Exemption of middle distillates from mandatory petroleum allocation and price regulations (energy actions no. 3 and no. ...

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Title:
Exemption of middle distillates from mandatory petroleum allocation and price regulations (energy actions no. 3 and no. 4 and H. Res. 1302 and H. Res. 1303) compilation of statements of witnesses before the Subcommittee on Energy and Power, June 22, 1976
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iii, 138 p. : ill. ; 24 cm.
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United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Energy and Power
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Petroleum as fuel -- Prices -- United States   ( lcsh )
Price regulation -- United States   ( lcsh )
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compiled by the staff for the use of the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce, U.S. House of Representatives.
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At head of title: 94th Congress, 2d session. Committee print.
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Full Text
at .1~


94th Congress }P
2d Session COMMITTEE PRINT





EXEMPTION OF MIDDLE DISTILLATES FROM
MANDATORY PETROLEUM ALLOCATION
AND PRICE REGULATIONS

(Energy Actions No. 3 and No. 4 and
H. Res. 1302 and H. Res. 1303)




COMPILATION OF STATEMENTS OF
WITNESSES BEFORE THE
SUBCOMMITTEE ON ENERGY AND POWER
JUNE 22, 1976




Compiled by the Staff for the Use of the
SUBCOMMITTEE ON ENERGY AND POWER
OF THE


COMMITTEE ON INTERSTATE
FOREIGN COMMERCE


AND


U.S. HOUSE OF


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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, Mjchigan
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
LEN S. HYDE
ELIZABETH HARRISON
JEFFREY H. SCHWARTZ


WILLIAM P. ADAMS
ROBERT R. NORDHAI'S
BRIAN R. MOIR
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 Couvsel


(n)










CONTENTS


Statement of- Page
Berson, Sid, chairman, Fuel Oil Committee, National Oil Jobbers
Council ------------------------------------------------------ 1
Buckley, John G., Vice president/director, Energy Corporation of
Louisiana, Ltd----------------------------------------------- 6
Easley, A. Thomas, executive vice president, New England Council
for Economic Research---------------------------------------- 12
Emison, James W., vice president, Mid-American Petroleum Marketers
Association -------------------------------------------------- 21
Fawcett, Robert, chairman, Fuel Oil Supply Study Committee, New
England Fuel Institute--------------------------------------- 36
Feldesman, James L., counsel, Energy Policy Task Forcq, Consumer
Federation of America---------------------------------------- 52
"Consequences of Middle Distillate Decontrol," paper prepared
by Energy Policy Task Force, Consumer Federation of
America ------------------------------------------------ 58
Fitzsimmons, Frank E., general president, International Brotherhood
of Teamsters, presented by Bartley O'Hara, legislative attorney --.... 76
Gallup, Charles A., secretary, Michigan Petroleum Association ------ 79
Hill, John A.. Acting Administrator, Federal Energy Administration-- 83
Landry, James E., vice president/general counsel, Air Transport As-
sociation of America ----------------------------------------- 111
Lichtblau, John H., executive director, Petroleum Industry Research
Foundation, Inc --------------------------------------------- 119
Ouriel, Abraham, managing director, Independent Heating Oil Deal-
ers of Rochester, N.YYYYYYYYYY-------------------- 130
Payne, J. Michael, executive director, Car and Truck Renting and
Leasing Association------------------------------------------ 134


(III)



















Digitized by the Internet Archive
in 2013













http://archive.org/details/exemmiddl00unit



























Testimony of the
National Oil Jobbers Council
Sid Berson
before the
House Commerce Committee
on the
FEA Proposal for Decontrol of Middle Distillates
June 22, 1976

(1)









Mr. Chairman, my name is Sid Berson. I am the President of Energy
Unlimited of Hartford, Connecticut. I am appearing here today in my capacity
as the Chairman of the National Oil robbers Council Fuel Oil Committee. NOJ3C
is a federation of 42 state and regional trade associations which represents small
independent marketers of middle distillate fuels from every part of the country.
Together these distributors sell approximately 75 percent of the No. 2 oils
American consumers use for residential space heating. Mr. Chairman, we are the
marketers who requested the Congress to establish allocation controls when
shortages appeared in 1973. Today, I am honored to have this opportunity to
speak before the Committee to. support with equal force the FEA proposed
amendments to end these same controls.

Mr. Chairman, I strongly concur In the qualitative judgments made by the
NO3C Board of Directors and the quantitative findings by the FEA which
constitute the bases for our position in favor of decontrol. There is an adequate
supply of crude oil and refining capacity to produce the middle distillates
marketed by our members in quantities sufficient to meet demand for the
foreseeable future. To a significant extent, traditional market mechanisms have
taken hold since the supply actually available is more than equal to the demand.
At present the national middle distillate allocation fraction is near one with
excess crude and refining capacity available. And competitive pressures of the
marketplace are keeping middle distillate prices well below permissible ceilings.

But I should emphasize that while the market is more competitive than it
was just a short time ago, government regulations prevent the kind of vigorous
competition which benefits consumers and, of course, the fiercely independent
small businessmen who serve them.

In view of the question before the Committee, I would like to address two
particular points in the matter of decontrol which are of critical importance to
the continued viability of small fuel oil businesses.

To begin with, the inability to change suppliers or even credibly threaten to
change suppliers is one of the most important objections we have to the
continuation of allocation regulations during a period of adequate supply.

Refiners need assured supplies of crude oil and assured markets to maintain
a stable and profitable business. When surplus refining capacity exists in the
industry, independent distributors have the power to significantly affect their
refiner's profits by shifting their supply contracts to other refiners. This power
forces refiners to participate in several forms of competition which they
presently escape. The refiner may lower his price to keep his markets, or he may
improve credit terms, or he may provide access to a more convenient rack. In
short, the refiner will compete more aggressively in one way or another if he
knows he must do so to protect his markets. The competitive pressures I am
discussing are particularly significant for middle distillates because a large
percentage of these products are sold by nonbranded independents and there is
little reluctance to change suppliers since customers look to marketers rather
than oil company brands.









But the freeze on supplier-purchaser relationships precludes this type of
competition. Refiners are not as competitive as they were because other
refiners cannot sign supply contracts as long as they have base period volume
commitments from which they cannot escape. In effect our members have
become captive customers of their supplier.

FEA's Findings support our belief that decontrol will enhance inter-refinery
competition. Their analysis of "Refiner/Distributor Margins" demonstrates that
margins have increased rapidly in the last two years. An examination of the
major refiners' first quarter reports show that sales to marketers were an
important source of record breaking profits. Refiner margins have raced ahead
of the Consumer Price Index while heating oil retailers' margins remained almost
constant in the same period, despite authority to adjust those margins for
increased nonproduct costs. In other words, market pressures regulate the
independent retailer more strictly and successfully than do FEA's regulations;
but, there is no evidence of similar competitive pressure on refiners.

The fact that refiner costs may have increased to justify a higher refiner
margin is irrelevant. Our costs have increased but the free market will not
permit home heating oil distributors to recoup those costs. No such pressure
prevented refiners from recouping their higher costs. Refiners feel less
competitive pressure than a freer market would provide because they are given
captive markets by FEA regulations. The only way to subject refiners to the full
force of competition is to convert Part 211 of the Act to a standby basis as the
FEA has proposed. The controls would then be available if new shortages
developed while the competitive forces of the marketplace would be free to
enforce efficiency in normal times.


PRICE DECONTROL

Most citizens understand that allocation controls are unnecessary when a
surplus exists, but seem somewhat confused about the price regulating effects of
a surplus. I would first point out that the market sets lower prices than price
regulations allow. I have already noted that heating oil distributors' margins
have remained fairly constant under price controls despite legal authority to
increase those margins.

In May, 1973, the average home heating oil marketer's margin was 7.4c per
gallon and in December, 1975, it had grown to only 7.7C per gallon. Yet during
1974, FEA granted retail home heating, oil marketers margin increases of 2C per
gallon to compensate for increased nonproduct costs they incurred. By
December, 1975, marketers were using only .3C per gallon of this authority.
Price regulations permit them an additional 1.7 t per gallon but the free market
will not allow them to recover it. Thus, price controls are clearly unnecessary
beyond the refinery level on home heating oils.

In addition we would point out that since price controls set ceilings, they
can be targets at which some sellers shoot. Although this form of price-fixing is
done by government regulators it must be viewed for what it is: a bureaucratic










scheme which deprives consumers of a competitive marketplace and appropriates
funds from small businessmen. The government cannot regulate a market as
efficiently as the price mechanism because the government must collect
information upon which it makes decisions. That takes time and the information,
in order to be manageable, must be incomplete. Hence, the government adapts
to new conditions less accurately and more slowly than does a free market.

Sections of the regulations are so complex that small businessmen have
often been held in violation of complicated provisions even though product is
being sold below ceilings. Beginning with the ambiguities, conflicting and I might
point out, retroactive interpretations of FEA's class-of-purchaser rule for small
businessmen, a variety of examples of enforcement problems can be cited.

We have seen auditors use out-dated procedures and assess different
penalties for identical violations. We have seen them spend months with one
business and never visit others of similar size. We have seen them abuse their
subpoena power by requiring marketers to make submissions never approved by
0MB or FEA. And we have seen some auditors refuse to give credit for
undercharges even where marketers can show they charged less than ceiling
prices to accumulate a buffer against misinterpretation.

While small businessmen bear the burden of this harassment, large volume
violators have benefitted from inequitable application of the rules. In the East
Coast fuel oil market, for example, a situation was created where independent
distributors lost customers to integrated refiners who were offering low cost
product because FEA ordered rollbacks for overcharges. As a result, major-
distributor marketshares increased at the expense of independents. Such short-
term price benefits do not work to the advantage of consumers in the long-run.

I would also point out that prior to controls the middle distillate spot
market (made up of excess product) served as a lid on retail prices because cheap
surplus product was available as an alternative to regular supply. Presently,
however, spot prices are inordinately high because class-of-purchaser rules
require refiner-suppliers with expensive and hard to move product to offer this
surplus at unreasonable prices. Consequently, only marketers at the low end can
afford spot prices, and by subsidizing these high cost purchases with supplies of
low-priced product their marketshares have grown. The point is not that the
price rules permit such predatory and monopolistic practices. The point is that
in a surplus they encourage them.

Mr. Chairman, I know of this Committee's great concern for the short and
long-term impacts of decontrol on consumers. I want to emphasize that I share
these concerns. Consumers are my customers. I want to keep serving and
pleasing them.

Therefore I should like to draw your attention to the positive effect
consumers are already experiencing from the recent suspension of mandatory
controls on residual fuel oils. The June 15th issue of Platt's Oilgram price
service shows that the average price for more than 80 million gallons of heavy
oils sold after controls were lifted, is more than 2 per gallon below the price of
4 and 6 oils under controls. Considered alone, these savings are significant; but,
more important, they foreshadow the large reductions consumers can and will
find through adoption of this proposal.






5


Middle distillate marketers therefore find opposition to decontrol, in the
current surplus situation, hard to understand. We are the people who would feel
any shortage first, and thus we are aware of the need for a standby control
program. We urge this Committee to instruct FEA to set up such a standby plan.
But decontrol should not be delayed until this plan is in place for two reasons.
First, no shortage can possibly take place until winter and there is adequate time
for the creation of a standby program before then. Second, unless decontrol is
effectuated immediately the great cost savings to the consumers wil be lost until
next year due to the timing of the signing of contracts for summer fill for supply
next winter.

In conclusion I would say that with excess product available but priced
artificially high, with most marketers selling below legal ceilings, and with
distributors forced to seek supplies from uncompetitive refiners we have an
inequitable situation where government action is causing distributors and the
people they serve to be denied access to the best product at the lowest price.







6



ECOL LTD. 3900 ONE S-IELL SQUARE NEW ORLEANS LA 70139 TELEPHONE I50-4) 569-2500











Statement

of


ENERGY CORPORATION OF LOUISIANA,


LTD.


EXEMPTION OF MIDDLE DISTILLATES
FROM THE
MANDATORY ALLOCATION AND PRICE REGULATIONS

before the

SUBCOMMITTEE ON ENERGY AND POWER
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
HOUSE OF REPRESENTATIVES

Washington, D. C.


SJune 22, 1976









My name is John G. Buckley. I am a Vice President

of Northeast Petroleum Industries of Boston and a Vice

President and Director of Energy Corporation of Louisiana

(ECOL) a joint-venture of Northeast Petroleum and the Ingram

Corporation of New Orleans, Louisiana. ECOL is presently

building a 200,000 barrels daily fuel-oriented refinery on

the Mississippi River about 35 miles up-river from New Orleans.

I am a former Fuel Oil Chairman of the National Oil Jobbers

Council and currently on the Steering Committee of the

Fuel Committee of NOJC. I am also a member of the Utility

Advisory Committee to the Federal Energy Administration,

Washington, D.C. and a member of the Emergency Petroleum Supply

Committee of the National Petroelum Council.

I am here today to support energy actions III and IV--

the Exemption of Middle Distillates from Allocation Controls and

Price Regulations. I am testifying for Energy Corporation

of Louisiana (ECOL), a new independent refining company due

to start refining operations early this fall.

