
seven-eighths of their obligations in May, and eight-ninths of their ob-
ligations in June 1975. Proportionate adjustments were made for small
refiners with capacities in excess of 30.00 barrels per day. In addition,
FEA invited all refiners to file requests for individual exceptions,
many of which were received and granted before the general phase-in
of obligations began. Finally., remember that regardless of whether
FEA helped resolve these problems or not, any sudden cash flow
problems at the beginning of the program have long since been
overcome.
(2) Diseconoinies o f 8ale.-Small refiners as a class will have larger
nonproduct costs than large refiners, because refinery per unit costs
are dramatically lower for large volume facilities. As a result, some
small refiners may find that they must charge more for finished prod-
uct than a large competitor with the same cost of crude oil. There are
already numerous programs to compensate for these extra costs and
I will discuss those in more detail later. For now, it is enough to note
that reducing or eliminating the purchase obligations of these small
refiners could compensate for the extra costs and that Congress was
told that FEA could not promptly respond to these requests on an
individual basis.
At our request the FEA Office of Exceptions and Appeals has pro-
vided N OJC with a list of the exception applications filed pursuant
to FEA's invitation in specal rle No. 3. We have examined the rulings
in each of these cases and find that only 28 of them were actually ap-
plications by small or independent refiners seeking exemption from
their obligation to purchase entitlements. Sixteen of these applica-
tions were at least partially granted and 12 were denied. Among those
granted the average time elapsed between filing and final disposition
was about 5 weeks. Considering the phase-in schedule in special rule
No. 3. this hardly seems an unreasonable period for deliberation.
It is important to note that where partial relief was granted that
relief was fashioned individually to limit the subsidy to a level which
would permit a net profit or return on investment approximately equal
to the average net profit or return on investment earned in a recent
base period such as the best 4 of the last 7 years. Moreover, among
those cases in which relief was denied, seven cases involved firms






33


Profit at or above historic levels even with
s1eentpurchase obligations. The other five denials consist
in which the fnancial data made available to FEA was
lui e on historical or currnt profit levels, two case in which
plcant refiner was in fact selling rather than buying entitle-
d one in which the refiner had just replaced its new crude
p with an old crude oil supply. In other words, in every case
f-tuned the individual exceptions so that they compensated
t to bring a refiners prices to the
e without overcompensating by awarding a windfall profit
!tting suc low prices that marketshares would be distorted.
he Con had been afforded an opportunity to review this
of the Office of Exceptions and Appeals, they would almost
il have concluded, as NOJC does, that FEA has done an
Sjob of balancing the public's interest in encouraging and
.. small refiners with the public's interest in avoiding Govern-
-wi ndfalls. It is true that the refiners who filed requests
2 n carried a heavy burden in assembling all the n
'on, but they were richly rewarded for their efforts. Under
eaes it is unlikely the Congress would again accept
c ent that FEA cannot provide adequate relief on a case-by-
ii.In fact, the Congress would very likely conclude that the
terest is better served bv this individual relief than by general
tion. L

11. WflAT ARE THLE RESULTS OF A GENERAL EXEMPTIlON?
V se. inequities are created by generally exempting refiners
capacities of less than 100,000 barrels per day from their pur-
cblitions under the entitlements program. In a few regional
ts these refiners and the marketers they supply will eventually
in enormous artificial price advantage over other small refiners
her independent marketers as well as major refiners. This price
w almost certainly increase the marketehare of the
t rfinrsin direct contravention of the objectives set forth in
n 4(b)>(1) (D) of the Emergency Petroleum Allocation Act.
House Interstate and Foreign Commerce Committee Report
panng H.R. '014 estimates that refiners covered by Section
uld be forcedtoraietheir picesby fron 4 to 8 centsper
they were not exempt. The former gure is probably closer
truth, but FEA can easily calculate the precise per gallon bn-
?achrefner Th imortnt point is that in almost, every case
r gllo beefi of te exception far exceed the extra per gallon
Associated with being all refiner. To see this one need only
hat 19 refiners whose entitlements purchase obligations are
4ber b section 4(e) never even be-
it appropriate to ask FEA for an exception from those obliga-
nd, a g the 3 refiners who did ask, 21 had their applications
or only partial ly granted because thev were operating at or near


had thatrefiners


' had


that






.34
might be required to charge market prices for their products instead
of passing the artificial reductions through, but we now understand
that section 9 of the Emergency Petroleum Allocation Act, as
amended, precludes this solution. In short, section 4(e) inevitably re-
creates the artificial two-tier price differentials the entitlements pro-
gram was intended to end.
Members of both the House and the Senate reasoned that these price
disparities would not be a serious problem because the exempt refiners
control only a small fraction of the total national refining capacity.
But this argument overlooks the fact that products sold by the exempt
refiners are not averaged into every marketer's inventory. Rather many
of the exempt refiners market in a small geographic area surrounding
the refinery. In these relevant markets exempt refiners are a very sig-
nificant factor.
Large price advantages worth millions of dollars every month and
concentrated in a few local markets will threaten competing small
refiners who happen to use less than the national average amount of
old crude oil. Remember, 50 percent of the small refiners sell entitle-
ments; yet, the nonexempt refiners have the same diseconomies of
scale as the exempt small refiners and they experience even more severe
cash flow problems than the exempt refiners because they purchase
much more expensive crude oil. In fact, where a nonexempt refiner
competes with an exempt refiner of the same size, section 4(e) may
discriminate in violation of the equal protection principles incorpor-
ated in the fifth amendment due process clause of the Constitution:
the entitlements program reduces the nonexempt refiner's net cost of
crude oil to the national average price of crude oil; but, section 4(e)
leaves the otherwise identical exempt refiner with a far lower net cost
of crude oil because paying the national average price is an intolerable
burden to small refiners !
Branded and nonbranded independent marketers will face equally
serious problems in the local markets served by exempt refiners. Non-
branded independents may be able to compensate somewhat by buying
at least part of their product from exempt refiners, but the branded
independent will be hopelessly trapped with a national average buy-
ing price that could exceed the prevailing local selling price of exempt
refiners.
In contrast with the particularized relief granted by the FEA Office
of Exceptions and Appeals, the effects of section 4(e) are truly cata-
strophic. Because it is a general exemption it gives many refiners too
much assistance and it may even give some refiners too little. It seems
clear that the individual case-by-case approach followed for the last
year by FEA not only awards benefits more equitably but also avoids
the comnpe-titive costs of over-compensation.
I1. OTHER SUBSIDIES OF EXEMPT REFINYERS MUST BE CONSIDERED
One of the major disadvantages of a general exemption from
entitlements purchase obligations is that it disregards the existing
government and private advantages already extended to the small
refiners who were supposed to need the assistance of section 4(e).
There are several special programs, few of which have ever received
extensive public scrutiny.






35


)s subsidy of small and independent refiners was the
iport tickets to these refiners under the oil import
Because they effectively conveyed the benefit of
crude oil, these tickets permitted many less efficient
tt the same level as or even below major oil companies.
il is expensive and the import fee differential which
tickets as a device for subsidizing small and inde-
now provides an advantage of only about 15 cents per
subsidy continues in the small refiner bias of the

e) issues additional entitlements on a graduated basis
apacities of up to 125,000 barrels per day. As a result,
Sbuy less than their share of entitlements or they are
than their share of entitlements. Either way, each
I many independent refiners receive a direct subsidy.
;hedule of benefits is supposed to approximate the
ralue of the maximum subsidy received by the eligible
ie 1972 base period under the old oil import program.
10,000 barrel per day refinery receives 1,238 extra
iday. That is an annual subsidy of approximately
'8.62 per entitlement, the value for October 1975). In
bsidy annually equals about one-third of the entire
uch a refinery.
allocations and royalty crude
freezing crude oil supplier/purchaser relationships
nber 1, 1973, FEA also requires the 15 major refiners
counts of crude oil to small and independent refiners
r buy/sell list. These programs, as well as a small
oGovernment Royalty Crude, eliminate what has
small and independent refiners' greatest vulner-
rud oil supply. An adequate assured supply of crude
Ss to credit which, in turn, permits expansion. While
rom one refiner to another, there is little question that
assures crude oil to a refiner is an important subsidy.
agreements
Js can eliminate conern over both markets and tho
oil. Many small or independent refiners enter into
Sing ment with major refiners. The major pro-
d markets tle products, paying the concubine re
A s all refiner with part of its capacity committed
eemerts is significantly less in need of a subsidy than
Is e ntirely upon the vicissitudes of the crude oil and

Supply set-aside
department must set-aside a disnrolortionate share of






36


Bids for the small business set-aide made by eligible refiners (50,000
barrels per day here) may be no more than 130 percent above the high-
est unit price at which non-set-aside sales are made. But that still per-
mits a significant subsidy since only one small refiner may be close
enough to bid at a given installation, permitting the refiner to safely
bid at or near 130 percent. Moreover, small refiners can often make jet
fuel more cheaply than can large refiners because jet fuel can be
straight run without cracking. In a few cases these set-aside contracts
are so lucrative that the small refiner will exchange its other products
for jet fuel in order to increase its sales under the set-aside contract.
A small refiner with one of these contracts is in far less need of an
additional subsidy than a small refiner competing with major refiners
on a full range of products.
The legislative history of section 4(e) does not indicate that Con-
gress was aware of any of these programs when it ordered an exemp-
tion from entitlements purchase obligations. NOJC members serious
question whether Congress would have adopted section 4(e) if full
consideration had been given to existing subsidies.
Equally important, not every small refiner shares in the benefits of
all these programs. The fact that need for additional subsidy must
vary from one refiner to another according to participation in these
programs again highlights the advantage of case-by-case exceptions
over the general exemption in section 4(e).

IV. CONCLUSIONS
The arguments and data presented in these comments demonstrate
that the two expressed congressional reasons for adopting section
4(e) are invalid. The Congress was misled to believe that the second
of three steps forced small refiners to subsidize major refiners. As we
have shown, that simply is not the case. And, contrary to congressional
expectation, FEA has established that it can process exception appli-
cations which give the really needy refiners adequate relief.
We have also shown that section 5(e) gives refiners much more
relief than was found necessary in a case-by-case analysis. We have
seen that section 4(e) duplicates, rather than supplements, a large
number of existing subsidies. And, we have seen that section 4(e)
will eventually place some small refiners and branded and nonbranded
independent marketers in various local markets at a $25 million
per month competitive disadvantage.
Section 4(b) (1) (D) of the Emergency Petroleum Allocation Act
FEA "to preserve the competitive viability of independent refiners,
small refiners, nonbranded independent marketers, and branded inde-
pendent marketers." It seems to NOJC that section 4(e) is in direct
irreconcilable conflict with section 4(b) (1) (D) and that, therefore,
FEA must immediately propose conversion of section 4(e) to a stand-
by status retrocative to December 1, 1975.
It may be true that some small refiners suffer diseconomies of scale
or other problems for which they are not fully subsidized by other
programs. But section 4 (e) exacts an unacceptable price in market dis-
ruption and then arbitrarily helps only that half of the small refiners
who bear the comparatively small burden of buying entitlements rather
than the other half which must pay the highest price for its crude










It would be far more equitable to fashion individual relief on
b for those few refiners who actually need it.
enc, NJCsucraetsthat the only mechanism which can recon-
t lof ion 4(e) with the lofsetion4(b)(1) (D) is
ex tion pgram uig the regular except
caseb aey xepioinga presl1,t ion of need for refiners
edres but initially raising rsiitolofiedfrrfnr
rd by Special Rule No. 6. The presumption could be rebutted
A and should be lost if a refiner fails to provide any data
f in the regulation stating the presumption or if the refiner
tsk an exception within a brief period such as 3 weeks. As
ye we have made clear, it is only with such case-by-case relief
F can aist those refiners who need addition subsidies without
subsidizing other refiners.

Aix.mix A


DFEpositiFnlingidatedipantedon e r rc r e
omayFE No Fiigdt d at grne insoecae)


1416
1438
1469
1479


Feb. 21, 1975 Mar 28, 1975 Denied-exceptional profits.
Jan, 7,1975 Jan. 20,1975 Inadequate evidence.
Jan. 22, 1975 --------------
Jan. 13,1975 Mar. 12, 9175 73.8 pcent exemption For
February-June.
Feb. 21,1975 Mar. 27, 1975 Denied-exceptional profits.
Feb. 7,1975 Feb. 20,1975 Denied -egal challenge, not
merits,
Feb. 13,1975 Mar. 27, 1975 Do.
F 1975 Mar. 28,1975 89.74 percent ex for
April-June.
Jan, 31,1975 Mar. 12,1975 Denied-exceptional profits.
Mar. 11, 1975 Mar. 28,1975 100 percent exemption for April-
June.
Feb. 21,1975 Mar. 27,1975 Denied-exceonal profits.
Feb. 19,1975 Apr. 2,1975 Denies-appears to be a seller.
Feb. 21,1975 Mar. 28,1975 100 exemption for April-
June
----- -- do --- -do . 0.
Feb. 10,1975 July 3,1975 Not an entitlements ap
Feb. 21,1975 Mar. 27, WIp
---do --- Mar.28,1975 Do
Feb. 19,1975 .- do ..... 75 percent exemption April-
August.
Mar. 10,1975 Mar. 27, 1975 100 percent exemption for April-
Jan. 13,1975 Mar. 18,1975 D a n
Feb. 27,1975 May 2,1975 rstobe -seller
Feb. 25,1975 Mar. 27,1975 100 percent exemption Ap.
Jan. 14,1975 Feb. 24,1975 63 percent exe January-
June,
Jan. 6,1975 Jan. 31,1975 Deidntra ml eie
Jan, 23.1975 Mar. 12,1975 Denied-eceptiona! profits.
Feb 27,1975 May 2.1975 Not a refiner.
Jan. 15,1975 Mar, 2, 1975 35 percent e t A

Ja.1,1975 a, 21,1975 295 prent fxmtor Feb-

Jan. 23,1975 Jan. 31,1975 Error correction.
------ ------- Mar. 27,1975
Mar. 13,1975 Mar.28,1975 100 percent for April-
~ .~de-----June.


