PAGENO="0001" ENERGY CONSERVATION AND CONVERSION ACT OF 1975 I sLo %1rL~ HEARINGS BEFORE THE COMMITTEE ON FINANCE UNITED STATES SENATE NINETY-FOURTH CONGRESS FIRST SESSION ON H.R. 6860 AN ACT TO PROVIDE A COMPREHENSIVE NATIONAL ENERGY CONSERVATION AND CONVERSION PROGRAM JULY 10, 11, 14, 15, 16, 17, AND 18, 1975 PART 1 OF 2 PARTS (July 10, 11, and 14, 1975) 0 Printed for the use of the Committee on Finance U.S. GOVERNMENT PRINTING OFFICE 55-583 0 WASHINGTON : 1975 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, D.C. 20402 - Price $3.95 PAGENO="0002" COMMITTEE ON FINANCE RUSSELL B. LONG, Louisiana, Chairmen HERMAN B. TALMADGE, Georgia VANCE HARTKE, Indiana ABRAHAM RIBICOFF, Connecticut HARRY F. BYRD, Ja., Virginia GAYLORD NELSON, Wisconsin WALTER F. MONDALE, Minnesota MIKE GRAVEL, Alaska LLOYD BENTSEN, Texas WILLIAM D. HATHAWAY, Maine FLOYD K. HASKELL, Colorado CARL T. CURTIS, Nebraska PAUL J. FANNIN, Arizona CLIFFORD P. HANSEN, Wyoming ROBERT DOLE, Kansas BOB PACKWOOD, Oregon WILLIAM V. ROTH, JR., Delaware BILL BROC, Tennessee MICHAEL STERN, staff Director DONALD V. MOOREHEAD, Chief Minority Counsel (II) I PAGENO="0003" CONTENTS Discussion between members of the Senate Committee on Finance and the witnesses: Page Russell B. Long, chairman 1, 123, 162, 167, 203, 215, 219, 226, 229-231, 234, 235, 239-241, 255, 261- 264, 278, 282, 299, 303, 304, 312, 313-315, 319, 340-347, 350, 353, 363, 375. 379, 380, 396, 398, 405, 411, 413, 429 Herman E. Talmadge 127, 129-132, 164-166,386-389,426-430 Abraham Ribicoff 142-145, 382-384, 434-436 Harry F. Byrd, Jr 266-269,328, 338, 339, 398-400 Gaylord Nelson 152-154, 167, 171, 172, 206, 207, 231-233, 240, 271-275, 278-282, 400-403 Walter F. Mondale 396-398, 440-442 Mike Gravel 322-326, 333-335, 342-347, 353, 393, 449-451 Lloyd Bentsen 269-271 Floyd K. Haskell - 132-135, 163, 164, 221, 234-236, 264, 265, 279, 313-315, 326, 337, 345, 346, 389- 391, 405, 412 430-432 Carl T. Curtis 157-160, 162, 384-386, 398, 445-447 Paul J. Fannin 306, 307,405 Clifford P. Hansen 145-149,278-282, 307-309, 403,404 Robert Dole 149-151, 380-382, 432-434 Bob Packwood 135-139, 167-170, 233, 234, 265, 266, 304-306, 391-393, 399, 436-438 William V. Roth, Jr 139-142,405, 438-440 Bill Brock 154-157, 166, 219-221, 236-239,241, 405, 412, 413, 447-449 ADMINISTRATION WITNESSES Enders, Hon. Thomas 0., Assistant Secretary for Economic and Business Affairs, Department of State 375 Simon, Hon. William E., Secretary of the Treasury 363 Zarb, Hon. Frank G., Administrator, Federal Energy Administration_~ 426 PUBLIC WITNESSES American Imported Automobile Dealers Association, Robert M. McElwaine - 204 Automobile Importers of America, Inc., Ralph T. Millet, president 203 Brannon, Gerard M., chairman, Department of Economics, Georgetown University, representing Taxation With Representation 319 Chamber of Commerce of the United States of America, Herbert S. Richey, vice chairman, accompanied by Walker Winter, chairman, taxation com- mittee; David Luken, acting director, natural resources section; James Graham, associate director, tax and finance section, U.S. Chamber of Commerce 256 Chrysler Corp., Alan G. Loofbourrow, vice president, engineering 127 Energy Corp. of Louisiana, Ltd., Frederic B. Ingram, chairman of the board, accompanied by John G. Buckley, vice president and director of Northeast Petroleum Industries, Inc., of Boston, and vice president and director of ECOL 299 Estes, Elliott M., president and chief operating officer, General Motors Corp., accompanied by Dr. Henry L. Duncombe, Jr., vice president and chief economist, GMC 119 Ford Motor Co., F. G. Secrest, executive vice president, operations stafL_ 123 (III) PAGENO="0004" Iv Fred Schulman Associates, Dr. Fred Schulman, energy consultant and chairman, Trade-Energy Information Center 349 Garden State Paper Co., Inc., Richard B. Scudder, chairman of the board_ 331 General Motors Corp., Elliott M. Estes, president and chief operating officer, accompanied by Dr. Henry L. Duncombe, Jr., vice president and chief economist, GMC 119 Ingram, Frederic B., chairman of the board, Energy Corp. of Louisiana, Ltd., accompanied by John G. Buckley, vice president arid director of Northeast Petroleum Industries, Inc. of Boston and vice president and director of ECOL 299 Johnson, William A., professor of economics, George Washington Univer- sity, director, university energy policy research project 215 Loofbourrow, Alan G., vice president, engineering, Chrysler Corp 127 McElwaine, Robert M., American Imported Automobile Dealers Association 204 Millet, Ralph T., president, Automobile Importersof America, Inc 203 Nathan, Robert A., Small Producers for Energy Independence 22~ Richey, Herbert S., vice chairman, U.S. Chamber of Commerce, accom- panied by Walker Winter, chairman, taxation committee; David Luken, acting director, natural resources section; James Graham, associate director for energy; and Robert H. Statbam, director, tax and finance section, U.S. Chamber of Commerce 256 Schulman, Dr. Fred, Fred Schuiman Associates, energy consultant and chairman, Trade-Energy Information Center 349 Scudder, Richard B., chairman of the board, Garden State Paper Co.. Inc_ 331 Secrest, F. G., executive vice president, operations staff, Ford Motor Co__. 123 Small Producers for Energy Independence, Robert A. Nathan 226 Taxation With Representation, Gerard M. Brannon, chairman, Depart- ment of Economics, Georgetown University 319 ADDITIONAL INFORMATION Opening statements of committee members: Senator Carl T. Curtis 1 Senator Robert Dole 2 Senator Bill Brock 3 Committee on Finance press release announcing hearings on HR. 6860_. 12 Text of HR. 6860 14 Impact on employment of the auto efficiency standards in H.R. 6860- Submission of the Department of the Treasury 385 Questions by Senator Curtis submitted to: General Motors Corp 161 Questions by Senator Fannin submitted to: Richard B. Scudder 339 Tables and charts: Imported car sales history in U.S. market-1960--75 207 New coal mines and major expansions of existing mines-planned, an- nounced or under construction in the United States, 1975-85 276 Domestic oil production 441 Windfall profits in oil-Submission of Gerard M. Brannon 326 Competitive impact of tax benefit for virgin woodpulp on waste paper re- cycling industries-July 16, 1975-Submission of Richard B. Scudder~ 336 COMMUNICATIONS Estes, B. M., president, General Motors Corp 405 Ford Motor Co., Lee A. lacocca, president 408 General Motors Corp., B. M. Estes, president 405 lacocca, Lee A., president, Ford Motor Co 408 Nelson, Hon. Gaylord, a Senator from the State of Wisconsin 272 PAGENO="0005" ENERGY CONSERVATION AND CONVERSION ACT OF 1975 THURSDAY, JULY 10, 1975 U.S. SENATE, COMMITTEE ON FINANCE, Washington, D.C. The committee met, pursuant to notice, at 9 :33 a.m., in room 2221 Dirksen Senate Office Building, Senator Russell B. Long (chairman) presiding. Present: Senators Long, Talmadge, Ribicoff, Nelson, Gravel, Bent- sen, Haskell, Curtis, Hansen, Dole, Packwood, Roth, Jr., and Brock. The CHAIRMAN. This hearing will come to order. This morning the committee begins hearings on H.R. 6860, the Energy Conservation and Conversion Act. It is my hope that by the time the Committee on Finance completes action on this bill, it will be a significant step toward `dealing with one of our most important do- mestic problems-assuring an adequate supply of energy to meet our economy's needs. We will welcome the suggestions of witnesses, not only on the specific provisions of the House Bill, but also on any other matter within the Finance Committee's jurisdiction relating to energy production, conversion and conservation. Our first witness this morning will be Mr. Elliott M. Estes, president and chief operating officer of the General Motors Corp. Mr. Estes, we are