I am also authorized to voice strong support for distillate

decontrol on behalf of Ashland, Clark, Koch, Tesoro

and Hawaiian Independent along with ECOL. All of these

are, like ECOL, either small or independent refining

companies as defined in the EPAA. All favor the exemption

of middle distillates from control now. All look to this

Committee for action that will free independent refiners

from unnecessary controls which hamper their ability to compete

with major integrated companies and limit their ability to

prosper and grow.











Mr. Chairman, we believe the FEA testimony before

this Committee today was very responsive to legitimate

Congressional concern about the adequacy of supply of

distillates under differing demand scenarios. Basically

the new updated FEA data presented today shows beyond a

shadow of a doubt that we do have sufficient domestic

refining capacity to meet demand this winter under even

the most adverse set of circumstances imaginable, providing

there is no massive cutoff of foreign crude supply such

as an embargo. Moreover we were impressed by the statistics

developed independently by the Petroleum Industry Research

Foundation which show that with even a 20% demand increase

for distillates this Winter, there is sufficient domestic re-

fining capacity to meet such demand.

We were also encouraged to note that FEA has proposed

a rulemaking immediately after decontrol is effective to provide

a "safety net" set aside of products to be made available to

any independent retailer who has difficulty lining up supply.

This goes to the heart of fears that some independent retailers

might feel at the prospect of being returned to the competitive

marketplace.

Equal salutary was the FEA proposal to closely monitor

month by month distillate production, stock levels, cargo,

barge, rail and retail price levels, the potential effects

of natural gas curtailments, distillate demand and the share

of distillate imports in total demand. FEA's commitment to

immediately convene hearings if there is a significant departure

in any of these factors from the trends projected in their












"Findings" is a very positive step that should reassure

members of this Committee and consumers generally as well

as independent marketers that there will be a close watch

on all of the storm warning signals that normally precede

potential problems.

In addition as an independent refiner we welcome FEA's

initiative in notifying this Committee today that it

intends to monitor refinery pricing for distillate by

constructing an index that will track month by month what

refinery prices should have been had controls continued.

In this way, as FEA states, if refinery prices rise by

more than 2e per gallon for any month above the permitted

indexed price levels FEA will again immediately call for

public hearings to determine what appropriate action should

be taken. Moreover FEA has stated quite bluntly that the

Administrator will take emergency measures, if necessary, to

put appropriate corrective action in place quickly.

With these rather precise, detailed commitments from

FEA we can see no legitimate reason for this Committee to

delay any longer the exemption from controls of middle

distillates.

It must be painfully obvious to members of this Committee

by now from the testimony presented today that the control system

hurts the very sectors of this industry they were designed

to help. Independent retail marketers have presented eloquent

testimony to the anticompetitive impact controls are having

on their operations. Independent wholesalers and terminal








10



operators have presented equal compelling testimony. I would

like to reinforce the testimony of these other independent

sectors by adding to it the voice of an independent refiner.

Most independent refiners are not basking in the glow of the

high first quarter profits reported by most of our major inte-

grated competitors. Indeed many independent refiners had

poorer profits in the first quarter of this year than a year

ago. Certainly my own company expects it will have a far

more difficult time breaking into the distillate marketplace

under controls than it will if this Committee takes the

appropriate action to return distillates to the marketplace.

SMr. Chairman, apart from our own ECOL refining project,

there are no other new independent refineries being built in

the United States today even though this nation desperately

needs more refining capacity. This situation is another clear

manifestation of the fact that government controls by their

very nature prevent new entry into any industry subject to

controls. A recent Congressional study of the airline industry

by the Senate Committee on Administrative Practices and Procedures

clearly described how that industry once under controls lost

the competitive spark provided by price competition. All of

the testimony presented today by the independent sectors

of the oil industry involved in distillate manufacture and

sales makes the case against controls--and makes it decisively.







11



Gentlemen, controls reward the inefficient, raise

prices to the consumer, discourage competition from the

very sectors that normally provide the cutting edge of

competition, discourage new entries, hurt the independent

sector of the industry and in sum are anticompetitive by

their very nature.

This Committee must ask itself what it is trying

to achieve. Who are you trying to help and who are you

trying to hurt. It would be bitter irony indeed if those

here in this Committee to whom we independents have always

been able to look to for help now turn against us. If

Congress is willing to harm the small businessman, hurt

the independent marketer and the independent refiner and

put them at a disadvantage to the major competitors, then

the competitive thrust always provided by this group will

be lost. And this country and this country's consumers will

be the losers.

Thank you very much.







12







THE
NEW ENGLAND
COUNCIL
STATLER OFFICE BUILDING
BOSTON. MASSACHUSETTS 02116
(AREA CODE 617) 542-2580







STATEMENT

OF

A. THOMAS EASLEY

EXECUTIVE VICE PRESIDENT

OF

THE NEW ENGLAND COUNCIL

BEFORE THE

HOUSE OF REPRESENTATIVES

SUBCOMMITTEE

ON

ENERGY AND POWER

WASHINGTON, D. C.

JUNE 22, 1976







13



Mr. Chairman, my name is A. Thomas Easley. I serve as Executive

Vice President of The New England Council for Economic Development.

We appreciate this opportunity to state our views concerning

the Federal Energy Administrations recommended removal of

Allocation and Price Regulations on Middle Distillate Petroleum

Products.

The New England Council was organized in 1925 by the six New

England Governors to take actions to develop and strengthen the

region's economy. In the enusing 50 years the Council has acted as

a catalyst for development, working with its members and others to

"spin off" ideas and institutions to serve the region.

The Council is a nonpartisan membership organization of

approximately 2,000 members and depends entirely upon membership

dues to finance its operations. No state or federal funds support

the Council. This arrangement assures that the organization is

broadly representative and reflects the region's interests and not

those of any single group within the region.

During the 50 years of the Council's existence energy always

has been a serious concern. The Council fought shoulder to shoulder

with the Governors of the six New England states, and with our

Senate and House delegations for 14 years to end the notorious

Mandatory Oil Import Program. That quota program cost New England

homeowners, electric power users, utilities, and industries billions

of dollars. To this day, three years after its demise, we believe

it continues to effect the structure of development in New England.

Had we had energy costs similar to those in other regions through

the 1950's and 1960's, would be have the problems we have today?


73-527 0 76 2











I doubt it.

In April, 1973, the Mandatory Oil Import Program (MOIP)

collapsed. As a result of the MOIP however, distillate and other

products were in short supply, United States refinery capacity was

inadequate, and severe shortages were on the horizon. Moreover,

foreign distillate prices had risen much above United States prices

for the first time. As the direct result of these shortages, major

oil companies began to cut-off supplies of lower-prices U. S.

domestic distillate to long-standing customers in New England,

forcing these New England marketers to purchase a larger and larger

share of their needs in the higher-priced overseas market.

This was unfair to independent marketers and unfair to their

New England customers, and the situation was compounded by the Arab

oil embargo later in the year. Naturally, at that time and under

those circumstances, The New England Council and almost every other

group in New England supported a fair allocation and price control

program.

The situation has changed drastically. The artificial supply

restrictions resulting from the MOIP are a thing of the past.

United States refinery capacity is now adequate and FEA projects

that it will continue to be so even if demand for middle distillates

grows at a rapid pace. This means that United States domestic

refiners should have adequate supplies of distillate available to

supply independent marketers in the Northeast and in New England

so that these independent marketers will not have to purchase

heavily in the higher-cost overseas markets.












The purpose of our testimony today, however, is to add our

voice to others who believe that the region will gain from the end

of allocation and price controls on home heating oil.

The New England Council supports FEA's proposal to end price

and allocation controls on middle distillates with appropriate

safeguards in case of unexpected changes in current market conditions.

We do this because we are basically against controls on the workings

of free markets under normal conditions. We believe that the market

for middle distillates has returned to normal since the extraor-

dinary period in 1973 and 1974, and that ending controls therefore

will mean greater competition, less red-tape and paper work, and

lower prices to consumers.

Mr. Chairman, I am at a loss to understand why there is such

fear among some end-user groups about the return of more "free

markets" for home heating oil and other products. These "end-

users" seem convinced that free markets would not work and that

heating oil prices would be pushed up, although they can produce

little or no evidence to support this fear. To the contrary it

is clear that markets for oil products do work competitively to

protect consumers.

Looking at the record, on March 29, FEA gave importers of

residual oil on the East Coast an 830 product entitlement. There

had been much opposition to this on the grounds that the major oil

companies would keep this entitlement and that residual oil prices

would not drop. But these fears were groundless. The market has

worked. Prices for resid have fallen and consumers are getting







16



full benefit of the entitlement. Residual oil was decontrolled on

June 1st and prices seem to be dropping still further. The Oil

Buyer's Guide of June 14, shows that residual oil prices are 13-15%

below those of one year ago. Clearly, markets for residual oil

are competitive. The market for gasoline is also convincing

.evidence that oil products are competitive. Gasoline prices

dropped lht in early spring of 1976, but jumped ahead 2-3 recently

as demand unexpectedly surged. The industry reacted to increased

demand and higher prices by increasing refinery output by over 5%

to more than 7.1 million barrels a day of gasoline.

What has been the result? Platt's Oilgram Price Service shows

that barge loads of gasoline were selling in New York harbor at

43-440 per gallon on June 4 as marketers scrambled to meet demand.

On June 15, however, because refinery output had increased, Platt's

said that "the bottom (had) fallen out of the gasoline market in

New York harbor." On June 17, they reported barges of gasoline,

available at 38-400 per gallon, 4-6 less than a few days before.

I have no doubt that these lower prices will soom reach consumers

at the retail level, the point is, Mr. Chairman, that for gasoline

and residual oil we have evidence that markets work flexibly and

competitively as they should. Those who said they would not work

for residual oil.have been wrong. The evidence of competitive

price movements discredits the fearful, status quo advice they

always give to this Committee and to the Congress.

The New England Council believes that present controls on

heating oil are costly to consumers, and that the heating oil











market will behave just as competitively as other oil product

markets under decontrol. Right now, a large buyer of heating oil--

an apartment, a university, a public facility, or a retail dealer--

cannot as a practical matter make a long term contract with a

supplier who was not his supplier on May 15, 1973. This is because

wholesalers and refiners cannot enter into such long term competitive

contracts because they must always have to be ready to supply the

same customers they had on May 15 three years ago. This limits

competition and raises prices.

Opponents of decontrol seem to like this inflexibility. They

perfer to lock consumers into a rigid system which is getting worse
r
rather than to accept those same risks which have to be taken if

we are to move back to competitive markets.

FEA and everyone else who has testified, are reasonably

confident that there is adequate refinery capacity to supply any

foreseeable increase in heating oil demand. Competition therefore

will keep prices down.

If prices and allocation control are removed, as FEA proposes

there will be important pressures for lower prices. This is because

heating oil marketers will have an incentive to fill tanks now with

lower priced summer heating oil, rather than wait for this fall

when prices normally rise. There will be an end to costly red-

tape which alone may save consumers one penny per gallon. Third,

dealers and end-users will be better able to shop around for the

lowest cost of supply. Moreover, price controls on domestic crude

oil will remain in effect, assuring defacto if not dejure that







18



United States heating oil price will remain well below world levels.

Everything therefore points to taking off control now, having

a little political guts now, and letting markets work. It is

surprising therefore that a few timid souls are asking not just

for reasonable guarantees of price stability, which The New England

Council thinks FEA should provide through standby arrangements,

but for actual ironclad assurances about prices and even about the

weather this winter. No one can give assurances about the weather,

Mr. Chairman.

Consumers cannot be assured that this winter will be as warm

as the last; we cannot be assured how much heating oil might be

diverted if natural gas shortages worsen. But we think that FEA

has made its case that heating oil is adequate and that consumers

will be protected under any reasonable set of assumptions if price

and allocation controls are ended. We think, Mr. Chairman, that

the Committee should have the courage to restore competitive

markets now.

The New England Council supports middle distillate decontrol

only after careful consideration because middle distillates are

more important to the economy of New England than to any other area

of the United States. Middle distillates provide 28% of total

energy consumed in the region against only 8% of the energy consumed

nationwide. Of oil product consumption, middle distillates are

28% of the total in New England, but only 17.4% nationwide. This

shows how much more important middle distillates are to New England

than to other areas of the country and how much more careful we







19



must be in deciding how to deal with them.

Second, the cost of middle distillates is more directly

focused on homeowners in New England than in other areas, 75% of

middle distillates used in New England are used for heating, while

the United States average is only 47.5%.

Third, distillate oil marketing in New England is overwhelmingly

a small business. In no region of the country are independent

marketers more important in middle distillate distribution.

Independents supply 85% of New England's home heating oil at retail

and 40% of the region's wholesale demand. Therefore, The New

England Council, in considering its position on decontrol of middle

distillate, has been acutely aware of the possible impact of this

move on New England small business. We believe it will be helpful.

While supporting decontrol, however, we do have some problems

and requirements for safeguards. FEA notes on page 122 of its

preliminary findings that "the most important question concerning

exemption of middle distillates is the impact that higher-priced

imports of middle distillates could have on New England wholesalers

and distributors," and indeed The New England Council believes on

New England consumers as well.

Foreign prices now are considerably above United States

domestic prices because of lower United States crude costs.

However, if--contrary to FEA's expectations--imports begin to flow

into the United States and/or New England market, United States

prices could be pulled up to foreign levels. To minimize the

danger of such price increases, which we regard as unlikely, a

standby emergency program is needed and it is our understanding




20



that the Federal Energy Administration is recommending such a

program.