3r 7








38


Disposition Judicial disposition (later relief
Company FE No. Filing date date granted in some cases)

Shell Oil Co., Houston, Tex ------------- 1454 Mar. 6, 1975 Mar. 27, 1975 Denied-legal challenge, no
merits.
Standard Oil Co. (Indiana), Chicago, IL_- 1418 Jan. 24,1975 ---- do ------- Do.
Southland Oil Co., Yazoo City, Miss ------ 1482 Feb. 21, 1975 ----do ------ 63.27 percent exemption April-
August.
Tesoro Petroleum Corp ---------------- 1483 ---do ...................
The Oil Shale Corp., Los Angeles, Calif_ 1491 --do ------ Mar. 28, 1975 100 percent exemption April-
June.
Vulcan Asphalt Refining Co., Cordova, Ala- 1398 Feb. 3, 1975 Mar. 6, 1975 Denied-result on a shut down.
Warrior Asphalt Co. of Alabama ----------1502 Feb. 24, 1975
Young Refining Corp., Douglasville, Ga_._ 1487 Feb. 21, 1975 Mar. 27, 1975 100 percent exemption April-
June.


APPENDIX B


Disposition Judicial disposition (later relief
Company FEE No. Filing date date granted in some cases)


REQUESTS FOR EXEMPTION FROM
ENTITLEMENT PURCHASE OBLIGA-
TION FILED AFTER MAR. 5, 1975
Beacon Oil Co., Hanford, Calif ----------
Delta Refining Co., Memphis, Tenn ------
Do - - - - -
Edgington Oil Co., Long Beach, Calif.
Laketon Asphalt Refining Co., Evansville,
Ind.
Do - - - - - - - -
D o ------------------------------
Midland Cooperatives, Inc., Refinery Di-
vision, Cushing, Okla.
Do - - - - - - - -


1855
1720
1854
1752
1500
1846
1981
1630
1888


Do ----------------------------- 1967
Navajo Refining Co., Artesia, N. Mex ----- 1417
Do ----------------------------- 1870
Do ----------------------------- 1973
Newhall Refining Co., Newhall, Calif----- 1858
D o- -----------------------------------------
North American Petroleum Corp., St. 1670
James, La.
OKC Corp., Dallas, Tex ---------------- 1354
Do ----------------------------- 1840
Do --------------------------- 1965
Pasco, Inc., Englewood, Co ------------ 1853
Do ----------------------------- 1974
Pennzoil Co.. Houston. Tex ------------- 1706


Rcck Island Refining Co., Indianapolis,
I nd.
Do .............................
Southland Oil Co., Yazoo City, Miss_.--.-
Warrior Asphalt Co., of Alabama Tusca-
Iousa, Ala.
Do .............................
Young Refining Co., Douglasville, Ga_....
Do ............. ---.............
D o ------------------------------
Do......................-----


1876
1982
1957
1833
1968
1487
1705
1844
1972


Aug. 1, 1975
June 2,1975
Aug. 1, 1975
June 17, 1975
Feb. 19, 1975
July 31, 1975
Oct 15,1975
Apr. 29, 1975
Aug. 21, 1975
Oct. 10, 1975
Jan. 23,1975
Aug. 7, 1971
Oct. 14,1975
Aug. 25, 1975
Oct. 17, 1975
May 13, 1975
Jan. 15,1975
July 30, 1975
Oct. 10,1975
July 31, 1975
Oct. 14, 1975
June 19,1975


Aug. 13,1975
Oct. 15,1975
Oct. 7, 1975
July 28, 1975
Oct. 10, 1975
Feb. 21, 1975
June 2,1975
July 31,1975
Oct. 14,1975


Sept. 12, 1975
July 9, 1975
Sept. 11, 1975
Sept. 18, 1975
Mar. 28, 1975
Sept. 17, 1975
Nov. 7, 1975
July 31, 1975
Sept 17, 1975
Nov. 7, 1975
Mar. 12, 1975
Sept. 18, 1975
Nov. 7,1975
Sept. 18, 1975
Nov. 6,1975
July 31, 1975
Mar. 21, 1975
Sept. 16,1975
Nov. 7,1975
Sept. 17, 1975
Nov. 7, 1975
Sept. 16, 1975


Sept. 15, 1975
Nov. 6,1975
Nov. 7, 1975
Sept 17, 1975
Nov. 7, 1975
Mar. 27, 1975
July 9, 1975
Sept. 16, 1975
Nov. 7, 1975


Denied-exceptional profits.
Extension through Aug. 31,
1975.
Denied-exceptional profits.
60.47 percent exemption for Sep-
tember-October.
75 percent exemption for April-
August.
100 percent exemption for Sep-
tember-October
100 percent exemption for
November-December.
100 exemption for August.
100 percent exemption for Sep-
tember-October.
100 percent exemption for
November-December.
Denied-exceptional profits.
100 percent exemption or
October.
100 percent exemption for No-
vember-December.
67.48 percent exemption for
September-October.
Denied-exceptional profits.
24.46 percent exemption for
August.
29.57 percent exemption for Feb-
ruary-July.
100 percent exemption for Sep-
tember-October.
100 percent exemption for No-
vember-December.
84.7 exemption for September
and October 1975.
36.99 percent exemption for No-
vember-December.
Relieved of obligation to purchase
20,186 entitlements . until
such time as it sold 21,861
entitlements.
52.20 percent exemption for Sep-
tember-October.
Denied-exceptional profits.
15.89 percent exemption for No-
vember-December.
70.97 percent exemption for Sep-
tember-October.
30 percent exemption for No-
vember-December.
100 percent exemption for April-
June.
100 percent exemption for
July-August.
100 percent exemption for Sep-
tember-October.
100 percent exemption for No-
vember-December.








AC


Rfier wth December purhs obligations reduced or eliminated
b (e) whic did not seek an exception from those obligations:
BarHunt.
CanaJ.Lakeside.
CLittle-Amer.
C o Placid.
Cra-Farmland. Saber-Tx.
Dow. Sage Creek.
Edgingtn-Oxn.Texas t.

FWITCO.

APmENix D

orT~ e-,-aS-Bm~
One of the major disadvantages of a general exemption from entitle-
ment puchae ligations is that it disregards the existing Govern-
ment and private advantages already extended to the small refiners
wo were sup to need the assistance of section 4(e). There are
sevralspeialprograms, few of which have ever received extensive

A. SMALL REFINERS' ENTIMEN T BIAS
The most famous subsidy of small and independent refiners was the
at of extra import tickets to these refiners under the oil import
quot prgra. Because they effectively conveyed the benefit of
c per foreign crude oil, these tickets permitted many less efficient
rto price at the same level as or even below major oil companies.
Toy foreign oil is expensive and the import fee differential which
briflyreplaced tickets as a device for subsidzn small and independ-
entreinrsnow provides an advantage of only about 1.5 cents per
br But the subsidy continues in the small refiner bias of the en-

Seton 211.6 (e) ise additional entitlements on a graduated basis
to rcapacitiesofupto125,0 barrelsperday.A a result.
byls than their share of entitlements or they are
able to sell more than their share of entitlements. Either way, each
smal refner nd any ndepndet refiners receive a direct, subsidy.
Sto approximate the
prnt inflated value of the maximumsubsidy received by thie eligible
refnes urig he197 bseperiod under the l oil import progra m.
Forexaple a 0.00 brre-per-day refinery receives 1.238 extra
enttleent eah dy. hatis an In'nual subsidy of ap-proximately
$3. Mllon(at $862 prettlement. the value for October 19Th5). In
thi cae, hesubidyannaly equals about one-third of the entire mar-

B. XR RUY ALLOCATI0KB AXND ROYALTY CRUDE
T additionto freezing crude oil supplier/purchaser relationships in
effect on December 1, 193, FEA also requires the 15 major refiners to


39






40


sell specific amounts of crude oil to small and independent ref
under the quarterly buy/sell list. These programs, as well as a small
refiner set-aside of Government royalty crude, eliminate what has al-
ways been the small and independent refiners' greatest vulnerability-
loss of crude oil supply. An adequate assured supply of crude oilf cili-
tates access to credit which, in turn, permits expansion. 'While the value
varies from one refiner to another, there is little question that pro-
gram which assures crude oil to a refiner is an important subsidy
C. PROCESSING AGREE-'ENT:S
Private contracts can eliminate concern over both markets and the
supply of crude oil. Many small or independent refiners enter into log-
term processing agreenments with major refiners. The major provides
crude oil and markets the products, paying the "concubine" refiner a
service charge. A small refiner with part of its capacity committed to
processing agreements is significantly less in need of a subsidy than
one which depends entirely upon the vicissitudes of the crude oil and
finished product markets.
D. DEaENSE FUEL suPLY SET-ASIDE
The Defense Department must set-aside a disproportionate share of
all its fuel acquisitions for small businesses. On many fuels the quanti-
ties are too small to attract refiners, but small refiners have taken full
advantage of this program with aviation fuels. This set-aside is clearly
intended to be a small business subsidy since these are "negotiated
procurements" which consider a bidder's costs and size as well as his
price. Bids for the small business set-aside made by eligible refiners
(50.000 barrels per day here) may be no more than 130 percent above
the highest unit price at which non-set-aside sales are made. But that
still permits a significant subsidy since only one small refiner may be
close enough to bid at a given installation, permitting that refiner to
safely bid at or near 130 percent. Moreover, small refiners can often
make jet fuel more cheaply than can large refiners because jet fuel can
be straight run without cracking. In a few cases these set-aside con-
tracts are so lucrative that the small refiner will exchange its other
products for jet fuel in order to increase its sales under the set-aside
contract. A small refiner with one of these contracts is in far less need
of an additional subsidy than a small refiner competing with major
refiners on a full range of products.

STATE-MENT OF CHARLES L. BIXSTED, EXECUTIVE DIRECOR) NATIONAL
CONGRESS OF PEmOU-31 RMrULRS
The National Congress of Petroleum Retailers represents branded
service station dealers in 47 States, Puerto Rico, and the District of
Columbia. Our 70,000 members are supplied by integrated oil com-
panies at wholesale prices (D.T.W.'s) established by their locked-in
suppliers. Few, if any, of our members have access to product from
small independent refiners. Rather it is with theso marketers, supplied
by such refiners., with whom our members must compete. Special Rule
No. 6, which exempts the first 50,000 barrels of product of certain
small refiners, is working a hardship on many of our members and
their customers.







inybefore the Federal Energy Administra-
m 22, 1976,that there is no justification for an auto-
ptin orsmllreinrs. On March 24,1976, we wrote FEA
r i terean jutiiction for an automatic subsidy for
x& Automatic exemptions or subsidies only further pro-
o m of unfair competition in the marketplace and fur-
ma the competitive viability of the branded independent

ritial effects of the amendment proposed by FEA are dis-
iby FEA, and by the major oil companies and
fines at hearings held by the FEA on the subject differ.
kn however, that present market conditions are intoler-
ny dealers. According to figures published by FEA, over
, are no disputes, there were mie firms in November and
if 1975 which received benefits of more than 10 cents per
to their exemption from entitlement purchases. Nineteen
rs, who ive befits under Special Rule No.6, never ap-
a exemption from the entitlements program prior to the
ion. They will continue to benefit under FEA's proposed
A dealer with a locked-in D.T.W. cannot possibly compete
keter being supplied by any of the nine refiners receiving
wer 10 cents a gallon no matter how inefficient their econ-
f might be. Neither can a dealer survive for lonc if he is
omith a marketer who is supplied by a refiner who
subsidy whh it doesn't need. FEA has certainly made a
right direction in recommending revocation of Special
ately, however, FEA's proposal to grant all small refiners
in the amount of additional entitlements which they al-
ye would still allow some small refiners and their market-
unfair competitive positions to the disadvantage of many
4f baded independent service station dealers.
s it recognizes that the small refiner exemption might
in small refiners benefits disproportionate to their actual
believe it was the intent of Congress and FEA regulations
te sall refiners only on the basis of need to insure their
d preserve a competitive market place. N.C.P.R. does not
ied ance. Exemptions or subsidies should be granted
by efnerbaisand only be given to small refiners who
tr neds Furthermore, the aid granted should y be
nsure eac salrfnr an equal chance to compete. FEA
,d that it ishestat to -go the route of a case-by-case study.
r..PR.beieesths oudbe the betroad for FEA to
le Special ule No.6 would eliminate extreme diftials,
emore double the number of small re-
rthe disturbance of more markets
orw prolm orne independent deales Althouh
s are imputed, th mobility of to 41/2 et dufferetials
,emly ificut fr ur embrstooppose FEA's recoin-
ultin cane. n ac, we quesin whether we can. The
le IoCnrs suatatvyttepooe mn-
-fe oeimdaerle.Th eiie oeei o






42


enough to cure the patient. the dealer who is competing with a mar-
keter under special rule 6 who has an unfair wholesale price advantage
which it can maintain under the proposed amendment. FEA can and
must do better if the objectives of section 4(b) (1) of the E.P.A.A., to
preserve a viable competitive independent sector of the industry, are to
e met. FEA has an obligation to insure the survival of small re-
finers, but that obligation extends to braided independent dealers also.
FEA's proposed amendment would be less damaging to independent
branded dealers than Special Rule No. 6 as fewer dealers would face
immediate failure. Yet for many dealers, the agony would only be pro-
longed. Their businesses would fail but at a later date.
Congress can only disapprove the proposed amendment if it can
assure the branded independent dealer that FEA will act quickly in
bringing a new proposal to Congress, a proposal which will adequately
protect the viability of all independents. It must also assure small
refiners that their requests to the Exceptions and Appeals Office of the
Federal Energy Administration will act quickly and fairly on their
applications for exemptions when Special Rule No. 6 is revoked.
Our members know that they can survive if given a fair chance
in the marketplace. We will not survive if our comp)etitors are granted
exemptions or subsidies which cannot be justified.
N.C.P.R. supported passage of the Energy Conservation and Policy
Act because it had faith that Congress would require FEA to enforce
and develop regulations in a manner consistent with the objectives of
section 4(b) (1) of the act. The amendment proposed by FEA, as well
as Special Rule No. 6. conflict with the objective of preserving the com-
petitive viability of the independent sector of the petroleum industry.
We know that our faith in Congress has been well placed. This sub-
committee has demonstrated its concern for all independent sectors
of the industry time and time again. We trust that the committes
recommendations to the House of Representatives and to the Federa'l
Energy Administration will recognize the threat posed to independent
branded dealers by both Special Rule No. 6 and the amendment to it
offered by the FEA.

