Amendments to old oil allocation program and the President's proposal to exempt residual fuel oil from the mandatory pet...

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Title:
Amendments to old oil allocation program and the President's proposal to exempt residual fuel oil from the mandatory petroleum allocation and price regulations
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United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Energy and Power
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U.S. Govt. Print. Off. ( Washington )
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Table of Contents
    Front Cover
        Page i
        Page ii
    Comments received by the Federal Energy Administration
        Page iii
        Page iv
        Page v
        Page vi
        Page vii
        Page viii
        Page ix
        Page x
        Page xi
        Page xii
    Amendments to old oil allocation program and further notice of proposed rulemaking
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
        Page 38
        Page 39
        Page 40
        Page 41
        Page 42
        Page 43
        Page 44
        Page 45
        Page 46
        Page 47
        Page 48
        Page 49
        Page 50
        Page 51
        Page 52
        Page 53
        Page 54
    Exemption of residual fuel oil from the mandatory petroleum allocation and price regulations
        Page 55
        Page 56
        Page 57
        Page 58
        Page 59
        Page 60
        Page 61
        Page 62
        Page 63
        Page 64
        Page 65
        Page 66
        Page 67
        Page 68
        Page 69
        Page 70
        Page 71
        Page 72
        Page 73
        Page 74
        Page 75
    Back Cover
        Page 76
Full Text
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94th Congress SUBCOMMITTEE PRINT
2d Sessions


d
F-.
- h~.' ~'


/ ~.-.


AMENDMENTS TO OLD OIL ALLOCATION

PROGRAM AND THE PRESIDENT'S PRO-

POSAL TO EXEMPT RESIDUAL FUEL OIL

FROM THE

MANDATORY PETROLEUM ALLOCATION
AND PRICE REGULATIONS





PREPARED FOR THE USE OF THE

SUBCOMMITTEE ON ENERGY AND POWER

AND THE


COMMITTEE


ON INTERSTATE AND


FOREIGN COMMERCE


U.S. HOUSE


OF REPRESENTATIVES


APRIL 1976




U.S. GOVERNMENT PRINTING OFFICE


WASHINGTON : 1976


7


69-0920







COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE


HARLEY 0. STAGGERS, West Virginia, Chairman


TORBERT H. MACDONALD, Massachusetts
JOHN E. MOSS, California
JOHN D. DINGELL, Michigan
PAUL G. ROGERS, Florida
LIONEL VAN DEERLIN, 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
JAMES H. SCHEUER, New York
RICHARD L. OTTINGER, New York
HENRY A. WAXMAN, California
ROBERT (BOB) KRUEGER, Texas
TIMOTHY E. WIRTH, Colorado
PHILIP R. SHARP, Indiana
WILLIAM M. BRODHEAD, Michigan
W. G. (BILL) HEFNER, North Carolina
JAMES J. FLORIO, New Jersey
ANTHONY TOBY MOFFETT, Connecticut
JIM SANTINI, Nevada
ANDREW MAGUIRE, New Jersey


SAMUEL L. DEVINE, Ohio
JAMES T. BROYHILL, North Carolina
TIM LEE CARTER, Kentucky
CLARENCE J. BROWN, Ohio
JOE SKUBITZ, Kansas
JAMES M. COLLINS, Texas
LOUIS FREY, JR., Florida
JOHN Y. McCOLLISTER, Nebraska
NORMAN F. LENT, New York
H. JOHN HEINZ III, Pennsylvania
EDWARD R. MADIGAN, Illinois
CARLOS J. MOORHEAD, California
MATTHEW J. RINALDO, New Jersey
W. HENSON MOORE, Louisiana


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


Professional Staff


CHARLES B. CURTIS
LEE S. HYDE
ELIZABETH HARRISON
JEFFREY H. SCHWARTZ
- JAMES M. MENGER, Jr.


WILLIAM P. ADAMS
ROBERT R. NORDHAUS
BRIAN R. MOIR
WILLIAM G. PHILLIPS
KAREN NELSON


MARGOT DINNEEN
JAN B. VLCEK, Associate Minority Counsel




SUBCOMMITTEE ON ENERGY AND POWER
JOHN D. DINGELL, Michigan, Chairman


TIMOTHY E. WIRTH, Colorado
PHILIP R. SHARP, Indiana
WILLIAM M. BRODHEAD, Michigan
JOHN M. MURPHY, New York
BOB ECKHARDT, Texas
RICHARD L. OTTINGER, New York
ROBERT (BOB) KRUEGER, Texas
ANTHONY TOBY MOFFETT, Connecticut
ANDREW MAGUIRE, New Jersey
HARLEY 0. STAGGERS, West Virginia
(ex officio)


CLARENCE J. BROWN, Ohio
CARLOS J. MOORHEAD, California
JAMES T. BROYHILL, North Carolina
H. JOHN HEINZ III, Pennsylvania
SAMUEL L. DEVINE, Ohio
(ex officio)


FRANK M. POTTER, Staff Director and Counsel


(II)









The following are lists of people who testified in the Rulemaking

proceeding before the Federal Energy Administration on the Old Oil

Entitlements Program. Copies of the written statements of each of the
listed persons are available for examination in the Committee files

together with a summary of the statement.

COMMENTS RECEIVED BY THE FEDERAL ENERGY ADMINISTRATION


Asiatic Petroleum Corporation
New England Petroleum Corporation
Independent Fuel Terminal Operators Association
Amerada Hess Corporation
Exxon Company, U..S.A.
Texaco Inc.
A. P. Woodson Co.
Colonial Fuel Company
American Petrofina, Incorporated
United Illuminating
Caribou Four Corners, Inc.
Americans for Project Independence, Inc.
Orange and Ronkl] nd Utilities, Inc.
Farmers Union Central Exchange, Inc.
United Refining Company
Central Hudson Gas & Electric Corporation
Independent Refiners Association of Louisiana
Town of Goshen
Tenneco Oil
Exxon Company, U.S.A.
Sun Oil Company
Total Leonard, Inc.
Tesoro Petroleum Corporation
Caribou Four Corners, Inc.
Tauber Oil Company
Potomac Electric Power Company
Minnesota Energy Agency
State of New York, Emergency Fuel Office
U.S. Oil & Refining Co.
Amoco Oil Company
American Petroleum Refiners Association
Continental Oil Company
Village of Tuxedo Park
Supervisors of Westfall Townshi!
Association for a Better New York
Honorable Otis R. Bowen, Goyvernor of Indiana
Honorable William G. Milliken, Governor of Michigan
Edgington Oil Company
Asiatic Petroleum Corporation
Coalition to Save New York
The Citizens Budget Commission (New York)


(III)









The Rockland County Association of Supervisors
Standard Oil Company of California
Gulf Oil Company U.S.
Southern California Edison Company
Getty Oil Company
Consumers Power Company
Independent Terminal Operators Association
Shell Oil Company
Crown Central Petroleum Corporation
Virginia Electric and Power Company
The Standard Oil Company (SOHIO)
Ralph Snyder Associates, Inc.
Union Oil Company of California
Marathon Oil Company
Cities Service Company
Kerr-McGee Corporation
Mobil Oil Corporation
Independent Petroleum Association of America
Government of the Netherlands Antilles


ORAL STATEMENTS PRESENTED AT FEA
HEARING ON vAJUy -i 19c6


Honorable Lawton Chiles, Senator of the State of Florida
ContinenLal Oil Company
Consolidated Edison Company of New York
Energy Corporation of Louisiana
American Oil Company
Union Oil Company
Independent Fuel Terminal Operators Association
Exxon Company, U.S.A.
Economic Development Administration Commonwealth of Puerto
New England Power Pool Rico
Florida Power and Light
Fuel Merchants Association of New Jersey
Oil Heat Institute of Long Island, Inc.
New England Petroleum Corporation
Commonwealth Oil Refining Company
Empire State Petroleum Association
Clark Oil and Refining Corporation
The Standard Oil Company (OHIO)
New England Fuel Institute
National Oil Jobbers Council






V


United Refining Company
Members of Congress, 26th District, New York
Air Transport Association of America
Boston Edison Company
Atlantic Richfield Company
Hawaiian Independent Refinery
Claiborne Gasoline Company
Long.Island Lighting Company
Mobile Oil Corpnrqtion
Gulf Oil Corporation
Attorney General State of Rhode Island









LATE COMMENTS -


Texaco Inc.
Delta Refining Company
Wanda Petroleum Company
Quintana Refinery Co.
Howell Corporation
Independent Refiners Association of America
Vickers Petroleum Corporation
Asiatic Petroleum Corporation
Powerine Oil Company
Hampton Roads Energy Company
Southern Airways, Inc. (Comments submitted by the'
Law Offices of Ballard and Beasley)
Iowa Energy Policy Counsel
Farmland Industries, Inc.
Texas Independent Producers and'Royalty Owners Assoc.
Liaison Committee of Cooperating Oil1 and Gas Associations
South Hampton Company
Midland Cooperative inc.
Kerr-McGee Corporation
Pacific Gas and Electric Company
International Trading and Transport, Ltd.
Honorable Michael S. Dukakis, Governor of Massachusetts
Coastal States Gas Corporation
Air Transport Association of America
Honorable Edward P. Beard
Navajo Refining Company
Independent Refiners' Association of California, Inc.
Phillips Petroleum Company
Florida Chamber of Commerce
Town of Tuxedo
Delta Refining Company
Borough of Cresskill
State of Connecticut Department of Planning and
Energy Policy
Florida Public Service Commission
Exxon Company, U.S.A.
Mid America Refining Co.
Edgington Oil Company
Wisconsin Office of Emergency Energy Assistance
Long Island Lighting Company






vn


LONG ISLAND LIGHTING COMPANY
STATE OF FLORIDA
PUBLIC SERVICE COMPANY
MARITIME TRADES DEPARTMENT
JULIAN C. MCGRATH
INDEPENDENT TERMINAL OPERATORS ASSOCIATION
ORANGE AND ROCKLAND UTILITIES, INC.
NEW ENGLAND PETROLEUM CORPORATION
SKELLY OIL COMPANY
VIRGINIA AELEC. AND POWER CO.
MULTIPLE SENATE ( HONORABLE EDWARD BROOKE
HONORABLE EDWARD KENNEDY)
HONORABLE TORBERT H. MACDONALD
MULTIPLE SENATE ( HONORABLE LAWTON M. CHILES,
HONORABLE ROBERT L.F. SIKES, HONORABLE JAMES A. HALEY
HOj!ORABLE PTAL (. ROGERS, HONORABLE DON FUQUA,
HONORABLE WILLIAM V. CHAPPELL, HONORABLE J. HERbtti BURKE,
HONORABLE C.W. BILL YOUNG, HONORABLE RICHARD KELLY,
HONORABLE RICHARD (DICK) STONE, HONORABLE CHARLES E. BENNETT
HONORABLE DANTE B. FASCELL, HONORABLE CLAUDE D. PEPPER
HONORABLE SAM M. GIBBONS, HONORABLE WILLIAM LEHMAN
HONORABLE LOU FREY, HONORABLE LOUIS A. (SKIP) BAFALIS).
HONORABLE MARGARET M. HECKLER, MEMBER OF CONGRESS
HONORABLE WALTER E. FAUNTROY, MEMBER OF CONGRESS
HONORABLE WILLIAM T. MAYO, CHAIRMAN
HONORABLE VANCE HARTKE
HONORABLE RICHARD KELLY, MEMBER OF CONGRESS
HONORABLE CARDISS COLLINS, MEMBER OF CONGRESS
HONORABLE NORMAN E. D'AMOURS
HONORABLE C.W. BILL YOUNG, MEMBER OF CONGRESS
HONORABLE WILLIAM LEHMAN, MEMBER OF CONGRESS
HONORABLE CHARLES THONE, U.S. CONGRESSMAN
HONORABLE BOB SIKES
HONORABLE KEITH G. SEBELIUS ( ON BEHALF OF C. RUSSELL LOCKWOOD
STANDARD OIL COMPANY, INDIANA)





VIII


HONORABLE L.A. "SKIP" BAFALIS, MEMBER OF CONGRESS-
HONORABLE DICK CLARK, U.S. SENATE
HONORABLE GERRY E. STUDDS
HONORABLE EDWARD I. KOCH
HONORABLE JACOB K. JAVITS
MULTIPLE SENATE (HONORABLE BILL BROCK
HONORABLE JOSEPH M.. MOrNTOYA, HONORABLE PETE V. DOMENICI
HONORABLE JAMES A. MCCLURE, HONORABLE PAUL LAXALT
HONORABLE FRANK E. MOSS, HONORABLE J. BENNETT JOHNSTON
HONORABLE ROBERT TAFT, HONORABLE DANIEL K. INOUYE.
HONORABLE GALE W. MCGEE, HONORABLE BARRY GOLDWATER
HONORABLE BOB DOLE










The following are lists of people who testified before the Federal

Energy Administration on the Exemption of Residual Fuel Oil. Copies

of the written statements of each of the listed persons are available

for examination in the Committee files together with a summary of

the statement.