Thank you.









































#214

6.22.76







21



STATEMENT OF

THE

MID-AMERICAN PETROLEUM MARKETERS ASSOCIATION

BEFORE

THE SUBCOMMITTEE ON ENERGY AND POWER

OF THE

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE

JUNE 22, 1976



My name is James W. Emison, and I am Vice President of the Mid-

American Petroleum Marketers Association [MAPMA]. MAPMA is an association

comprised of independent businessmen engaged in the retail and wholesale mar-

keting of refined petroleum products. Because none of the members of MAPMA

own the means of refining, they are entirely dependent upon other participants

in the petroleum industry for their supplies of finished products. However, in

all other respects, we perform all of the marketing functions of a refiner and

most importantly, we directly compete with refiners in the marketplace. They

are our principal competitors. The purpose of our organization is to assure that

adequate supplies of economically priced refined petroleum products are available

to marketers and consumers in the midcontinent.







22


If I may, let me tell you a little about myself so you will understand

both my background and my point of view:

I have been in the petroleum business over twenty-five years. I

have had limited experience in the production of crude oil and refining. I have

had a great deal of experience in the marketing of refined petroleum products.

Among other organizations, I am a member of the American Petroleum Institute

and the National Petroleum Council. I am an economic conservative, a free

trader, an advocate of the free market system, and a Republican. I believe in

my Industry and despite Its shortcomings and infrequent errors, I think it has

done a better Job of supplying this country's energy needs than any other similar

industrial group in any other country. But most importantly, I wish to emphasize

my faith in the free market system.

As independent businessmen, MAPMA's members support any action

which will result in a return to a free petroleum market or which will result in

participants in the petroleum industry operating in as free a petroleum market

as is achievable, given the economic realities of the oil industry.

Your subcommittee has requested comments on the feasibility of re-

moving controls on middle distillate fuels. While strongly opposed to decontrol

at the refinery level, MAPMA would support decontrol at the wholesale and. retail

levels under certain circumstances. MAPMA's support for such decontrol would

be strictly conditioned on FEA's lifting controls on these levels of the petroleum







23



industry only in a manner which is reflective of the realities of the marketplace

and which comports absolutely with the objectives of the Emergency Petroleum

Allocation Act of 1973 and the Energy Policy and Conservation Act.

The ability of any independent marketer to compete in the petroleum

marketplace is dependent upon its obtaining (1) adequate supplies of product ,

and (2) obtaining this product at a price which will permit it to operate at a

profit. The enactment of the EPAA was necessitated by the development of market

conditions which prevented many independent marketers from fulfilling those

conditions precedent to their own survival. Fortunately, current market conditions

are at least different from those which existed during and shortly after the

embargo. However, we have not returned to the supply and market conditions

that existed in the more stable period of 1971-72.

As you consider deregulation, let me tell you exactly where I think

we stand today. As I proceed, I will provide appropriate illustrations of con-

ditions in the petroleum industry.

1. The OPEC cartel still reigns. It did not die as so many predicted.

2. This country still does not have an integrated systems oriented

energy policy.

3. Domestic prices for crude oil have been set at prices substantially

below world market levels for equivalent grades of crude oil.







24


4. The United States employees a duty and license fee system

designed to discourage or restrain imports of refined petroleum products.

5. We have had three back-to-back winter seasons where degree

day accumulations have been far below normal. It is unlikely that this kind of

favorable weather will continue.

6. We have not deregulated natural gas which is in previously short

supply. Now we are told by a Federal Power Commission report that while we

have staved off the problem in past years, we absolutely will not escape another

season. With regard to this point, I recall seeing recently the American Oil

Company's quarterly report. American Oil is one of this country's most significant

sellers of natural gas. The report indicated that while revenue from sales of

natural gas had increased, unit sales of natural gas had decreased, a trend

which they expect to continue. That is not a happy cohabitant for decontrol of

middle distillate.

7. Our great and good friends, the Canadians, have told us repeatedly

both publicly (and privately when I met with officials of the National Energy

Board) that whether it is crude oil or refined products, the United States will

receive less and less and finally no Canadian hydrocarbons. What we do receive

will be sold at their prices, not ours. I am associated with a company that is the

largest exporter of Canadian refined fuels in that country. In light of that fact,

you would think that I could afford to import product from Canada in order to

supplement my customer's requirements or to develop new markets in the United







25


States. The fact of the matter is that whether it is for distillate or for gasoline,

Europeans will pay higher prices for product than Americans by as much as 10

cents per gallon. Since I must compete with other would be purchasers of this

Canadian product, the only place I can sell it without losing a fortune is offshore.

I think this accurately explains the de minimus chances that independent oilmen

in this country have of receiving Canadian refined material.

8. Even the FEA's own forecasts indicate that the manufacture of

petrochemicals will take an increasing percentage of each barrel of middle distillate,

an unhappy prospect when we view the increasing use of jet turbine fuel, tractor

and truck diesel fuel and the greater industrial requirement for distillate spurred

by the strongly recovering domestic economy.

9. The "world market" for petroleum is not a free market and the U.S.

domestic market is not a free market. Talk of returning to a free market is just

that, Rather we can only talk of returning to a "freer" market. But the approach

to such a market must be accomplished with great care in order to avoid anomalous

situations in which businesses, that would normally prosper in a free market, are

destroyed.

In this connection, imagine these facts. This scenario, while distress-

ing, is based on supportable facts and is likely to occur:

A. Because of artificially low U.S. prices, I can not afford to purchase

high priced offshore products to sell within the United States.







26



B. Because of Canadian restraints on exports and U.S. restraints on

imports, I can not afford to import product from Canada.

C. Therefore, our suppliers who are abundantly aware of this closed

market situation have no real incentive or even good reason to recognize our

class of trade function. My own supplier, with whom I have historically competed,

can go after my customers. However, my suppliers' ability to make this unilateral

and destructive decision is made possible only because the refiner-supplier is

sheltered from the effect of a truly free market competitive system.

D. Presently, my refiner competitors receive a major cost subsidy in

the form of "old oil" entitlements. Take that away from them, and I will be glad

to take them on in nose-to-nose competition. But if they are to receive this cost

protection, and I am effectively prohibited from buying offshore or in Canada,

then I must inquire how am I going to be able to compete in a foreclosed middle

distillate market where they are afforded both cost and supply protection while
\
I am afforded no protection at all.

10. The FEA is great at using general supply figures--figures that

consider only the whole--never the parts. In spite of their protestations that

there is plenty of product, I ask that the Subcommittee look at the last sixty

days in the spot market for gasoline.

A. The Gulf Coast posting for spot sales has gone from 32 cents per

gallon to 42 cents. At 42 cents FOB the Gulf I would have to sell gasoline in







27


Minneapolis at 46 cents per gallon vs. my largest competitor whose price is

37 3/4 cents per gallon. Absent controls, neither my customers nor I could

survive these conditions. The retail price to the motorist in Minneapolis,

exclusive of taxes, is only 45 cents. These conditions are not reflective of

a market where supply and demand are in balance.

B. With regard to middle distillate fuels similar facts are present.

In the last several weeks, middle distillates have taken a contraseasonal spurt

in price of about 2 cents per gallon. Inventories are about 2,000,000 bbls. less

now than they were a year ago. To illustrate these facts and their impact In

the marketplace, 30 cents per gallon distillate on the Gulf Coast means I would

have to realize 35 cents for the material from a Northern Tier customer. However,

my largest competitor is selling at 33 cents per gallon to the same customer.

While I am a successful marketer, I can not sell a single pint in that kind of

market and remain economically viable. Even If I could, imagine how disadvantaged

my customers would be vis-a-vis their competitors.

At this point, let me ask what I believe is the telling question.

If there is to be decontrol of middle distillates, do you believe

that spot prices will fall to the levels of today's controlled prices;

or on the contrarydo you believe decontrol will allow presently

controlled prices to move up to spot market levels ?







28


I believe controlled prices will move to spot levels which in times

of shortage are in fact world market levels. Thus, my refiner-competitors will

be in a position to charge world market prices to me and offer the same price to my

customers. Because the price of their crude oil will have remained fixed as will

have their refining costs, my refiner-competitors will be in a position to remove

my company from the marketplace without any loss of revenues. In short, because

my company will be unable to price compete under these FEA created conditions,

there will be no Justification for my continued operation. Because my company and

companies like it have always provided the source of price competition, our

removal will result in higher prices and consequently in a substantial public outcry

over the resultant increase in oil company profits.

11. So that everyone can understand exactly what is involved in

trying to measure the effect of middle distillate decontrol, let me suggest that

forecasting gasoline use can be done somewhat scientifically. After all there

are X number of cars driving at X speed consuming a certain amount of gasoline

for each mile driven. About the only variable is the fleet mix of large, medium,

and small cars--a mix determined by the public's demand. However, even though

there is only a single variable, our gasoline forecasters produced inaccurate

forecasts and in just 60 days the price of gasoline jumped over 10 cents per

gallon because demand--particularly for high octane material modestly exceeded

supply. Such a giant increase would have been unthinkable in the more normal

markets of 1970 and 1971. In those markets increased domestic demand was met











by increased domestic supply. However, today increased domestic demand if

met at all is and will continue to be met with foreign supply. The unhappy result

is radical price fluctuations when the market is even slightly out of balance for

even short periods of time. While we are on the subject, let me suggest that

you keep your eyes on the developing world octane shortage. It is my view that

if octane demand is to be met at all over the next several years, it will be met

only by reducing the demand curve rather than by increasing supply. The reason?

Because there is not sufficient world wide octane manufacturing capacity.

If forecasting gasoline consumption is somewhat of a science, then

the forecasting of middle distillate use issomething considerably less precise.

To the best of my knowledge, we have no one, no group and no mechanism that

can accurately and consistently forecast its demand. Winter weather conditions,

availability of natural gas and the agri-business community largely determine

whether or not we will have enough distillate. What would be the consequence

if this coming heating season were 8% colder than normal nationwide and 11%

colder than normal in the Northeast and Midwest? The equation for forecasting

demand becomes so complex that all one can do is forecast ranges of demand.

How would increased demand be met? If it were to be met at all, it would have

to be met with offshore product. Once we start bidding in foreign markets, prices

will rise at an ever-accelerating rate. I request that the Subcommittee recall the

70 cents per gallon distillate our country bought during the embargo. The world

auction market becomes an absolute sellers market the minute a new buying group


73-527 0 76 3







30


enters the auction. I think we might be able to meet the demands of a cold

winter, petrochemical use of distillate feedstock, Increased agri-business

demand, increased demand caused by natural gas cutoffs, and increased demand

created by a revitalized economy but such demand will be met only at exorbitant

cost, Under these so called free market conditions, which, of course, are far

from free, decontrolled domestic distillate prices will rise at the same rate as

world prices.

An independent marketer cannot bid against a refiner who has greater

economic resources plus the subsidy of the "old oil" entitlements program.

12. You must understand that marketing entitles are very fragile.

If we are out of product for three weeks or If our customers are out of business

for three weeks--we are out of business period. No consumer is going to get

cold or even risk getting cold In order to do business with me or my customers.

There are many anomalies throughout the petroleum industry and as

we learned in 1973, market conditions can change very rapidly. In the event

of such a change in conditions, the greatly inferior economic position of

independent marketers relative to their integrated oil company competition,

invariably results in the severe weakening, If not elimination of the independent

marketers' ability to compete. While I am willing to attribute the action of our

more powerful competition In tight market situations to the simple pursuit of

economic self interest, rather than to malice, it is important to note that the

Congress has twice passed legislation which affirms its belief that the interests

of the nation are best served by a highly competitive petroleum industry in which











independent participants actively compete at all levels and in all areas of the

country. Therefore, I believe that EPAA and EPCA provide the FEA with a mandate

to take appropriate steps to insure that imbalances in economic power within the

domestic and international petroleum market do not preclude independent participants

from effectively competing.

Given the foregoing, MAPMA believes that the PEA can and should send

to Congress proposals which will remove allocation and price controls from the

wholesale and retails levels of the petroleum industry, but which also provide

ample protection for marketers whose positions are potentially weakened by FEA

participation in the market. They should not continue to afford protection to

refiners unless adequate protection is offered to these refiners' marketer competition.

Parenthetically, let me state that competition has returned at the retail and Jobber

distributor level. I can assure you that absent the EPAA and the FEA, this would

not have occurred. Despite my criticism of the FEA on this issue of decontrol,

I think it has been far more effective than its critics want to recognize. However,

if the FEA truly wishes to deregulate middle distillates, then there is a better way

in which to do it. In the meantime with regard to this proposal, I urge you to tell

the FEA NO, NO,a thousand times NO.

You should not buy "a pig in a poke" and the FEA should not have

suggested you do so. Why the rush to deregulate? MAPMA believes that it is

better to suffer some administrative inconvenience rather than risk a price and

supply catastrophe.







32


FEA could and should have formulated a middle distillate decontrol

proposal that was timely and reflective of its statutory mandate.

1. FEA should have proposed decontrol of the wholesaling and retailing

function leaving controls on at the refinery level which enjoys the benefit of crude

oil cost equalization. This would have given the FEA, the Congress and the

industry some time to test decontrol and to see what, if any, problems developed.