PuBLic TESTIMONY OF GEORGE W. JANDACEK, PRESIDENT, CLARK
OIL & REFINING CORP.
Mr. Chairman and members of the subcommittee, I am
Jandacek, president of Clark Oil & Refining Corp., a small independ-
ent refiner with two refineries in Illinois having a total capacity of
115,000 barrels per day. I appreciate the opportunity to appear before
you today to present our company's viewpoint on an issue of vital
concern to us.
Simply stated, the issue is, shall Congress support or reject the
President's amendment which discontinues the small refiner exemp-
tion-Special Rule No. 6-and substitutes an increased, sliding scale
entitlement benefit for all small refiners.
Our position is that the Congress should support the President's
amendment. We are fully prepared to set forth a virtual mountain
of data to show why Special Rule No. 6 is grossly unfair and competi-
tively disruptive within our industry. However, in the interest of time,
we will not go into detail here but will submit with our written copy






43


)reenaton, for your later study, the following documents;
which have previous ben submitted to the BRA in opoi
5peialRul No 6.Thefourth document is simpl1 a restate-
a rcet FEA reles on February 1976, crue oi volumes and
-hchweare certain will be of real interest to you. It sum-
t relative sources and of the crude supplyof U.S.
sepratly for integrated majors, large independents, and
ins Th douet enre:n

w ents ofJauary 15,1976.
o pion at FEA's March 23 public hearing.
supplemental written comments dated March 24.
- y February crude oil volumes and prices excerpted
e yo wil, after examining the documents, con-
ecial Rule No. 6 is a travesty. However, we also believe
afw mites of reflection on the problem, we can add
ur documentation and further convince you to support the
V's amendment. May we try?
An with the crude oil entitlements program was designed to
! oil costs to all refiners. To a large degree it has. Not
ever. Special interest groups have constantly been at
subvert the program in order to gain an economic advantage
selves. To the credit of the FEA, they have, we believe,
tried to achieve uality of crude oil costs to all refiners.
r they have had to bow to pressure from the producing seg-
ur industry to disadvantage imported oil by 21 cents per
ehave bowed to east coast residual importers to the detri-
aentitlmt sellers; they have had to include a bias for
ners b on the historical subsidy of the oil imports pro-
nd they have had to comply with the congressionally man-
amtion for small refiners.
t special considerations distort, to some degree, the com-
of refining and marketing in this country. The
grrant disruption, however, is caused by Special Rule No. 6
befits only some but has a dollar effectWhkh is approximately
both the existing bias and the 21-cent subsidy of domestic
on,
-.ht acgrund we now ask by what logic should refiners who
,iave te west crude oil cost ini the Nationi, by a large margin
much by the luc of the w, and who are already enjoying
atil basfrom crdecost equalization be further exempted

maretoneof which is an enttet' sle, the other a buy-
t eneof oz or fairns would alow tliA rfinp~r whn iq n


now when prior to the







4241


Arab embargo and the FEA these same refiners operated profitably
with only a 1 to 2 cent oil import advantage?
Gentlemen, we believe the FEA has all the data to prove that special
rule No. 6 is terrible regulation necessitated by the mandate of bad
legislation. If you have not already done so, we urge you to ask them
for the data. Further, we specifically recommend that you ask the PEA
to report to you, separately, the cost and volumes of crude oil to ex-
empted small refiners in comparison to small refiners who do not en-
joy the exemption. It should be an eye opener and make your decision
to support the amendment eliminating Special Rule No. 6 logical and
easy.
It is our hope that this subcommittee will conclude that a continua-
tion of the exemption is unwarranted and will support the President's
amendment both in the full committee and on the floor of the House, in
the event a disapproval resolution is introduced.
Thank you again for this opportunity. I will be pleased to attempt
to respond to questions you may have.

ATTACHMENT I
CLARK OIL & REFINING CORP.,
Milwaukee, Wis., January 15, 1976.
FEDERAL ENERGY ADMINISTRATION,
EXECUTIVE COMMUNICATIONS,
Washington, D.C.

EMERGENCY AMENDMENT-SPECIAL RULE NO. 6
We join in the chorus of those within the petroleum industry and the Federal
Energy Administration who oppose Special Rule No. 6. Recognizing that the word-
ing of section 403 (a) of the Energy Policy and Conservation Act mandates exemp-
tion from entitlement purchases for those small refiners whose refining capacity
does not exceed 100,000 barrels per day and whose old oil proportion exceeds the
national average, we realize that FEA had no choice but to adopt this special
rule in order to comply with the law. The brunt of our criticism is therefore
directed toward the inequity of that provision of the law itself. We also believe
that the FEA has erred in the implementation of the law in the calculation of
entitlements under Special Rule No. 6.

INEQUITY OF THE LAW
The law specifically precludes application of "entitlements" purchase obliga-
tions to the first 50,000 barrels per day of old oil inputs to any refiner whose
capacity does not exceed 100,000 barrels per day. This directly contradicts and
frustrates the intent of the Emergency Petroleum Allocation Act which in part
states that the regulation shall provide for-"preservation of an economically
sound and competitive petroleum industry * and to preserve the competitive
viability of independent refiners, small refiners * *"; and further "equitable
distribution of crude oil * at equitable prices among all * sectors of
the petroleum industry, including independent refiners, small refiners * *"
Clearly the two most important concepts are equity and competition. They
are interrelated. Under free-market conditions each manufacturer has relatively
equal access to needed raw materials at comparable (if not equal) prices. The
major variables which then determine competitive product prices are the costs
of manufacture, distribution, and administration. If one is relatively efficient
in these aspects of the busines, he can compete with others.
However, this situation no longer obtains in the manufacture and sale of
petroleum products. With crude oil prices artificially established at differing
levels by our own and foreign governments, and with regulated access to the
domestic crude oil which each specific refiner is eligible to purchase, it became
necessary to develop a system by which individual refiners' raw material costs
would approach equality in order that they might effectively remain competitive.









the intent of the FEA developed regulations for the
old oil (m co nly referred to as the entitlements program)
194. Understandably, this program did not achieve the desirable
equity" immediately. However, through the normal evolutionary
pwas improved until, together with special relief granted
'i xecptions" procedure to those refiners who qualified because of
icial hardship, it had at least achieved the desired goal in recent
option granted under the Energy Policy and Conservation Act
equity and attendant relative competitiveness of many refiners
yes a tremendous cost advantage to approximately 38 refiners,
need; and, in so doing directly harms about 84 others, of which 67
3 refiners by definition. It should be observed that raw materials is
?t single cost element in refined product prices, representing more
f the selling price (exclusive of taxes). Between some competing
; cost advantage may range as high as 8 cents per gallon, an insur-
ad if competition is to be maintained.
as the new law authorizes FEA to amend its regulations to avoid
led advantages which may result from the "blanket exemption"
possible disapproval by a majority of either legislative body), we
to proceed with all possible haste to develop such amendments
prevent the unwarranted competitive advantage granted to some
r from continuing. Furthermore, we believe that FEA should
wlding legislators with sufficient information so that a further mis-
ug of the potential of the "small refiner exemption" will not
approval of the amendment by either House of Congress.
SPECIAL RULE NO. 6 CALCULATIONS
D8(a) of EPOA amends section 4(e) of EPAA. Included in the
)rding, the exemption "small not affect-the receipt by any small
payments for entitlements." As implemented, Special Rule No. 6
reduce (affect) the amont of the payments received by us and by
all refiners for entitlements earned on October runs. We therefore
the calculation fails to implement the letter of the law or the
he conferees, as espoused by Senator Hartke and confirmed by
kson "that small refiners who are sellers of entitlements should
receive their full measure of entitlement payments." This under-
i corroborated on the floor of the House by Representative Krueger,
the exemption expressly protects small refiner entitlement sellers
l of entitlement revenue * *"
fore believe that all entitlements notices calculated under the
; forth in Special Rule No. 6 erroneously fail to provide our ful
d protect us from any loss of entitlement revenue. Until such time
atory amendments can be developed which will prevent unwarranted
advantages for small refiners with greater proportional old oil, the
,n be done is to remove the direct competitive disadvantages that
er small refiners are suffering by these erroneous calculations.

AREAS OF AGREEMENT
lend FEA for its concern over the potential for circumvention of the
intent through new processing and/or exchange agreements which
to direct additional volumes of old oil into the refineries of exempt
ers, thereby reducing the equalization benefits to others who are
advantaged by their relative lack of access to price-controlled old
commend FEA's Deputy Administrator John Hill, for publicly
the small refiner exemption for exactly what it is, for opposing
rocity, and for his stated intention to work to remedy the situation.
pleased to him in that effort and to provide any statistical or
eal backup which may be useful in achieving the common goal.
GEORGE W. JANDACEK, President.








46

DHEIMENTAL EFFECT OF SMAL REFINER EXEMPTION ON THE DECEMBER 1975 ENTITLEMENT COSS OF SM
REFINERS WITH PACITS LES THAN 5,0 BB./



Nam Dec. 12 Dec. 31 qatt au


A. John - - - - - - - - - -

Ai ed ------ .- +-- -- -- -- . ---------------------
C i .......................................-----


Cr ss-- --------------------------------------------+

C -f 'al efg ------------- ------- ---... ----------
Diamo ed-- --- ---------------

Fainrins- - - - - -- - - - - -
G ary-- - - - - - - - - - - -
G iant- - - - - -- - - - - -



Indiata FrBureau----------------

M arion - - - - - -- - - - - -

Mot untainee-r--- --- - - -- -- -- - -


Pride - - - - - - - - - - - -
Quake S 12t ---------------------------------------.







San Joaquin----------------------------------
Sigm mr- - - - - -- - - - - - -



Texas Mpht- - - - - -- -- - - -
The Refiry Cop---------- --------
IMp-p......................................








Thunderbird --- -- - -- - - - - - -
Total Leonard..... .......... .......... ......
Vickers - - - - - - - - - - -
Vulcan-- - - - - - - - - - - -
West Coast -- - --- -- -- - -- - -
W Le ........................................
W i k t --------------- .-.------ .- .-----------------
W in to ---------- ---------- ---------- ----------
W ireb c ------------------------------ ----------

YT e r ----------- ---------- -------- .-.------- .- .