very pleased to welcome you here before the com- mittee, and we look forward to your statement. We would `hope that you could limit your statement to 10 minutes and on the first round of questions, I will ask each Senator to confine `himself to 7 minutes, hop- lug that that is sufficient time for all the questions they wish to ask, but if they wish to ask more, they can. [Statements of Senators Curtis, Dole, and Brock, the committee's press release announcing these hearings, and a copy of the bill, H.R. 6860 follow. Hearing commences on page 119.] STATEMENT OF SENATOR CARL CuRTIS Mr. Chairman, we are today commencing full committee consideration of the Energy bill passed by the House. I look forward to hearing the witnesses who will come before us to give us the benefit of their views on the energy problem and their suggestions as to how Congress should respond to I~he problem. Mr. Chairman, our responsibility is an important one. If we are to reduce our dependence on foreign energy sources, we must greatly expand our production of domestic energy resources. Yet, so far as I can tell, there is no provision in the House bill that will lead to the production of a single barrel of domestic oil. Conservation is important, but it is only a part of `the solution. I look forward to working with you Mr. Chairman, and with my colleagues on the committee, to develop an effective and equitable bill that will start us down the road to energy independence. (1) PAGENO="0006" 2 STATEMENT OF SENATOR BOB DOLE Because of the apparent and well-publicized weaknesses in the House-passed version of H.R. 6860, we bear the responsibility of shaping an equitable, respon- sive energy bill whioh encourages the conservation of available energy resources and provides incentives for the development of new domestic energy supplies. It seenis that the House has attenipted to give the American people something that simply cannot be given-energy independence at no cost. But, more importantly, the House bill does absolutely nothing to encourage the development of new domestic supplies of oil and gas. Nowhere does the House bill address the inevitable shortages of natural gas `and oil which we will face in the very near future in the absence of positive legislation whioh provide~s'the economic incentive to step up efforts to find domestic reserves. Instead, the House has settled for a measure which relies heavily on import quotas as a means of self-imposed conservation without, at the same time, providing realistic methods ~- of increasing domestic energy production to take up the economic slack which will certainly develop if new domestic energy sources are not found to replace the lost imported energy. NO COST-FREE SOLUTION In fact, the import restrictions in H.R. 6860, which could reduce oil imports by 2 million barrels per day by 1985, could result in a loss to the American economy of as much as $60 billion per year. The Senate budget committee energy task force has estimated that the mandatory reductions in energy consumption which will result if incentives are not provided for increased domestic energy production will lead to a diminution in the Nation's output of goods and services. Specifically, it is estimated that a self-imposed reduction in imports of 1 million barrels per day would save about $3.7 billion per year in payments to foreign energy producers. But, such a reduction could cost as much as $30 billion in gross national product, for a net cost of over $26 billion per year to the American economy. True, it is difficult to identify precisely who bears this cost. And therein lies the political appeal of the import quota concept. I am hopeful that we in the Senate will be able to vastly improve and expand the bill sent to us by the House. We must strengthen the provisions which provide incentives for fuel conservation. We must closely examine the superficial appeal of import quotas in light of their impact on the economy. And we must review carefully the provisions relating to business use of petroleum products in light of economic reality. ENCOURAGE DOMESTIC ENERGY PRODUCTION More importantly, we have the opportunity to demonstrate leadership in the drive for energy independence by enacting positive measures to deregulate the artificially-controlled prices of natural gas and old domestic crude oil. It should be painfully obvious to everyone how artificial price regulation affects petroleum production. And if it is not yet obvious, the curtailments of natural gas this winter-estimated as high as 3.3 trillion cubic feet-will make it obvious. For such curtailments may lead to factory shut-downs, increased unemployment and economic hardship. Domestic production of crude oil is also declining due to artificial price restraints. For that reason, I believe that the increased revenue the industry is getting from high oil prices should be channeled back into the exploration and development of additional domestic oil and gas. The Finance Committee could take the lead in this area by adopting a windfall profits tax with a plowback provision in conjunction with the phased decontrol of natural gas and crude oil prices. Obviously, such decontrol should be phased in gradually over a period of years so that prices to consumers rise slowly, thus avoiding an infla- tionary shock just as the economy begins to recover from the recession. Moreover, a properly constructed excess profits tax provision will assure that oil producers plow back their increased revenues in the search for new domestic reserves. Only when we balance decreased imports and conservation with increased domestic production or development of alternative energy sources can we begin to solve this Nation's energy problem. I urge that we balance the numerous energy conservation incentives in H.R. 6860 with incentives for development of domestic reserves. For this is a situation where half a loaf is not necessarily better than no loaf at all. PAGENO="0007" 3 STATEMENT OF SENATOR BILL BROCK Mr. Chairman and Members of the Committee, some six months before the Arab oil embargo I warned that: "In the long run, few alternatives are less attractive than an America de- pendent for its vital energy upon the caprice of such areas as `the Middle East or the Communist bloc. Our national security impels us to extreme caution as we move toward greater dependence on such sources. "We must never allow ourselves to be placed at the mercy of some volatile monarch who may, under whatever influence, suddenly decide to turn off the lights." Now, two years and one embargo later, we are at a turning point. The House of Representatives has failed to act decisively and the burden is on us. We can either adopt a tough but evenhanded energy conservation and development program, or we can continue to drift, growing more dependent on foreign sources of energy with all the consequences this implies for our economy and our na- tional security. But before we begin considering legislation, perhaps it would help to take a look at what we've accomplished in the last two years. For maybe we can learn what we should and should not do. On the face of it at least, there have been many develepments that would appear to have contributed to our long run goal of energy security. A major reorganization of federal energy policymaking was effected. The Federal Energy Administration Act was enacted; the Energy Resources Council and Energy Re- search and Development Administration were also formed. Last November, the Project Independence Report was published. At the same time, however, there have been many indications that the energy industries are moving away from energy self-sufficiency. There have been many suspensions and cancellations of refinery expansion programs. The total loss of `new refinery