2. The Congress should have been furnished with the FEA's proposed

regulations regarding the action it intends to take in the event of regional im-

balances. I believe that FEA has already violated its mandate under the EPAA by

not assuring you, the Congress, that the FEA has developed proposed regulations

designed to alleviate the potentially previous problems and anomalies that the

decontrol of middle distillates can generate.

The proposals envisioned by MAPMA would include a number of provisions

necessary to FEA's fulfillment of its statutory mandate. In particular, MAPMA

believes that FEA must (A) retain the ability to reimpose the Mandatory Allocation

and Price Regulations on both an Industry-wide basis and on a particular market

basis; and (B) create a procedure under which an independent marketer, upon a

showing of its inability to obtain adequate supplies of product, despite a good

faith attempt, may be assigned a supplier; and (C) make adequate provision for

the Office of Exceptions and Appeals to grant relief to an independent marketer

upon a showing of economic hardship resulting from FEA's regulations.







33


The necessity for FEA's retaining the ability to reimpose the Mandatory

Allocation and Price Regulations on an industry-wide or when appropriate on a

particular market basis, is self-apparent. In the event of supply imbalances,

conditions will develop in the marketplace which require such action in order

to avoid the type of hardship which originally caused the enactment of the EPAA.

Because of crude oil or product supply imbalances and/or natural disasters or

equipment failure, severe shortages could develop in particular areas. The FEA should

retain the authority to reimpose the Allocation and Price Regulations in such an

area during the time in which such circumstances impose an emergency. A very

real and dramatic example of such regional imbalances is presented by the crude

oil and finished product supply situation in the Northern Tier states. Such

situations always have a ripple effect so that while the Northern Tier may be

affected very adversely, adjoining areas are affected somewhat adversely.

In addition to retaining the authority to reimpose the Mandatory

Allocation and Price Regulations under appropriate circumstances, it is essential

that FEA create an emergency procedure under which an individual marketer can,

upon a showing of its inability to obtain adequate supplies of product despite a

good faith effort, be assigned a supplier. This procedure should be separate and

distinct from the exceptions procedures currently employed by the Office of

Exceptions and Appeals. Under this emergency relief procedure, a marketer

seeking an assigned supplier, should be required to submit to FEA an explanation

of its efforts to obtain adequate supplies and the results of those efforts, including:







34


(1) a list of suppliers contacted; (2) the response of those suppliers including

volumes of product offered and locations at which such product was offered; and

(3) an explanation of why it is not feasible for the marketer offered product to

accept and employ offered product for its requirements. Under this procedure,

FEA would be required to issue an assignment order for the benefit of the applicant

within fifteen days of FEA's receipt of the application. In order to make this

procedure a meaningful remedy, FEA must impose a requirement that any supplier

intending to terminate a supplier/purchaser relationship must give the purchaser

written notice of its intention no later than ninety days prior to the proposed

termination. Refiners receiving an assignment order under this procedure would

be obligated to sell product to the marketer concerned at a price that recognizes

the marketer's class of purchaser function. In short, provide adequate protection

for those entities disadvantaged by the artificial market in which we now operate

and in which the precursors, necessary to a truly free market, do not exist.

Finally, FEA should make adequate provision for its Office of Exceptions

and Appeals' to grant extraordinary relief to an independent marketer upon a show-

ing of severe hardship. This procedure would be totally separate from the

emergency procedure previously described and relief would be granted on the

basis of the applicant's meeting of the "severe hardship" standard currently

employed by the Office of Exceptions and Appeals. The potential for competitive

imbalances caused by FEA regulations in Just the Northern Tier states provides

an example of the type of circumstances in" which MAPMA believes such relief

would be appropriate. In order to maintain the competitive viability of Northern






35


Tier refiners, FEA has not only provided entitlements to these refiners, but has

also instituted a bias In the entitlements program to reflect problems resulting

from the shortfall in Canadian crude oil. Because the FEA has enhanced the corn-

petitive position of these refiners, it has thereby potentially weakened the ability

of independent marketers to compete with these refiners, MAPMA believes that

FEA must be prepared to take affirmative and timely action to correct these in-

equities.

We should not forget that when the supply situation was at its worst

and for long afterwards, a number of companies evaded the intent of EPAA and

the FEA's regulations in order to advantage themselves and disadvantage others.

Members of our group are more than willing to return to a truly free worldwide

and domestic marketplace, but if the market is going to be partly free and partly

foreclosed, then our very recent experience reveals that independent marketers

are likely to be victimized again.

In conclusion, given the adequate safeguards described, MAPMA

believes that decontrol of the wholesale and retail levels of the petroleum industry

is feasible and desirable in light of current worldwide and domestic market con-

ditions, The safeguards suggested are necessary in light of the vast disparities

in economic power between the participants in the petroleum market as it is structured

today and, therefore, these safeguards are essential to PEA's fulfillment of its

statutory mandate.







36


,SvVw EngfanJ gJuJf _Uq d

330 COMMONWEALTH AVE. 0 BOSTON. MASSACHUSETTS 02215 0 OEnmore 6-7320 rcitx:. NEFIBSN 940-667












Statement

of

NEW ENGLAND FUEL INSTITUTE

on

EXEMPTION OF MIDDLE DISTILLATES
FROM THE
MANDATORY ALLOCATION AND PRICE REGULATIONS

before the

SUBCOMMITTEE ON ENERGY AND POWER
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
HOUSE OF REPRESENTATIVES

Washington, D. C.

June 22, 1976







37


Mr. Chairman:

Thank you very much for the privilege of appearing before

this Committee. My name is Robert Fawcett. I am President

of Fawcett Services, an independent retail home heating oil

company located in Cambridge, Massachusetts and serving the

metropolitan Boston area. I am Chairman of the Fuel Oil Sup-

ply Study Committee of the New England Fuel Institute (NEFI)

and a past president of the Institute. With me is Mr. Charles

Burkhardt, Executive Vice President and Managing Director of

NEFI.

We are appearing today on behalf of NEFI to present com-

ments on the proposal submitted to the Congress by the Federal

Energy Administration for "Exemption of Middle Distillates
*/
from the Mandatory Allocation and Price Regulations." NEFI

is an association of 1,300 independent retail and wholesale

home heating oil distributors throughout the six-state region.

The independent marketers serve over 2.4 million retail home

heating oil consumers and market 85% of the 4 billion gallons

of No. 2 home heating oil sold in our area at the retail level

and 40% of the gallonage at wholesale. .Seventy-one percent

of all of New England's buildings and 74% of its population

are supplied with heat by No. 2 home heating oil. Members of

our association also market residual fuel oil at the wholesale

and retail levels.

*/ Federal Register Notice, June 16, 1976, pp. 24516-21.







38


General Comments
The members of NEFI are of course deeply involved in the

fuel oil market and are well aware of current supply and price

conditions. In response to the Federal Register Notice, issued
u
by FEA last month, NEFI's Fuel Oil Supply Study Committee

reviewed the impact that the proposed exemption of middle dis-

tillates would have on such factors as supply, demand and price.

We have determined that the conclusions reached by the Federal
*!/
Energy Administration and set forth in its "Findings and Views"'

are generally consistent with our own. Thus, we strongly sup-

port FEA's decision to exempt middle distillates from controls

and urge that this Committee and the Congress permit the plan

to become effective on July 1, 1976.

At the outset we wish to underscore the commitment of our
Institute to our customers, the fuel-oil consumer. For the

past nine years we have been in the forefront of the effort to

insure full supplies of fuel oil at the lowest possible price

to the consumers of New England and the country. We fought
against the import quota system, against the supplemental fee

system, against the Administration program to ration and allocate

through very high prices, and we fought for allocation and price con-

trols before and during the Embargo period. It is in this spirit

and with this record on behalf of the consumer that we now advo-

'7 Federal Register, April 26, 1976, pp. 17512-15.

**/ Findings and Views Concerning the Exemption of Middle Dis-
ETllate from the Mandatory Petroleum Allocation and Price Regula-
tion, Federal Energy Administration, June 15, 1976.







39


cate removal of price and allocation controls on middle distil-

late fuels. Since we depend on the goodwill and patronage of

the consumer--and since we have daily contact with our customers

on both a personal and business basis--it is in our own interest

to be strong consumer advocates.


Specific Comments

Supply

From our own experience in the market, we can confirm FEA's

finding that currently there is more than an adequate supply of

middle distillates available. Surplus product is now abundant,

and there is no indication that it will disappear. We are all

operating above an allocation fraction of one and have been do-

ing so since the end of 1974 or beginning of 1975. Allocation

regulations no longer serve the purpose for which they were de-

signed--there is no necessity to allocate product.

Our Association is in the best position to comment on the

adequacy of supply since we in New England, as opposed to almost

all other areas, depend most heavily on middle distillates for

heating. Since we are so dependent we need the most protection

against shortage. However, our requirements are being met, and

we are convinced that they will continue to be met, particularly

during the next two or three years. Our Association believes

that the "stand-by" allocation and price program, with the

monitoring and safeguards proposed by the FEA, is more than suf-







40



ficient protection under current conditions.

There is, however, one troubling factor in the supply pic-

ture. If current controls are maintained. supPlies will be tight-

er than they would be without controls. This results from the

fact that the pricing regulations do not permit our members to

take advantage of summer fill programs.

Historically, "summer fill" was a device used by the industry

to build up large inventories of home heating oils. During the

summer months,when demand slackened, refiners would lower their

prices, thus encouraging dealers and terminal operators to pur-

chase and store large volumes of fuel oil for use during the next

heating season. Lower prices and liberal credit terms encouraged

inventory buildup and part of the savings realized were used to

finance construction of storage tanks and part were passed on to

the consumer in the form of lower Winter prices. However, while

refiners and wholesalers have maintained the liberal credit terms

of summer fill programs, present pricing regulations provide

neither incentive to refiners to lower their prices during the

summer months, nor incentives to dealers and their customers to

store large quantities in the months of low demand. In fact,

under those regulations the dealer suffers a financial penalty if

he buys in the summer.

We are already seeing disturbing signs. While the primary and

secondary stock picture for middle distillates is favorable, the

tertiary stock build-up is not. This involves the tanks of the

homeowner and the retail dealer. Unfortunately as a result of







41



controls, retail dealers are not filling up these tanks; they can-

not afford to do so.

Demand

For the past ten years we have seen the demand for middle dis-

tillates grow steadily at an annual rate of approximately 4 percent,

except for the 1973-74 period. Since that time there has been a

very large increase in the cost of most energy sources. However,

fuel oil costs have not increased as much as electricity. More

homes and industries have therefore turned to fuel oil as their

primary source of energy. Despite this fact there has been no in-

crease in overall demand--due to intense conservation efforts by

consumers--and the supply of middle distillates has remained ample.

It is our understanding through our own study that domestic capacity

(including new and expanded capacity due to go "on stream" this Fall

and Winter) is more than ample to meet expected demand. Moreover

even if demand increases far beyond expected levels, there will

still be sufficient capacity to meet such increased requirements.

Price

This factor is obviously of primary concern to this Committee

and the Congress. It is to us as well, for we--the retail dealers--

are the ones who get the blame and lose the business when fuel oil

prices go up.

As I have indicated, we would not be before you advocating

decontrol if we thought that it would cause prices to rise. We

have too much at stake--our businesses.

We favor decontrol because we strongly believe that competi-

tive forces in the marketplace are strong and those forces will







42



insure that the independent marketers and the consumer are bene-

fitted, not harmed,in the coming Winter.

Opponents of decontrol are concerned with product price in-

creases. They say that home heating oil prices will rise sub-

stantially (that is, to the world level) as a direct result of de-

control. Our response is that retail prices could rise to the world

level now--even with controls. Independent dealers sell more than

85% of all the retail volume in New England; data on their "bank"

or unrecouped costs are not readily available to the FEA and have

thus not been included in the analysis presented to this Committee.

It might be useful, therefore, for you to realize that the retail

dealers in New England have accumulated massive banks and that the

average lawful ceiling price under controls for fuel oil in our

area is nearly 50 cents per gallon--far above the world level.

The selling price is, of course, around 40 cents per gallon.

These facts demonstrate the fallacy of the "world price theory".

If prices are going to go to that level without controls, they

could do so with controls--today! But prices have not and will

not escalate, for one simple reason--competition.

Let me give you a concrete example: Recently an independent

retail dealer in Connecticut received a 2 cent per gallon "rack"

(wholesale) price increase from his major oil company supplier.

The independent, in an attempt to recoup some of the increased

cost, raised his retail price by one cent--half the increase he

had been charged. Ten days later he had to drop his retail

price back down. Why? Competition; he found that his retail

customers were leaving him and he decided to absorb the losses

and maintain their patronage and good will. To repeat: the






43


retail market is highly orpetitive. We know because we're out there.

This Committee is receiving a lot of theoretical analysis

at these hearings. You, of course, must act on the basis of

fact and truth. We submit that there is only one group that can

give you the true story of the market place, and that is the

people who are in the market place--the retail dealers.
Middle distillate prices are, of course, related to crude

oil prices; as the cost of crude oil goes up in the months ahead,
in accordance with the Congressional mandate, we would expect

middle distillate prices to rise somewhat. However, this will

occur whether or not decontrol is implemented.
From the consumers' point of view, it is, as wehave indi-

cated, important to realize that the greater the competition in

any market area the better the chances that any increase in

middle distillate prices will be minimal. Historically, in the

fuel oil market--and any market where there are a large number

of sellers-- competition takes place through price reductions,

as the sellers attempt to expand market shares. The price pres-

sure in the New England fuel oil market was, prior to controls,

always downward.