64,824 63,811
23,491 22,474
21,831 21,419
2625 2,9
43,684 42849
12,615 6
-3,925 23,547
1,183
6,498 6,311
65







8271 84,9 04

4002 ............
39,147 X 614
107,911 16,224
349,543 343,267
2,919 2647
117,418 13170
4,866 4,763
98,995 95968
160,136 155,415
42,939 4 1,267
22291 16,304
392 331
6,087 5,55,6
15,24-4 15,746,

2f,821 22,442
273,543 26, 60.
2,318 2,28
18,237 17,942
31,376 29.882
49,338 49,56
14,845 14,496
37,06 36,456
14,9 14,439
3,576 2,G82
552 532
74, 545 71,165
3,7201,8
2.8,610 2,6
369,591 360,176
141,632 139,411
64,286 56,871
25,224 24,829
19,157 18,535
21,719 21,344
148,025 144,938
1,399 1,279
1,346 1,325


Total ---90--158---8---249--9-,0-9-836,217.-8


1,013
1,017
412
20
411

378
1,193
197
65
40D
1,367
533
2,325
1,067
272
4,248
103


6,967
61
531
498
8,465
4,379
4, M
36
295
1,494
772
349
596
230
1,494
20
3,380
577
1,931
842
9,415
2,215
7,415
622
375
1,282
3,087
20
21


,766.54
17.40
14,541.92
7,177
2,347.98





4, 44. 76
37,746
14,54.18

54,878. 1


12,344.6

497.74


81,607-9


4,22.7


42,54.1


2,0515 2,808249


97, OD9 936,217.58







47


L OF SMALL REFINER EXEMPTION ON THE DECEMBER 1975 ENTITLEMENT COSTS OF SMALL
RFNR WITH CAPTITIES BETWEEN 50,000 BBL AND 175,000 BBLID
ITLEMENTS SELLERS WHOSE DECEMBER ENTITLEMENTS WERE SUBSTANTIALLY REDUCED


List dated


Dec. 12


Dec. 31


Value


234,005
91419
707
654,505
667,772
36,784
84,709
148,963
470,858


222,089
533,362
942,166
213,207
614,794
644,783
14,850
74,290
125,069
459,266


4,043,532 3,870,876


11,916 $102,715.92
22,448 193,501.76

12,711 109, 568. 82
22,989 198,165.18
21,934 189,071.08
10,419 89,811.78
23,894 205,966.28
11,592 99,923.04
172,656 1,488,294.72


ITS BUYERS WHOSE DECEMBER PURCHASE OBLIGATION WAS SUBSTANTIALLY INCREASED


$273,236.76
322,319.04
129,291.38


1,248,766 1,332,855


84,089 724,847.18


REFINER EXEMPTION ON THE DECEMBER 1975 ENTITLEMENY COSTS OF MAJOR REFINERS

S=011%
Cost increase B=Buye


.anPerfn --- -



-------------------------------------------------------
-------------------------------------------------------
- ------------------------------------------------
-- - --I- - -- - - - - -- - - - - ----------
----------------------------------------------------------
5 ----------------------------------------------------------------
------------------------------------------ ----------

- - - - - - - - - - - - - - - - - -
- - - --L- - - - - - - - - - - - - - - -


$1,077,120.72
334,318.08
1,908,786.94
1,361,865.18
667,265.58
567,121.04
238,644.70
642,121.04
2,469 250.72
186, 554. 04
1,359,374.00
493,943.24
1,384,854.72
114,938.00
1, 885,314.68
153,358.42
1,963,860.12
610,17532
12,126,614.34
820,753.30


S------------------------------------------------- 1,991, 52.58

1 W anal (De. 12) ;e ption caused them to become a buyer on the revised (Dec.


[Excerpted from Ptt's OI1gram Price Service, New York Ediion, Jan. 6, 19T6]

8MALI EFNE GAINS FRM ENITEME'-NTS TOLD

Wy-four dometc refiners ve their average

isi en purchase exemption (Dec.24 PS and re
this issue).


----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
1P --------------------------------------
7 ---------------------------------------


List dated


Dec. 12


388,734
643,789
216,243


Increased
quany


Dec.31


420,432
681,181
231: 242


31,698
37,392
14,999


Reucio
quanit


Value


-----------------------------------------
----------------------------------------
-----------------------------------------







48


The refiners have capacities under 100,000 barrels per day, and were-previously
entitlement buyers under FEA's calculations, because their old oil ratios exceeded
the national average.
Oilgram estimates the net gain of these firms from the exemption, and the
effects on their average crude costs in the following chart. All calculations were
made from FEA entitlements data.
Initial costs are based on each refiner's original old oil supply ratio for Decem-
ber. PEA figures show the weighted average old oil cost to small refiners in
October (covered by the December period) was $5.42/bbl. The weighted average
new, released, stripper and import crude cost to small refiners in October was
$13.62/bbl. It is from these averages that the following estimated crude costs
were derived.

Estimated crude cost
Net gain Per barrel, With
Buyers (December) Initial adjustment

Arizona --------------------------------------$148, 332.96 ($2. 87) $10.77 $7.90
Bayou ---------.----------------------------------- 109,861.90 (.86) 10.68 9.82
Beacon -------------------------------------- 1,159,519.30 (2.47) 10.76 8.29
Charter --------------------------------------1,205,170.80 (.45) 10.68 10.23
CRA -----------------------------------------809,081.82 (.42) 10.66 10.24
Delta ------------------------------------------------- 1, 767, 574. 10 (1.30) 10.70 9.40
Evangeline ------------------------------------- 107, 163.84 (1.71) 10.72 9.01
Farmers --------------------------------------- 537,620.78 (.46) 10.66 10.20
Howell --------------------------------------3, 315, 510. 60 (2.90) 10.78 7.88
Hunt --------------------------------------- 1,347,271.50 (1. 69) 10.71 9.02
Husky ---------------------------------------- 699,926.76 (.45) 10.66 10.21
LaGloria --------------------------------------------- 1,227,729.30 (1.29) 10.70 941
Lakeside --------------------------------------394, 847. 72 (1. 29) 10. 70 9.41
Little Amer -------------------------------------------- 924, 132. 96 (1. 74) 10. 72 & 98
Newhall --------------------------------------- 598, 253. 86 (1. 50) 10. 71 9.21
Pasco ------------------------------------------------- 1,143,977.00 (.49) 10.66 10.17
Pennzoil. -------------------------------------1, 063, 052. 80 (.69) 10.67 9.98
Rock Island ------------------------------------589,461. 46 (.53) 10.67 10. 14
Saber Texas ------------------------------------ 478, 987. 54 (3.32) 10. 79 7.47
Southland -------------------------------------891, 911.40 (1.27) 10. 70 9.43
Tesoro ---------------------------------------- 2,786, 682.20 (1.44) 10.72 9.28
Texas City -------------------------------------------- 1, 596, 311.90 (.66) 10.68 10.02
Union-Texas ------------------------------------154, 375. 58 (.52) 10.66 10. 14
Witco ------------------------------------------------- 494,831.10 (.48) 10.66 10.18

In addition to those firms, 12 other small refiners received benefits from the
new exemption. These include Dow and Monsanto, primarily petrochemical
producers, which will realize cost reductions of approximately $2.41/bbl. and
$0.52 bbl. respectively.
The 10 remaining firms. feedstocks costs -are not expected to be lowered by
their entitlement benefits. These firms are Canal, Caribou. Claiborne, Edginton-
Oxnard, Flint, Morrison, Placid, Plateau, Sage Creek, and Warrior.

ATACEIMMNT II

STAT-EAENT OF GEORGE W. JANDACEK, PRESIDENT, CLARK OIL &
-REF NING CORP.

Members of the panel, ladies and gentlemen, I am George W.
Jandacek, president of Clark Oil & Refining Corp. We are pleased to
be here today to share our thoughts with you concerning this ex-
tremely important issue. The brief statement we are making orally
will be supplemented by more detailed written comments.
The basic purpose of the entitlements program, which is equaliza-
tion of crude oil costs among refiners, cannot be emphasized too
strongly. If refiners' crude oil costs are equalized, product prices at all
levels in the distribution chain fall into place almost automatically.








,very action which grants a specific refiner or group of
eleative advantage in raw materials costs increases com-
s brefiers and their respective customers.
fr ro convicti that full and complete equalization
costs iesntial to our continued economic
to t of independent refiners, generally-we have al-
o the conce t of the entitlements program, but opposed
We have even questioned the desir-
the bias for small refiners, whih does, at least, apply
I "peting refiners of similar size.
Iatively ted exemption and Special Rule No. 6 imple-
ire totally unfair and inequitable. They cannot be defended
oned analysis. Only some of the small refiners benefit from
e other small refiners suffer tremendously. We are en-
iat FEA now has accumulated and published data which
l proves this point; and hopeful that Members of the Leg-
I now comprehend the full impact of the horror they have
F including this provision in the law, and will not dis-
propriate corrective action.
month of Deeber 1975, the small refiner exemption
luation where post-entitlement crude oil costs for refiners
ictvariedfrom a lowof 5 cents to a highof 30 centsper
e ket area where we compete, some refiners' net crude
low as 13 cents, while our was nearly 27 cents per gallon.
viously an insurmountable competitive advantage. Our
average pretax net profit per gallon over the past 10 years
ss than 2 cents per gallon. Many major competitors have
nilar margins for their refining and marketing operations.
i'ic margins such as these, there is no way we can compete
-'s who begin with raw material cost advantages ranging up
nativee determination that the exemption results in unfair
and impairs its ability to achieve the objectives delineated
Lb of the Emergency Petroleum Allocation Act is more
It should have been so apparent as to make the 3- (now 4-)
period unnec ry. The proposed solution a ars to be a
SWhich will reduce-but not eliminate-the unfair comn-
uaion, If it is the best compromise ible, we have no
to support it and hope that further remedial action may
at e future time.
ther hand, we believe that the bias is somewhat fairer. A
ise in the bias-say one-half cent or less per gallon for all
I refiers-wo l e referable to a 1-cent advantage for
ew of te. Even this is significant. In the pre-embargo
per barrel crude wholesale competitive prices were such
iarter and1 sometimes even one-eighth of a cent per gallon
ntive as to which refiner got the sale. Gasoline prices
gof only 1to 2 ct between branded major and un-
r lers at m times; differentials of greater
t isigniflat shifts in market share. A logical case
bly be made for gyrantingr small refiners an additional one-


49,







50

half-cent advantage now that the average cost of crude has increa
to almost $10 per barrel.
In summary, we urge elimination of Special Rule No. 6 because it is
totally unfair and competitively devastating. We do not believe any
further advantage need be given any refiner, but, if one is granted, we
believe it would be extremely difficult to find reasons to justify
than one-half cent per gallon. Any such advantage granted should
apply to all refiners of similar size, not just to those who already en
the best of all worlds. Frankly, we would be hard-pressed to
justification for this additional one-half-cent-per-galion advantage.
Thank you. I will be pleased to respond to your questions.

ATTACHMENT III
CLARK OIL & RFINi.NG CoRP.,
Milwaukee, Wis., March 2 ,1976.
Re modification of small refiner entitlement purchase exemption.
FEDERAL ENIGY ADMINISTRATION,
ExEcUTIvE COMMUNICATIONS,
Washington, D.C.
Clark Oil & Refining Corp., is opposed to any special treatment for some
small refiners which results in disparities in crude costs and a substantial com
titive advantage for these refiners vis-a-vis the balance of the industry and
specifically, against other small refiners.
The benefit to certain small selected refiners is unwarranted for manyre
sons which we will discuss in detail later in this paper. Section 403(a) of the
EPCA of 1975 was certainly unwarranted, and if unwarranted, any tam -
ing of the relief attempted by FEA is welcome. But, Clark suggests that the
only true correction of the inequities of this section would be FEA action
remove this section from that act.
There was nothing magic about the contract freeze date of December 1, 1973
or the new date of January 1, 1976, which maintain supplier/purchaser
ments in effect for the duration of the crude oil allocation program. As of those
dates certain refiners found themselves with a quantity of domestic crude oi
defined as old oil and upper tier crude oil. Old oil had a frozen price averaging
$5.25 per barrel, a price which is presently $6.03 per barel less than the average
nominal price for domestic upper tier crude and as much as $8.50 per barrel less
than imported crude. Refiners with more than the national average of old oil
did not attain that position because of their business acumen. They were simply
beneficiaries under "the luck of the draw."
The entitlements program was developed to equalize crude costs. At the
ning of the program, small refiners who would have been immediate entit
ments buyers were phased into the program over a 4-month period to cushion the
impact upon their cash flow and to enable them to accumulate cash for subse-
quent entitlements purchases. At the same time, notice was published that those
small refiners who would be purchasers in the near future could file a petition for
exception with the FEA Office of Exceptions and Appeals where relief from some
or all of the purchase requirements would be granted upon proof of extreme
hardship to that specific refiner. Although Clark believes that relief granted
during the period of February through October, 1975, was not in all cases war-
ranted, at least each individual refiner's case was investigated in detail with
some being granted total relief, some partial relief, and some no relief
However, that was not satisfactory to a hard core group of some 30 refiners
who pressured and misled Congress into enacting section 403(a) of EPCA,
despite the opposition of Clark and a few other small refiners. Their reasoning
was that small refiners need the crude cost advantage to compete with the
"majors" and because that had to pay attorney fees and justify with their bal-
ance sheets the need for exception relief. They also argued that they could not
plan for future operations or expansions if they had to file an exception request
every few months.
However, as can be seen now, the exemption has benefited only half the small
refiners in the 4 effective months and something less than that in any one month.






51

It i g markets, a g the crude oil cost tion program, re-
sulting in anomalies in crud oil movements, providing for nonrec very of costs
bun ting small refiner competitors, providing a disincentive for efficient
b tions for those benefited, and subsidizing certain geographic mar-
kets at the of those markets not benefiting.
Clerks detailed statement will be directed at both section 403 (a) of EPCA
dat the 1 cent per gallon advantage with which this rulemaking is
e k emphasizes that I cent per gallon is better than -the status quo
bu tat any vantage is -unwarranted.
SMALL REFINER LEGISLATIVE STATUS
A detailed discussion of the provisions of the Federal Energy Administration
Act, the Emergency Petroleum Allocation Act, and the Energy Policy and Con-
s tion Act is not again necessary except to emphasize several factors. The
Administrator is directed to develop regulations to preserve an economically
sound and competitive petroleum industry including preservation of the com-
te, viability of small and independent refiners and branded and nonbranded
t marketers. Regulations are also to provide equitable distribution
of troleum petroleum products at equitable prices in all areas of the
United Sates and among all segments of the industry. The FEA directs the
Administrator to promote stability in prices to the consumer, promote free and
open competition in all aspects of the energy field, and to prevent unreasonable
p ts Infany segment of the industry.
Any crude cost benefit not accruing to all small refiners or all areas of the
country obv ly does not accomplish the directives of the various energy acts.
C kubmlits that FEA must resolve this conflict between section 403 (a) of the
EPUA and the sections alluded to above by submitting to Congress an amend-
mt which would eliminate section 4)3 (a) as a viable legislative mandate or
r medial legal action seeking court direction to do so.
NEITHER THE PROPOSED RULE NOR SECTION 403 (a) BENEFIT ALL SMALL REFINERS
Recent refinery listings indicate there are 119 small refiners in this country,
FE data indicates a maximum of 62 refiners, who, in the first 4 months of the
pto benefited in any one month by not having to purchase entitlements.
This means tat 57 small refiners did not benefit and, in fact, had their entitle-
mentsfor sale reduced because of the effect of the exemption. In any one month,
the sof te exemption result in disproportionately high costs for crude oil
fth n half of the small refiners in this country while their small refiner
pettors ve disproportionately low crude costs and thus a significant com-
petitive advantage.