COMMENTS RECEIVED-BY THE FEDERAL ENERGY ADMINISTRATION


United Refining Company
Ralston Purina Company
Cities Service Company
Salt River Project Agricultural Improvement
and Power District (SRP)
Energy Task Force -- ACE/APPA/NACUBO
Union Oil Company of California
Howell Corporation
Quintana Refinery Co.
Florida Power Corporation
USA Petroleum Corporation
Consolidated Edison Company of New York
General Motors Corporation
American Public Power Association
American Telephone and Telegraph Company
Kerr-McGee Corporation
International Trading and Transport, Ltd.
Clark Oil & Refining Corporation
Continental Oil Company
Atlantic Richfield Company
Standard Oil Company of California
Air Transport Association of America
Pennzoil Company
-Tesoro-Petroleum Corporation
American Petroleum Refiners Association
Getty Oil Company
U. S. Oil & Refining Co.
Ashland Petroleum Company
Independent Refiners' Association of California-, Inc.

(IX)


69-092 0 76 -2









ORAL STATEMENTS PRESENTED AT MARCH 9, 1976, HEARING



COALITION TO SAVE NEW YORK INCORPORATED
NEW YORK STATE EMERGENCY FUEL OFFICE
*NEW ENGLAND PETROLEUM CORPORATION
INDEPENDENT FUEL TERMINAL OPERATORS ASSOCIATION
NATIONAL OIL JOBBERS COUNCIL
NEW ENGLAND FUEL INSTITUTE
FUEL MERCHANTS ASSOCIATION OF NEW JERSEY
OIL HEAT INSTITUTE OF LONG ISLAND INCORPORATED
ECOL, LTD.
SUN OIL COMPANY
STANDARD OIL COMPANY OF OHIO
CONTINENTAL OIL COMPANY
AMOCO OIL COMPANY
ATLANTIC RICHFIELD COMPANY
EXXON COMPANY, U.S.A.
SHELL OIL COMPANY
TEXACO CORPORATION
MOBIL OIL CORPORATION
OIL HEAT INSTITUTE OF WESTCHESTER, INC.






XI


LATE COMMENTS RECEIVED BY THE FEDERAL ENERGY ADMINISTRATION


State of Connecticut Department of Planning and
Energy Policy
American Telephone and Telegraph Company
Amerada Hess Corporation
The Standard Oil Company (SOHIO)
Powerine Oil Company
Government of the Netherlands Antilles
Northeast Utilities
Amoco Oil Company
New England Power Service Company
Arizona Public Service Company
American Petrofina, Incorporated
Champlin Petroleum Company
Tenneco Oil
Phillips Petroleum Company
Famariss Oil Corporation
Hawaiian Electric Company, Inc.
Marathon Oil Company
American Paper Institute, Inc.
New England Congressional Caucus Statements of
(1) Congressman Ronald Sarasin and Congressman
James Cleveland
(2) Congressman James Jeffords
(3) Congressmen William Cotter, Christopher Dodd,
Robert Giaimo, Toby Moffett and Stewart McKinney
(4) Congressmen Fernand St Germain and
Edward Beard
(6) Congressman Norman D'Amours
(7) Congressmen Edward Boland, Silvio Conte,
Joseph Early, Robert Drinan, Paul Tsongas,
Michael Harrigton, Tobert Macdonald, Thomas
O'Neill, Jr., John Moakley, James Burke,
Margaret Heckler and Gerry Studds
The Commonwealth of Massachusetts Energy Policy Office
Department of Water and Power the City of Los Angeles
Southern California Edison Company
Honorable Reubin O'D. Askew, Governor of the State
of Florida












TITLE 10 ENERGY

CHAPTER II FEDERAL ENERGY ADMINISTRWbTION

PART 211 MANDATORY PETROLEUM ALLOCATION- REGULATIONS

PART 212 MANDATORY PETROLEUM PRICE RE/ATIONI

Amendments to Old Oil Allocation Program
and Further Notice of Proposed Rulemaking


On February 12, 1976, the Federal Energy Administration

issued a notice of proposed rulemaking and public hearing

(41 FR 7125; February 17, 1976), to amend Title 10, Part

211, of the Code of Federal Regulations with respect to the

old oil allocation or entitlements program (hereinafter

referred to as the "entitlements program") set forth in 10

CFR 211.67. The principal amendments proposed were to

modify the entitlements program with respect to residual

fuel oil marketed in the East Coast and to expand the coverage

of the program to all domestic crude oil, with differing

entitlement weights being assigned to old oil and to new and

stripper well oil. Various other amendments were also

proposed, the most significant of which clarified the treat-

ment of exchanges of crude oil under the program and provided

for a special manner of handling reporting errors for the

first ten months of the program.

Comments were invited through March 2, 1976, and over

90 written comments were received. A public hearing was

held on March 2 and 3, 1976, and 30 persons presented state-

ments at this hearing. The purpose of this final rule is to


(1)









take action on the amendments set forth in FEA's February 12

proposal and to request further comments as to certain of-

these amendments.

It should be emphasized, however, that FEA is aware

that the amendments to the entitlements program adopted

today are very complex and will require further review after

the effect of their interaction with other FEA regulations

is fully understood. In particular, before the end of this

year, FEA intends to reassess the operation and effective-

ness of the entitlements program.

FEA is also especially concerned as to the impact of

the entitlements program, as amended today, upon new, inde-

pendent refining capacity in this country, the viability of

which FEA considers to be in the national interest. It is

recognized that the projections upon which the amendments

adopted today are based may not necessarily be fully con-

sistent with the needs of refiners operating such new refinery

capacity. These projections may also not hold true for

changing market conditions in future periods which may

necessitate additional adjustments to the entitlements

program. Therefore, FEA will monitor closely the effects of

this amendment as to new domestic refiners, and is prepared

to take any action warranted to adjust the program so that

it will not impact adversely on such firms.










I. ENTITLEMENT PROGRAM AMENDMENTS FOR
EAST COAST RESIDUAL FUEL OIL MARKET

Introduction

FEA proposed amendments to the entitlements program

pertaining to the East Coast residual fuel oil market to

adjust the program to the peculiarities of this market. The

purpose of FEA's proposal was to place marketers dependent

on foreign supplies in an acceptable competitive position

vis-a-vis domestic refiners.

Imports of residual fuel oil f4om foreign refiners into

the East Coast account for between 60% and 70% of the total

consumption of that product in the region. Domestic residual

fuel oil production marketed in the East Coast (the most

significant domestic marketer being the Amerada Hess Cor-

poration) receives the cost equalizing benefits of the

entitlements program, thus resulting in a significant dis-

parity between the feedstock costs for the various foreign

refiners and their affiliates and the crude costs of domestic

refiners. This situation has been aggravated in recent

months by the removal of the $2 supplemental import fee and

the rollback in domestic crude oil prices under the EPCA.

In summary, although the entitlements program has generally

had the effect of reducing domestic refiners' crude cost

disparities and resulting market distortions, it has created

competitive imbalances in the East Coast residual fuel oil

market. The structure of the East Coast market is discussed

at length in FEA's February 12 proposal, and reference









should be made thereto for the agency's rationale for the
%
modifications to the entitlements program in this area.

Regulatory Amendments Adopted

In the February 12 proposal, FEA set forth two alterna-

tive regulatory procedures for modification of the entitle-

ments program pertaining to the residual fuel oil market on

the East Coast. The first alternative would have basically

reduced the entitlement value for domestic refiners' residual

fuel oil production marketed in PAD District I so that

domestic refiners would be placed on a higher crude cost

basis, relatively equivalent to that of foreign refiners

marketing in that District. The second alternative took the

opposite approach and provided for the issuance of entitle-

ments to importers of residual fuel oil refined in a foreign

refinery so as to reduce their cost to a level equivalent to

the cost of residual fuel produced by domestic refiners.

FEA requested that all persons commenting on these

alternatives bear in mind that, concurrent with issuance of"

the entitlements program proposal, FEA also issued a separate

notice of proposed rulemaking to exempt residual fuel oil

from allocation and price controls. Thus, comments were

requested as to the effect of each of these alternative

proposals assuming that such exemption would in fact take

place.










FEA received numerous comments on its alternative

proposed regulatory amendments. Neither alternative proposed

was favored by a clear majority of firms that are actual

participants in the East Coast residual fuel oil market.

However, the consensus of the comments regarding the first

alternative was that FEA's proposed calculations involving

the use of imputed selling prices fbr domestic refiners were

unworkable and would not achieve their intended result. As

to the second alternative, some firms commenting also

expressed concern as to the compatibility of the issuance of

entitlements for product imports with FEA's proposal to

decontrol residual fuel oil.

Finally, many comments were received with respect to

the regional impact of each of the proposals. Numerous

comments opposed the second alternative in that it would
/
cause some price increases outside of the East Coast.

Comments from interested parties on the East Coast, however,

largely opposed the adoption of the first alternative on the

grounds that it would cause a price increase for residual

fuel oil in that region.

In general, however, the comments received by FEA on

its proposal to modify the entitlements program as to the

East Coast residual fuel oil market were very detailed and

supported FEA's initial conclusions set forth in the proposal

as to the need for amendments to the program in this regard.

FEA wishes to express its appreciation in particular to the
I


69-092 0 76 3










firms from which it requested detailed information on this
%
matter in advance of the public hearing. These latter

submissions were of significant value to the agency in its

analysis of this problem. The comments received clearly

indicated that a continuing advantage for domestic refiners

of the type previously in effect was having a significant

adverse financial effect on all firms reliant on refineries

not eligible for benefits under the entitlements program.

In many cases severe operating losses were being experienced,

market shares had suffered severe declines and the incentives

for continuing operations by certain of these firms were

disappearing.

In light of these comments, FEA has concluded that

mitigation of the competitive imbalance which exists in the

East Coast residual fuel oil market is definitely necessary.
A-
FEA is, however, particularly concerned about the regional

impact of each of its proposed alternatives. In this regard,

FEA concurs with the comments received that the first

proposed alternative would result in energy cost increases

on the East Coast, whereas the second alternative would
i
lower East Coast energy costs and increase those for other

regions of the United States. Because of the adverse impact

both alternatives have upon different areas of the country,

neither alternative has been adopted. Instead, the amend-

ment adopted hereby combines elements of the two alternatives

in a manner which is expected to remove the current market










distortions but which assures virtually no changes in the
%
regional impact of the amended entitlements program compared

with the program prior to this amendment.