Unfortunately such price competition is being stifled by

the present controls. At the wholesale level our members are

locked in by regulation to established base period suppliers;

*/ In New England, no company controls more than 1% of total
Retail sales.







44



they must buy from the companies regardless of price or risk

loss of volume. In many cases these suppliers may have higher

crude oil costs, and accordingly they pass these costs through

to our members in the form of higher rack (wholesale) prices.

Significant price differentials thus still exist in many mar-

keting areas. This would not happen if our members were per-

mitted to shop around for the lowest cost supply and enter into

new supplier/purchaser relationships. If the market were freed

up, competition would force wholesale prices to a lower average

level and our members could pass their savings on to their

customers. Decontrol would not bring higher costs--the result-
*1
ing competition would prevent them.

As we have demonstrated, retail prices are set by free com-

petitive forces at the consumer level. These forces are working

for the consumer now. The retail customer can move around and

select the retail heating oil distributor of his choice. That is

why heating oil at retail is selling far below the allowable

ceiling price as provided by controls. We only ask that same

competitive freedom of choice be provided for our independent

dealers when purchasing fuel oil supplies at the wholesale level.

If this freedom is supplied through decontrol, the independents


7/ Removal of controls on residual fuel oil has resulted in sub-
stantial reductions in prices, due to increased competition. Prices
on low sulfur residual fuel in New York harbor have dropped by more
than $1.00 per barrel--even more than the value of the residual
fuel entitlement. The Oil Buyers Guide of June 14, in its U. S.
East Coast Market Report described the latest of several reductions:
"Exxon, on June 10, initiated temporary allowances of 40 barrel
on 0.3%, Nos. 4 and 6 fuels; and 300 bbl. on 0.5% sulfur, No. 6
fuel. Trade sources said Exxon made the move to be 'more in line
with the actual market.' Actually sources pointed out, with de-
control of residual prices on June 1, most of Exxon's supply con-
tracts theoretically expired, and in order for Exxon to renew these
supply arrangements, the company had to be more competitive."







45


will then push the major oil company's rack price down. This

will reduce the profit of the majors at a rapid rate, as

the major refiners will be hit by the competition that the

independents will provide if we are allowed freedom to pur-

chase from lower-priced suppliers. The savings achieved at the

rackewholesale level would then be passed on to New England con-

sumers. It would amount to from $40 to $80 million per year at

the retail level, a one to two cents reduction per gallon for

every one of the 2.4 million heating oil consumers throughout

New England.


Negative Impact on Independent Marketers and Consumers

During the crisis conditions of 1973-74 allocation and price

controls were essential to the viability of the independent sec-

tor of the industry. As we have indicated, we were in the fore-

front of those advocating controls. But times and conditions

have changed. Now, in a time of surplus these very same con-

trols undercut the independent's competitive position and threaten

his viability. What Congress erected as a wall of protection for

the retail dealer will, unless torn down, become our tombstone.

FEA has found that retail dealer margins for home heating

oil have remained relatively constant despite the fact that crude

oil costs, refiner margins and consumer prices have increased
*1
significantly over the past two years. This demonstrates that


*/ FEA "Findings and Views Concerning the Exemption of Middle
Distillates from the Mandatory Allocation and Price Regulations"
Tables XXIX and XXX, pp. 110 and 112 (June 15, 1976).


73-527 0 76 4







46



the small independent dealer is caught in a terrible position,

that he is being hurt the most.

Consumers have become keenly aware of energy costs and

while historically they did not readily change fuel oil dealers

because of price differences, today that is not the case. Home-

owners and industry cut costs wherever they can and if a lower

cost supplier is available, they will immediately change to

take advantage of this benefit. No one blames them for this

action; it is a wise move. But it means that consumer pressure

is keeping the dealer's retail prices highly competitive and

stable. And, as a result, as we have indicated, the selling

prices of our members are far below the maximum levels permitted

under the FEA regulations.

However, under these regulations, retail dealers are not

free to exercise the same kind of pressure on their wholesale

suppliers that is placed on the dealer by his customer. If

dealers were able to shop around and permitted to establish

new supply relationships, competitive pressure would force whole-
sale prices lower. As a result profits and earnings of the inte-

grated companies would be reduced, the competitive viability of

independent retailers would be increased, and the consumers would

enjoy lower prices.

Under present conditions, when the dealer's product costs


*/ The Committee might consider what would happen if it attempted
to freeze the homeowner dealer supply relationship, thereby
locking the consumer to the dealer and preventing the consumer
from shopping around. The consumer reaction would be understandably
severe, as is that of the retail dealer who is now locked in to
his supplier. The fact that the retail dealer i-s-also a consumer
(at wholesale) is often overlooked.











increase, he is unable to pass those increased costs through to

his customer because of competition at the retail level. The more

cos t he is forced to absorb, the weaker his position becomes.

The facts speak eloquently and alarmingly. A survey of indepen-

dent New England heating oil dealers shows that 83 percent of

the 1,300 members of NEFI operated for the first quarter of 1976

at a considerably lower profit than for the first quarter of

1975. The decrease in profit for this large number of dealers

ranged from a minimum 7 percent fall off, to a maximum 51 percent

fall off. The average profit reduction was over 28 percent. A

good portion of this reduction in profit for small independents

was a direct result of FEA's controls on middle distillate.

During the same period, profits for the major refining oil com-

panies rose substantially, showing that the actual effect of con-

trols is to increase the profit for major oil companies while

lowering profit for the small independents. This negates a major

purpose for which the price and allocation controls were instituted.

This is a major reason why we favor decontrol. The present

system is helping the integrated refiners and hurting the indepen-

dent. Decontrol will strengthen the independent dealer and pre-

vent his gradual elimination from the distribution chain--which
*/
will be the ultimate result of regulations if they are retained.


7/ The suggestion is often made that the regulations need not be
removed since they can easily be amended to take care of the prob-
lems of the independent retailer. NEFI has been deeply involved
in efforts to develop such amendments over the past two years and
our conclusion is the task is impossible. Amended regulations
would create new and perhaps more serious competitive distortions

(Footnote continued on next page.)







48


Conclusion

No issue is of greater importance to the independent fuel

oil retailer than decontrol. This Committee and its members, of

course, deal extensively and effectively with a broad range of

energy issues. Decontrol is only one of many.

To us, it is the central issue. It involves our very sur-

vival--the future of businesses we have built over a lifetime

of effort. We have not taken our position lightly nor reached

our conclusion rapidly. As we have indicated, we were the first

to advocate controls in 1973.

But times have changed. The reality of the marketplace

has changed. We know that this Committee and its Chairman act on

the basis of reality and fact. They have always done so when

the future and survival of small, independent businessmen such

as ourselves has been involved.

We therefore wish to conclude by summarizing the facts and

stressing the realities. We also wish to reaffirm our belief

that the Committee will not act on the basis of vague fears and

unsubstantiated conclusions.

The fact is that decontrol will not change the competitive


(Footnote continued from previous page.)

and inequities in the fuel oil market. In any case, in order to
be successful, such an effort requires a willing and creative
bureaucracy and extensive involvement by the Congress. The bureau-
cracy is not willing and the Congress cannot in fairness be asked
to take on this complex oversight burden. Finally, such an effort
would take a great deal of time, and one is reminded of Lord Keynes'
classic camnent that, "In the long run, we'll all be dead". In view
of the minimal risks and immediate benefits, decontrol is far
preferable.







49



situation at the retail level. There is already a free market at

this level and prices are being restrained by this competition.

SThe fact is that decontrol will increase competition at

the wholesale level. As a result, independent dealers will be

able to force wholesale suppliers to price more competitively,

thus strengthening the competitive viability of the independents.
The fact is that the price to the consumers will not in-

crease as a result of decontrol. In fact, the savings realized

by the retailer as a result of removal of the bureaucratic regu-

latory system may offset the increases resulting from crude oil

costs, thus stabilizing consumer prices over the coming Winter.

The fact is that the summer supply build-up will be great-

er and overall supply levels higher if controls are removed, thus

helping to stabilize prices and avoid supply disruption.

As prudent and successful businessmen we have always operated

on the basis of the realities of the marketplace. If the reali-

ties were not as outlined, we would not, based on our past record

and concern, support decontrol.

We are pleased that the FEA will monitor the market closely,

and establish a "warning system" about conditions. This can and

must provide the Executive Branch, the Congress, the public and

the industry with sufficient data--at the appropriate time--to

determine whether it is necessary to reimpose allocation and price

controls in the future.







50



We are also pleased that FEA will take prompt action to assist

individual dealers who cannot obtain supplies. We are also

pleased that price ano allocation controls will, as provided in

the legislation designed by this Committee, remain on a stand-by

basis for prompt reactivation. All of these steps will provide

sufficient protection and assurance for the independent market

and his customer, the consumer.

Some persons are recommending delay; they say we should

wait another year. Our response is that we have had several bad

years already. Another year will only result in a further de-

cline in the competitive strength and market position of the in-

dependents. And what about next year? Conditions will be no

different than they are now, except that prices will have gone up

and supplies may have been tight--as a direct result of the con-

tinuation of controls. There will be a new Congress and

perhaps a new Administration and the voices of delay will be

heard again. It's a real "Catch 22" situation. And unless this

Committee is willing to act on the basis of fact and not vague

fears, our real fear--of being driven under by the Federal control

system--may well come true.

The arrival of warm weather is the traditional transition

period in the fuel oil business; before controls, we used to

shop around for new suppliers. Thus, this is the most opportune

time for removal of price and allocation controls. Based on our







51



experience in the oil business, we believe that the transition

to decontrol could be made smoothly and quickly on July 1;

obviously as we move closer to the arrival of cold weather the

transition will become more difficult.

In conclusion, we wish to thank you for the privilege of

presenting this testimony today. On behalf of all of the mem-

bers of the New England Fuel Institute, we ask that the Congress

permit the FEA plan for removal of allocation and price controls

on middle distillate fuels to become effective on July 1, 1976.

We too are looking forward to celebrating our independence and

freedom to compete during that month.






52




energy policy ia/k rorce

1012 14th STREET, N.W. SUITE 901 WASHINGTON, D.C. 20005 (202) 737.3732
LEE C. WHITE, CHAIRMAN ELLEN BERMAN, DIRECTOR






STATEMENT OF JAMES L. FELDESMAN
COUNSEL, ENERGY POLICY TASK FORCE
OF THE
CONSUMER FEDERATION OF AMERICA
BEFORE THE
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
U.S. HOUSE OF REPRESENTATI YES


JUNE 22, 1976







53


Mr. Chairman:


My name is James L. Feldesman and I am Counsel

to the Energy Policy Task Force of the Consumer Federation

of America (CFA). CFA is a federation of approximately

two'hundred consumer and consumer-oriented organizations

located throughout the nation. Collectively, these or-

ganizations represent about 30 million consumers.

The Energy Policy Task Force itself has thirty

member organizations. Its expressed purpose is to ensure

that the consumers' views are included and considered in

the energy policy debates currently taking place. We

recognize that there is no necessary single "consumer

interest" in any of the numerous issues that comprise the

energy policy debates, Nevertheless, we have undertaken

to do the best job possible in'assessing and stating the

views of the consuming public and, as the broad base of

our membership suggests, in making this Statement, we are

indirectly representing millions of Americans.

For the record, the members of the Task Force

are:

Adams Electric Cooperative, American Federation of
Inc. Teachers, AFL-CIO
AFL-CIO American Public Gas As-
Allegheny Electric Co- sociation
operative, Inc. American Public Power
American Federation of Association
State, County and Munici- Consumers Union
pal Employees, AFL-CIO






54


* Cooperative League of
the USA
Industrial Union Department,
AFL-CIO
International Association
of Machinists and Aero-
space Workers, AFL-CIO
International Brotherhood
of Electrical Workers,
AFL-CIO
Kansas Municipal Utilities
Lincoln (Nebraska) Electric
System
Maritime Trades Department,
AFL-CIO
Minnesota Farmers Union
National Farmers
Organisation
National Rural Electric
Cooperative Association
North Dakota Farmers Union
Northeast Missouri Electric
Power Cooperative
Northeast Public Power
Association


Northwest Public Power
Association
Oil, Chemical and Atomic
Workers International
Union, AFL-CIO
Pennsylvania Rural Electric
Association
Service Employees Inter-
national Union, AFL-CIO
South Dakota Farmers Union
Tennessee Valley Public
Power Association
Textile Workers Union of
America, AFL-CIO
Tillamook Peoples Utility
District
United Auto Workers
United States Conference
of Mayors
United Steelworkers of
America, AFL-CIO
Washington Public Utility
Districts' Association
Wisconsin State AFL-CIO


I am here today on behalf of the Task Force to

urge this Committee and the Congress to disapprove the pro-

posal of the Federal Energy Administration to de-control

Middle Distillates.

There are several reasons why we believe the

plan should be withdrawn. First, it comes virtually on

the heels of the de-control of Residual Fuel Oil. After

long and often bitter debate, the Congress and the Ad-

ministration reached agreement only a few months ago that

controls would be extended for forty months -- more than

three years. Yet, if the proposal to de-control Middle

Distillates becomes effective, in virtually no time, at all,







55


controls will have been lifted from two major product cate-

gories, upon which millions of consumers rely for essential

space heat.