SUBSTANTIAL COMPANIES BENEFIT FROM THE EXE3M6PION
It can be assumed that Congress intended to benefit those small and independ-
e re whose business was limited to the oil industry and particularly to
rand marketing. A Yeview of beneficiaries in the first 4 months indicates
the following substantial companies receiving benefits: Monsanto, Texas Eastern
t Gloria), Es (Vickers), Tesoro, Reserve (Mohawk), Pennzoil, Hunt Oil
Co., d Shamrock, Alied Chemical (Union Texas), and Agway (Texas City
Rfnr).

RENTS SHOULD BE M AGAINST MAJOR INTEGRATED REFINER
WEIGHED AVERAGE CRUDE COST
Clark reiterates its belief that there should be no favorable treatment for a
portion of the ind ry at the ex of other companies similarly situated or,
for that matter, at the expense of the majors whose independent dealers must
cometewith poutfrom the beneficiaries.
However, if there must be a benefit, the meurement should be from a
weig average crude cost best ted nationwide by the integrated com-
waverage crude cost. There was no intent on the part of Congress
to give any "small' r a competitive advantage over his"sm1" competitor.
aswith the inclusi of the small refiner bias, the com-
petitive vantage shows up versus a s refiner entitlement seller of the same







52

size. The disparity against the major is only enlarged, very possibly r in a
loss of market or profit margin for the branded, independent dealer.

THE EXEMPTION AND PREVIOUS EXCEPTIONS RELIEF DO NOT RECOGNIZE THE
COMPETITIVE POSITION OF OTHER SMALT REFINER SELLERS
PEA regulations have limited product prices to those in effect on May 15,1973,
plus product cost increases. Nonproduct cost increases were recoverable if proft
margin limitations were not exceeded. It is doubtful that those small refiners who
have been consistent entitlements sellers are fully recovering all increased costs.
Exceptions and appeals relief has been given to allow a refiner the lower of
his historic profit margin or an arithmetic average return on invested capital.
There is no quarantee of that type for small refiner entitlements sellers. In the
past 21 months, competition has forced Clark and others similarly situated to
absorb nonproduct cost increases in order to maintain market share. Those
excepted by exceptions and appeals are able to use full passthroughs for their
product cost base. Therefore, while a market survey may indicate that an entitle-
ments buyer cannot raise his prices, it should be emphasized that his prices
reflect a greater passthrough of costs than his small refiner competitor who must
sell entitlements to equalize his crude costs. Perpetuation of that type of relief,
either through this proposal or by a full exemption will certainly have the effect
of stifling competition on the part of the nonexempted refiners.
On appendix A, attached hereto, Clerk has compiled a listing of certain small
refiners comparing profits as a return on sales and sales growth in 1975. This
listing is based on financial summaries reported in The Wall Street JournaL
Earth Resources, Delta, Edgington, Holly, Navajo, Howell, Husky, Oil Shale
Corp., and Pasco all have consistently refined an amount of old oil in ex
of the National Old Oil Supply Ratio; and all, except for Howell, received sub-
stantial relief from the PEA Office of Exceptions and Appeals. Clark, United,
and Crown are small refiners who have consistently refined less than NOOSR
and who have not received exceptions and appeals relief. Several assumptions
can be made from this limited data:
(1) Profits computed as a return on sales percentage were substantially higher
for those companies refining more old oil than the national average than were
the profits of the small refiners running less old oil than the national average.
(2) Year to year fluctuations of profit margins indicates that exceptions and
appeals relief tended to maintain high 1974 profit margins for those refiners
who, under a blanket exemption under section 403(a), would incur the same
advantages in 1976. The three small refiners that were sellers of entitlements
had an average 1975 return on sales of 2.28 percent as against 14.60 percent for
those companies who did or would have purchased entitlements (Oil Shale had
a 1975 loss due to nonrefining factors).
13) The three small sellers of entitlements increased sales revenues in 1975
by an average 8.79 percent, not enough to even account for product cost in-
creases and inflation. The eight refiners with the greater portions of old oil
as a group increased sales 18.84 percent. Several refiners having exception relief
exhibited sales growth of 62.7 perent (Earth Resources-Delta), 62.11 percent
(Holly-Navajo), and 29.50 percent (Pasco).
Several conclusions can be made from the simple data published. Those re-
finer-buyers who were awarded relief must have entered or enlarged markets at
the expense of competition. Since returns on sales were consistent in 1975 and
1976. those same refiners were passing through all or substantial amounts of
their increased costs. Exception and appeal relief resulted in conditions in
regard to costs and prices which were not available to Clark, Crown, and United
members of the same segment of the industry as their benefitted brethren.

MARKET ANALYSIS AND COMPARABLE COMPETITIVE ADVANTAGE
Though retail market prices of products (e.g. gasoline pump prices) may be
indicative of competitive disparities caused by the Special Rule No. 6 exemption,
we doubt that they are the most accurate measure of the problem. Rather it is
the price at the refinery gate (wholesale) which is somewhat related to each
refiner's crude oil cost. Even at that point increased nonproduct costs may or
may not be included in the price, contributing to the disparities among refiners.
Bias or exemption built into the crude cost equalization program should not
attempt to compensate for operating and distribution cost differences.







53

Moreover, the degree to which individual refiners have recovered (or banked)
will be most revealing with respect to advantages enjoyed or dis-
advan suffered by them. It should be obvious that a refiner who is adding
to a b vered cost increases is not doing so by choice. Rather, his
pries reresondngto copttiva influences in an effort to retain market
-onv those refiners who are currently able to recover all of their
increased costs or even those attributable to only product cost increases must
enjoy a g degree of profitability. We believe it is valid to assu e that
are establish the competitive price.
of to prove these points are available to FEA without addi-
treporting requirements. Each refiner submits a monthly cost
a t port (FEO- ) on which he details increases in his product costs
a the ered and unrecovered amounts of such costs. Monthly crude
Sted by each refiner on P 102-M-0. From them FEA can
rea a tain the degree of utilization of each refiner's capacity. Down-
t d utition of capacity indicate loss of market; uptrends and full utli-
zation reveal market share increases and can certainly be construed as the re-
sult of ultracompetitive prices. P 302-M-1 reports are also submitted monthly by
all refiners on which price information is detailed. In addition, many refiners
u i onthy P 306-M-O reports detailing market share data. We submit that
h no lck of data; only lack of utilization of the data it already possesses.
Retail maket share and price information is essential it can best be ob-
t e om professional who are in the business of tabulating and publishing
such inoration. To our knowledge, the most comprehensive and reliable work
in this area is done by Lundberg Survey, Inc.

SPECIAL TREATMENT EXEMPTING SOME SMALL REFINERS HAS AFFECTED OLD CRUDE
OIL RECEIPTS
Referring to FEA entitlements data (Appendix B), it is apparent that those
refiners who are exempted from purchasing entitlements are increasing the
amount of old oil they are processing in their refineries. From January 1975 to
January 1976, the national figures for old oil processed in all domestic refineries
was reduced from 153,104,333 to 136,301,701, or stated otherwise, the 1976 figure
was 89.35 percent of the year earlier level.
At the time, those refineries who were exempt under Special Rule No. 6
in any one of the first 4 months of the rule virtually the same amount
of old oil in January 1976, that they did in January 1975. Their 1976 monthly
old oil runs were 97.97 percent of the comparable month a year earlier!
The total old oil figures for the industry represent natural declines in produc-
tion of old oil and are not surprising. What is surprising is that enterprising
small reine beneficiaries are incurring benefits that certainly were not antci-
ted by Congress. Any number of business agreements could have been made
o circumvent the intent of Congress. Clark submits that congressional intent
w to, at most, protect certain small refiners based on their Spring 1975 crude
oil position. Therefore, to correct current crude oil runs distortion and to main-
t past old oil ratios for entitlement calculation, any freeze date on p
iug agreements and old oil amounts exempted from entitlements purchases
uld be no later than July 1, 1975.
ppendix C details crude oil receipts for each for the small refiners under
100,000 B/D who were exempted by Special Rule No. 6 in any one of the first 4
mths. It should be noted that analysis of particular companies indicate tam-
pering with the intent of section 403(a) of EPCA. Some refineries monthly runs
yciate so much that no one can predict whether they'll be an entitlements
seller or an exempted refiner (Canal, Farmers Union, Golden Eagle, Husky,
Monsanto, Pennzoil, Powerine, Sunland, Tesoro, Union-Texas, Vickers, West
Coast. Western, Witco). Clark again submits that this is indicative of tamper-
awith runs and receipts and old oil contracts which gives a company the bt
of both worlds.
Dependent on old oil runs, crude costs vacillate vis-a-vis other refiners and
result in inequities as against nonbenefitted refers. Such a finding compels
FEA to go back to Congress to eliminate the exemption.
Other refiners, in anticipation of such an exemption, have apparently found a
way to increase old oil receipts (Beacon, Rock Island, Powerine, San Joaquin,
Fletcher, Toscapetro, Pasco, Young and Golden Eagle). With continuation of
the exemption, such distortions will probably become more frequent.










ExCEPTIO AND APPEALS

Clark's response to questions regarding exemptions and appeals relief is
twofold.
Clark believes that relief should not be granted for a period 1 than 3
months. Excessive relief based on projections can be readily and
rected if pro forma income statements indicate that a company is benefitted
excessively against industry norms.
Second, Clark recommends that any application for relief should -
cation to small refiner and large refiner competitors. Such opportunity to inter-
vene will provide FEA with true market data and potential market disruption.
Finally, Clark restates its position that relief based on historic profitability or
return on investment does not recognize the competitive viability of small re
finer competitors. Relief previously granted to certain refiners has ru d
lost market share and reduced margins for other small refiners. No one guaran-
tees Clark such a return or profit. To do so for other refiners peculiarly situated
is to reward inefficient operation, subsidize particular consumers, and upset the
strength of free and open markets.
SUMMARY

Clark submits that FEA can take corrective action based on known statistical
data. Profit statements, refinery runs, dealer margins, old oil receipts, and other
factors indicate the unwarranted strength of most exempted refiners and the
weakness of refinery and marketing operations for nonbenefitted small refiners
and integrated companies. Clark is willing to support FEA in any corrective
action taken.
JEFFREY A. FRITZLEN.
APPENDIX A
SMALL REFINER BENEFICIARIES HAD GREATER RETURNS AND PROFITS IN 1975 THAN SMALL REFINER
ENTITLEMENTS SELLERS
[Quarter- Profits as a return on sales]

Quarter-Profits as gross Year-Profits as gross
return on sales return on sales Sales
1975 1974 1975 1974 Quarter Year

Earth resources:
4th quarter -------------------10.6 12.2 8.6 10 +40.8 +62.7
2d quarter --------------------- 7.44 6.81 --------------------- +16.51 ------------
1st6 mo ----------------------- 6.95 6.29 -------------------------------+22.52
Edgington:
3d quarter--------------------------------------------------------------------- (23.55) ---------
4th quarter -------------------- 17.08 14.59 ----------------------- (37.8) ------------
6 mo ------------------------------------------------- 19.21 19.91 ------------ (31.37)
Holly:
Year------------------------------------------5.93 6.34 ------------ 62.11
2d quarter --------------------- 6.40 9.53 ---------------------- 12.98 ------------
6mo(1-31)-------------------- 8.47 8.60 ----------------------22.48
Howell: Year ---------------------------------------------- 24.04 12.8 7------------ (13.27)
Husky:
6 mo ------------------------15.37 10.74 ----------------------- 4.33 -----
Year -------------------------------------------------- 15.24 13.03 ------------ 4.39
Oil shale:
3d quarter --------------------- 4.65 3.99 ----------------------- 16.05 -----------
4th quarter .................................................... ----.................................
Year --------------------------------------------------------------------------------------17.83
Pasco: 3d quarter-- --------------- 10.82 13.32 --------------------39 29.50
Clark (seller):
Quarter ----------------------- 2.55 ( ------) 1.17 ( -------) 41.18 3.81
Year--
United (seller):
Quarter ----------------------- 2.50 3.55 3.46 3.08 23.8 6.9
Crown (seller): Year --------------------------------------- 2.22 4.74 ------------ 15.59





















APPENDIX B


s bene
.-'-'-- $1877204 $17,947,462 $18,2Z82, 112 $8,2946,479 $1, 510,732 $18, 672605 $19,999,094 $19,313,743

----r-- 953,104,333 r 1907 to 153,217,230 19,547375 8eipts 151,962,212 154,402,877 147,86,79 1
are 89.35 percent of January 1975 total receipts. January 1976 receipts for small beneficiaries are 97.97 percent of January 1975 receipts.