Under the amendment adopted, issuances of entitlements

will be reduced by 50% as to a domestic refiner's total

production (in excess of the first 5,000 barrels per day) of

residual fuel oil for sale in the Bureau of Mines East Coast

Refining District. In addition, each importer of residual

fuel oil (i.e., the importer of record under the import

program) would receive 30% of the entitlement value of a

barrel of crude oil included in a refiner's crude oil runs

for each barrel of residual fuel oil imported by it for a

particular month into the BOM East Coast Refining District.

Imports from the U.S. Virgin Islands would not be eligible

for these entitlement issuances.
/-
FEA adopted this amendment, which has certain features

of each of the proposed alternatives, after full considera-

tion of all the comments. FEA concluded that a more sub-

stantial entitlement deduction as to domestic residual fuel

oil production would likely result in price increases for

this product on the East Coast and provide incentives for

domestic refiners to reduce production of residual fuel oil.

Therefore, FEA has provided for an entitlement value reduc-

tion of 50% (instead of the maximum 75% reduction proposed

as a possible option). FEA, however, agrees with the comments










on proposed Alternative No' 1 which suggested that the use-

of imputed selling prices for domestic refiners was un-

workable and would not achieve its intended result. Thus,

it has not adopted this complicated method of reducing

entitlement benefits and instead has provided for a single

flat entitlement value reduction.

FEA has further decided to exetmpt the first 5,000 B/D

of residual fuel oil production for all domestic refiners

instead of just exempting firms with production levels under

5,000 B/D. FEA believes that an exemption of the first

5,000 B/D of residual fuel oil production for domestic

refiners will serve as an incentive to increased domestic

production and also help to maintain stable prices in the

East Coast market if decontrol occurs by forcing importers

to pass through the maximum amounts of product entitlement

benefits in order to remain competitive.

FEA has also provided for an entitlement deduction for

residual fuel oil produced for sale into the BOM East Coast

District, as opposed to an automatic deduction for produc-

tion within that District as contemplated by the proposal.

FEA believes that the rule adopted in this regard is more in

keeping with the overall purpose of this amendment, which is

to mitigate market distortions on the East Coast.

The 30% value chosen for entitlement issuances for

imports of residual fuel oil is the same utilized for this









purpose in the first three months of the entitlements pro-

gram. FEA believes that adoption of this level of entitle-

ment value will be sufficient (when taken with the entitle-

ment deduction for domestic production) to make the price of

residual fuel oil imports competitive with domestic produc-

tion. At the same time, this valuation for imports would

avoid the undesirable results of a situation where world

residual fuel oil prices are depressed and a high product

import entitlement value is simultaneously in effect.

Finally, although the scope of FEA's proposed Alter-

native No. 1 was defined as PAD District I excluding Puerto

Rico, in response to comments received, FEA has concluded

that residual fuel oil production sold in the Bureau of

Mines Petroleum Refining District Appalachian #1 and the
U.S. Virgin Islands should also not give rise to any entitle-

ment deduction because these-areas do not generally consume

imported residual fuel oil, but are almost entirely supplied

by domestic refiners. Similarly, the scope of the product

entitlement program has also been limited to the BOM East

Coast District since this is the only area of the country

experiencing substantial market distortions caused by the

operation of the entitlements program.

Decontrol of Residual Fuel Oil

Concurrent with the issuance of this rule, FEA is also

transmitting to the Congress under the procedures specified










in Section 551 of the EPCA the final rule adopted by the

agency providing for the exemption of residual fuel oil from

FEA's Mandatory Petroleum Allocation and Price Regulations.

FEA has also issued in conjunction with this rule its final

findings and views concerning such exemption. As provided

in the EPCA, the effectiveness of this exemption is condi-

tioned on its not having been disapproved by either House of

Congress within the period specified in the EPCA.

FEA believes that the amendments adopted hereby are

eminently compatible with the proposed decontrol of residual

fuel oil. As shown below in the analysis of the pricing

adjustments expected as a result hereof, it is not expected

that there will be any significant residual fuel oil price

increases resulting from the entitlement deduction for

domestic production on the East Coast in the immediate
A
future due to the combined effect of the entitlement value

awarded to product imports and the exemption of the first

5,000 B/D of domestic production for each refiner.

Thus, the amendment adopted should have a stabilizing

effect on prices once decontrol is effected. The product

entitlement benefits granted to importers should help to

hold down prices of domestic refiners while the 5,000 B/D

exemption should operate to force importers to pass through

the maximum amounts of product entitlement benefits in order






11


to remain competitive. The amendment should also tend to

prevent any distortions from arising in the East Coast

market for No. 2 heating oil due to the substitution of

heating oil for residual fuel oil while prices therein are

still subject to price controls.

Projected Pricing Effects and Regional ILmpact

FEA's analysis of the impact on residual fuel oil

prices of the adoption of this final rule indicates that the

effects of the removal (in December 1975) of the $2 supple-

mental import fee have not yet materially influenced these

prices.

Under the program before its amendment today, the level

of entitlement benefits received by domestic refiners per

barrel of imported crude oil would increase from approxi-

mately $1 to approximately $3 due tb the removal of the fee.

These benefits will, however, now be reduced by 50%, or

approximately $1.50 per barrel, with respect to crude oil

processed into residual fuel oil for sale on the East Coast.

Depending on the amounts of imported crude oil processed,

the impact of the first 5,000 barrel per day exemption, and

the impact of other FEA regulatory changes, the combined

effect of the removal of the $2 import fee and the 50%

reduction in entitlement benefits is not expected to result

in any material price changes from domestic refiners' current

price levels.






12


Domestic marketers purchasing from foreign refiners -

will now receive approximately 90 cents in entitlement value

per imported barrel (30% of the $3.d0o projected entitlement

value of a barrel of crude oil). Under the current price

control regulations, the full entitlement benefits like any

other reduction in product costs are not required to be

passed through if a marketer is selling below its maximum

allowable selling price. To the extent that some importers

have been selling at or below their cost of product, a full

passthrough of benefits would therefore not necessarily

occur. However, in order to meet competition from domestic

refiners which will enjoy approximately a $.60 per barrel

competitive advantage over the foreign refiners due to the

higher level of entitlement benefits they receive, product
9
importers will be under substantial market pressure to pass

through the maximum amount of entitlement benefits received

whether or not price controls remain in effect.

Adoption of this final rule should, therefore, at a

minimum, effectively prevent any price increases in the East

Coast residual fuel oil market. The impact of this amend-

ment is also expected to have little or no effect on prices

charged for covered products in other regions of the country,

even though product entitlements are granted to East Coast

importers. This is principally due to the fact that entitle-

ment benefits which would otherwise have been available for










domestic residual fuel oil produced'or sold in the East

Coast will be reduced by 50%, subject to the first 5,000 B/D

exemption. The amount of this reduction is expected to be

approximately equal to the amount of the entitlement benefits

which will be provided to imports of residual fuel oil.

However, it is FEA's belief that had no adjustment been made

to the entitlements program as previously in effect, domestic

refiners such as the Amerada Hess Corporation would have

been in a position to significantly increase their market

shares, the result of which would be to increase the entitle-

ment benefits applicable to residual fuel oil sold in the

East Coast market. For example, if domestic refiners were

to increase their residual fuel oil sales in the East Coast

(which would be the likely result i no adjustment to the

current program were made) it would have the effect of
/"
increasing the prices of other covered products sold in

other regions. Consequently, the impact of this modification

to the entitlements program is effectively neutral on a

regional basis.


69-092 0 76 4










II. AMENDMENTS TO REFLECT THREE TIER PRICE SYSTEM
%
In the proposal FEA provided for modification of the

entitlements program to allocate upper tier domestic crude

oil as well as old oil through entitlement transactions,

with differing entitlement weights being assigned to posses-

sion of supplies of old oil as opposed to those of upper

tier crude oil. FEA invited comments as to whether receipts

of upper tier crude oil should be given a fixed advantage

over receipts of imported crude oil and as to whether the

appropriate effective date for these modifications, if

adopted, should be February 1 or March 1, 1976.

FEA has concluded that adoption of these proposed

amendments is appropriate effective February 1, 1976 to

correspond to the effective date of the new crude oil pricing










provisions of the EPCA. FEA has further concluded, on the

basis of comments solicited and received on this issue, that

a fixed advantage of 216 per barrel for all domestic crude

oil production over receipts of iitbrted crude oil is also

appropriate, in that the import program identifies this

amount as being necessary to preserve incentives for refin-

ing domestic crude oil. Thus, S 211.67(i) has been amended

to provide that the entitlement price will be the exact

differential between the weighted average costs to refiners

of old oil and of imported crude oil less 210.

Under the amendments adopted hereby, each refiner will

receive entitlements based on the application of the national

domestic crude oil supply ratio to the volume of its crude

runs. The domestic oil supply ratio is based on the national

supply levels of old oil and of upper tier crude oil.

Essentially, the formulae set forth in the proposal for

computing entitlement obligations have been adopted, except

that the incorporation of a 210 per barrel advantage for

domestic crude oil production necessitates revising the

fraction which is applied to upper tier crude oil receipts

to determine the entitlement value for such receipts so that

its numerator is equal to the weighted average cost of

imported crude oil less the sum of the weighted average cost

of upper tier crude oil and 210, and its denominator is the

entitlement price. Thus, refiners will account for their

excess old oil supplies with a full entitlement for each







16


barrel of excess supplies and for their excess upper tier

crude oil supplies with the fractional entitlement value as
%
computed for the particular month. Utilization of a weighted

entitlement issuance for upper tier crude oil supplies will

allow FEA to continue to administer the program with trans-

actions being limited to one class of entitlements.


III. MISCELLANEOUS AMENDMENTS


1. Crude Oil Exchanges (S 211.67(g))

The amendments set forth in the proposal as to the

treatment of crude oil exchanges under the entitlements

program have been adopted as proposed, except that as to

exchanges not involving an exchange balance delivered abroad,

crude oil received in an exchange is to be included in a

refiner's crude oil receipts at the time it constitutes a

crude oil receipt as defined in S 211.62. As to the proposed

amendments generally, most firms commenting supported adop-

tion thereof in the form proposed.

Under the clarifying amendments adopted hereby domestic

crude oil which is exchanged (in tle type of transaction

described in S 211.67(g)(1)) for foreign crude oil delivered

and processed outside the United States must be reported in

one of two ways, depending on whether the domestic firm

exchanging away the domestic crude oil is a refiner or a

firm other than a refiner. First, a refiner that exchanges

away domestic crude oil and receives in exchange foreign

crude oil which is delivered and processed outside the










United States is deemed to retain that domestic oil and is

required to include the related volumes of domestic crude

oil in its crude oil receipts at the time the volumes thereof

are so exchanged away. On the other hand, where domestic

crude oil is exchanged away by a firm other than a refiner

for foreign crude oil which is delivered and processed

outside the United States, the provisions of S 211.67(g) do

not apply; that is, the volumes of domestic oil subject to

the transaction are not deemed to be retained by the firm

exchanging away such volumes. Accordingly, the transfer of

these domestic volumes within the United States pursuant to

an exchange transaction in which other crude oil is also

transferred outside the United States is considered to be a

sale subject to the certification requirements of S 212.131,

and the domestic refiner which ultimately refines that

domestic oil must include the volumes thereof as volumes of

domestic oil in its crude oil receipts at the appropriate

time as provided in S 211.62.