Accordingly, we believe that the de-control pro-

posal is premature and instead encourage the Committee and

the Congress to act on the spirit of the resolution of the

House Committee on Interstate and Foreign Commerce to dis-

approve all future de-control proposals until the Congress

and FEA have been able to evaluate the effects of the de-

control of Residual Fuel Oil.

Our position also J,s predicated on our concern

that FEA has not adequately considered the impact of de-con-

trol on the consumer. In a May 7, 1976 report, the Con-

gressional Research Service of the Library of Congress esti-

mated the direct cost of implementing middle distillate de-

control to be between $800 million and $1.2 billion per year

-- a total of $2.4 billion to $3.6 billion over the

statutory life of the present control program.

While this cost impact alone is shocking, it is

nothing compared to the possible effects of de-control if,

during the next winter, major natural gas shortages occur.

Last Friday, the Washington Post reported that the Federal

Power Commission will soon release a study which will show

that there will be a major shortage of natural gas during

this coming Winter season. Number 2 heating oil, which

FEA now proposes to de-control, just happens to be the.pri-







56


- mary stand-by fuel for commercial natural gas users.

If FPC's prediction is correct, this would mean

that FEA (whose analysis of middle distillate de-control

included only one brief paragraph on natural gas) is prepared

to subject the nation to a major energy shortage without an

apparatus in place to deal with it. Thus, the country could

find itself unable to ensure that short supplies would be

equitably shared or that unscrupulous suppliers could not

exploit the shortage by charging outrageous prices.

It is no answer that in such a situation FEA could re-

institute controls. It could not. By the time such a situation

would unfold, it would be at least mid-winter. By then,

existing FEA staff would be dispersed and new supplier-pur-

chaser relationships would be formed. It is quixotic at

best and disingenuous in fact to even think that FEA could

quickly recapture its "handle" on this multi-billion dollar
1
industry. Realistically, if effectuated, its middle dis-

tillate de-control will subject the consumers, workers and

industries of this nation to a major gamble that somehow

everything will be all right.

Thus, only a few months after a three and one-

quarter year extension of price controls, FEA has peered

into its crystal ball and urges us -- the consumers, the

nation -- to take a chance -- a very big chance. We must

be pardoned if we say, "no thanks" Recognizing that FEA's

crystal ball pould be perfectly correct and that, if so, de-







57


control could be warranted, we ask instead that at least

one more winter heating season be allowed to pass before con-

cluding that controls are not warranted. Next year, the

current predictions of FEA can be analyzed, as can the ef-

fects of Residual Fuel Oil de-control. At that point, if

all has gone well, we believe it will be fair for FEA to come

back to us and assert, "see, we were right and now we want

again to propose de-control." And if all has not gone well,

the consumer and the Nation will be protected.





58


energy policy taok Force


1012 14th STREET, N.W. SUITE 901
LEE C. WHITE, CHAIRMAN


* WASHINGTON, D.C. 20005 (202) 737-3732
ELLEN BERMAN, DIRECTOR


CONSEQUENCES OF MIDDLE DISTILLATE DECONTROL



PREPARED BY

THE ENERGY POLICY TASK FORCE
OF THE
CONSUMER FEDERATION OF AMERICA


June Z1. 1976







59


Consequences of Middle Distillate Decontrol

On June 15, 1976, the Federal Energy Administration
formally proposed to exempt No. 2 (home) heating oil, No. 2

diesel fuel and other middle distillate petroleum products
from the allocation and price controls mandated by the Energy

Policy and Conservation Act ("BPCA"), YEA endeaVored to sup-

port its proposal by extensive "findings" concluding that
middle distillates would be freely available after decontrol

and that middle distillate prices would not rise as a result

of decontrol. This memorandum reviews FA's analysis in light

of the evolution and purposes of EPCA, the areas of risk high-
lighted by recent middle distillate history, and current con-

ditions in domestic petroleum product markets.

IPCA represented a compromise between those who believed
that high energy prices, essentially controlled by OPEC, would
stimulate domestic production and conservation and those who
/
pointed out that American consumers and the domestic economy
would be unduly injured by the immediate acceptance of OPEC

prices. Under NPCA, the price of domestic crude oil is con-
trolled at a reasonable level substantially below OPEC levels.
/
In order to insure that the cost benefits of this scarce do-

mestic resource are passed through to individual and business

consumers, EPCA requires a system of petroleum product allocation







60


controls. The product price controls permit refiners and mar-

keters to raise prices to meet increased costs but not to

expand profit margins by raising prices to world market levels

even where marginal supply is imported.

When EPCA was passed, there were numerous contentions

that physical allocation controls, designed to apportion product

shortages, were inappropriate in a post-embargo situation where

imports permitted virtually all domestic demand to be met.

There was also substantial argument that product price controls

were unnecessary to insure equitable consumer prices in markets

where competition was exclusively domestic with all competitors

benefiting from lower crude oil costs.

Because the issues raised by product allocation and

price controls were complex and sensitive, EPCA left their

initial resolution to FEA but made FEA's conclusions subject

to Congressional review. Under EPCA Section 455, FEA may pro-

pose to exempt products from allocation and/or price controls

but only if it finds that supplies of that product (and all

other affected products) will not be disturbed and that "com-

petition and market forces are adequate to protect consumers"

from "inequitable prices." If Congress disagrees with FEA's

findings, either House may disapprove the proposed exemption

within 15 legislative days of submission. In the case of

middle distillates, the time for disapproval will run out on

June 30.






61


From the perspective of consumers and the domestic

economy, EPCA has been remarkably successful. Energy prices

have been stabilized and, in some cases, marginally reduced

without shortage. Relaxation of the inflationary and reces-

sionary pressures generated by the post-embargo energy spiral

has permitted improvement of Consumer Price Index trends and

facilitated economic recovery.

Domestic oil interests have, at the same time, not been

unduly compromised by EPCA. Oil company profits for the first

quarter of 1976 were extremely healthy, in large measure be-

cause domestic economic recovery expanded the volume of sales.

FEA price regulations permitted full recovery of all legitimate

costs and, indeed, were flexible enough for FEA to determine

that many refiners and marketers were selling below controlled

ceilings.

Despite what appeared to be a satisfactory evolution of

the EPCA compromise, strong pressures for dismantling the prod-

uct allocation and price control machinery were almost imme-

diately placed on FEA by the oil industry. The oil companies

quite naturally perceived controls as an interference with

their business practices and a limitation on their profit po-

tential. Unhappy with the EPCA crude oil compromise, they are

philosophically committed to elimination of all controls and

view product decontrol as a necessary first step. Realistically,

if product prices to individual and business consumers can be


73-527 0- 76 5







62


raised to world market levels, domestic crude oil controls will

serve little purpose to consumers and can quickly be discontinued.

FEA's first proposed exemption under EPCA related to

residual fuel oil, a heavily imported, industrial product pri-

marily used on the East Coast. FEA combined this exemption

with an import subsidy program for East Coast consumers designed

to keep U.S. import prices about 2 1/2 cents per gallon below

world levels, and Congress permitted the exemption to become

effective June 1, 1976. At the same time, the House Interstate

and Foreign Commerce Committee formally requested that FEA defer

further exemption actions until the impact of residual fuel de-

control could be studied.

Instead of deferring further action, FEA is now attempt-

ing to exempt middle distillates, a more important and price

inelastic product for individual consumers since almost 50 per-

cent of its use is in space heating. Middle distillate use,

in fact, is projected at approximately 40 billion gallons in

1976 so that each 1 cent per gallon increase directly taxes

consumers by $400 million. On a household basis, FEA estimates

that each 1 cent per gallon increase costs the national average

household $16.16 per year in heating costs. Thus, were domestic

middle distillate prices to rise by the full 89 per gallon

domestic/international crude cost differential after exemption,

the average household heating bill would increase by over $129

per year.







63


FEA's proposed exemption is not the first time middle

distillates have been removed from price and allocation con-

trols. On January 11, 1973, in the midst of a cold winter,

Phase II controls on middle distillates were replaced by Phase

III "voluntary" controls. According to FEA's "findings," the

result was "large increases in petroleum product prices" and

a return to mandatory price controls for the 23 largest re-

finers on March 6, 1973.

Even after March 6, however, the decontrol experience

created problems. Integrated refiners operating under price

controls refused to allocate lower priced middle distillates

to independent distributors. The result, according to testi-

mony by the Independent Fuel Terminal Operators Association

before the FEA, was to force independent distributors to become

import dependent and thus that "large companies" were able to
"seriously weaken (and destroy) many independent companies."

Consumer prices also continued to rise.

Comprehensive price and allocation controls for middle

distillates were put into effect on November 1, 1973 and have

continued since that time. Like all control regimes, middle

* distillate controls have produced some rigidity by limiting

individual consumption and preserving historic supplier/pur-

chaser relationships. In general, however, FEA's "findings"

show minimal complaints from consumers and FEA acknowledges

that controls have permitted healthy market participation by






64


independent enterprises at all levels of middle distillate

production and distribution.

The generally successful implementation of allocation

and price controls contrasted with the historically demon-

strated volatility of middle distillate prices, the peculiar

vulnerability of import dependent markets and independent dis-

tributors to tight middle distillate supply and the lack of

hard evidence on the effects of post-embargo decontrol resulted

in serious doubts about exemption expressed at FEA's middle

distillate decontrol hearings.

The AFL-CIO, for example, anticipated increased distil-

late demand "high enough to tighten supplies and produce a

considerable and unnecessary rise in price." The State of

Connecticut was "unconvinced that there will be equitable

prices among regions or that the competitive viability of in-

dependent marketers will be preserved." The Consumer Federa-

tion of America found FEA's forecasts "far too optimistic,"

and the National Farmers Union flatly stated that "FEA's

supply forecasts are not dependable." Even the airline in-

dustry whose middle distillate jet fuel supplies were excluded

from the FEA proposal protested that sharp increases in middle

distillate prices after decontrol could dry up the supply of

jet fuel.

At distributor level, there was almost universal con-

cern that FEA retain adequate authority to insure adequate







65


supplies at competitive prices for independent operators.

The Mid-American Petroleum Marketers Association, for example,

could not "support the exemption of middle diptillates from

price and allocation controls until these issues are satis-

factorily resolved." The Independent Terminal Operators

Association similarly supported "decontrol on the condition

that it is accompanied by the implementation of a system

whereby independent marketers will be assured of receiving

adequate supplies of product at equitable prices, and by a

standby program of allocation."

FEA attempted to meet these expressed concerns through

a detailed projection of the consequences of the exemption

proposal. Conceding, however, the possibility that at least

some dissenting points were well taken, FEA also revised its

rulemaking to include a promise "to propose shortly procedures

pursuant to which firms experiencing supply problems may ob-_

tain supplies." PEA also decided to place allocation controls

on a "standby status" by staying rather than deleting them.

PEA did not explain how controls dependent on existing supplier/

purchaser relationships could be reimplemented once those re-
/
lationships had been revised after decontrol.

Because any effort by PEA to reimpose controls would

meet with enormous practical and political difficulties, and

because of the absence of any meaningful experience with post-

embargo decontrol, the soundness of PEA's "findings" is a







66


matter of substantial public concern. The validity of those

findings must be assessed against the background of the dif-

fering production and pricing incentives operating in a con-

trolled and decontrolled environment.

Existing controls limit sellers to a price which per-

mits full recovery of their own average costs plus a fixed

profit margin based on May 15, 1973 returns. Where product

imports are required to meet market demands, the higher cost

of imports is simply weighed in the overall average and domestic

prices are not permitted to rise to import levels. Where

shortfalls arise, they are distributed equally to all the

seller's customers.

Since sellers can increase their current profits only

by cutting costs or expanding volume, and since favored as

well as disfavored customers must share in any shortfall, the

control regime provides an incentive for sellers to produce

and market so long as physical capacity is available and ob-

tainable price exceeds average cost. Equally important, there

is nothing to be gained by restricting supply since the demand

pressure of shortage conditions cannot trigger highly profit-

able price increases.

Once middle distillates are exempted from controls,

the entire incentive system will change. Eash seller will

be able to market all middle distillate product at the price

which calls forth sufficient supply to meet market demand.







67


Where that demand can only be met by high priced imports, the

market price will rise to the correspondingly high level at

which imports can be sold profitably. Where shortfalls arise,

a seller will be free to choose which customers (or distributors)

will bear the primary burden.

Since sellers can increase their post-decontrol profits

by commanding higher prices as demand exceeds supply, major re-

finers may require a high threshold price, regardless of physical

capacity, before expanding domestic production to meet market

demand. Suppliers may, in fact, be unwilling to expand pro-

duction and sales until the market reaches the import level

where alternative supply is a possibility and where what they

consider the true value of the crude oil component can be ob-

tained. This is particularly likely in the absence of allo-

cation controls where, as in 1973, the principal revenue losses

of shortage can be thrown on independent distributors.

The supply/demand analysis attempted by FEA is almost

exclusively concerned with physical capability despite the

fact that the critical question in an uncontrolled market is

the price at which available supply will appear.- For that

reason, even if FEA's analysis were accurate it could only

establish that adequate supply might ultimately be produced

at some price level. The critical policy issue is the


*- In economists' terms, FEA should have looked to a supply
curve rather than a projection of maximum available supply.







68


identification of that price and the dislocations arising as

supply pressure is exercised to reach it.