capacity now exceeds two million barrels per day, and several companies that build and design refineries are now out of work in the United States. Company drilling programs have been curtailed sharply, while the de- velopment of oil shale has also been delayed indefinitely, largely because of fed- eral energy policy. Many electric utilities have postponed expansion of their generating capacities, while domestic production of crude oil has fallen since January, partly because of the government's entitlements program. Perhaps one reason for contrast between what is supposed to be happening in energy policy and what is happening is the confusion created by the repeated reorganization of the federal energy policymaking establishment. One way to appear to solve a problem is to reorganize. Governments, it often seems, meas- ure their success in terms of new organizations created. As one observer has noted: ". . . we tend to meet any new situation by reorganizing; and a wonder- ful method it can be for creating the illusion of progress while producing con- fusion, inefficiency, and demoralization." This was said, incidentally, not by Secretary William Simon or Secretary Rogers Morton or Administrator Frank Zarb, but by Gains Petronius Arbiter, a confidant of Nero Caesar during the First Century A.D. Of course, we in Congress have gotten `to know the different energy czars and their subordinates quite well. For particularly since the embargo, they have had to spend much of their time appearing before Congressional committees. During his tenure time as Administrator of the Federal Energy Office, Secre- tary Simon reportedly appeared on the Hill at the request of Congress 108 times, an average of more than once per working day. And in the first 135 days of ERDA's existence, witnesses from this agency testified for 10~ hours of formal hearings before 6 full committees and 27 subcommittees. All this wouldn't be so bad if we had been more productive. However, aside from the Alaskan pipeline bill, which was passed about a year and a half ago, not one meaningful piece of energy legislation has emerged since the energy crisis was officially recognized as such. Instead, we have preoccupied ourselves with the search for a scapegoat and with methods of punishing the industry for alleged wrongdoing. We have threatened the oil industry, especially the major oil companies, with price rollbacks, extension of allocation authority, the divesture of holdings in production, pipelines and marketing facilities, and the extension of FPC jurisdiction to the intrastate market for natural gas. None PAGENO="0008" 4 of these measures will save energy; neither will they encourage the production of energy. In short, Congress has been worse than useless; it has been counter- productive. But while we have been busy hunting scapegoats and trying to rollback prices, the Administration's record has been `dismal as well. The embargo was an ex- cellent time to obtain Congressional approval of such critically important meas- ures as the deregulation of natural gas. Rather than acting, however, the Ad- ministration chose to study the issues. And what a fine study emerged. The result of months of work by hundreds of federal bureaucrats, the Project In- dependence Report is a massive document that I'm sure few if any in this Cham- ber have read. And even if someone has read it, it raises more questions than it answers. However, the primary failing of the report is not what it says or does not say, but the diversion it has created. The Report, like appearing before Congress, has absorbed enormous amounts of time and talent in the Federal government. Perhaps worse, throughout 1974, it provided the Administration with a means of reassuring the public, and themselves, that the goal of self-sufficiency was being advanced when, in fact, it was being studied. Reorganization is one way to create the illusion of progress; studying a matter is another. While Congress has been scapegoating and the Administration reorganizing and studying, another and far `more dangerous aspect of federal energy policy has emerged: the regulatory one. Now, the Federal Energy Administration em- ploys about 3,700 bodies, most of them concerned with administering price and allocation controls. The bureaucracy is rapidly becoming entrenched, with a vested interest in prolonging the controls. And the regulations these bureaucrats write often make little sense. They have also gone far beyond the original intent of the United States Congress. For example, the San Francisco Office of the Federal Energy Administration ruled early this year that no gasoline station could use allocated products to engage in price wars. In other words', FEA is opposed to lower prices for consumers. Several months ago PEA issued a regulation, without a comment period, re- quiring parties seeking to establish new stations in a market area to first solicit comments from existing stations (and potential competitors) to assure that their market position will nnt be eroded. In other words, in the name of pro- tecting competition, PEA is actually opposing competition and, because of this, the interests of the American consumer. Mr. Chairman, I would like to have included and printed in the Record a policy directive from the San Francisco office of the Federal Energy Adminis- tration regarding price cutting and a notice from the Federal Register contain- ing the procedures a businessman must follow to open a new gas station. The regulatory approach to energy policy has clearly been a failure. It has discouraged domestic production, encouraged imports and created uncertainty and stagnation in the energy industry. It is ironic to me that at the same time that we are questioning the efficacy of government regulation of economic activity in so many areas, we are saddling the energy industry with more and more regulations. [f our fascination with regulations and controls was responsible only for rising consumer prices and increasing inefficiencies in the energy industry, I would be deeply concerned. But the consequences of our present energy policy are much more grave. We are in essence insuring our dependence on insecure foreign sources of oil. What happens if we have another oil embargo slapped on us tomorrow? And even without an embargo, we face the prospect of future increases in oil prices from the OPEC nations with all the consequences that this will have for an already weak domestic economy. What am I talking about? For one thing, I am talking about the increasing vulnerability of `the United States economy `to foreign supply disruptions. I `shudder at the thought of what such actions could mean. And I would like to point out another question which I h'ave come to fear more and more. What happens when our freedom to conduct foreign policy is hampered by our ever growing dependence on foreign oil? For example, will we be forced to abandon, or lessen, our support of Israel because of our need for Arab oil? The United States cannot be a great power unless it is independent. Dependence is not freedom. A year ago, the United States sent $2.2 billion in special military assistance to Israel. We thought it necessary to rebuild Israeli forces `to balance the Soviet- supplied Arab forces. Wha't did that do to the balance of power in the Middle PAGENO="0009" 5 East? Did resupplying Israel force us to start digging ourselves a hole because there is no true balance of power in that region as long as the Middle East has oil dependence to hang over our heads? Let me present a rather grim scenario. Suppose there is another Middle East war and this time, out of fear of a more devastating embargo, the United States refuses to resupply Israel with the military equipment it needs to survive. Thoughtful observers