Additional amendments adopted hereby specify that

domestic crude oil subject to S 211.67Cgi shall be included

in a refiner's cru4e oil receipts generally when the exchange

balance in question constitutes a crude oil receipt under S

211.62 to the particular refiner (or refining entity of an

integrated company), unless the transaction involves an

exchange balance delivered outside the United States, in






18


which case that domestic crude oil is required to be included

in the refiner's receipts at the time it is exchanged away.

The amendments adopted also make it clear that the provi-

sions of S 211.67(g) apply to all firms engaged in crude oil

exchanges, including producers and brokers acting as resellers,

as well as refiners.

2. Corrections for reporting errors (S 211.67(J))

FEA is adopting as proposed the amendments with respect

to reporting of errors and invoice adjustments and as to the

special correction mechanism for the first 10 months for

which the entitlements program was in effect. However, FEA

has not adopted the provision that would permit firms to

report as a correction (by the filing of an amended report)

adjustments resulting from an FEA audit pertaining to a

period more than 60 days prior to the month in which the

related revised invoice was received. Comments received on

this particular provision pointed out that in most cases

refiners would be.unable to identify this type of invoice

and that generally all adjustments deriving from revised

invoices should be treated as current volumetric adjustments

to a refiner's crude oil receipts. However, firms which

have received invoices effecting substantial adjustments of

this type could apply for exception relief if an especially

severe impact is experienced under the program.






19


Under the special correction procedures adopted in S

211.67(j)(2), FEA will recalculate the proper national old-

oil supply ratios for each of the first ten months for which

the program was in effect and arrive at an aggregate net

plus or minus dollar amount for each firm for all of these

months. This would be based on the inclusion in the proper

month of all amounts reported by May 14, 1976 as errors for

this period (whether resulting in favorable or unfavorable

corrections) and the calculation of a revised national old

oil supply ratio for each of these first ten months. Retro-

active invoice adjustments for this period will continue to

be reflected in the month in which the invoice was received.

Once each refiner's net plus or minus dollar position under

the program for this period is arrived at, these amounts

will be reflected in the entitlement issuances for the

period April/ through July 1976, substantially equal adjust-

ments to be made in each such month.
The definition of "adjusted crude oil receipts" in S

211.62 has also been clarified to provide that retroactive

invoice adjustments include corrections of good faith esti-

mates based on prior experience as to the old or upper tier

crude oil content of a particular delivery of crude oil.

These adjustments are to be reflected on a current basis in

a refiner's crude oil receipts. On the other hand, reporting

errors requiring the submission of an amended report include






20


clerical errors and inaccurate estimates as to the domestic

crude oil content of a particular delivery where there is no

basis in past experience for the estimate. In this regard,

FEA has eliminated the provision requiring the filing for

exception relief for favorable corrections reported more

than two months after the initial report filing for the

month in question. Reporting errors require the filing of

an amended report and are adjusted by giving effect to

differentials in the entitlement price as set forth in S

211.67(j) (1).

These amendments governing the reporting of retroactive

invoice adjustments and reporting errors are made effective

for refiners' reports to be filed for February 1976 and

subsequent months.









Further Proposed Correction Procedures

FEA is soliciting comments with respect to a further

proposed modification to account for invoice adjustments and

reporting errors. Various refiners have complained of the

increasing burdens of amended report filings; of the effect

of entitlement price fluctuations on amounts received for

invoice adjustments; and of the method of correcting errors

to crude oil runs where fluctuations in the national supply

ratio dilutes the intended correction.

FEA offers the following proposal as a method for

handling, on a prospective basis, invoice adjustments and

reporting errors. FEA emphasizes that it is seeking a

workable and equitable method of handling these data correc-

tions, but is equally concerned with avoiding greater com-

plexity and administrative burdens on reporting firms.

The proposal would provide for one method of handling

of invoice adjustments and reporting errors within 90 days

of the original month's report, and another method for

handling invoice adjustments and errors reported more than

90 days after the original month's report. FEA believes

that most routine invoicing would occur within a 90 day

period and that fluctuations in the entitlement price and

national supply ratio would be relatively insignificant for

this period as compared with the original month, especially

in light of recent adjustments to the manner of determination

of producers' base production control levels.


69-092 0-"76 5






22


Within a 90 day period after the original month's

reporting date, FEA proposes that a simple volumetric adjust-

ment to the current month's report would be made as to all

revised invoices and reporting errors.

For invoice adjustments or reporting errors prior to

the 90 day period, FEA proposes that an entitlement price

and domestic oil supply ratio adjustment would be determined

by the reporting firm on a worksheet to be filed with FEA

using the following procedures. The dollar equivalent

(using the original month's entitlement price) of the adjust-

ment or correction would first be determined. For changes

to receipts of crude oil, this dollar determination would be

based for old oil on the entitlement price, and for upper

tier crude oil on the fractional value thereof in effect for

the original month. For changes to crude runs, the refiner

would calculate the dollar impact for the original month by

recalculating its entitlement obligation using the corrected

data and the original month's national supply ratio. The

dollar difference between the original month's actual entitlement

issuance and the corrected issuance for that month would

then be determined. These dollar adjustments for each

affected month's corrections would be aggregated into a net

dollar adjustment and reported to FEA as such. FEA would

then convert the net dollar adjustment as reported into an

entitlement adjustment based on the current month's entitle-

ment price.






23


The following brief examples illustrate the procedures

described above.

Refiner A has received a revised invoice 120 days after

actual receipt of the related crude oil. This invoice

indicates that 100 barrels of old oil were erroneously

billed as upper tier crude oil. Thus, Refiner A would

calculate the additional 100 barrels of old oil at the

entitlement price for the original month (assumed to be

$8.00) to constitute an increased obligation of $800. The

decreased upper tier crude oil volume of 100 barrels that

bore an assumed .25 fractional entitlement value in the

reporting month would constitute a reduced entitlement

obligation of $200 (100 X $8 X .25). Thus, the net dollar

adjustment is $600, which FEA would incorporate as an entitle-

ment purchase obligation of that amount in the current

month.

Refiner B erroneously included in its crude runs 1,000

barrels of certain feedstocks not qualifying as crude oil.

Refiner B, using the program calculation data for the original

month, would recalculate its corrected entitlement purchase

or sale obligation, incorporating its new data as it is

affected by the national supply ratio for the original

month. After recalculating its obligation, and determining

that the sale obligation would have been 30 entitlements

less, Refiner B would multiply that number of entitlements

by the entitlement price in the original month. That dollar





24


adjustment (which reflects an increased current entitlement

obligation) would be reflected in its entitlement issuance

for the current month.

FEA requests comments on this proposal in accordance

with the procedures set forth below in Section IV.







25


3. Inclusion of Certain Condensates in Crude Runs and Receipts
(SS 211.62 and 211.67Cd) (3))

FEA is not adopting at this time the proposed amendments

to include plant condensate recovered at the inlet side of a

gas processing plant in refiners' crude oil runs and receipts.

The purpose of this proposal was to conform the coverage of

the entitlements program to crude oil as defined in the

price regulations. Several comments indicated that it would

be inappropriateto include all condensates recovered at the

inlet side of a gas processing plant in that only a portion

of this material is actually allocated back to the lease and

thereafter sold as crude oil. In addition, certain refineries

connected with gas processing plants could experience

severe difficulties if required to purchase entitlements for

these condensates, due to the provisions of the processing

agreements under which they operate. Therefore, this par-

ticular amendment is not being adopted at this time and FEA

is continuing to evaluate how this matter should be most

appropriately resolved. In this regard, FEA requests further

comments under the procedures set forth below from affected

firms as to how this issue should be resolved. However, the

clarifying amendment excluding these condensates from the

definition of old oil has been adopted and will be effective

for all reports under the program until FEA has taken further

action on the proposal in this regard.







26


4. Timing of Program and Reporting Requirements
( 211.66(h) and Ci); S 211.67(i))

The amendments set forth in the proposal as to the

timing of the program and reporting requirements have been

adopted as proposed and were supported by substantially all

firms commenting thereon.

The reporting requirements set forth in S 211.66(h) in

connection with the monthly refiner's report have been

amended to clarify and confirm that each refiner is required

to certify to FEA the weighted average costs of old oil,

upper tier crude oil and imported crude oil, and of stripper

well crude oil if specified by FEA, included in that refiner's

crude oil receipts and that such costs shall include any

transportation or other costs associated with delivery of

those crude oils to the refinery. As to imported crude oil,

refiners required to file transfer pricing reports shall

utilize the landed cost as reported therein. Section 211.66(h)

has been amended to extend the date on or prior to which

refiners must submit monthly reports to the fifth day of the

second month following the month for which the report is

filed. The issue date for entitlement notices under S

211.67(i) would be ten days following this later report

filing date. These revised filing dates are being made

effective immediately.







27


5. Export Sales Deduction (S 211.67Cd) C21)

FEA is adopting as proposed the amendments to

S 211.67(d)(2) which clarify that the term "refined petroleum

product" includes aviation fuels and which include export

sales of residual fuel oil as a deduction from a refiner's

crude runs. FEA is making the amendment including residual

fuel oil as such a deduction effective on a prospective

basis, i.e. for the entitlement transactions which will take

place in June 1976 for April crude receipts and runs.

FEA received numerous comments on this particular

provision, many of which indicated confusion as to exactly

what constitutes an export sale for purposes of the deduction.

This point has been clarified by a reference in the regula-

tions to S 212.53, which permits export sales to be made at

uncontrolled prices.

FEA wishes further to emphasize that the purpose of the

export sales deduction is to not grant cost equalization

benefits under the entitlements program for sales made into

the world market at uncontrolled prices. FEA has been made

aware of the marketing difficulties associated with the

production of high sulphur residual fuel oil especiallyy on

the West Coast) and bunker fuel for shipping use; however,

FEA has initially determined that the entitlements program

is not the appropriate vehicle to subsidize exports of

residual fuel oil, or other domestically produced product,

to foreign countries.







28


6. Inventory Averaging ( 211.67(h))

Section 211.67(h) has been amended to make it clear

that refinery shutdowns, whether due to routine required

maintenance or to mechanical failures, qualify a refiner for

purposes of the provision.



IV. WRITTEN COMMENT PROCEDURES


Interested persons are invited to comment on the further

proposals set forth in this rulemaking by submitting data,

views, or arguments with respect thereto to Executive

Communications, Room 3309, Federal Energy Administration,

Box FY, Washington, D.C. 20461.

Comments should be identified on the outside of the

envelope and on documents submitted to FEA Executive Commu-

nications with the designation "Further Comments on Amend-

ments to Entitlements Program". Fifteen copies should be

submitted. All comments received by April 30, 1976, and all

relevant information, will be considered by the FEA in any

final decisions on these matters. Any information or data

considered by the person furnishing it to be confidential

must be so identified and submitted in writing, one copy

only. The FEA reserves the right to determine the confidential

status of the information or data and to treat it according

to that determination.




29


-29-


(Emergency Petroleum Allocation Act of 1973, as amended by
Pub. L. 94-163; Federal Energy Administration Act of 1974,
Pub. L. 93-275; E.O. 11790, 39 FR 23185).

In consideration of the foregoing, Parts 211 and 212,

Chapter II of Title 10, Code of Federal Regulations, are

amended as set forth below, effective immediately, except

that the amendment (other than the clarifying amendment) to

S 211.67(d)(2) shall be first effective for refiners' crude

oil runs to stills in April 1976.

Issued in Washington, D.C., March f, 1976.