FEA quite reasonably assumes that middle distillate

demand will rise sharply in 1976 "due primarily to a further

increase in economic activity." FEA is anticipating an average

demand in excess of 3.1 million barrels per day of middle dis-

tillates.

The latest FEA Monthly Energy Review discloses that

domestic middle distillate production averaged 2.65 million

per day in 1975 and 2.8 million barrels per day in the first

three months of 1976. The American Petroleum Institute's

latest Weekly Statistical Bulletin placed distillate produc-

tion at 2.88 million barrels per day for the week of June 4,

1976 when U.S. refineries were operating at an extraordinary
*/
92.4 percent of capacity.1

These figures clearly demonstrate that total demand can

only be met by an induced increase in middle distillate yields

relative to other products, a drawdown of existing stocks or

a sharp upswing in imports. The price and distribution con-

sequences of each of these alternatives must be separately

examined.

FEA's "findings" initially contend that higher prices

will not be required to attract higher domestic yields because


FEA sssumes operations at 86.0 percent of capacity for
the year 1976.







69


certain refiners were not using the full extent of regulatory

price flexibility last winter. In FEA terminology, these re-

finers were said to be "banking" costs for future application

to middle distillates or gasoline. Other refiners, however,

including seven of the top 30 were charging at the highest

possible lawful price.

Analysis of pricing conditions last winter is suspect

for a number of reasons. In the first place, the winter was

unusually warm so that "degree days," a standard measurement

of heating requirements, were 8.9 percent below normal and 6.8

percent below the abnormally warm conditions in the previous

winter. This unusual condition cannot be anticipated in the

coming winter.

Second, under the FEA price regulation system, refiners

may choose to accumulate "banks" because future prices will be

limited by the costs per unit then available for passthrough.

Costs are accumulated as a result of production but sales can

exceed production when inventory is drawn down. If the costs

of production are the only costs available for passthrough,

spreading these costs over production and inventory drawdown

can result in unusually low prices. To avoid this result, re-

finers "bank" costs against inventory and apply "banked" costs

as inventory is sold. Unusually warm conditions last winter

inhibited inventory drawdown and thus resulted in a carry-

forward of "banks."






70


Confirmation of this point can be drawn form FEA's

treatment of distillate "banks" in the distillate exemption

proceeding. Refiners sought the right to apply distillate

"banks" to make further increases in gasoline price since

price increases on distillates after decontrol would not de-

pend on cost availability. FEA correctly attributed distil-

late "banks" to distillate inventory and prohibited the

transfer of these "banks" to gasoline prices.

Given these analytical limitations, which are recognized
*/
in FEA's "findings," FEA's assurances that refiners will be

willing to increase domestic yields without steep price incen-

tives are not well founded. Indeed, if existing price controls

are not constraining refiner pricing, the enormous efforts

being undertaken by FEA and the refiners to remove them are

difficult to explain.

FEA's "findings" seek to bolster the "banking" analysis

with a profit analysis designed to show that sellers are

achieving sufficient profitability on middle distillates to

make it desirable to increase output. FEA's analysis centers

on a comparison of changes in middle distillate gross margins

(selling price less raw material cost) and changes in the

Consumer Price Index. FEA concludes that these changes are

comparable, that gross margins have therefore kept pace with

inflation and thus that profits are satisfactory. FEA also


J/ FEA itself terms the banking analysis "inconclusive."
u. *







71



contends that the generally healthy return on equity in the

oil industry while not "directly pertinent" does indicate a

relaxed pressure for middle distillate profits.

The FEA "findings" on this issue are most interesting

because they directly contradict the provisions of FEA regu-

lations which require unit profit margins to be fixed on the

basis of May 15, 1973 returns. If the regulations are being

enforced, any increase in gross margin must be attributed to

increases in costs other than raw material costs, and profit

increases cannot stem from refinery operations./

FEA's gross margin "findings" also contradict the con-

tinued arguments by refiners that controls are sharply limiting

refinery profitability. Most refiners in the FEA hearing

simply chose to ignore this aspect of the "findings" but SOHIO

could not resist setting the record straight:

"We are further disturbed by the fact that
the FEA analysis of petroleum industry
profits infers that the domestic refining
industry is as profitable today as it was
in the late 60's and early 70's. We cannot
subscribe to the technique of using an
overall sales margin to be indicative of
the financial health of the refining indus-
try. Nor does the analysis of return on
equity speak to the measurement of the
return on investment for the refining in-
dustry, which has declined during the period
of price controls. There is just too much
contradictory evidence, much of which has
presented this year in FEA hearings, to per-
mit agreement with the profit inferences
contained in the FEA report."


*- The expansion of gross margins demonstrated by FEA led a
recent Library of Congress analysis to conclude that there
was a wholesale breakdown in FEA regulations.





72
4


Based on its own analysis, SOHIO candidly states that

it is "sufficiently uncertain as to the mechanism currently

controlling the market to subscribe to a basis for decontrol

which predicts that no price increases will be associated with

decontrol."

The uncertainty expressed by SOHIO is of particular in-

terest given the current situation of middle distillate stocks.

Despite the mild winter, middle distillate stocks are currently

near 150 million barrels and approaching the levels which

triggered the shortages and rapid inflation in the winter of

1973. The extraordinary pressures now being experienced by

domestic refineries to maximize gasoline output may exacerbate

this situation by cutting into the normal build-up of distil-

late inventories. Thus, there is almost no prospect of a

sufficient inventory overhang next winter to dampen refiner

pricing ambitions to command the world market value for dis-

tillates as a precondition of increased domestic production.

Because FEA recognized that import prices might well

be the only realistic ceiling on middle distillates after de-

control, FEA attempted to analyze import price trends and

concluded that "foreign prices should place a ceiling of three

cents on any possible rise in middle distillate prices regard-

less of domestic supply/demand conditions." This critical

part of FEA's work seems, unfortunately, the most analytically

deficient.






73


FEA first attempted to approach import pricing by in-

vestigating prices in European spot markets and concluding

that these prices averaged only 3.6 cents per gallon higher

than domestic prices. As FEA acknowledged, however, these

spot prices "fluctuate considerably."

In fact, the European distillate spot markets are ex-

tremely vulnerable to demand pressure. Between late 1972

and the fourth quarter of 1973 these prices jumped 35 cents

per gallon. Even the limited period of decontrol and shortage

in the United States between January and March of 1973 pushed

these prices up 7 cents per gallon. As late as last summer

when FEA was predicting tight distillate supplies due to

natural gas curtailments, European spot prices rose more than

5 cents per gallon between July and September and were 10

cents per gallon over controlled U.S. levels in October.

FEA also sought to establish an import price ceiling

3 cents per gallon above controlled prices for distillates

by constructing a hypothetical Caribbean processing agreement

for foreign crude oil. One key assumption of this analysis

was that the Caribbean product would sell at a gross margin

of $1 per barrel (2.5 cents per gallon) over raw material

costs. At the same time, however, FEA's actual domestic

gross margin analysis demonstrated a margin of $3 per barrel

(7.5 cents per gallon) over raw material costs. Since sellers

are unlikely to accept a narrower margin on foreign operations,


*/ The FPC has again predicted severe natural gas curtailments
this winter.









a more realistic interpretation of the processing scenario

would concede an 8 cent per gallon import differential.

The import analysis performed by FEA somewhat strangely

ignored the two most obvious sources of relevant information.

First, the cost of foreign crude oil is 8 cents per gallon

higher than the cost of domestic raw material. Thus, import

prices will inevitably reflect this differential as pointed

out to FEA by Exxon:

"Exxon concurs with FEA's analysis that
foreign distillate prices will impose a
ceiling on domestic distillate prices.
It should be recognized, however, that
the raw material cost difference between
domestic and imported product is approxi-
mately 8d per gallon because of controlled
domestic crude prices and import fees."

Second, FEA regulations permit sellers to calculate the

cost of distillate imports at current foreign market prices or

"transfer" prices representing integrated refiners' best judgment

of foreign distillate values. FEA collects this data on a

monthly basis but has not chosen to disclose it. The likely

reason is that the actual data more nearly reflects the 8 cent

per gallon cost differential than the hypothetical 3 cent per

gallon figure used by FEA.

The overall speculative nature of FEA's analysis clearly

indicates that the middle distillate exemption proposal is

fraught with serious risks for individual and business con-

sumers. By moving in the summer when supply conditions are











impossible to predict, FEA is running the risk of shortages

designed to create upward price pressure. By moving before

any real experience has been gained on residual fuel decontrol,

FEA is running.the risk of precipitous price increases. By

masking the true alternate value of imports, FEA is ignoring

the serious dislocations which could occur if the American

public is forced to pay import prices 8 cents per gallon over

current domestic levels.

FEA's own analysis demonstrates that controlled prices

in January of 1976 should be no higher than those in January

of 1975. FEA also believes that supplies would be adequate

under continued controls. The allocation problems FEA has

discovered in the control regime can be cured by building in

additional allocation flexibility short of dismantling the

control regime and denying independent distributors supply

security.

The inadequacy of FEA's findings and the limited public

benefits of the middle distillate exemption proposal would

seem to counsel Congressional disapproval of the FEA proposal

at this time. Reconsideration should take place only when

hard evidence under residual fuel decontrol is assembled.





76


STATEMENT

Frank E. Fitzsimmons, General President


International Brotherhood of Teamsters, Chauffeurs,
Warehousemen & Helpers of America




Regarding

Decontrol of Middle Distillate Petroleum Products




Committee on Interstate and Foreign Commerce
Subcommittee on Energy and Power


United States House of Representatives
Washington, D.C.


June 22, 1976







77


Good afternoon, my name is Bartley O'Hara, Legislative Attorney

for the International Brotherhood of teamsters. I am appearing on

behalf of General President Frank E. Fitzsimmons who is unable to be

with you today.

Mr. Chairman and members of the Committee, when the Energy

Policy and Conservation Act (EPCA) was passed early this year, it

contained provisions that were designed to give petroleum producers a

fair price for their products and at the same time assure petroleum

users a reasonable price and adequate supply for these commodities.

Under that law, the Federal Energy Administration (FEA) was

given authority, subject to Congressional approval, to modify price

and allocation regulations for petroleum products.

In accordance with the requirements of EPCA, FEA.on June 15

submitted its proposal to remove the price and allocation regulations

from the class of products commonly known as middle distillates.

We are appearing here today to urge the Congress to disapprove

the middle distillate proposal submitted by FEA.

The primary reason is this: Our members depend quite heavily

on middle distillates, especially diesel fuel, for their livelihood.

Any significant distortion in either the price or availability of these

products will bring unemployment to our members.

Judging from prior experience and current conditions, these

distortions are certain to appear under decontrol of middle distillates.

When petroleum products were decontrolled in, January 1973, the

price increases and supply shortages became so serious that controls had

to be reimposed on the 23 largest oil companies by March 6, and full

scale controls were put into effect on June 13.


73-527 0 76 6






78



The plight of petroleum users during that period was best

exemplified by the experience of the St. Johnbury Trucking Company

of Manchester, New Hampshire. In a letter to Senator Mclntyre that

company outlined how a major oil company offered St. Johnsbury, on a

take it or leave it basis, a 17 percent price increase for diesel

fuel. Under the system proposed by FEA, we see nothing to prevent

this from happening again.

As to the present condition the middle distillate market,

when FEA held hearings on this middle distillate proposal, virtually

every class of refinery customer predicted significant difficulties

under price and allocation decontrol.

Thus, distributors such as the Mid-American Petroleum Marketers

Association opposed decontrol unless they were given assurances of

adequate supplies at competitive prices. These assurances were not

given. Indeed, they cannot be given.

Individual users, represented by organizations like the National

Farmers Union states that "FEA's supply forecasts are not dependable."

All FEA could assure was increased prices and promised the use

of standby authority if the situation were to get out of hand.

We prefer a continuation of the present program. It is pro-

viding, in conformity with the policy of EPCA, adequate supplies and

reasonable prices for all.

In summary, we urge the Congress to disapprove the FEA's pro-

posal to remove the price and allocation regulations for middle dis-

tillates because it didn't work in 1973 and cannot be expected to work

again.


Thank you.






79



Michigan
~tr c VIe m l SERVING THE INDEPENDENT JOBBER SINCE 1934
PeTroleurney
Al Grera Office 8469 Easi Jfferson Avenue a Deti oi, Michigan 48214 (313) 821-6255
A \d atJ\OI LdnsinqOffce 400 Mu.nigan Nai.onal Tower Lansing. Michigan 48933 ( 15171 487.9139
AFFILIATED WITH THE NATIONAL OIL JOBBERS COUNCIL







Statement
of
CHARLES A. GALLUP


on behalf of the
MICHIGAN PETROLEUM ASSOCIATION
on
EXEMPTION OF MIDDLE DISTILLATES
FROM THE
MANDATORY ALLOCATION AND PRICE REGULATIONS
before the
SUBCOMMITTEE ON ENERGY AND POWER
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
HOUSE OF REPRESENTATIVES
Washington, D. C.


June 22, 1976






80



Mr. Chairman:

My name is Charles A. Gallup. I am President of Gallup-

Silkworth Company, a distributor of heating oils, gasoline and

LP gas in Ann Arbor, Michigan. I am Secretary of the Michigan

Petroleum Association, a state trade association comprised of

400 independently-owned distributors of heating oil and gasoline,

and affiliated with the National Oil Jobbers Council. I am

appearing on behalf of the Michigan Association, representing
0
my fellow dealers in that state.