have believed for many years that Israel possesses nuclear weapons and has the capacity to deliver them. And when faced with a question of national survival, is there any doubt as to what would occur? In fact, we could see the fulfillment of a Biblical prophecy within our lifetime a nuclear Armageddon in the Middle East-stemming, in part, from the failure and misdirection of U.S. energy policy. This is a terribly grave matter. We face a precarious time. Decisions need to be made which will allow us to make future decisions in an atmosphere of freedom, not of dependence. For months, we have talked and listened and argued and gotten nowhere. The Senate now has the opportunity to work toward a national energy policy which allows us our freedom and also allows us the oil necessary to continue with a strong economy. However, a strong economy will not appear by itself as long as Congress continues to believe that all wisdom remains in Washington. Our belief in controls and regulations has put us deeper in that hole which we are digging. We must strive toward energy security, but to achieve that we must realize that the laws of supply and demand are still valid ones and should be given as much of an opportunity as possible, as soon as possible. Energy is still our future. Policy direction is vitally needed if we are to remain a strong and free nation. [From the Federal Register-Friday, May 9, 1975] FEDERAL ENERGY ADMINISTRATION, Moron GASOLINE GUIDELINES FOR EVALUATION OF APPLICATIONS FOR ASSIGNMENT OF SUPPLIES AND BASE PERIOD U5E TO NEW GASOLINE RETAIL SALES OUTLETS The Federal Energy Administration hereby gives notice of guidelines to be used by PEA in evaluating applications for assignment of suppliers and base period uses to new gasoline retail sales outlets. The guidelines are set forth below and will provide a basis for consistent application of PEA's regulatory provi- sions with respect to new retail sales outlets `of motor gasoline. May 6, 1075, Washington, D.C. ERIC J. Fyoi, Acting General Uo'unsel. APPENDIX GUIDELINES FOR EVALUATION OF APPLICATIONS FOR ASSIGNMENT OF SUPPliER AND BASE PERIOD USE To NEW GASOLINE RETAIL SALES OUTLETS 1. $cope. Numerous questions have been raised as to the procedures and sub- stantive criteria which FEA should apply to applications for assignment of suppliers and base period use for new gasoline retail sales outlets. These guide- lines are intended to provide guidance as to how such applications should be handled both procedurally and substantively under current FEA regulations. In particular, these guidelines will discuss the identification of and service of notice to possible aggrieved parties as required by 10 CFR § 205.33 and the evaluation of applications to determine whether to assign a supplier and, if so, bow to determine the assigned base period use pursuant to 10 CFR §~ 205.34 and 211.12(e). 2. Notice to Aggrieved Parties. (a) General. The procedural regulations and criteria applicable to all applications for assignment of suppliers and base period use are set-out in Subpart C of Part 205. Section 205.34 requires that the appli- cant file an application which not only contains various facts regarding the re- quest, but also the "names and addresses of all affected persons (if reasonably ascertainable) ," and "[t]he identification of any persons who will be aggrieved by the PEA action sought, including potential suppliers." Section 205.33(a) provides that FEA shall serve notice on any person readily identifiable by the PEA as one who will be aggrieved by the PEA. action and PAGENO="0010" 6 may serve notice on any other person that written comments will be accepted if filed within 10 days of service of the notice. . . . (Emphasis added.) The word "aggrieved" is defined in § 205.2 as describing or meaning "a person with an interest sought to be protected under the FEAA or EPAA who is adversely affected by an order of interpretation issued by the PEA or a State Office." Thus it is the responsibility of the applicant under § 205.34(b) to supply PEA with a list of potentially aggrieved persons, but the burden is on FEA under § 20533 (a) to serve notice of the application on such aggrieved parties. More- over, PEA "may serve notice on any person. . . (Emphasis added.) (b) Identification of Aggrieved Parties. The applicant's task of identifying potentially aggrieved persons is not as difficult as it might seem. In most cases this information is known to the applicant because suppliers opening new sites often have made sophisticated studies of the size of the trading area and the competitors located within it before their application is submitted. As a general rule, in the case of a new station located in a typical residential neighborhood, all retail sales outlets, particularly small and independent refiner-operated outlets and all branded and non-branded independent marketer-operated outlets, located within a mile radius of that station should be presumed to be "aggrieved persons" within the meaning of the notice requirements. The geographical trading area affected might be somewhat larger in rural neighborhoods and somewhat smaller in urban neighborhoods. Moreover, because of the peculiarities of traffic flow, an affected trading area might be longer in one direction than another. But, even though it is not possible to prescribe rigid rules for the determination of the perimeters of the trading area, in most cases the PEA's discretion in this area should be freely exercised so long as the general rule of erring on the side of over-inclusion is followed. It is not necessary that notice be served on other persons also identified by the applicant but not located in the trading area of the proposed new station-even though they might otherwise be affected because their supplies might be re- duced-since the administrative burdens of doing so greatly outweigh the mini- mal effect which comments received from such persons would have on the decision. (c) Method of Providing Notice. Notice should be individually served upon any person identified by the applicant as an aggrieved party and located in the trading area of the proposed new station using the form of notice provided in Attach- ment A. In addition, FEA should arrange, using imprest funds, for the publica- tion of a notice in local newspapers of general circulation in the market area to be served by the proposed retail sales ouElet. The notice should also be substan- tially in the form of Attachment A to these guidelines and should be published on at least two separate occasions at least one week apart. This procedure should serve to provide notice to those persons not readily identified by the applicant as aggrieved persons and satisfies FEA's independent responsibility to identify and notify aggrieved persons. (d) Information in Notice. It is not necessary to disclose in the notice any of the information contained in the application except (i) the applicant's name and address, (ii) the location of the station for which application is made, and (iii) an approximation of the base period use sought by the applicant. Only an approxi- mation of the amount being applied for should be given because in some cases applicants have claimed that the actual amount is proprietary information ar- rived at after a thorough and highly confidential marketing survey of the area, the disclosure of which would inform the applicant's competitors of the appli- cant's strategy of market expansion. While such information may not in fact be the type of proprietary information protected from disclosure, there is at least a colorable argument that it is. In any event, the problem can be readily avoided by providing in the notice only an approximation of the actual amount. For example, if the amount applied for is 1,000,000 