Michaeneral CoF. Butler
General Counsel





30


1. Section 211.62 is amended in the final sentence of the

definition of "crude oil receipts" by deleting the word
"old" and inserting in lieu thereof "domestic crude"; to

revise the definitions of "adjusted crude oil receipts",

"eligible firm", "entitlement" and "old oil"; to delete the

definitions of "adjusted national old oil supply ratio",

"eligible products", "new crude petroleum", "old oil supply

ratio" and "released crude petroleum"; and to add, in appro-

priate alphabetical sequence, new definitions of "East Coast

market", "eligible product", "national domestic crude oil

supply ratio", and "upper tier crude oil" to read as follows:

211.62 Definitions.

"Adjusted crude oil receipts" means the crude oil

receipts of a refiner in a particular month the composition

of which has been adjusted to reflect any invoice which is

received in that month for domestic crude oil (including

crude oil sold under S 211.65) delivered to that refiner in

any previous month (excluding, however, months prior to

November 1974), and which has the effect of increasing or

decreasing the volume of old or upper tier crude oil reported

by that refiner under S 211.66(h) for such previous month,

in cases where such previously reported volume was based on

either a prior invoice or a good faith estimate (based on

that refiner's past experience as to the old and upper tier

crude oil content of domestic crude oil of the same origin)





31


as to the old and upper tier crude oil content of that crude

oil delivery.
.* .* *

"East Coast market" means the geographical area coexten-

sive with the Bureau of Mines East Coast Petroleum Refining

District.
*

"Eligible firm" means any firm that imports an eligible

product into the East Coast market for sale or use in that

market area, that is the importer of record under a license

issued pursuant to Part 213 of this chapter and that owns

the eligible product at the time of importation thereof

pursuant to that license. Importation for the purpose

hereof shall be as defined in paragraph (j) of S 213.27 of

Part 213 of this chapter.

"Eligible product" means residual fuel oil imported

into the East Coast market, except that an import of residual

fuel oil into United States customs territory from the U.S.

Virgin Islands shall not be considered an eligible product.

"Entitlement" means, for a particular month, the right

of the refiner owning the entitlement to include one barrel

of deemed old oil (as provided in S 211.67(b)), in its

adjusted crude oil receipts in that month. The issuance and

transfer of entitlements shall be evidenced on records

maintained by the FEA.





32


"National domestic crude oil supply ratio" means, for a

particular month, the volume of deemed old oil (as defined

in S 211.67(b)) included in the aggregate adjusted crude oil

receipts of all refiners, decreased by a number of barrels

of old oil equal to the number of entitlements issuable to

small refiners under S 211.67(e), divided by the sum of the

total volume of the crude oil runs to stills for all refiners

for that month and thirty (30%) percent of the total volume

of imports of eligible products by eligible firms for that

month. The calculation of the national domestic crude oil

supply ratio for each month shall take into account entitle-

ment purchase or sale requirements resulting from the correc-

tion of reporting errors pursuant to paragraph (j) of S

211.67.
*

"Old oil" means old crude oil as defined in S 212.72 of

this chapter, except that old oil included in a refiner's

adjusted crude oil receipts shall not include condensate

recovered at the inlet side of a gas processing plant.
*

"Upper tier crude oil" means, effective February 1,

1976, new crude oil as defined in S 212.72 of this chapter





33


and crude oil produced and sold from a stripper well lease

as defined in S 212.74 of this chapter, except that upper

tier crude oil included in a refiner's adjusted crude oil

receipts shall not include condensate recovered at the inlet

side of a gas processing plant.
.

2. Section 211.66 is revised in paragraph (h) and is amended

to add a new paragraph (j) to read as follows:

S 211.66 Reporting requirements.
*

(h) Monthly report. On or prior to the fifth day of

each month, commencing with the month of April 1976, each

refiner shall file with the FEA a report certifying the

following information as to the second month prior to the

month in which the report is filed:

(1) The estimated volume (to the best of the knowledge

of the certifying officer) of old oil included in the crude

oil receipts of that refiner.

(2) The estimated volume (to the best of the knowledge

of the certifying officer) of upper tier crude oil (with

separate volumes for stripper well crude oil, if specified

by the FEA) included in the crude oil receipts of that

refiner.

(3) Any permitted or required adjustments to the

estimated volumes of old and upper tier crude oil included

in the crude oil receipts of that refiner.





34


(4) The volume of crude oil runs to stills of that

refiner, taking into account, and specifying the amount of,

the adjustments provided for in S 211.67(d).

(5) The weighted average costs for that refiner

(including transportation costs to the refinery) of old oil,

upper tier crude oil (with separate costs for stripper well

oil, if specified by the FEA) and imported crude oil included

in that refiner's crude oil receipts. For refiners required

to file transfer pricing report forms under S 212.84 of this

chapter, the weighted average cost of imported crude oil

reported under this subparagraph shall be derived from the

landed costs set forth in such reports.

(6) Such other information as the FEA may request.
.

(j) Monthly report by eligible firms. On or prior to

the fifth day of each month, commencing with the month of

April 1976, each eligible firm that has imported an eligible

product in the second month preceding that month shall file

with the FEA a report certifying the following:

(1) The identity, volumes and ports of origin and

entry of any eligible products imported by that eligible

firm in that preceding month.

(2) That the eligible product was imported for sale

in the East Coast market.

(3) Such other information as the FEA may request.








3. Section 211.67 is revi.;ed in all paragraphs except

paragraphs (e) and (f) to read as follows:

S 211.67 Allocation of domestic crude oil.

(a) Issuance of entitlements. (1) For each month,

commencing with the month of February 1976, each refiner

shall be issued a number of entitlements by the FEA equal to

the number of barrels of crude oil included in the total

volume of that refiner's crude oil runs to stills for that

month multiplied by the national domestic crude oil supply

ratio for that month, subject to the entitlement adjustment

for small refiners set forth in paragraph (e) of this section.

(2) Refiners to which entitlements shall be issued

under this section shall include all refiners classified as

refiner-buyers or refiner-sellers as of December 1, 1974 for

purposes of S 211.65. Any refiner that is not so classified,

or the refinery capacity of which is not certified by the

FEA for purposes of S 211.65, shall apply to the FEA for

certification of its refinery capacity for purposes of

qualifying to receive entitlements under this section. With

respect to the granting of any such application for certifi-

cation, the FEA shall consider the factors set forth in S

211.65(b) (v) and (vi).

(3) For each month, commencing with the month of

February 1976, each eligible firm that has imported an

eligible product in that month shall be issued a number of

entitlements equivalent to thirty (30%) percent of the




36


number of entitlements that would be received by a refiner

(without giving effect to the provisions of S 211.67(e)) in

that month with respect to inclusion of a number of barrels

of crude oil in that refiner's crude oil runs to stills

equal to the number of barrels of that eligible product

imported by that eligible firm. An eligible product is

imported for purposes of this paragraph (a)(3) in the month,

as specified on Customs Forms 7501 or 7505, as appropriate,

in which importation takes place. For purposes of this

paragraph (a)(3), "importation" means that term as defined

in paragraph (j) of S 213.27 of Part 213 of this chapter.

(b) Required purchase of entitlements by refiners.

(1) For each month, commencing with the month of February

1976, each refiner that has been issued fewer entitlements

for that month than the number of barrels of deemed old oil

(as calculated under subparagraph (2) of this paragraph)

included in its adjusted crude oil receipts shall purchase a

number of entitlements effective for that month equal to the

difference between the number of barrels of deemed old oil

(as so calculated) included in that refiner's adjusted crude

oil receipts for that month and the number of entitlements

issued to and retained by that refiner. Entitlement purchases

required under this paragraph (b) with respect to a particular

month shall be effected by the close of the second month

following that month.

(2) To calculate the number of barrels of deemed old

oil included in a refiner's adjusted crude oil receipts for







37


purposes of the definition of national domestic crude oil

supply ratio in S 211.62 of this subpart, subparagraph (1)

of this paragraph and paragraph (c) of this section, each

barrel of old oil shall be equal to one barrel of deemed old

oil and each barrel of upper tier crude oil shall constitute

that fraction of a barrel of deemed old oil the numerator of

which is equal to the reported weighted average cost per

barrel to refiners of imported crude oil for that month,

less the sum of 21 cents and such weighted average cost per

barrel to refiners of upper tier crude oil, and the denominator

of which is the entitlement price for that month.

(c) Refiners and other firms with excess entitlements.

For each month, commencing with the month of February 1976,

each refiner that has been issued a greater number of entitle-

ments for that month than the number of barrels of deemed

old oil (as calculated under subparagraph (2) of paragraph

(b) of this section) included in its adjusted crude oil

receipts shall sell such excess entitlements and any eligible

firm (other than a refiner) that has been issued entitlements

shall sell such entitlements.

(d) Adjustments to volume of crude oil runs to stills.

(1) A refiner's volume of crude oil runs to stills shall

(i) include (A) the volume of crude oil processed by another

refiner for that refiner pursuant to a processing agreement

and (B) the volume of crude oil processed by that refiner

for a person other than a refiner pursuant to a processing







38


agreement, and (ii) exclude the volume of crude oil processed

by that refiner for another refiner pursuant to-a processing

agreement.

(2) The volume of a refiner's crude oil runs to stills

in a particular month for purposes of the calculations in

subparagraph (1) of paragraph (a) of this section and the

calculations for the national domestic crude oil supply

ratio shall be reduced by that refiner's volume of export

sales under S 212.53 of Part 212 of this chapter in that

month of refined petroleum products (including aviation

fuels as defined in S 211.142 of this part, but excluding

refined lubricating oils) and residual fuel oil, including

sales to a domestic purchaser which certifies the product is

for export.

(3) The volume of a refiner's crude oil runs to stills

in a particular month for purposes of the calculations in

subparagraph (1) of paragraph (a) of this section and the

calculations for the national domestic crude oil supply

ratio shall include the total number of barrels of plant

condensate and the total number of barrels of synthetic

crude oil made from tar sands which are imported from Canada

and are utilized in that month as inputs to distillation

units by a refiner, measured in accordance with the Bureau

of Mines Form 6-1300-M. Neither plant condensate nor

synthetic crude oil made from tar sands which are imported







39


from Canada shall be eligible for inclusion in the volume of

a refiner's crude oil runs to stills under this subparagraph

(3) unless payment has been made in accordance with Presiden-

tial Proclamation No. 3279, as amended, of any import license

fees applicable to crude oil as defined for purposes of this

section, which is imported for refining.

(4) For purposes of the calculations in subparagraph

(1) of paragraph (a) of this section and the calculations

for the national domestic crude oil supply ratio (but not

for purposes of paragraph (e) of this section), the volume

in excess of the first 5,000 barrels per day of a refiner's

crude oil runs to stills for a particular month attributable

to production of residual fuel oil for sale (whether directly

for consumption or for resale) by that refiner in or into

the East Coast market shall be reduced by fifty (50%) percent.

Any export sales of residual fuel oil giving rise to a

deduction under subparagraph (2) above shall not be considered

as residual fuel oil production for purposes of this subpara-

graph (4).
*

(g) Exchanges of crude oil. (1) Subject to the

provisions of subparagraph (3) below, in any exchange of







40


crude oil in which only quality and location differentials

are given effect in the calculation of the exchange ratio,

or in any matching purchase and sale transaction which has

the same effect as such an exchange, no volumes of domestic

crude oil shall be deemed to have been transferred. Any

volumes of domestic crude oil exchanged away or sold pursuant

to any such exchange or matching purchase and sale transac-

tion shall be considered as having been retained by the

refiner or other firm that has so exchanged away or sold

such volumes, regardless of the volume of crude oil received

or purchased by that refiner or other firm in such exchange

or transaction.

(2) Subject to the provisions of subparagraph (3)

below, volumes of domestic crude oil deemed to be retained

by a refiner under the provisions of subparagraph (1) above

shall be (i) included in that refiner's crude oil receipts

at the time the crude oil acquired pursuant to the related

exchange or purchase and sale transaction constitutes a

crude oil receipt under S 211.62 of this subpart to that

refiner, or (ii) certified as old oil or upper tier crude

oil, as the case may be, under the provisions of S 212.131

of Part 212 when the crude oil acquired pursuant to the

related exchange or purchase and sale transaction is sold to

another firm.