Note: Ja







56

APPENDIX C
CRUDE OIL RECEIPTS BY MONTH OF SMALL REFINERS BENEFITTED UNDER EPCA SEC. 403(a), 1975

Company January March April May June

Allied ---------------------------1 45, 304 43, 816 1 70, 589 61, 105 1 51,209
Arizona ----------------------------- 1 44,491 140,816 139,576 0 138,203
Bayou ---------------------------' 22,687 29,556 136,876 '42,178 '38,104
Beacon -------------------------- 317,914 344,532 281,514 292,845 306,074
Canal ------------------------------- 58,157 53,625 61,822 61,497 67,939
Caribou ----------------------------- 104,477 71,643 166,122 109,342 49,238
Charter ----------------------------- 1, 124,748 751,829 '961,758 1,040,996 1,003,323
Claiborne -------------------------- 78,203 90,074 79,902 78,512 74,370
CRA-Farmland ---------------------- 654,657 555, 966 464, 760 747, 769 726,410
Crystal Oil ------------------------ 230,481 1 2-92, 659 1 132, 012 1 171, 528 1 189,155
Delta ------------------------------- 638,921 554,850 2605, 178 12508,612 2519,386
Diamond------------------------- 661, 105 683,507 1646,848 673,791 647,638
Eddy ----------------------------- 42,240 1 34,810 41,593 139,444 40, 318
Edgington ------------------------- 483, 072 453, 932 617, 373 457,094 357, 117
Edgington-Oxn ----------------------- 1 13,602 18,318 7,413 115,405 1 13,354
Evangeline -------------------------- 28,947 42, 195 42, 027 31,242 36,513
Famariss ------------------------- 395, 333 (3) (() 3()
Farmers Union --------------------- 376,847 134,758 219,470 '227,793 1 344,460
Fletcher -------------------------- 339, 345 259,624 283,874 0 (3)
Flint -------------------------------- 12, 137 10, 789 11, 701 1 11, 776, 12,592
Golden Eagle ----------------------1 160, 270 208, 808 191, 214 1 175, 102 1 107,235
Good Hope -------------------------- 348,299 (() (3) ()
Howell--------------------------- 743,104 942,593 834,426 850,383 803,151
Hunt---------------------------- 238, 329 214, 964 1123, 135 215, 745 28, 554
Husky---------------------------- 606,547 (3) () (3) (3)
J&W --------------------------- 44,726 1 42,768 149,436 140,271 (3)
Lagloria -------------------------- 418,867 559,010 546,293 510,961 408,288
Lakeside ---------------------------- 1 7,700 1 3,537 1 11,951 1 5,421 12,075
Laketon ------------------------- 206,292 1242, 901 1259,932 2 127,758 2141,869
Little America ---------------------1 219, 485 1 236, 347 1 209, 909 281, 579 1 208, 511
Midland ----------------------------- 1212,724 130,951 1 150,432 285,610 (3)
Mohawk --------------------------- 664,547 472,703 549,225 504,820 489,041
Monsanto ---------------------------- 481,459 1264,608 317,220 1225,724 1264,887
Morrison -------------------------- 2,403 3,654 12,895 1 7,056 1 5,602
North America-Petro -----------------1 95, 848 1 52, 355 88, 019 83, 328 137,099
Navajo--------------------------- 420,157 413,663 354, 715 (3) (3)
N ewhall -------------------------- 178,238 1t 50, 042 1274,040 1276,941 2118,499
Oil Shale ------------------------- 960,389 (3) () (3) (3)
OKC ----------------------------- 385,590 2361,213 () (3) (3)
Pasco ------------------------------- 919,620 2 920,665 (3) (3) (3)
Penzoil -------------------------- 480,109 616,170 1539,594 637,591 575,622
Placid -------------------------- 300, E63 459,462 ......---- ......---.--......-" ---,-
---- -- ---- --------- 398,726 333,921 1251,588
Plateau --------------------------- 94, 151 93,244 105,466 103,987 1 87,797
Powerine ---------------------------- 517,551 (1) (3) (3) (3)
Rock Island ------------------------- 537,399 488,677 422,925 (3) (3)
Saber-Tex ----------------------------------------- -3,854 94,196 125,370 97,318
Sage Creek ------------------------ 3,699 4,831 5,495 7,066 12,536
San Joaquin -----------------------205,826 2209,576 2 195,316 2 302,713 1222,625
Sigmor ------------------------------- 0 --------------------------------------------------------
South Hampton --------------------- 70,047 99,846 1 53,438 1 89,852 193,767
Southland --------------------------- 367, 632 2362,436 2 323, 328 2 422,511 2 334,843
Sunland -------------------------- 81,803 1 8,495 203,499 1 110,412 126,135
Tesoro -------------------------- 1,153,113 1,023,474 1,128,516 1,119,311 1,241,273
Texas Asphalt ------------------------ 1 577 11,008 '1,840 11 080 1989
Texas City ------------------------ 690, 569 1 871,608 1911, 197 962,931 852,945
Thagard ---------------------------- 53,627 (3) (1) (3) (3)
Thunderbird ------------------------- 139,245 1 138,696 156,098 123,203 1 138,052
Union Texas ----------------------- 129, 351 168,707 257,509 212,184 235,406
Vickers -----------------------------1 306,673 1 310, 00 1 327,833 1 343,165 1 277,153
Warrior ----------------------------- 60,285 45,926 33,579 38,405 38,226
West Coast -------------------------- 133, 351 3 -65,467 60,454 89,100 1 -14,949
Western ----------------------------- 1 887 1 -8,054 1 12,041 12,588 1 12,025
Wickett ------------------------------ 0 -------------------------------------- 22,454
WITCO ----------------------------- 394,657 1129, 558 1 159, 394 1 183,558 542,147
Young ------------------------------ 66, 727 (3) (3) Q) (3)
Total ------------------------- 18,775,204 13,947,462 13,623,724 13, 175,585 12, 157,808
E. & A. Exempt ------------------------------------4 4,000,000 4,658,388 5,770,894 6,352,924
Total ------------------------- 18, 775,204 4 17, 947,462 18, 282,112 18,946,479 18, 510,732

1 Entitlements sellers.
2 Partial E. & A. relief from entitlement purchase requirements.
3 Total E. & A. relief from entitlement purchase requirements.
4 Estimated.









OLD OIL RECEIPTS, 1975


September


October November December January (1976)


-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------
-------------------

-------------------
-------------------


-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------
in -----------------------
-------------------------
-------------------------
-------------------------
t ------------------------
-------------------------
-------------------------
-------------------------
-------------------------
---- --------------------
-------------------------
-------------------------
-------------------------
-------------------------
-------------------------


O IL57 97


1 45, 027
239679
13 81
220573

11, 517
1549, 134
2"171, 081

39,56
1 13, 274
1 4284, 503
,0
21I0,30

287,521
2 529, 934
2 610, 13

17,1I05
1211,9
(6)
16497, 248
2441,341


137,8S
2 4 1, 534,48


1493,980

2 474: 802
1 35, 984
2 189, 538


174,734

1, 08 414
112 ,04
1 113,8
1 108,910
1440,915
,47
113,536

~40


1 41,556
36,002
59,415
57, 327

5459
809,016
1 167,247
699,805
51228
42070
281,078
11,424
35,296
38259
487,596
412,847
11,021
10
342, 425
445, 659
651,114
54,85
487,666
157,061
208,414
300,539
278,756
14495, 300
465,993
7, 752
75,003
379,690
214,643
4 269,573
37(0,792
986,11



475,238
108,032
3959

96,230

13428
17175
2... .1 0,94



14 2: 76


1 51,97
26,726
42,663
432,170
140,843
120,445
61, 047,141
14,015
72117
18818
562,141
1 501,645
39,959
418,059
35,238
41,187
127853
408:818
11,957
1 108,608
1 295,371
839,278
399,999
730,405
1 47,572
530,017
94, 163
158,296
324,841
345, 406
476,961
8,36-8
183,630
358,4
163,5
4 5l, 212, 6
...405,269
942,5
545, 511
556, 273
94, 90:3
1933,772
44268
1 67, 106
1415



142,023
11,269
61,102977

194,9


77853
62,023


19, 31374


174,977
32381
41: 0

169,682
122 287
6 1, 247,45
15,631
2659,817
195,329
605, 257
1589427


57-: 358
345 8
1 310: 1
13,183
345,364
814,815
606,58

543: 7
83854
134,896
272,828
234,648
1463549
7270
144, 578
1370, 056
204,064
51,572, 947
44, 147
1,061, 809
1519877
28 538
1 101:270
531;60
11,4
291,361

318,36


S956,073
63,91
165 407
149 34



127,9
7076


67,596
31,69
36,597
281,554
53,115
123,8
6t1, 203,351
17,331
739,0
168,431
466690
592,057
32,833
478,087
1 8,377
49,700
301,393
1253,521
48176
12,872
177,879
292 575
785: 491
298,665
144 890
4:287
511,650
66,817
14266
151,456
280,034
500,693
461,392
6,781
172 358
352: 321
171,710
5 1, 310, 152
376,401
959,622
559,367
1 249,247
107,002
537,9
414,334
1102805
1877
289,260

30,69
167,428

5715,279
19100
184,603
1220023
47, 406
115,60
10778
85:81






58

TABLE 1.-BARRELS OF CRUDE OIL RECEIVED IN REFINERY INVENTORY


February Percent Percent
1976 ofall of gro up

Large nonindependent refiners:
Total upper tier .......................................... 67,814,478 64.97 24.67
Old oil---------------------------- 95,858,779 71.99 3
Total domestic ------------------------------------------------ 163,673,257 68 91 5.
Im ported --------------------------------------------------- 111,208,168 69.33 40.46
Total receipts ------------------------------------------------- 274,881,425 69.08 10 .00
Large independent refiners:
Total upper tier ----------------------------------------------- 6,643,184 6.36 14.8
Old oil 8,060,293 6.05
Total domestic --------------------------------------------- 14,703,477 6.19 3
I imported ---------------------------------------------------- 29,986,673 18.70
Total receipts ------------------------------------------------ 44,690,150 12 10.0
Small refiners:
Total upper tier ---------------------------------------------- 29,919,499 28.67 3819
Old oil ------------------------------------------------------- 29,232,322 21.96 37.31
Total domestic ----------------------------------------------- 59,151,821 24.90 75.50
Imported ---------------------------------------------------- 19,196,274 11.97 24.50
Total receipts ---------------------------------------------- 78,348,095 19.69 1W.0D
Total-All refiners:
Total upper tier ---------------------------------------- 104,377,161 100.00 26.23
Old oil ------------------------------------------------ 133,151,394 100.00 33.46
Total domestic ----------------------------------------- 237,528,555 100.00 59.69
i mported -------------------------------------------- 160,391,115 100.00 40.31
Total receipst ------------------------------------------ 397,919,670 100.00 100.00

ATTACH T 4

TABLE MI.-Cost8 of crude oil received in refinery inventory
[Average costs-dollars per barrel]
Large non-independent refiners: February i96
Total upper tier ----------------------------------------- 11.98
Old oil --------------------------------------------------5.45
Total domestic ------------------ ------------------ 8.16
Imported-----------------------------------------13.50
Total receipts --------------------------------------------10.32
Large independent refiners:
Total upper tier--------------------------------- 11.70
Old oil --------------- -----------------------------------5.36
Total domestic -----------------------------------8.
Imported--------------------------------------- 51
Total receipts --------------------------------------11.77
Small refiners:
Total upper tier ...--- ----------------------------12.
Old oil -------------------------------------------------- 5.
Total domestic ---------------------- &
Im ported .. .. .. .. .. .. - - - -L-- - -- - - -- - - -- 3 4

Total receipts ri------------------------------------------- 9.
Total-All refiners :
Total upper tier --------------------------------------12.
Old oil ---------------------------------------- 44
Total domestic ------------------------ 833
Total receipts ------------------------------- 10.41
Entitlement value: $7.85.

STATEMEN-T OF R. M. LiLLYA, GEXEAL Ih MANAGER, MTARKETIN
DErAkRTMEx- ExxoN Co., U.S.A.

I'NTRODUCTION

I am Richard Lilly, general manager of marketing, Exxon Co.,
'U.S.A. I appreciate the opportunity to appear at the hearing today
and express Exxon's views on the small refiner subsidy issue.