gallons per year. It could be described as "a high volume station having an aggregate base period use in excess of 800,000 gallons per year." Such a description would give potentially aggrieved parties adequate notice of the relative size of the station and at the same time avoid the unnecessary disclosure of possibly confidential competitive information. (e) Comment Period, Hearings and Conferences. Subpart C of Part 205 re- quires PEA to give aggrieved parties 10 days from service of the notice in w~ch to file written comments. PEA may also make an independent investigation of facts alleged in the application of comments and may rely on information obtained from any source. (see § 205.35.) A conference and hearing are both discretionary with the agency. (~8ee § 205.35 and Subpart M of Part 205.) A conference with PAGENO="0011" 7 oniy the applicant in attendance is the recommended means of obtaining addi- tional information if the application and the written comments still leave some unresolved issues. A hearing should be used only rarely and in exceptional cir- cumstances, since most of the information relevant to the application can best be conveyed only in writing. (f) Timeliness of PEA Action and Interim supplies. FEA is required to act upon an application for assignment of a specified supplier within 00 days after its receipt. Failure to act during such period may be considered by the applicant as a denial from which an appear may be taken. (&e § 205.37.) It is sometimes difficult, however, to evaluate an application properly within the 00-day period. Moreover, the applicant may need prompt action because the station is idle, perhaps at great expense to the applicant. In such cases it is possible for FEA office to issue an order granting a temporary assignment until such time as a full evaluation of the application for a permanent assignment can be completed. (See also discussion below concerning retail sales outlets which operate using surplus products.) The procedures for issuing such temporary orders are found in 1 205.30. As indicated in that section, a temporary assignment can be made "upon appli- cation." This does not mean that the applicant must expressly apply for a tem- porary as well as a permanent assignment. Since an application for a temporary assignment need contain no more information than that required for a permanent assignment, the filing of two applications is unnecessary. Thus, when an applica- tion for a permanent assignment has been made and it is apparent from the cir- cumstances that a temporary assignment is warranted pending a final decision and is not objected to by the applicant, the application on file for a permanent assignment may be treated as an application for temporary assignment as well as for a permanent assignment. An order granting a temporary assignment can be effective for only 60 days and cannot be renewed. The temporary order must contain an express finding that circumstances do not permit issuance of an assignment or phase with the usual processing of permanent assignment orders. See § 205.30 (b). 3. Substantive Criteria Applicable to Assignment of Supplier and Base Period Use. (a) General. The procedural regulations set forth in § 205.35(b) the cri- teria applicable to the evaluation of applications for assignment of a supplier and new base period use, These criteria restate the criteria set forth in section 4(b) (1) of the Emergency Petroleum Allocation Act of 1973 applicable to PEA's overall duties in promulgating and applying the Mandatory Petroleum Allocation and Price Regulations. Like the criteria of section 4(b) (1) of the EPAA, the various, criteria of § 205.35(b) are to be applied only "to the maximum extent possible." As ap- plied to a particular set of circumstances, these criteria may not only be difficult to apply but also conflicting. As the courts have said in applying the various goals of section 4(b) (1), [t]he goals are inherently inconsistent, and no regula- tion could promote all of them at the same time. Congress recognized this in say- ing that the regulations shall provide for them `to the maximum extent prac- ticable.' A balancing of goals is required, and Congress has left the details of this balancing to the Federal Energy Administration. Union Oil Co. v. PEA, F. Supp. -~--~, Fed. Energy Guidelines ¶ 20,007, at p. 26,098 (C.D. Cal. 1974); see also Air Trans. Ass'n of America v. PEA, 382 F. Supp. 437 (D.C. 1974). Thus, PEA should be guided by the criteria of § 205.35(b) but has considerable discretion in balancing one against the other. While it is inappropriate to prescribe precise rules for the application of these criteria to assignments of suppliers and establishment of new base period uses in all circumstances, nevertheless some general principles may be prescribed. (b) Whether to Assign a Supplier/Purchaser Relationship. Three of the criteria which must be taken into account in deciding whether to assign the new outlet a supplier are whether granting the application in ques- tion would promote "economic efficiency ;" minimize "economic distortion, in- flexibility, and unnecessary interference with market mechanisms," and promote the equitable distribution of petroleum products at equitable prices among all regions of the country and segments of the industry. (See § 205.35(b) (1) (viii), (ix), and (vi).) These three criteria together can be read as stating that even within the context of the regulatory program, free market forces should be allowed to function to the extent possible. Thus, in the absence of other counter- vailing considerations, PEA should start with a strong but rebuttable presump- PAGENO="0012" 8 tion in favor of assigning a supplier/purchaser relationship for a proposed new retail sales outlet. In particular cases there might also be other relevant cri- teria favoring the application, such as the maintenance of public services and agricultural operations. ($ee § 205.35(1) (ii) and (iii).) A possible countervailing consideration may be the preservation of a com- petitively viable independent section of the industry. Thus, in each case the facts must be reviewed to determine whether the gen- eral presumption in favor of granting the application should be overriden or sus- tained by a weighing of these other countervailing considerations. (i) Effect on ~S'upplier's Other Purchasers. Attention should be paid to the effect of any assignment upon the supplier's other customers, particularly the sup- plier's branded and non-branded independent purchasers. If the assignment will significantly lower the supplier's allocation fraction below one (1.0) then the assignment should be questioned. In general, if the assignment can be expected to reduce the supplier's most recently reported allocation fraction by more than one percentage point (0.010), the reduction may be significant and would warrant especially careful assessment of the supplier's future supply position. (ii) Effect on Independent Competitors. In evaluating applications, the com- ments solicited from independent and small refiners and branded and non- branded independent marketers operating stations within the same trading area as any new station which will not be operated by an independent marketer or small or independent refiner should be carefully reviewed to determine whether or not granting of the application may seriously jeopardize the competitive via- bility of small and independent refiners and branded and non-branded independ- ent marketers. The existence of substantial evidence that granting the application would result in probable severe and irreversible damage to the existing independent segment in the proposed market may be the basis for denial of an application. Such evidence would not consist of a showing of probable