(3) Where a refiner exchanges away or sells volumes of

domestic crude oil in an exchange or matching purchase and

sale transaction of the type described in subparagraph (1)

above and receives in exchange or purchases in the transac-

tion foreign crude oil that is delivered and processed

outside the United States, that refiner shall include any

domestic crude oil so exchanged away or sold by it in its

crude oil receipts as of the date that domestic crude oil is

so exchanged away or sold.

(4) The provisions of subparagraph (1) above shall not

apply to transactions involving domestic crude oil which is

exchanged away by a firm other than a refiner for foreign

crude oil that is not processed in a refinery located in the

United States. Any firm other than a refiner that has

exchanged away or sold domestic crude oil within the United

States pursuant to an exchange transaction in which other

crude oil is also transferred outside the United States

shall comply with the certification requirements of S 212.131

of Part 212 as to any volumes of old oil or upper tier crude

oil, as the case may be, so exchanged away or sold. Any

domestic crude oil delivered to a refiner in the United

States pursuant to a transaction of the type described in

this subparagraph (4) shall be included in the crude oil

receipts of the refiner that receives, directly or indirectly

through further sales or exchanges, the volumes of domestic






42


crude oil that are the subject of the transaction, as provided

in S 211.62 of this subpart.

(5) For purposes of this paragraph (g), "refiner"

means any firm that owns, operates or controls the operations

of one or more refineries, and includes any entity that is a

part of or affiliated with, or that controls or is controlled

by (whether directly or indirectly), a refiner.

(h) Averaging of crude oil receipts. Upon application

by a refiner in accordance with the procedures established

under Subpart G of Part 205 of this chapter within thirty

(30) days following the close of a month, the FEA may adjust

the crude oil receipts of that refiner for that month to

permit the portion of such crude oil receipts specified by

the FEA to be included in the crude oil receipts of that

refiner for one or more subsequent months, if the volume of

crude oil receipts in that month is significantly dispropor-

tionate to the volume of that refiner's crude oil runs to

stills for that month due to a shutdown (by reason of either

a mechanical failure or normal maintenance procedures)

resulting in a fifty (50%) percent or greater portion of

that refiner's refinery capacity not having been operable

for the duration of that month.

(i) Issuance and transfer of entitlements. (1) The

FEA shall issue entitlements for each month (effective for

the month of February 1976 and subsequent months) pursuant






43



to a notice issued on the fifteenth day of the second month

following that month.

(2) Each notice published by the FEA evidencing the

issuance of entitlements under this section shall specify as

to a particular month the national domestic crude oil supply

ratio, the name of each refiner and other eligible firm to

which entitlements have been issued, the number of barrels

of deemed old oil-included in each refiner's adjusted crude

oil receipts, the number of entitlements issued to each such

refiner or other firm, the number of entitlements required

to be purchased or sold by each such refiner or other firm,

and the price atwhich entitlements shall be purchased and

sold.

(3) No transfer of an entitlement shall be effective

if made to any firm that is not purchasing such entitlement

to fulfill such firm's obligations under this section.

(4) The price at which entitlements shall be sold and

purchased shall be fixed by the FEA for each month and shall

be the exact differential between the weighted average cost

per barrel to refiners of old oil and of imported crude oil,

less 21 cents, such costs to be equivalent to the delivered

costs to the refinery.

(j) Reporting errors. (1) Refiners and eligible firms

shall correct any errors contained in reports filed pursuant





44



to S 211.66 by filing an amended report for the particular

month. Based on any reporting errors so corrected, the FEA

in its discretion may adjust entitlement issuances to the

refiner or eligible firm in one or more months subsequent to

the month in which the amended report is filed with the FEA,

by issuing fewer entitlements than the number otherwise

issuable, by requiring the refiner or eligible firm to

purchase entitlements in order to correct for excess entitle-

ments issued in a prior month or by issuing entitlements

over and above the number otherwise issuable to compensate

for too few entitlements having been issued in such prior

month. All entitlement issuances or purchase requirements

under this subparagraph shall give effect to any differential

between the entitlement price for the month in which any

correction is reflected as compared with the entitlement

price for the month as to which the reporting error was made

(except with respect to corrections to volumes of crude oil

runs to stills where a corresponding adjustment to crude oil

receipts was made as contemplated by the term "adjusted

crude oil receipts" in S 211.62) and such other factors as

the FEA deems appropriate.

(2) Notwithstanding the provisions of subparagraph (1)

of this paragraph, corrections of reporting errors for the

months November 1974 through August 1975 shall be made as

follows. FEA shall recalculate for those months the purchase






45


and sale obligations (giving effect to any applicable relief

under decisions and orders issued by FEA's Office of Exceptions

and Appeals and to the provisions of Special Rule No. 3 for

Subpart C) of all refiners and eligible firms based on

inclusion in each month of each refiner's and eligible

firm's corrected volume (as reported to the FEA) of crude

oil runs to stills, volume of old oil included in its crude

oil receipts (other than adjustments effected as contemplated

by the term "adjusted crude oil receipts" in S 211.62) and

eligible product imports. No entitlement price adjustment

as contemplated by subparagraph (1) of this paragraph shall

be made in the calculations under this subparagraph (2).

FEA shall then aggregate for each refiner and eligible firm

its net purchase or sale amount (in dollars) for these

months (giving effect to the published purchase and sale

obligations for these months) and apply these amounts in

substantially equal portions (translated into current entitle-

ment values) to that refiner's or eligible firm's entitlement

purchase or sale obligations for the months of April through

July 1976.

(3) For purposes of this paragraph, errors required to

be corrected by the filing of amended reports include (i)

clerical errors, and (ii) inaccurate estimates as to the

domestic crude oil pricing composition of a particular

volume of crude oil where the refiner had no basis, in prior

experience or otherwise, on which to make that estimate.










(k) Failure to consummate transactions. The FEA may

direct refiners or eligible firms that have not purchased

the required number of entitlements under this section for a

particular month to purchase such required number of entitle-

ments at a price specified by the FEA from any refiner or

eligible firm that has entitlements for such month available

for sale. The FEA may direct refiners or eligible firms

that have entitlements available for sale to sell such

entitlements at a price specified by the FEA to refiners or

eligible firms that have not purchased their required number

of entitlements under this section.

(1) Certification of old and upper tier crude oil

by non-refiners. Within twenty-eight (28) days following

each month, commencing with the month of February 1976, each

firm other than a refiner that has delivered crude oil to a

refiner for processing for the account of such firm pursuant

to a processing agreement in that month shall certify to

that refiner the volumes of old oil and upper tier crude oil

contained in the crude oil so delivered to that refiner.

(m) Adjustments to Crude Oil and Product Costs. (1)

Refiners. (i) Entitlements purchased. (A) The cost of

entitlements purchased in a particular month pursuant to

this section by refiners, which shall be calculated exclusive

of any reduction in such costs in a particular month because

of entitlements issued for the importation of eligible










products, and exclusive of the cost of entitlements purchased

in a particular month pursuant to adjustments to a refiner's

crude oil runs to stills under paragraph (d)(4) of this

section, shall be added to the cost of crude oil purchased

or landed in that month (which is the period "t" (the month

of measurement), for purposes of calculating the increased

cost to be applied to product prices in the following month

under the "At factor of the general formulae of S 212.83(c)(2)

of this chapter); provided, that, to the extent that the

obligation of a refiner to purchase entitlements is reduced

by volumes of crude oil processed by a refiner for a firm

other than that refiner pursuant to a processing agreement,

and that the monetary value of that reduced purchase obliga-

tion is used to reduce the processing fee otherwise payable

by that firm under the processing agreement, or is otherwise

passed on to that firm, such monetary value may also be

added by that refiner to its cost of crude oil purchased or

landed in that month, but shall be subtracted from the cost

of crude oil purchased or landed in that month by the firm

to which the monetary value of the reduced purchase obliga-

tion is passed on pursuant to this paragraph.

(B) The reduction in the cost of entitlements purchased

in a particular month because of entitlements issued for the

importation of eligible products shall be subtracted from

the total cost of the product concerned, purchased or landed






48


in that month (which is the period "t" (the month of measure-

ment), for purposes of calculating the increased costs to be

applied to prices of that product under the "B.t" factor of
1
the appropriate formula for that product of S 212.83(c) of

this chapter).

(C) The cost of entitlements purchased in a particular

month pursuant to the adjustments to a refiner's crude oil

runs to stills under paragraph (d)(4) of this section shall

be a cost of crude oil purchased or landed in that month

which shall not be applied to product prices pursuant to the
"At' factor of the general formulae of S 212.83(c)(2) of

this chapter, but which shall instead be applied only to

prices for residual fuel oil.

(ii) Entitlements sold. (A) The sales revenues from

entitlements sold in a particular month pursuant to this

section by refiners, which shall be calculated exclusive of

any reduction in such sales revenues in a particular month

pursuant to adjustments to a refiner's crude oil runs to

stills under paragraph (d)(4) of this section, and exclusive

of any sales revenues from the sale of-entitlements issued

for the importation of eligible products, shall be subtracted

from the cost of crude oil purchased or landed in that month

(which is the period "t" (the month of measurement), for

purposes of calculating the increased costs to be applied to

all product prices in the following month under the "At"







49


factor of the general formulae of S 212.83(c)(2) of this

chapter); provided, that, to the extent that the sales

revenues from entitlements which are issued for volumes of

crude oil processed by a refiner for a firm other than that

refiner pursuant to a processing agreement are used to

reduce the processing fee otherwise payable by that firm

under the processing agreement, or are otherwise passed on

to that firm, such sales revenues shall not be subtracted by

that refiner from its cost of crude oil purchased or landed

in that month, but shall be subtracted from the cost of

crude oil purchased or landed in that month by the firm to

which the entitlement sales revenues are passed on pursuant

to this paragraph.

(B) The sales revenues from entitlements issued for

the importation of eligible products which are sold in a

particular month shall be subtracted from the total cost of

the product concerned, purchased or landed in that month

(which is the period "t" (the month of measurement), for

purposes of calculating the increased costs to be applied to

prices of that product under the "Bit" factor of the appro-

priate formula for that product of S 212.83(c)(2) of this

chapter).






50


(C) The reduction in sales revenues from entitlements

sold in a particular month pursuant to the adjustments to a

refiner's crude oil runs to stills under paragraph (d)(4) of

this section shall be a cost of crude oil purchased or

landed in that month which shall not be applied to product

prices pursuant to the "At" factor of the general formulae

of S 212.83(c)(2) of this chapter, but shall instead be

applied only to prices for residual fuel oil.

(2) Resellers and Retailers. The sales revenues from

entitlements sold pursuant to this section by resellers or

retailers shall be subtracted from the cost of the product

in inventory for which the entitlements were issued, so as

to reduce the weighted average unit cost of that product in

inventory computed pursuant to S 212.92 of this chapter.

(3) Sales of Eligible Products to Eligible Firms. The

total amount of any reductions in the cost of eligible

products to the seller because of entitlements issued for

the importation of such products, which are required by

paragraphs (m) (1) and (m) (2) of this section, shall be

applied exclusively to the determination of maximum lawful

prices charged in sales in which the purchaser does not

receive entitlements for the importation of an eligible

product. Separate price calculations shall be made for

sales of eligible products in which the purchaser receives

entitlements for the importation of eligible products, which







51


shall comply in all respects with the regulations of Subparts

E or F of Part 212 of this chapter, except that the amount

of increased product cost used to compute such prices shall

not be reduced because of entitlements issued for the importa-

tion of eligible products.