59


-atement today I will address only the subsidies given to
.r companies under the PEA's entitlement program. I do
cover the preferential treatment afforded these companies
dfnse fuel supply set-aside or the variety of programs,
essinal and FEA, designed to give small refiners prefer-
;s to domestic crude oil at 21 cents per barrel advantage.
rans include:
juremeut that the Defense Department obtain a dispropor-
of its fuel acquisitions from small refiners at the highest

freezing of crude oil supplier/purchaser relationships ii
1, 19T6, and the PEA's quarterly crude oil buy/sell list.
all refiner set-aside of Government royaty crude oil.
pd amendment to the crude oil supp er/purchaser
if adopted, would allow a seller of crude oil to terminate a
)plier/purchaser relationship if he immediately thereafter
n crude oil to a refiner with capacity of 50,000 barrels per

newly adopted preferential treatment for small refiners
uude oil pruced from the naval petroleum reserves.
5 barrel per day exemption for domestically produced
dl oil sold into the east coast.
)ov& list of six existing and proposed .special preferences to
,rs cates, this group of companies receives very sub-
ieflts from governmental rules aside from the additional
,re in focus today. The additional three are the small re-
ipecial rule and FEA exemptions and exceptions from
s purchases. My comments will be limited to the subsidy
om the last three of the nine subsidies.
ipports the FEA's proposal to rescind special rule We
he FEA's statement that the objectives of the Emergency
allocation Act cannot be met with this exemption in place.
nittee's information, I am submitting copies of Exon's
before the PEA regarding special rule 6 and ask that this
P placed in the record.
,we strongly oppose the PEA's proposal to increaesgii
mall refiner bias in the titlement p m. We also be-
3 be minimal use of FEA exceptions and exemptions
rtitlements. The subsidy given t smal refiners under the
programs n tomaintain aviablerefiningin-
willbeanticompetitive, and unreaso y g






60


In addition. currently special rule 6 has added another $475 million
per year to the small refiner subsidy, to bring the total to $775 mil
lion per year. We believe there will be nothing but damage to the
efficiency of the refining industry, to the livelihoods of thousands of
branded independent marketers, and to the consumer in essentially
replacing special rule 6 with a greatly increased bias. We conserva-
tively estimate that the FEA's substitute proposal will result in a
cf more than $500 million per year plus any exceptions and exemp-
tions which the FEA may give. The resulting total is likely to be only
moderately below the $775 million we calculate as the value of the
current program.
To put the current level of subsidy received by small refiners in
perspective, the preferential treatment afforded small refiners under
the entitlement program should be compared to the subsidy they re-
ceived under the mandatory oil import program during its 15-y r
existence. from 1959 to 193.
The FEA's announcement of the entitlement program in late 1974
indicated that the small refiner bias formula had been designed to give
small refiners the maximum subsidy that they had been receiving
under the MOIP. Mr. John Hill. Deputy Administrator of the FEA,
testified on September 4. 1975. that the import program subsidy to
refiners in PAD districts I-TV was 31 cents per gallon for refiners
of 10.000 barrel per day. and 22 cents per gallon for refiners of 30,000
barrel per day. The annual amount of subsidy for all small refiners
under the import program averaged $60 million as compared to about
$775 million of today and probably only moderately less in the FEA's
new proposal. Thus instead of giving the small refiners $60 million
subsidy, adjusted for inflation and capacity changes, even the current
reduced proposal could give more than 10 times that amount.
It is important to recognize that during the 15 years of the MOIP,
1959-74. the small and independent refiners accounted for 44 percent
of the growth in total refining capacity. They increased their share of
total U.S. refining capacity from 19 percent in 1965 to 29 percent as of
January 1, 1975. These refiners grew at over three times the growth
rate of the 16 largest integrated refiners. At least 15 new small refiners
entered the business by construction of new facilities. These facts
indicate the MOIP subsidy levels were in themselves greater than
required to preserve the competitive viability of small and indepen
refiners. It seems clear that even the proposed entitlement subsidy-
over 10 times that of the historic subsidy-is excessive and
unwarranted.
The significance of the FEA's proposal to increase the smalt refiner
bia
Next I would like to speak to the significaice of the small refiner
subsidies, and try to place their magnitude in perspective.
The FEA's proposal will result in removing about $350 million of the
annual subsidy attributable to Special Rule No. 6 and redistribution at
least $250 million of the amount to all small refiners. The FEA's pro-
posal will. therefore. continue the harm of special rule 6, albeit in a
modified form, to the nonsubsidized portions of the refining
marketing industry and to the thousands of branded independent
dealers and resellers.








appreciating the magnitude of the proposed bias
tibsidy with the level of investment in small refin-
I bias would (ive an annual rate of subsidy of
lion to refiners of 100,000 barrels per day capacity
pproxiinatey 3 years remaining in the crude price
this must be added the subsidy which most likely
.er exceptions. Based on past data, we would expect
re $100-200 million per year. Using the low end of
then expect annual subsidies of $600 million, or a
d urin the remaining 3 years of the EPCA. If we
pita! employed in refiners of up to 100,000 barrels
r barrel per day of capacity, the subsidy is equiva-
90 percent of the $2 billion invest ent in this 2
day of capacity. We believe it is excessive to permit
efiners to receive a subsidy equal to 90 percent of
ent in 3 years.
mnfaiing Special le No. 6 or adopthig the


iould like to draw to the attention of Congress the damage that
ve is lky to occur whether Special Rule No. 6 is maintained
EA proposal is adopted.
P e to independent banded dealers amd re8elers-Inde-
branded dealers and resellers are being greatly damaged by
idies. Exxon conducted a survey of retail gasoline prices dur-
last week of February 1976, covering 14,000 service stations
where Exxon markets gasoline. The average differential be-
tor brand and private brand gasoline was 4.8 cents per gallon
to a pre-FEA verage of 3.6 cents per gallon. More iin-
ycities in the Northeast and East, where there is lesser
c eft of mall subsidized refiners, averaged, 3.7 cents per
price differential between major brand dealers and private
s. Cities in the South, Suthwest, Rocky Mountains, and West
iost of th subsidized refiners are located, averaged a 6.0 cents
[on differential. These exceptionally hbih price differentials
I to increasing financial difficulties of branded dealers and


ngE


prod-


per-
and
tuar-


inue to shrink rapidly since many will not be able to coiipele with
subsidized, primarily company-operated outlets of small refiner


7






62


marketers and their private brander customers. In brief the proposed
magnitude of subsidies is heavily discriminatory against 175,000
branded dealers and resellers.
(B) Damage to the adequacy of refining capacity and the ef7kiency
of refining capacity-and hence the comumer.-The consumer will
also lose because of the adverse effect the FEA proposal will have on
the entire refining industry. The subsidy under the MOIP of $60 mil-
lion per year was of sufficient magnitude to help small refiners expand
rapidly. A subsidy of more than $500 million per year, plus probable
crude entitlement exceptions, will make all but the favored smallest
refiners extremely wary of their ability to economically justify in-
creases in refining capacity. Shortages in refining capacity could re-
sult in the future. We are concerned that refinery capacity may not
grow sufficiently to handle future demands, and suspect that regula-
tory problems are a substantial factor in this situation.
Conversely, the subsidy creates a strong incentive to construct re-
finery capacity of inefficient size. Refineries of under 30 million barrels
per day are likely to be seen as the preferred size in the future, guaran-
teeingc long-term burdens of inefficiency for the consumer.
(C) Damxtge to the prinIple of equal geographical treatment.-Sec-
tions of the country having limited amounts of small refinery capacity
and receiving only small quantities of product from them, such as the
Mid-Atlantic States and the Northeast are required by the proposal to
subsidize other areas where small refiners supply a substantial volume
of product. The result seems in conflict with the congressional mandate
in the Emergency Petroleum Allocation Act, and may possibly cause
concern in the parts of the country which are not favored.
Finally, the proposed increase in the small refiner bias is not based
on any factual study or public hearing record of what subsidy, if any,
should accrue to small refining companies. It is clear from the history
of the import program that a subsidy of $60 million per year, plus in-
flation and volume adjustments, would be more than adequate to insure
the competitive viability of small and independent refiners. We can
see no justification to expand this historic program by a multiple of 10.
Recomnewdation for removing much or all of the problem
The FEA's stated support for increasing the small refiner's bias and
easing the exception procedures was the number of small refiners that
have appealed for special exception on the basis of their inability to
earn an historic return on their refiing operation. Difficulties experi-
enced by small refiners are not the result of competitive difficulties, but
are the result of regulatory difficulties, caused to a large degree b the
FEA's refusal to allow patough of cost increases in repair materi-
als, supplies, depreciation, and taxes. These costs amounted to about
25 percent of a refiner's operating costs in May 1973, the base period.
The refusal to permit passthrough of these costs would seem to be in
direct conflict with both the EPAA and the EPCA which require dol-
lar-for-dollar passthrough of all refining costs.
This problem applies to all rfiners, regardless of size. Testimony
has been presented to the FEA by a number of companies on numerous
occasions that their return on refining and marketing has been negative
or break-even.






63


Sli n theEAcorrectingthisregula-
ttempt to coret this inequity for small
mif air to try to correct the problem for
181' refiners to bear the cost oftecorrec-
id arge degree caused by the regulations
~it should be resolved b~y correcting the
.r cost passthrough for all refiners and
ns more consistent with today's capital


ipport the removal of Special Rule
he smaller refiner bias. We recomn-
X proposal to the Rouse of


heineqjuities and sinfcant harm that is being
ident marketers under the current program of
the FEA to propose to Congress the elimina-
6.
.e the FEA should promptly correct the regu-
precludes complete dollar-for-dollar pass-
-eased costs so there will be little or no need to
.s to the entitlement program. Thereafter the
level of subsidy, if any, small refiners need to


LY, GENoRA. MANAGER,
T, Exxo.N Co., U.S.A.


Richard


MARKETING


. Lilly and I am general manager of the
JxXon Co., U.S.A.
unity to appear at the hearing today, and
)f the FEA's determination that the small
Se exemption results in unfair competitive
ie FEA's ability to meet EPAA objectives.
osals to continue an exemption subsidy of 1
y to increase the small refiner bias or con-
flners with less than 10,000 barrels per day
reduce these problems and will not resolve
vould still exist tnder any of these proposals
rm. and ultimately bankrupt, thousands of
id inhibit investment in refining facilities.


oil import pro-
'ye the competi-
i fact gave them


and en-


s, and dam-
nonfavored


01






64


(3) Small refiner subsidies will still be excessive even if thepro-
posed I cent per gallon limit to the entitlement purchase exemption is
adopted.
(4) 1 will also address the other specific issues posed by the FEA.

1. 31OP SUBSIDIES REPRESENTED AN UNFAIR COMPETITIVE ADVANTAGE
The domestic petroleum refining industry is highly competitive as
evidenced by the many new entrants and remarkable rate of growth of
small and independent refining companies as a class for the period
from 1965-75. Over this period the refining capacity of the small
and independent refiners has grown from 19 percent (2.0 million bar-
rels per day) to 29 percent (4.5 million barrels per day) of the total
capacity in the 50 States. Puerto Rico. and the Virgin Islands. This
high growth rate was caused by at least 30 new entrants into the smal
and independent refiner sector since 1950, as well as expansions by
companies owning refineries earlier. An analysis of small refiner
growth is included as attachment B.
Most of the new entries and expansions Occurred during the 1965-
73 period when small refiners were subsidized under the MOIP by
being rianted quota to import forelicn crude based on a higher per-
centace of their crude runs than larger refiners. Since imported crude
oil was less costly than domestic crude during this period, quota had a
real value which could be realized directly by coastal refines or
through crude oil exchanges by inland refiners. As reported by FEA
Deputy Administrator John A. Hill before the U.S. Senate Commit-
tee on Interior and Insular Affairs on September 4, 1979, these sub-
sidies in PAD Districts J-1V averaged 0.31 cents per gallon for 10
MBD refiners, 0.22 cents per gallon for 30 MBD refiners, and 0.14 cents
per gallon for 100 MBD refiners over the period 1959-73. This aver-
aged about $60 million a year for all small refiners.
After the inception of the MOIP in 1959, the smaller independent
refiners accounted for 44 percent of the total growth in refining ca-
pacity, and increased their share of the total U.S. capacity to 29 per-
cent as of January 1. 1975. The fact that these refiners grew at over 3
times the gYrowth rate of the 16 largest inte-ated refiners, indicates
that the MOIP subsidy levels provided an unfair competitive advan-
taffe and were greater than required to preserve the competitive via-
bilitv of small and independent refiners. Inflating these subsidies to
today's dollar value based on the Consumer Price Index would indi-
cate that subsidies of 0.25 to 0.55 cents per gallon would represent a
continuation of the unfair competitive advantage today. Recognizing
the current ru ns of small refiners, this would amount to about $160
million a year today.

2. CURRENT SMALL REFINER SUBSIDIES ARE EXCESSIVE, SERIOUSLY
DAMAGING VITAL SEGMAEN4 TS OF PETROLEUTI INDUSTRY
The subsidy provided by the combination of Special Rule No. 6 plus
the level of benefit provided previously by exceptions and exemptions,
amounts to an average of 3.3 cents per gallon on about 50 refiners with
1 million barrels per day of refining capacity. This is in addition to
the small refiner bias subsidy under the entitlement program which
averages 1 cent per gallon for these refiners. The total 4.3 cents per








gdy is about 20 times the level of the A1011 subsides. For
su dieotal $10 million per year without con-
sirng additi b fi ree ved from the set-aside of F ral
aly oand DFS( fuel requim ts, the crude buy-sell program,
port license The ph in attachment A document this
uioble subsidy increase, which has been granted without any
facua demonstration of need.
Tdisortions which have already resulted from these sub-
ii ar ning the existence of tens of thousands of independ-
ent resellers and retailers who are supplied by the refiners paying these
subi and who therefore are experiencing higher product costs at
the. same time their coinpetitor are slashing prices. A spread in costs
bet subsidized and n bsidized refiners of $112 billion per year
r d. The marketplace effect a-ill become much worse if these
sin in p for an extended period of time.
conducted a survey of retail gasoline prices during the last
week of February 1976, covering 14,000 service stations in areas where
Exxon markets gasoline. The average differential between major brand
and private brand gasoline was 4.8 cents per gallon compared to a pre-
FEA average of 3.6 cents per gallon. More importantly, cities in the
Northeast and East where there is lesser volunietric effect of the Special
R No.6 bsidized ners, averaged 3.7 cents per gallon differential.
Oiti s in the Southwest, Rocky Mountains, and West where most of the
special Rule No. 6 subsidizd refiners are located, averaged a 6 cents
p gallon differential. It is not surprising that the private brand/
ajor nd differential is 2.3 cents per gallon higher in the area where
cerin small refiners are receiving the prefer ntial benefits of Special
Rule No. 6 which average 2.5 cents per gallon. The annualized turnover
of independt dealers selling Exxon products has increased in the
ares most affected by Special Rule No. 6 from 9 percent in 1974 and 16
1 nct the fit. three quarters of 1975 to 23 percent in the last quar-
tof and 24 percent in the first 2 months of 1976.
T unjustified subsidies also damage the refiners whose costs
i by the subsidy payments to the favored small refiners.
SThe income levels of the refining industry as a whole are below those
r ired tojustify new investment, as a result of inflation and the
A reulatins'whieh $lmit nonproduct cost passthrough. The In-
ability of refiners to ern reonasable returns is not an indication of
need Tor preferential treatment, but is instead an indication of need
fr dwnstream decontrol and revised passthrough regulhtions. ap-
plicable to all refiners.
Continuation of the preferential subsidies will only add to invest-
n certainties. Small refiners" subsidies decrease if they expand.
Large refiners cannot lelp but be h heavily influenced as to decisions
on expansion by the uncertainty of future return levels created by
Continual preferential treatment of competitors.
3. TH~E CONMBNNED S11ALL REFNER SUBSIDD WOULD STILL BE EXCESSIVE
WITH TiiZ rR9NOSED I CENT- -GALLON LIMUTAYLON
We flly support the determination by the FEA that the small
refine entity purcaseexemption does reslt in unfair economic
and competitive advantage and does seriously impair FEA'sA ability
to attain the objectives of the EPAA.