financial impairment to a particular independent marketer, but rather would require evidence that the volume of busi- ness enjoyed by the independent segment in that marketplace would probably be substantially and permanently reduced. Although these judgments are extremely difficult to make, FEA cannot ignore clear and compelling evidence that the operation of a new retail sales outlet which is not operated by an independent marketer will so dominate a trading area as to substantially impair the competitive viability of independent marketers. Gener- ally such evidence is not present if: (1) independent marketers in the trading area can remain competitively viable by relying upon customers who will patron- ize such stations because of the availability of supplementary products and serv- ices not provided by the new station; (2) there are other large volume/low profit margin stations in the trading area or in other nearby trading areas, and the pres- ence of such stations has not impaired the competitive viability of independent marketers; 1 and (3) there is a reasonable prospect of considerable growth in demand within the trading area so that the new station, notwithstanding its advantages, will not necessarily acquire most of its business at the expense of the other stations in the area. This is not meant to be an exhaustive listing of the kinds of evidence that would sustain the granting of such an application notwithstanding a showing of adverse impact upon the various aggrieved parties. Indeed, given the rebuttable presump- tion in favor of granting such applications in any event, the burden is on those opposing the application to make a clear and convincing showing that the com- petitive viability of the independent marketing sector within the trading area will be substantially impaired by the opening of a new station which is not to be oper- ated by an independent marketer. This showing is not made merely by a showing of financial harm to, or even of impending bankruptcy by, one or more independent marketers. Finally, such a showing cannot rest upon unsubstantiated assertions or mere speculation. There must be evidence of the specific adverse impacts of the new station's opening before FEA can perform the analysis outlined above and conclude that the application must be denied. (iii) Consideration of Applications for Retail I~lales Outlets to be Built in the Future. FEA has encouraged operators of potentially new retail sales outlets to 1 The FEA must consider, however, whether, given limited demand within the trading area (see item (3) following), the new station, in conjunction with the existing high- volume station, will destroy the competitive viability of the remaining independent marketers. PAGENO="0013" 9 apply for FEA assignment of a supplier/purchaser relationship and a base period use prior to construction of the new outlet. (&~e § 211.12(e).) This policy was established to prevent any hardship which might result from a failure to obtain an assigned supplier or base period use following the operator's expenditure of con- struction funds and assumption of other obligations connected with the proposed new retail sales outlet. Consequently, consideration of an application should not be delayed because a retail sales outlet is not currently operational or may not become operational before the expiration date of the EPAA. Approvals of such applications may be conditioned upon the retail sales outlets being operational within a certain period of time. Of course, such assignments should be made effective only upon the retail sales outlet's becoming operational. (iv) New Retail sales Oatlets Operating ~oilely on supplies of Surplus Product. In some cases new retail sales outlets are being operated with gasoline purchased from suppliers which have certified their gasoline to be surplus product as per- mitted by § 211.10(g). Such retail sales outlets, however, are new suppliers as defined by § 211.10(e) which must receive FEA approval before they commence operations. Such approval should ordinarily be freely granted to gasoline retail sales outlets provided it is made clear that such approvals do not create a sup- plier/purchaser relationship between the retail sales outlet and the supplier of the surplus product and does not establish a base period use for the retail sales outlet. Approvals pursuant to § 211.10(e) (2) need not be conditioned upon application for a supplier and an assigned base period use. Operators of new retail sales out- lets under § 211.10(e) (2) should understand, however, that unless they have been assigned a supplier and a base period use pursuant to § 211.12(e), they have no future claim to a supplier or a pro rata share of available supplies in a period when there is no surplus product. (e) Assignment of Base Period Use. Once a decision to assign a supplier/pur- chaser relationship for a new retail sales outlet is made, FEA must determine the appropriate base period use to be assigned the retail sales outlet. As a general rule, the average base period use for retail sales outlets of a similar size (number of pumps) and nature (full service, gas only, self service, car wash. etc.) in the same market area will be the appropriate assigned base period use. Thus, for example, a station of a particular size and type should receive a base period use approximately equal to other stations of the same kind in the market area. When a new type of station is constructed in a market area, it should receive an alloca- tion commensurate with the relative treatment of the new type of station com- pared to existing types in the nearest market area where such comparisons may be made. The delineation of the market area will vary in each case. and ultimately will be determined by FEA. There can be no hard and fast criteria, but some general guidelines may be observed. (i) In a city over 25,000 population, the market area to be considered should be the area within a one-mile radius of the proposed new outlet. (ii) In a suburban area (housing developments, shopping centers, apartments) the market area to be considered should be the area within a two-to-three mile radius of the proposed new outlet, depending upon the density of recent growth and traffic pattern characteristics in the area. (iii) On a non-urban arterial highway with full control of access, the market area should include the area within one-fourth mile of the access point at the pro- posed location of the new outlet and the next two access points in each direction from the proposed location of the new outlet. (iv) On a non-urban arterial highway with uncontrolled access or partially controlled access, the market area should include five miles in either direction along the highway. (v) On a through street or through highway in a rural area, the market area should be that area within a five mile radius of the proposed new outlet. (vi) In a town under 25,000 population, the market area should be a two mile radius from the proposed outlet. As used in the above guidelines, the following terms have the following meanings: "Arterial highway" means a highway primarily for through traffic, usually on a continuous route. "Full control of access" means that the authority to control access is exer- cised to give preference to through traffic by providing access connections with selected public roads only and by prohibiting crossings at grade or direct private driveway connections. PAGENO="0014" 10 "Partially controlled access" means that the authority to controll access is exercised to give preference to through traffic to a degree that, in addition to access connections with selected public roads, there may be some crossings at grade and some private driveway connections. "Through street or through highway" means every