(4) Timing. The date of purchase or sale of entitle-

ments for purposes of determining the date on which a cost

or a cost reduction is incurred under S 212.83(c) or S

212.93 of this chapter shall be the date on which the trans-

action is reported to have taken place on the monthly trans-

action. report filed with the FEA under paragraph (i) of S

211.66.

4. Section 212.83 is amended in paragraph (e)(8) to read as

follows:

212.83 Allocation of refiner's increased costs.
,**.* *

(e) Carryover of costs.
*

(8) Equal application among classes of purchaser.

With respect to each covered product other than crude oil,

when a firm calculates the amount of increased product cost

not recouped that may be added to May 15, 1973 selling

prices to compute base prices in a subsequent month, it

shall calculate its revenues as though the greatest amount

of increased product costs actually added to any May 15,






52


1973 selling price of that covered product and included in

the price charged to any class of purchaser, had been added,

in the same amount, to the May 15, 1973 selling prices of

such product and included in the price charged to each class

of purchaser; except that, where an equal amount of increased

product cost is not included in the price charged to a

purchaser because of a price term of a written contract

covering the sale of such product that was entered into on

or before September 1, 1974, that portion of the increased

product costs not included in the price charged to such a

purchaser need not be included in the calculation of revenues,

and except to the extent that S 211.67(m) of this chapter

specifically requires certain costs and revenues resulting

from entitlements transactions to be applied exclusively to

determine maximum lawful prices in sales in which purchasers

do not receive entitlements for the importation of an eligible

product.
*

5. Section 211.51 is amended in the definition of "importer"

to read as follows:

S 211.51 General definitions.
*

"Importer" means any firm (excluding the Department of

Defense) that owns at the first place of storage any allocated

product or crude oil brought into the United States, but not






53


necessarily the importer of record under a license issued

pursuant to Part 213 of this chapter.
*









55


TITLE 10 ENERGY

CHAPTER II FEDERAL ENERGY ADMINISTRATION

PART 210 GENERAL ALLOCATION AND PRICE RULES
PART 211 MANDATORY PETROLEUM ALLOCATION REGULATIONS
PART 212 MANDATORY PETROLEUM PRICE REGULATIONS
PART 215 LOW SULFUR PETROLEUM PRODUCTS REGULATION

Exemption of Residual Fuel Oil from the
Mandatory Petroleum Allocation and Price Regulations


Introduction

On February 12, 1976, the Federal Energy Administration

issued a notice of proposed rulemaking and public hearing

(41 FR 7122, February 17, 1976) to amend 10 CFR Parts 210,

211 and 212 to exempt residual fuel oil from the Mandatory

Petroleum Price and Allocation Regulations. The proposal

was based on tentative conclusions with respect to residual

fuel oil set forth in a document dated February 11, 1976,

entitled "Preliminary Findings and Views Concerning the

Exemption of Residual Fuel Oil from the Mandatory Petroleum

Allocation and Price Regulations" ("Preliminary Findings").

Written comments on the exemption proposal and on the Prelimi-

nary Findings were invited through March 5, 1976, and the

public hearing was held March 9, 1976.

FEA also issued a separate notice of proposed rule-

making on February 12, 1976 to adjust the entitlements

program in order to correct certain distortions in the East

Coast residual fuel oil market. Since the proposed exemption

assumed that those distortions would be eliminated before
the proposed exemption would become effective, interested
the proposed exemption would become effective, interested






56


persons were advised to consider the closely-related entitle-

ments proceeding in connection with this proceeding.

Concurrently with the issuance of this final rule, FEA has

issued amendments to the entitlements program and to the

refiners' cost allocation regulations to correct the East

Coast market anomalies. The amendments are expected to

enhance competition in the East Coast market by reducing the

amount of the disadvantage suffered by some non-refiner

importers and to prevent any marketer from obtaining an

undue economic advantage as a result of decontrol.

Sixty-one written and oral comments were received in

response to the notice of proposed exemption. Those offering

comments included major integrated refining companies, small

and independent refining companies, marketers, ultimate

consumers, state governments, a foreign government and trade

associations.

Almost all of the parties commenting agreed with FEA

that residual fuel oil should be exempted from FEA's alloca-

tion and price regulations. This support was based generally

upon agreement with FEA's conclusions as to supply and

demand projections, competition, and other findings and

views set forth in the Preliminary Findings. Parties opposing

the exemption of residual fuel oil generally based their

opposition on the belief that the current surplus supply

situation might end sometime in the future, that spot shortages







57


might occur, and that if such shortages were to occur,

consumers of residual fuel oil would be without the pro-

tection of price controls and might be subject to inequitable

prices.

FEA has carefully considered the comments of all

persons who participated in the rulemaking. Following its

consideration, FEA has concluded that its initial view that

residual fuel oil should be exempted from regulations is

correct.

No information or data were presented in this pro-

ceeding which significantly alter FEA's preliminary findings

and views. FEA does not anticipate that supply shortages

will occur in the future as predicted by some comments and

in any event FEA has standby authority under section 12(f)

of the Emergency Petroleum Allocation Act of 1973 (EPAA) to

reimpose allocation and price controls (on a temporary or

permanent basis) if necessary to attain the objectives set

forth in section 4(b) (1) of the EPAA. Therefore, FEA hereby

adopts the proposed amendments exempting residual fuel oil

from the Mandatory Petroleum Allocation and Price Regulations.

This exemption will be effective June 1, 1976 unless dis-

approved by either House of Congress under section 551 of

the Energy Policy and Conservation Act (EPCA).

Findings and Views

In addition to this amendment to exempt residual fuel

oil from the Mandatory Petroleum Allocation and Price









Regulations, FEA has prepared its findings and views support-

ing the amendment as required by section 12 of the EPAA

based upon its consideration of the comments of those persons

who participated in the rulemaking and other information

available to FEA. These findings and views are set forth in

a document dated March 29, 1976 and entitled "Findings and

Views Concerning the Exemption of Residual Fuel Oil from the

Mandatory Petroleum Allocation and Price Regulations" ("Find-

ings and Views"). These findings and views may be summarized

as follows:

(1) Residual fuel oil is not in short supply.


-- Sufficient refining capacity exists,

both in the U.S. and abroad, to satisfy

adequately projected U.S. demand.


The East Coast has traditionally relied on

Caribbean imports to supply 80-90% of its

residual fuel oil demand. However, since

1973, an increasing percentage of its demand

has been satisfied by domestic refining with

a shift towards the U.S. Gulf Coast for

supplies.


(2) Exemption of residual fuel oil from the Mandatory

Petroleum Allocation and Price Regulations will not

have an adverse impact on the supply of any other oil or

refined product subject to the EPAA.







59


(3) Competition and market forces are adequate to protect

consumers, following an exemption of residual fuel

oil from regulation. In -fact a greater degree of

competition would be expected after exemption than
%
exists under current regulations.


No price increases are anticipated

to result directly from decontrol.


The residual fuel oil market share of large,

integrated refiners has been decreasing since

1972, while that of the large independent and

small refiners has been increasing. However,

continued controls could lead to a dete-

rioration of competition, resulting in

reduced economic efficiency and higher prices.


Market anomalies on the East Coast detrimental

to some marketers have existed due to the

previous operation of the entitlements

program. Amendments to. the entitlements

program and to the refiners' cost allocation

regulations, however, have been issued concur-

rently with this exemption to correct these

anomalies. The amendments are expected to

enhance competition in the East Coast market






60


by reducing the amount of the disadvantage

suffered by some marketers and to prevent any

marketers from obtaining an undue economic

advantage as a result of decontrol.


-- The exemption itself will have a positive

effect on competition, in particular enhancing

the competitive viability of small and independent

refiners and marketers.


-- The exemption would permit purchasers (includ-

ing consumers) to seek the lowest cost supplier

by freely using competitive bids without

regard to fixed supplier/purchaser relation-

ships, thereby exerting downward pressure on

existing market prices and providing incentives to

enhance marketing services.


The availability of consumer goods and services

will not be adversely affected by exempting

residual fuel oil from regulation.



(4) Exemption of residual fuel oil from regulation will

not result in inequitable prices for any class of

residual fuel oil or other product user.






61


-- Current market prices for domestic and foreign

refined residual fuel oil are relatively

equal.


Aggregate prices for residual fuel oil will

remain unchanged by the exemption itself.

Prices can, however, be expected to rise over

time as the result of increased domestic and

foreign crude costs.


Analysis of the historical price relationship

between crude oil and residual fuel oil

suggests that the residual fuel oil market

has returned to its historical pattern follow-

ing the disruptive effects of the Arab embargo.


"- A review of existing "banked" costs indicates

that some non-refiner importers may have

experienced serious difficulty passing through

their increased product costs. Although

banked costs for residual fuel oil at the

refiner level are not specifically segregated,

costs have been applied to this product in

such amounts as to result in an equilibrium

between domestic and foreign prices.






62


The Findings and Views also state FEA's views concerning

the potential economic impacts of exempting residual fuel

oil from the Mandatory Petroleum Allocation and Price Regula-

tions. It is not anticipated that there will be any adverse

state or regional impacts resulting from the proposed exemp-

tion. In fact, governmental units which use large quantities

of residual fuel oil will find that exemption will permit

them to use competitive bids more easily. In addition, FEA

anticipates no adverse economic impacts on the availability

of consumer goods or services, the gross national product,

small business or the supply and availability of energy

resources as fuel or feedstock for industry. FEA expects

that the exemption will have a positive effect on competition.

The exemption is likewise expected not to cause an adverse

effect on employment or consumer prices. FEA's analysis of

the effects of the exemption on the rate of unemployment in

the U.S., on the Consumer Price Index and on the implicit

price deflator for the gross national product are set forth

in detail in the Findings and Views.

In addition to these findings and views, FEA is required

by section 12 of the EPAA to set forth its conclusions as to

whether the exemption is consistent with the objectives set

forth in section 4(b) (l) of the EPAA. These objectives are:






63


(A) protection of public health (including the pro-
duction of. pharmaceuticals), safety and welfare (including
maintenance of residential heating, such as individual
homes, apartments and similar occupied dwelling units), and
the national defense;

(B) maintenance of all public services (including
facilities and services provided by municipally, cooperatively,
or investor owned utilities or by any State or local govern-
ment or authority, and including transportation facilities
and services which serve the public at large);

(C) maintenance of agricultural operations, including
farming, ranching, dairy, and fishing activities, and
services directly related thereto;

(D) preservation of an economically sound and competi-
tive petroleum industry; including the priority needs to
restore and foster competition in the producing, refining,
distribution, marketing, and petrochemical sectors of such
industry, and to preserve the competitive viability of
independent refiners, small refiners, nonbranded independent
marketers, and branded independent marketers;

(E) the allocation of suitable types, grades, and
quality of crude oil to refineries in the United States to
permit such refineries to operate at full capacity;

(F) equitable distribution of crude oil, residual fuel
oil, and refined petroleum products at equitable prices
among all regions and areas of the United States and sectors
of the petroleum industry, including independent refiners,
small refiners, nonbranded independent marketers, branded
independent marketers, and among all users;

(G) allocation of residual fuel oil and refined petroleum
products in such amounts and in such manner as may be
necessary for the maintenance of exploration for, and
production or extraction of--

(i) fuels, and

(ii) minerals essential to the requirements of
the United States, and for required transporta-
tion related thereto;

(H) economic efficiency; and

(I) minimization of economic distortion, inflexibility,
and unnecessary interference with market mechanisms.