66


The FEA proposal would limit the small refiner entitlement pur-
chase exemption to a maximum 1-cent-per-gallon advantage in addi-
tion to the small refiner bias. This would limit the total average sub-
sidy to refiners receiving the entitlement purchase exemption to 2.8-
cents-per-gallon. Since this level would be 13 times the subsidy level
under the MOIP, it would obviously still be unfair, and much greater
than needed to preserve the competitive viability of small and inde-
pendent refiners. The subsidies will encourage inefficient operations
which, one started, become permanent financial cripples dependent on
subsidies which in turn increases costs to consumers.
In the retail gasoline market, a 2 cents per gallon increase in a
seller's price differentials from an existing equilibrium can produce
a 30 percent loss in his business. Therefore, even with the proposed
limitation, a marked increase in business failures among retailers arid
resellers will continue to occur. The total number of industry outlets
will shrink rapidly since many will not be able to compete with the
subsidized outlets.

4. OTHER SPECIFIC ISSUES POSED BY FEA
The ideas being considered by FEA to increase the small refiner
bias or to permit refiners with capacities less than 10,000 barrels daily
to receive unlimited exemptions should be dropped. Very small re-
finers are often stronger competitively in the localized markets they
serve than larger refiners are in the larger markets. The proposal com-
pletely ignores the harm which would continue to large numbers of
independent marketers in the localized markets served by these very
small refiners.
We see no need for the proposal to exempt additional old oil receipts
in the form of Federal royalty oil obtained under the Department of
Interior program. This program was designed to provide crude
volumes, not subsidies, and should continue only on this basis. The
exception procedure should also not be modified to provide for longer
exception periods, as this would mean less frequent review of the need
for exception.
We do support the proposed limitation to prevent the receipt of
small refiner bias entitlements on crude run under processing agree-
ments, with no other business purpose.
We would also support a modification which would prevent an
increase in any of the subsidy benefits by corporate rearrangements
with no other business purpose.
As detailed in attachment C, if the small refiner entitlements pur-
chase exemption is not eliminated, other technical changes should be
made to minimize unintended preferential benefits.

RECOMMENDATIONS
The factual data show that subsidies granted under MOIP over the
1959-73 period to PAD I-IV refiners and which averaged 0.1 to 0.3
cents per gallon were more than enough to preserve the competitive
viability of small and independent refiners. We believe that consumers
should not be asked to pay the price of subsidizing inefficient opera-
tions, and that the industry, the consumer, and the Nation will ulti-
mately suffer as a consequence of any such subsidies.





67


s l re ent ent
bias be com elimi-

and exceptions from the


a cannot be accomplished promptly, we believe that
mutation should be enacted, to restrict the sum of the
bias, the entitlements purchase exemption, and any in-
[tions to a total of no more than 0.5 cents per gallon, This
is more in line with historic subsidies and would
is which would inevitably result.

LDE COST SUBSIDIES, 10 MB) REFINER
RAGE OLD OIL RATIO FOR REFINERS BENEFITTING
OM ENTITLEMENT PURCHASE EXEMPTIONS
ERAGE EXCEPTION'S AND EXEMPTIONS PRIOR TO SPECIAL
LE # 6


mit








-I
1
i
I
-I


IL >


Special
Rule #6


4 &: y:


I


I I
~3) LI


34
I
-4-f


-,Bi -


Previou Ecpion
AdEepions




68


CRUDE COST SUBSIDIES, 30 MBD REFINER

ASSUMES AVERAGE OLD OIL RATIO FOR REFINERS BENIFITTING
FROM ENTITLEMENT PURCHASE EXEMPTIONS

AVERAGE EXCEPTIONS AND EXEMPTIONS PRIOR TO
SPECIAL RULE #6


p/gallon
Subsidy


--

I











I


Special
Rule #6









Previous Exceptions
and Exemptions






Small Refiner
Bias


60 62 64 66 68 70 72 74 76


YEAR


-s


6.0


5.0





4.0




3.0





2.0




1.h0











- AEGED OIL RATIO FO RINER BfEFITTG
F TPURCASE

- AVRAE DOEPIOIS AND EKEMTIOS PRIOR MJX SPECIAL
RULEf 6


Special Rule
#6



Previous Exceptions
and Exemptions


Refiner Bias


4.0


.60 62


68 70


72 714


Y AR


I


69


3.0 1


2.0


64 66






70


GROWTH OF U.S. REFINING CAPACITY-50 STATES, PUERTO RICO, AND VIRGIN ISLANDS
16 largest refiners Small/[ndependent refiners
Total,
Million Million million
barrels Percent barrels Percent barrels
perday of total per day of total per day
Jan. 1, 1950 ------------------------- 5,119 82.3 1,104 17.7 6,223
Jan. 1, 1961 ------------------------- 7,856 80.7 1,884 19.3 9,740
Jan. 1, 1963 ------------------------- 7,983 80.4 1,950 19.6 9,933
Jan. 1,1965------------------------- 8,311 80.6 2,005 19.4 10,316
Jan. 1, 1967 ------------------------- 8,350 79.0 2,215 21.0 10,565
Jan. 1, 1970 -------------------------- 9,548 77.9 2,707 22.1 12,255
Jan. 1 1971 ------------------------- 10,094 77.3 2,967 22.7 13,061
Jan. 1 1972 ------------------------ 10,504 76.7 3,190 23.3 13,694
Jan. 1, 1973 ------------------------- 10,719 75.7 3,441 24.3 14,160
Jan. 1, 1974 ------------------------ 11,090 74.4 3,813 25.6 14,.893
Jan. 1, 1975 ------------------------ 11,157 71.1 4,524 28.9 15,681
1950/1975 --------------------------- Up 6, 038 Up 118 Up 3, 420 Up 310 Up 9, 458
Notes: (1) The 16 largest integrated refiners today (including the effect of mergers since 1951) are Exxon, Shell, Amoco,
Texaco, Socal, Mobil, Gulf, Arco/Sinclair, Union/Pure, Sun/Sunray, PhillipsI Sohio/BP, Conoco, Marathon, Cities, Getty/
Skelly. (2) Ashland and Amerada Hess are included in the independent classification.
Source: 50 States and Puerto Rico-U.S. Bureau of Mines, Virgin Islands-Oil & Gas Journal.

SxmATT REFINER ENTRANTS INTO TME REFNING BUSINESS
SINCE 1950

REFINERS CURRE*TLY CLASSIFIED AS c"MAJOR
Arnerada Hess
Grassroots 45 thousand barrels daily refinery at Sewaren, N.J., in
1958.
Grassroots 50 thousand barrels daily refinery in the Virgin Islands
in 1964, now expanded to 70 thousand barrels daily.
Purchase of 28.5 thousand barrels daily refinery at Purvis, Miss., in
1971.
Coastal States
Purchase of 29.5 thousand barrels daily refinery at Corpus Christi
in 1962.
Refinery now expanded to 185 thousand barrels daily.
CommonwealtA Oil & Refining
Grassroots 21.8 thousand barrels daily refinery in Puerto Rico in
1956.
Refinery now expanded to 161 thousand barrels daily.
Murphy Oil Corp.
Purchase of 13.6 thousand barrels daily refinery at Superior, Wis.,
in 1958. -- )
Purchase of 22 thousand barrels daily refinery at Mereayx, La., in
1961. j
Refiners expanded to 45 thousand barrels daily and 92.5 thousand
barrels daily respectively.

REITNERS STILL CLASSIFIED AS t 8ALL
Over 25 other companies have entered the petroleum refining
business since 1950 by constructing grassroots refineries with capacities
each in excess of 1 thousand barrels daily [see p. 3].







71


VIA CONSTRUCTION OF GRASS ROOTS


January 1, 1975.
capacity (mWio
barrels peray)


Date


d re, Ala ......-- .---------------------------- ............. 17.3 1967
,ordova Ala- - - - - - -- - - - - - - 5.0 -- -
Hol A a -- --- --- --- -- --- --- -- --- --- --- -- --- --- --3.0 11967
So t ae Cif -- - - - - - -- - - - - - 3.2 1967
6ulsilGa r------------------6---------0----
50

FotWayne, Ind-------------------------------------------- 8.5 -----
11.0 1968
eLisbon ---------------------------------------------6.5 1971
...s Tonopah, ............................... .5 1969
ver B yon eN.J--- --- -- --- --- -- --- --- --- -- --- --- --3.0 1973
.. ..l - --- - --- -- -- -- - - - - - - - - -- - -- - - - 8 9 - -- -- -
4.0 1972
in N ak- -- -- -- -- -- -- -- -- -- -- -- -- - 4 .7 -
..... ..... ....12.0
,t n, -- -- -- -- -- -- ----- --- --- --- ---- --- --- ----- 12. ----------
Oka3.3 1969
;i~ be ex-- -- -- -- -- -- --- -- -- -- -- -- -- -- -- -- -- 18.1 1972
..........ost....x 1.5 1973
,, Te-------------------------------------------- 9.4 ------..
Co. W odCrss U ah---- -- --- -- -- -- -- -- -- -- -- -- --- 10.0 1973
imWoo C oss Ut h --- --- -- --- --- -- --- --- -- --- --- --1.5 1913
ier L Ba ge Wy -- --- -- --- --- -- --- --- --- -- --- --- --9.7 1972
-------------- ---------------------- ------ -------- -------- -- --- 17 4 .1

fies"prFEAdeiton



INDEPENDENT REFINERS WITH LARGE PERCENTAE CAPACITY EXPANSIONS
n mln rl


1950


106.7
10.0
7.0
206
4.0
&.5
.8
9.'
5.0
&5
30.0
ItS
6.5


1975


362.9
58.7
32.5
los 0
43.9
4 3
33.0
41.7
59.0
62.6
46.0
114.0
422
5.110.0
18.


-----------------------------------------------------------------

----------------------------------------------------------------


---------------------------------------------------


----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
---------------------------------------


23& 6







advantage over other refiners (including many small refiners) to such an extent
so ;s to be incoisistent with the objectives set forth in section 4(b) (1) of the
EPAA. FEA's initial views on the small refiner purchase exemption were borne
out by the magnitude of the benefits flowing from the exemption for the entitle-
ment transactions * *
EXXON CO3MENTS
An analysis of the adjusted old oil receipts data included in the
entitlement notices for the months of October, November, and Deen-
ber 1975 and January 1976, compared with the 2 months prior to the
implementation of the exemption of small refiners from the euire-
nent to purchase entitlements, indicates that:
Old oil receipts of the total group of 69 small refiners exempted in
I or all 4 months have increased by over 650 MB/month. This increase
alone constitutes almost 25 percent of the total amount of old oil
exempted to date under Special Rule No. 6.
Significant month-to-month variations in the level of old oil receipts
by individual refiners has resulted in almost 30 instances where a
refiner exempted in 1 month became a seller of entitlements i the
following month.
The intent of Congress to include a provision in the Energy Policy
and Conservation Act (EPCA) to exempt small refiners from the
obligation to purchase entitlements became generally known during
late summer 1975. The legislative history of the exemption shows
that it was first introduced into the Congress by Senator Church on
February 26. 1975, as S. 861. Considerable debate is documented in
the Congressional Record in August, and in the conference committee
report accompanying EPCA.
Examination of the adjusted old oil receipts of all small refiners,
as reported in the entitlement notices for the months through Septem-
ber 1975, indicate that (with a few certain exceptions) most small
refiners did not significantly alter their pattern of receipts of old oil.
However, examination of comparable data for the period beginning
October, 1975, and extending through the four entitlement notices
subject to Special Rule No. 6, show significant increases in old oil
receipts by over 20 small refiners. Some refiners increased old oil
receipts by severalfold in October/January versus August/September,
1975, while several refiners increased their receipts by an order of
magnitude during the same time period. FEA has rewarded s
speculative changes in refinery operations by setting December 1, 19 5,
as the base period from which the increased old oil receipts are
exempted under Special Rule No. 6. In addition, increases in old-oil
receipts in January over the December level were not disallowed in
the determination of entitlement purchase exceptions. A more equit-
able approach would be ot limit the allowable old oil receipts for
purposes of calculating the small refiner exemption to the average
level received in August/September, 1975, prior to the point at which
the probability of existence of the exemption became general knowl-
edge. This limit should be established and adhered to.
A further examination of the Entitlement Notices data indicates
well over 1 dozen instances where month-to-month variations in old
oil receipts or other operations have resulted in significant changes
in the purchase/sell position of individual small refiners. This has
allowed them to be entitlement sellers in some months and exempt









fro puchae rquiemetsnothtermonthTi hsgealyin




the enilempe exemptions o u,
flutuaion whthe inendd o nasb the al ld iles result in

deficiecy limtation n saleof entteet ntemntts eolng














EXXON RECO
Ism for of th enilmn puchs exmto iscniud
thenthe EA sould




UNIVE