highway or portion thereof at the entrance to which vehicular traffic from intersecting highways is required by law to stop or yield before entering or crossing and where appropriate signs are erected as provided by law unless entry or crossing is made on the proper indication of traffic control. "Uncontrolled access" means that the authority having jurisdiction over a highway, street, or road, does not limit the number of points of ingress or egress, except through the exercise of control over the placement and the geometries of connections as necessary for the safety of the travelling public. ATTACHMENT A NOTICE Pursuant to 10 CFR § 205.83(a), this is to notify you that has applied to the Federal Energy Administration for an order assigning to it a base period volume of [more than] [less than] gallons per month for a retail gasoline station it intends to operate at . This retail station will be owned by and operated by You are invited to submit written comments to FEA in support of or in opposi- tion to the application. If you oppose the application on the ground that approval of it would adversely affect your business, you should set forth in detail the following minimum information: 1. Your name and address. 2. The person or persons who have an ownership interest in the business which you allege would be adversely affected, and the extent of each such person's ownership interest. 3. The location of your business in relation to the retail station for which the application for assignment was made. 4. The person or company from whom you presently purchase gasoline, and whether your business operates under the trademark of your supplier. 5. The volume, in gallons, of gasoline sold by your business in each month from January 1, 1972 until the present. 6. Whether or not there is a demand for gasoline in the trading area in which your business is located which cannot be met by existing retail stations. 7. The adverse effect which you believe approval of the application would have on your business. 8. Detailed factual data and information which support your claim that approval of the application will have an adverse effect on your business. Such data and information should include, at a minimum, audited or unaudited balance sheets and profit and loss statements for a recent, representative time period. FEA can consider alleged adverse effects on your business only if such allega- tions are supported by the best available data. Broad and unsubstantiated allega- tions of adverse impact will be disregarded. PEA will consider your written comments along with those submitted by the applicant and other interested persons. If you submit written comments, you will be notified of PEA's decision. PEA may, at its discretion, hold a public hearing to consider the application, in which event you will be notified. A copy of that portion of PEA's procedural regulations applicable to these proceedings is enclosed for your information. Your written comments should be hand delivered or received by mail not later than to the following address: Unless you claim confidential treatment for your submission, a copy of your comments should be delivered to the applicant. If you want the FEA to treat as confidential the information which you submit to it, it will do so if you so request and if the information is of a type entitled to such confidential treatment under the Freedom of Information Act, 5 U.S.C. 552, as amended, 18 U.S.C. 1905, 10 CFR 205.9, or under other Federal statutes, regulations or rules. Trade secrets and certain commercial and financial information are entitled to confidential treatment if you so request. If you request confidential treatment, you should designate on the original version of your written comments the information which you wish to be kept confidential and submit to FEA and the applicant another version of the document with such confidential information deleted. Information PAGENO="0015" 11 which is not designated as confidential or is not entitled by law or regulation to confidential treatment will be disclosed to the applicant and perhaps to other interested persons. Sincerely, (Name and Title) Enclosure. [FR Doc.75-12273 Filed 5-6-75; 1: 07 pm] FEDERAL ENERGY ADMINISPRATION, San Francisco, Calif., Noventber 26, 1974. POLICY NoTICE, PROGRAM PARTICIPANTS AND FEA STAFF This Notice Transmits: Policy for the reporting and investigating gas wars as an Indication of supply imbalances within Region IX. Purpose: For several months, there has been an abundant supply of motor gasoline in most areas of Region IX, although some areas and sectors of the market continue to report shortages. There have lately been vague, unconfirmed reports that supply in some areas is so excessive as to precipitate gasoline price wars. The Regional Office believes that any situations of this sort are an indica- tion that product may be poorly distributed. (Section 211.13(f) of the Manda- tory Petroleum Allocations Regulations requires that any purchaser (including retail outlets) whose needs decline, shall apply to his supplier for a downward adjustment to base period use.) Hence, it is not the intention of FEA that larger allocations be used for engaging in gas wars. The regulations prohibit suppliers from increasing volumes to a station in order to support gas war activity. This Policy Notice rescinds: First notice on this subject. WILLIAM C. ARNTZ, Regional A~lm4nistrator. POLICY FOR REPORTING AND INVESTIGATING GAS WARS AS AN INDICATION OF SUPPLY IMBALANCES WITHIN REGION IX PROCEDURES 1. Reporting of gas wars: A. All FEA employees are to report any "gas wars" they are aware of, giving names, addresses and specific activity (such as gas war signs, low prices being charged, etc.) to the Director, Compliance and Enforcement Division. B. Complaints from public will be accepted by PEA provided the details listed in 1A are given. Initial contact may be made by telephone to the local FEA office but should be followed up by a brief summary in writing to the Director, Compliance and Enforcement Division, 111 Pine Street, San Fran- cisco, California 94111. 2. PEA Region IX will review all reports and will investigate those determined to have merit. The investigation will determine if the stations involved are being allocated product by their suppliers in accordance with the regulations. 3. If FEA determines that violations of the Regulations have occurred, enforce- ment action will be taken. 4. If FEA determines that there is an excess of product in the area involved, action will be taken under Section 211.14 of the Regulations to redirect the excess product into areas still experiencing shortages. PAGENO="0016" 12 PRESS RELEASE FOR IMMEDIATE RELEASE COMMITTEE ON FINANCE June 24, 1975 UNITED STATES SENATE 2227 Dirksen Senate Office Bldg. FINANCE COMMITTEE SETS HEARINGS ON ENERGY CONSERVATION AND CONVERSION ACT (H.R. 6860) The Honorable Russell B. Long (D., La.), Chairman of the Senate Committee on Finance, announced today that the Committee would hold hearings on the Energy Conservation and Conversion Act (H.R. 6860), a bill passed by the House on June 19, 1975. The hearings will begin on Thursday, July 10, 1975 at 10:00 a.m., and will be held in Room 2221, Dirksen Senate Office Building. On Monday, July 14, at 10:00 a.m., the Committee will hear testimony from the Honorable William E. Simon, Secretary of the Treasury and the Honorable Frank G. Zarb, Administrator, Federal Energy Office, who will present the Administration's position on the legislation. The House-passed bill would impose import quotas and tariffs on petroleum, would set automobile efficiency standards, would establish a trust fund for energy research and development, and would levy taxes on certain business uses of oil and gas. The Chairman