64


FEA's conclusions, based onr all information available

to FEA, are that since an adequate supply is anticipated,

the allocation and pricing of residual fuel oil are not

necessary to protect the public health, safety and welfare

(section 4(b)(1)(A)); the maintenance of agricultural

operations (section 4(b)(l)(B)); or the maintenance of

exploration for and production or extraction of fuels

(section 4(b)(l)-(F)). Adequate supply and the positive

effects of increased competition should insure that the

exemption is consistent with the preservation of an eco-

nomically sound petroleum industry (section 4(b)(l)(C)); the

equitable distribution of crude oil, residual fuel oil and

refined petroleum products (section 4(b) (l) (E)); economic

efficiency (section 4(b)(l)(G)); and minimization of economic

distortions, inflexibility, and interference with market

mechanisms (section 4(b)(1)(H)). The exemption should have

no adverse effect on the allocation of suitable crude oil to

U.S. refineries (section 4(b)(l)(D)).

Definition of Residual Fuel Oil

Under the proposal, "residual fuel oil" included the

fuel commonly known as No. 4, No. 5 and No. 6 fuel, Bunker

C, No. 4-D diesel fuel, Navy Special Fuel Oil and all other






65


fuel oils which have a fifty percent boiling point over 700

F in the ASTM D-86 standard distillation test.* The Mandatory

Petroleum Allocation Regulations include within the defini-

tion of residual fuel oil crude oil, when burned directly as

a fuel. FEA, however, did not propose that crude oil be

exempted from either Subpart C of Part 211 or the Mandatory

Petroleum Price Regulations. Consequently, as part of the

proposal residual fuel oil was redefined in 211.51 to

exclude crude oil when burned directly as a fuel.

Because no comments raised valid objections to the

proposed scope of the exemption, FEA has adopted the defini-

tion as proposed. Certain conforming amendments are also

made to the Part 212 price regulations, to reflect the

exemption of residual fuel oil. The term "residual fuel

oil" has been re-defined, to include No. 4-D diesel fuel and

No. 4 heating oil, and the term "covered product" has, in

turn, been re-defined to exclude residual fuel oil. Also,

references to permissible levels of price increases for

residual fuel oil to reflect increased marketing costs (for

refiners) and increased non-product costs (for resellers and

retailers) have been deleted from 212.87 and 212.93.

Allocation of Increased Crude Oil Costs to Residual Fuel Oil

The notice of proposed rulemaking also noted that

further amendments to the price regulations applicable to

refiners, beyond a simple exemption, might be necessary,






66


depending in part on the precise nature of changes in the

entitlements program with respect to residual fuel oil.

Pursuant to the refiners' cost allocation formulae of

212.83(c), the portion of the total increased cost of

crude oil of each refiner which is attributable on a propor-

tionate volumetric basis to the quantity of exempt products

produced from crude oil is excluded from the amount of

increased costs of crude oil which may be passed through in

prices charged for covered (i.e., non-exempt) products.

The notice specified that it might be appropriate to

modify this general approach to the allocation of increased

crude oil costs between exempt and covered products with

respect to residual fuel oil, particularly if the entitle-

ments program were modified so that less than a full entitle-

ment would be earned for crude oil runs attributable to

production of residual fuel oil for the East Coast market,

so as to increase the effective cost to each refiner of

crude oil attributable to such residual fuel oil production.

The notice stated that in that event, it might be appropriate

to exclude a proportionate share of increased crude oil

costs plus the total amount of the reduction in entitlement

benefits (or increased entitlement obligations) which result

from the residual fuel oil modifications to the entitlements

program to insure that the impact of the cost adjustments

with respect to crude oil attributable to residual fuel oil

production would be limited to residual fuel oil, as intended.






67


In addition, FEA solicited comments on whether the

increased costs of crude oil attributable to residual fuel

oil (and therefore not eligible for pass through in prices

charged for covered products if residual fuel oil is made an

exempt product) should be determined on the historical basis

of actual cost allocation under price controls rather than

on a volumetric basis, or whether it would be more appropriate

to accomplish the adjustment based on the percentage of the

refiner's actual residual fuel oil production thus eliminat-

ing the necessity of including purchases of refined product

within the calculation.

With respect to the issue as to how to treat increased

costs of crude oil with respect to residual fuel oil, the

written comments and oral testimony generally supported the

concept as set forth in the notice of proposed rulemaking of

treating residual fuel oil as other exempt products under

212.83. FEA has concluded that this approach is the most

appropriate.

Pursuant to S 211.67(m), as amended, the costs or

revenues resulting from entitlements transactions other than

for residual fuel oil sold in the East Coast market, or any

entitlements issued for the importation of residual fuel

oil, into the East Coast market, constitute an increase or

reduction in the total cost of crude oil for each refiner.






68


Pursuant to S 212.83(c), as recently amended, refiners may

allocate the increased total cost of crude oil between

products subject to price controls and exempt products on

the basis of the volumes of those product categories refined

by each refiner. Based on the comments received, this

approach is preferable because it appears to be the most

equitable and easily administered. It is also consistent

with the past treatment of exempt products under FEA price

regulations.

Any adjustments to entitlement benefits because of

residual fuel oil sold in the East Coast market, or because

of imports of residual fuel oil may, pursuant to S 211.67(m),

be reflected only in prices charged for residual fuel oil

and may not be reflected in prices charged for any other

products.



The notice of proposed rulemaking noted that with

respect to banked costs, to the extent that any refiner may

have recovered less than a proportionate share of its

increased costs of crude oil attributable to residual fuel

oil on a volumetric basis, it may be appropriate to reduce

that refiner's unrecovered (or "banked") costs for general

refinery products by that amount. This would insure that

amounts of "banked" costs attributable to the production and

sale of residual fuel oil are not passed through on other

covered products.






69


Parties commenting on this issue generally opposed

reducing refiners' banked costs. Because refiners have been

allowed to allocate a disproportionate amount of increased

costs to residual fuel oil and it is very difficult to

determine the extent to which this has or has not occurred,

FEA has concluded that it would be unduly complex to deter-

mine in an equitable manner how much reduction should be

made in each refiner's banked costs. Moreover, if controls

are removed from other products in the general refined

products category soon after the exemption of residual fuel

oil, such a reduction even if now justified would no longer

serve any purpose. Therefore, FEA has decided not to adopt

any reduction in banked costs in connection with this exemption.

Amendments to Part 215

The rule as adopted by FEA also exempts residual fuel

oil from the operation of Part 215 of FEA's regulations,

which prohibits sale or receipt of petroleum products for

use for burning under certain power generators that were not

so using a petroleum product on December 7, 1973, and which

imposes certain reporting requirements when covered power

generators which burn petroleum products switch to petroleum

products of a lower specified sulfur content, by weight,

than that used during November of 1973. The exemption of

residual fuel oil from the definition of petroleum products

covered by Part 215 is necessary to make that part technically










consistent with exemption of residual fuel oil from the

Mandatory Petroleum Allocation and Price Regulations, and

takes into account the views expressed in the two comments

on Part 215 that were received by FEA in response to the

Notice of Public Hearing and Opportunity for Public Comment

on Reevaluation of the Mandatory Petroleum Allocation and

Price Regulations, (41 FR 4727, January 30, 1976).

Effective Date and Standby Authority

Comments and testimony received with respect to the

time necessary between the promulgation of the exemption

amendment and its implementation generally supported FEA's

tentative conclusion that 30 to 45 days would be sufficient

for suppliers and purchasers to establish alternative supply

arrangements. In order to provide the time required for

Congressional review under section 551 of the EPCA and the

necessary lead time, FEA has determined that this amendment

should be effective June 1, 1976.

Section 12(f) of the EPAA provides that following the

exemption of any product from regulation, FEA shall have the

authority at anytime to reimpose price and allocation controls

if necessary to attain the objectives of the EPAA. For this

reason, FEA is adopting amendments which stay the effective-

ness of Subpart I of Part 211 and of the general price









regulations as they would otherwise apply to residual fuel

oil, without deleting those regulations from the Code of

Federal Regulations. They are in effect converted to

standby status, so that in the event of shortages or other

occurrences which might require reimposition of controls,

they may be quickly put into effect.


(Emergency Petroleum Allocation Act of 1973, Pub. L. 93-159,
as amended by Public L. 94-163; Federal Energy Administration
Act of 1974, Pub. L. 93-275; E.O. 11790 (39 FR 23185)).

In consideration of the foregoing, Parts 210, 211,

212 and 215 of Chapter II, Title 10 of the Code of Federal

Regulations, are amended as set forth below, effective June

1, 1976, unless this amendment is disapproved by either

House of Congress pursuant to the review procedures set

forth in section 551 of the EPCA.

Issued in Washington, D.C., March?, 1976.




Michael F. Butler
General Counsel
Federal Energy Administration






72


1. Section 210.35 is added to Part 210 as follows:

210.35 Exempted products.

(a) Residual fuel oil is exempt from the provisions of

Part 211 and Part 212 of this chapter.

2. Section 211.1 is amended in paragraph (b) by revoking

subparagraph (2), redesignating subparagraph (4) as sub-

paragraph (2), and by adding a new subparagraph (4) to read

as follows:

211.1 Scope.

*

(b) Exclusions.

*

(4) Notwithstanding the provisions of Subpart I of this

part, residual fuel oil is excluded from this part.

3. Section 211.51 is amended in the definition of "Residual

fuel oil" by deleting the phrase "(d) crude oil when burned

directly as a fuel;".

4. Section 212.31 is revised in the definitions of "covered

products," "middle distillates," and "Residual fuel oil" to

read as follows:

212.31 Definitions.

*

"Covered products" means aviation fuels, benzene,

butane, crude oil, gas oil, gasoline, greases, hexane,






73


kerosene, lubricant base oil stocks, lubricants, naphthas,

natural gas liquids, natural gasoline, No. 1 heating oil and

No. 1-D diesel fuel, No. 2 heating oil and No. 2-D diesel

fuel, propane, special naphthas (solvents), toluene, unfinished

oils, xylene, and other finished products. A blend of two

or more particular covered products is considered to be that

particular covered product constituting the major.proportion

of the blend.

*

"Middle distillates" means Nos. 1 and 2 heating

oils, Nos. I-D and 2-D diesel fuels, kerosene and aviation

fuels.

.* *

"Residual fuel oil" means No. 4 fuel oil, No. 4-D

diesel fuel, those fuel oils commonly known as ASTM Grades

No. 5 and No. 6 fuel oils, heavy diesel, Navy Special,

Bunker C and all other fuel oils which have a fifty percent

boiling point over 700 F. in the ASTM D86 standard distilla-

tion test.
*

5. Section 212.83 is revised in paragraph (c)(1)(ii)(B) to

read as follows:

212.83 Allocation of refiner's increased costs.






74


(c) Allocation of increased product cost (1)

General rule.

*

(ii) General refinery products.
*

(B) For purposes of this section, each of the

following products or product categories shall constitute "a

particular general refinery product": aviation gasoline,

benzene, butane, gas oil, greases, hexane, kerosene, lubricant

base oil stocks, lubricants, naphthas, natural gas liquids,

natural gasoline, No. 1 heating oil and No. 1-D diesel fuel,

propane, special naphthas (solvents), toluene, unfinished

oils, xylene, and other finished products. A blend of two

or more particular covered products is considered to be that

particular covered product constituting the major proportion

of the blend.

*

6. Section 212.87 is amended by deleting paragraph (c)(4)(v)

and by redesignating paragraph (c)(4)(vi) as paragraph

(c) (4) (v).

7. Section 215.2 is amended in the definition of "Petroleum

product" to read as follows:

215.2 Definitions.






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"Petroleum product" means crude oil, refined petroleum

products and petroleum coke as defined in S 211.51 of Part

211 of this chapter.
*




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