I should like to present the following statement of posi-

tion. We support decontrol for the following reasons:
I
1. Present controls have the effect of stifling competi-

tion between the major oil companies at the wholesale level,

and, as a result, are damaging the competitive viability, and

thus the future operations of the independent dealer.

The price controls hurt the independent dealer by creating

a multi-tier pricing system under which a few companies do well

while many are unable to recover costs. The allocation controls

have frozen supplier purchaser relationships for nearly three

years now, with the result being a guaranteed market share for

the the major oil company at both the wholesale and retail level.

Independent dealers have become virtually locked in to their

suppliers, and, therefore, are unable to bargain effectively for

product.







81



In the first quarter of 1976 profits of the major oil com-

panies increased an average of over 50% from their first quarter

of 1975, while nearly all independent heating oil dealers re-

ported a decline in their profits, which is a clear indication

of the problems caused by the inequities of the FEA controls.

2. We believe decontrol will stabilize fuel oil prices and,

therefore, benefit the customer. With wholesale price variations

of as much as 316 per gallon in most areas, either someone is too

high or someone too low, and it is our evaluation that a competi-

tive market price is somewhere in between, and that this would

mean savings for most customers. Further, if controls are dropped,

costly bookkeeping procedures required of dealers would be elimin-

ated and in a competitive marketplace would reflect in lower

prices to the customer.

3. Traditionally, prior to FEA controls, fuel oil dealers

with their own storage capacity filled their tanks during the

summer months, and this helped stabilize prices in the Winter

and helped avoid supply disruptions in the peak Winter months.

Present FEA controls discourage a build-up of inventory in the

summer by making it impossible for companies to recover the cost

of storing oil. If controls are removed July 1 we will have time

to build up inventories at fair prices and thus insure adequate

supplies for the Winter ahead.

In closing, I vould like to point out that in the area I

know best, Michigan, fuel oil dealers are interested in the







82



lowest possible price of fuel oil for their customers, as over

20,000 fuel oil customers were lost to natural gas in 1975,

due to price, as natural gas is readily available in most of

Michigan at approximately 1/2 of the cost of fuel oil. In

Michigan fuel oil sales were dovn 14% in 1975 while natural gas

sales were down only 1%. You can see why.

The electric utilities are also taking present and poten-

tial new customers from us promoting energy wasting electric

heat, using subsidized rates that are 25 to 30% lower than regu-

lar residential and commercial electric rates.

In the face of this extreme competition from the gas and

electric utilities, whose rates are kept low by government con-

trol or consent, we fuel oil dealers elect for no controls,

because we honestly feel that without them prices will at least

stabilize, and that we can return to reasonable profitability

and serve our valued fuel customers better.

In conclusion, we strongly urge that this Committee permit

the FEA decontrol plan to go into effect, as scheduled, on July

1, 1976.

Thank you very much.







83


STATEMENT OF


JOHN A. HILL, ACTING ADMINISTRATOR

FEDERAL ENERGY ADMINISTRATION
FEDERAL ENERGY ADMINISTRATION


before the


SUBCOMMITTEE ON ENERGY AND POWER


*HOUSE INTERSTATE AND FOREIGN COMMERCE COMMITTEE


HOUSE OF REPRESENTATIVES


JUNE 22, 1976






84


Mr. Chairman and members of the Subcommittee. Thank

you for the opportunity to testify today on Energy

Actions 3 and 4, FEA's proposals to exempt No. 2 oils and

other middle distillates from the Mandatory Petroleum

Allocation and Price Regulations. Energy Action No. 3

encompasses No. 2 heating oil and No. 2-D diesel fuel.

Energy Action No. 4 encompasses No. 1 oils, No. 1-D diesel

fuel, and kerosene.' The two are submitted as separate

actions to conform to the product categories set out in

Section 455 of the Energy Policy and Conservation Act of

1975.

These proposals were submitted to the Congress only

after a detailed preliminary study setting forth FEA's

findings and views had been completed, subjected to public

scrutiny, and revised as a result of written comments and

testimony at public hearings. These findings and views

were transmitted to the Congress with the Energy Actions

and additional copies have been made available to the
Subcommittee and to other members. In addition, we have -made

available to the Subcommittee and to each member a summary

of the issues in a document entitled "Rationale for

Exempting Middle Distillates from Federal Energy Adminis-

tration Price and Allocation Regulations." With your






85


permission, I would like them to be included in the record

as appendices to my statement.

On March 29, a similar proposal regarding the

exemption of residual fuel oil was sent to the Congress

as Energy Action No. 1 and became effective June 1, as

neither House of Congress disapproved the proposal.

HISTORY OF CONTROLS

I think it might be helpful in considering these

proposals to review very briefly why we have the existing

controls. Price controls were first imposed in 1971

under the authority of the Economic Stabilization Act

to counter severe inflationary pressures in the economy.

These controls were terminated for all other sectors by

early 1974 because they had accomplished their purpose

and were no longer needed. They were continued for

petroleum products during the embargo to protect the U.S.

economy from disruptions caused by sudden price increases

and severe shortages. A set of allocation controls

was added to spread available supplies equitably among

classes of users and regions of the country. The reasons

for imposition of the current controls are stated in the

Emergency Petroleum Allocation Act which was enacted in

1973 to deal with the embargo. As stated in the findings

and purposes section of the Act:






86


The Congress hereby determines that shortages

of crude oil and refined petroleum products caused

by inadequate domestic production and the unavail-

ability of imports sufficient to satisfy domestic

demand, now exist or are imminent; such shortages

have created or will create severe economic dis-

locations and hardships, including loss of jobs,

closing of factories and businesses, reduction of

crop plantings and harvesting, and curtailment of

vital public services, including the transportation

of food and other essential goods ... The purpose

of this Act is to direct him (the President) to

exercise specific temporary authority to deal with

shortages of crude oil, residual fuel oil, And

refined petroleum products or dislocations in their

national distribution system. The Authority granted

under this Act shall be exercised for the purpose

of minimizing the adverse impacts of such shortages

or dislocations on the American people and the

domestic economy.

Controls were further made necessary under shortage conditions

to protect the independent and small refining, wholesaling

and retailing segments of the industry from supply cutoffs

that threatened their competitive viability. The Act states

this clearly among its objectives in requiring:






87


Preservation of an economically sound and

competitive petroleum industry; including

the priority needs . to preserve the

competitive viability of independent refiners,

small refiners, nonbranded independent marketers,

and branded independent marketers.

After the embargo ended, however, there were no crude

oil or product shortages except of some special products

such as propane; and the need for refining, wholesaling, and

retailing controls began to dissipate rapidly. For the last

several months, controls designed to deal with the problems

created by product shortages have been interfering with the

competitive operation of the marketplace. This has created

major problems for the very people they were designed to

help -- the independent and small refiners, wholesalers,

retailers, and consumers.





88


The imposition of detailed controls over any segment

of the economy necessarily restricts the degree of

competition in that sector. Those firms with the largest

amount of resources are, by their nature, better able to

cope with the reduced degree of competition that

inevitably follows from a detailed control mechanism.

To counter this result, additional controls are

formulated to try to protect the competitive position of

the smaller firms. These additional controls tend to
further inhibit competition.

These considerations may be outweighed by others in

a period of a substantial and suddenly imposed supply

shortage. A control mechanism may do less damage to

effective competition than the existence of the substan-

tial and sudden supply shortage itself. Moreover,

controls can protect consumers temporarily during periods

of significant supply shortages by keeping prices below

market clearing levels for limited periods. Once the

shortage no longer exists, however, the continuation of

controls actually serves to impose higher prices on

consumers than would be the case in the absence of

controls. It does so by reducing competition without

generating any offsetting benefits. Thus, public policy is

not served and substantial penalties are incurred by the

perpetuation of unnecessary controls.







89


Approval of Energy Actions 3 and 4 will benefit

thousands of consumers, marketers and small independent

refiners in the following ways:

1. Terminate involuntary supplier/purchaser

relationships. Purchasers would be able to

shop freely in the market for the best terms

and prices available, thus exerting downward

pressure on prices.

2. Encourage industrial and commercial growth.

Inability to secure firm supply commitments under

the current FEA regulations inhibits plant ex-

pansion and capital investment.

3. Encourage competitive bidding and direct -

negotiation for longer-term supply contracts.

This would also exert downward pressure on prices.

This change is especially beneficial to state and

local governments, many of which are required

by their statutes to purchase through competitive

bidding.

4. Suppliers would regain the flexibility to respond

to changing levels and patterns of demand in the

marketplace, thus allowing suppliers to shift

supply commitments to areas of increasing population

and industrial expansion.







90


5. Independent marketers and their customers will

benefit from the restoration of competitive

wholesale pricing by suppliers in regional markets.

The competitive position of independent marketers

vis-a-vis major integrated refiners will be sub-

stantially improved by these actions.

6. Desirable and necessary seasonal inventory buildups

will be encouraged and facilitated by the removal

of controls.

7. Eliminate some of the costly and burdensome record-

keeping and reporting requirements imposed by FEA

on the petroleum industry, although FEA will con-

tinue to require reporting of sufficient data to

enable it to monitor market conditions closely.

FINDINGS

Mr. Chairman, I would like now to summarize FEA's

findings concerning the exemption of middle distillates from

the allocation and price controls. This proposed exemption

is supported by FEA's extensive analysis of middle distillates

demand, supply, prices,and market forces, and also by the

majority of comments received by FEA during the public hearings

on its analysis, particularly from those whom these controls

were originally designed to protect.







91


MIDDLE DISTILLATES SUPPLY ADEQUACY

FEA has found that the proposed exemptions will not

result in shortages of middle distillates or other

products. Projections of domestic demand for a normal

winter under the expectation of no price increase above
\
what would have occurred under continued regulation together

with conservative projections of the domestic supply of

middle distillates demonstrate that the domestic supply

of middle distillates over the 1976 1978 period will

be fully adequate to meet domestic demand without any

substantial increase in the volume of imports. This

means the share of imports as a part of total consumption

will actually decline slightly from its current level of

about 6 percent.

Chart 1 shows middle distillate demand projections

made by FEA's Short-Term Forecasting Model from March

1976 until March 1977 by month for three cases:

Sa normal winter, which is one with 4,600

degree days from October 1 through

April 30, which is the average for the

period 1941 1970);

Sa cold winter, which assumes 10 percent

more degree days than normal; and

a warm winter, which assumes 10 percent

fewer degree days than normal.








92


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93


These projections are compared with actual demand data

for the months of March, April, and May of 1976.

Chart 1 also shows the highly seasonal nature of

distillate demand. Refinery production to meet that

demand also experiences a seasonal variation, but nowhere

near as marked as the demand variation. The difference

between domestic production and demand is made up by

stock changes. Stocks accumulate in spring and summer

while refineries are running to meet gasoline demand, then

are drawn down in fall and winter to meet demands in

excess of current production.

Imports of middle distillates are a small part--less

than 6 percent in 1975--of total supply. They are

principally a means for meeting seasonal peak demands

for those major refiners who have large refineries in

the Caribbean and (formerly) Venezuela. These refiners

find it economically preferable to import small quanti-

ties as needed from the current production of the

Caribbean refineries rather than build the domestic

storage and incur the added carrying costs of larger

stocks from domestic production. In effect, imports


73-527 0 76 7






94


offer a readily available, although higher cost, source

of supply to meet temporary surges in demand or to cushion

supplies while domestic refinery output is being expanded.

Table 1 compares actual data for the period February

through the first two weeks of June to FEA's March

projections for the case of a warm winter, which the 1976

winter turned out to be. These data show the close corres-

pondence between the model's projections and actual results

to date.

Returning to the issue of the accuracy of FEA's demand

projections, Chart 2 is a comparison of actual and simulated

distillate demand for the two year period mid 1973 to mid

1975. This shows the close correspondence between actual

distillate demand and what the forecasting model generates

when actual economic variables are entered.

The level of economic activity and the weather are the

two most important determinants of middle distillates demand.

As shown in Chart 1, weather variations are handled by making

separate projections for warm, normal, and cold winters.

Further detail on the short term demand model is contained in

Appendix II to the "Findings and Views" document.

Using this short term demand forecasting model, average

annual demand for middle distillates is projected to

increase by 200,000 b/d in 1976 over 1975 levels, assuming

a normal winter. A colder than normal winter--one

with 10 percent more degree days--would add about








95


Table 1


COMPARISON OF MIDDLE DISTILLATES ACTUAL CONSUMPTION
DATA TO FEA'S PROJECTIONS FOR A WARM WINTER

1976

(Thousand Barrels per Day)


MONTH

February

March

April

May
2/
June


ACTUAL DEMAND

3,706

3,244

2,707

2,520

2,142


I/
PROJECTED DEMAND

3,951

3,206

2,905

2,468

2,412


DIFFERENCE (%)

+ 6.6%

1.2%

+ 7.3%

2.1%

+ 11.2%


FEA short term forecasting model, 3-12-76

Actual demand figure is as of June 11.





96

Chart 2
Actual and Simulated Distillate Demand
6000-
5MU


4500-


4000-



~3M0
250 / I




,,,'Actuirs

2000- Simulated Demand


1500 ...... ...II


1975


1973


1974