stated that the Committee would welcome witnesses to testify not only on the specific provisions included in H.R. 6860, but also on other proposals within the Finance Committee's jurisdiction relating to energy production, conversion, and conservation. Requests to Testify. --Senator Long advised that wit- nesses desiring to testify during this hearing nust make their request to testify to Michael Stern, Staff Director, Committee on Finance, 2227 Dirk~en Senate Office Building, Washington, D.C. 20510, not later than Thursday, July 3, 1975. Witnesses will be notified as soon as possible after this cutoff date as to when they are scheduled to appear. Once the witness has been advised of the date of his appearance, it will not be possible for this date to be changed. If for some reason the witness is unable to appear on the date scheduled, he may file a written statement for the record of the hearing in lieu of a personal appearance. Consolidated Testimony. --Senator Long also stated that the Committee urges all witnesses who have a common posi- tion or with the same general interest to consolidate their testimony and designate a single spokesman to present their common viewpoint orally to the Committee. This procedure will enable the Committee to receive a wider expression of views than it night otherwise obtain. Senator Long urged very strongly that all witnesses exert a maximum effort, taking into account the limited advance notice, to consolidate and coordinate their statements. Legislative Reorganization Act.--In this respect, he observed that the Legislative Reorganization Act of 1946, as amended, requires all witnesses appearing before the Com- mittees of Congress to file in advance written statements of their proposed testimony, and to limit their oral presentations to brief summaries of their argument." PAGENO="0017" 13 -2- Senator Long stated that in light of this statute and in view of the large number of witnesses who desire to appear before the Committeein the linited time available for the hearing, all witnesses who are scheduled to testify must compl~y with the following rules: (1) A copy of the statement must be filed by the close of business the day before the witness is scheduled to appear. (2) All witnesses must include with their written statement a summary of the principal points included in th~~ statement. (3) The written statements must be typed on letter-size paper (not legal size) and at least 50 copies must be submitted before the beginning of the hearing. (4) ~ ~ iné~fJ~eir ten-minute oral presentations to a summary of the points included in the statement. (5) Not more than ten minutes will be allowed for the oral summary. Witnesses who fail th wil forféiE Written Statements. --Witnesses who are not scheduled for oral presentation, and others who desire to present their views to the Committee, are urged to prepare a written state- ment for submission and inclusion in the printed record of the hearings. These written statements should be submitted to Michael Stern, Staff Director, Committee on Finance, Room 2227 Dirksen Senate Office Building not later than July 18, 1975. PR #27 55-583 (Pt. 1) 0 . 75 - 2 PAGENO="0018" 14 94T11 CONG1U~SS 1ST SESSION 6860 IN THE SENATE OF THE UNITED STATES JUNE 23 (legislative day, JUNE 6), 1975 Read twice and referred to the Committee on Finance S ANACT To provide a comprehensive national energy conservation and conversion program. 1 Be it enacted by the Senate and House of Representa- 2 tives of the United Stales of America in Congress assembled. 3 SECTION 1. SHORT TITLE. S 4 This Act may be cited as the "Energy Conservation and 5 Conversion Act of 1975'~. S 6 SEC. 2.. TABLE OF CONTENTS. S Sec. 1. Short title. S S Sec. 2. Table of contents. 5ec 3. Amendment of 1954 Code. S S TITLE I-IMPORT TREATMENT OF OIL Sec. 101. Statementof purpose. PART I-QUOTAS Sec. hf. Imposition of quantitative restrictions. Sec. 112. Establishment of import licensing system. II PAGENO="0019" 15 TITLE I-IMPORT TREATMENT OF OIL-Continued PART `I-DUTIES Sec. 121. Rates of duty on oil. PARr III-A1)MIN15TRATI\'J~ AND MISCELLANFOUS Pjeovisioa-s Sec. 131. Import restrictions and rates of duty to be reflected in the Tariff Schedules of the United States. Sec. 132. Annual reports. Sec. 133. Definitions. PART IV-Orric,a OF PETROLEUM IMPORT LIcENSING Sec. 141. Establishment of office. Sec. 142. Functions of the Deputy Administrator. Sec. 143. Conforming amendment. TITLE TI-OTHER ENERGY CONSERVATION PROGRAMS PART I-AUIOMOBILE-FUEL MILEAGE Sec. 211. Definitions. Sec. 212. Average fuel economy standards applicable to each manufac- turer. Sec. 213. Duties and pow ers of the Secretary and Administrator. Sec. 214. Labeling and advertising. Sec. 215. Prohibited conduct. Sec. 216. Civil penalty. Sec. 917. Relationship to State law. PAWr 1I-JNTERCITY BUSES, RADIAL TnuIs, AND REREFINED OIL Sec. 221. Repeal of excise tax on buses used in intercity public transpor- tation. Sec. 222. Repeal of excise tax on radial tires. Sec. 223. Rerefined lubricatmg oil. PAR r TII-TAx INcENTIVEs FOR CERTAIN ENERGY-RELATED IMPROVEMENTS OF BUILDINGS Sec. 231. Insulation of principal residence. Sec. 232. Residential solar energy equipment. Sec. 233. Qualified electric motor vehicles. TITLE ITT-ENERGY CONSERVATION AND CONVERSION TRUST FUND Sec. 311. Establishment of Energy Conservation and Conversion Trust Fund. Sec. 312. Expenditures from Trust Fund for energy projects and pro- grams. Sec. 313. Energy Conservation and Conversion Trust Fund Review l3oard. Sec. 314. Requirement of annual authorizations and appropriatiomis PAGENO="0020" 16 TITLE IV-ENCOURAGING BUSINESS CONVERSION FOR GREATER ENERGY SAVING PART U-BusINEss Usa OF PETROLEUM AND PETROLEUM PRODUCTS Sec 411. Excise tax on business use of petroleum and petroleum products. PART II-A~IORTIzATION FOR CERTAIN ENERGY-RELATED PROPERTY Sec. 421. Amortization of qualified energy use property. Sec. 422. Amortization of qualified railroad equipment. Sec. 423. Amendments relating to amortization of certain railroad rolling stock. Sec. 424. Technical and conforming amendments. PART Ill-TAX CREDIT CHANGES RELATING TO ENERGY OONSERYATION Sec. 431. Changes in investment credit relating to insulation,, solar energy, and air conditioning. Sec. 432. Generating facilities powered by petroleum and petroleum Products. 1 SEC. 3. AMENDMENT OF 1954 CODE. 2 Except as otherwise expressly provided, whenever in 3 this Act an amendment or repeal is expressed iii teams of 4 an amendment to, or repeal of, a section or other p~ovision, 5 the reference shall *be considered to be made t~ *a section 6 or other provisk~n of the Internal Revenue Code of 1934. 7 TITLE I-4MPORT TREATMENT 8 OF OIL 9 SEC. 101. STATEMENT OF PURPOSE. 10 The purpose of this title is- 11 (1) to reduce the dep~ndenc~ of the United States 12 on foreign oil by imposing restrictions on imports of 13 oil so as to reduce such imports as rapidly as practicable 14 without contributing to serious economic dislocation, 15 (2) to decrease imports of oil so that not later PAGENO="0021" PART I-j--QUOTAS SEC. 111. IMPOSITION OF QUANTITATIVE RESTRICTIONS. (a) QUANTITATIVE RESTRICTI0NS.-Except us `other- wise provided in this section, the maximum average daily quantity of petroleum and petroleum products which may be imported into the United States shall be determined iii accordance with the following table: Maximum average daily number Calendar year: of barrels (in millions) 1975 6.0 1976 6.0 1977 6.5 1978 1979 6.0 `1980 and thereafter 6. 5 17 than 1985 the amount of such imports should not e~- ceed 25 percent of the amount of domestic oil consump- tion, and (3) to place the United States, as soon as practi- cable, in a position to deal with any oil embargo by foreign nations through a combination of any strategic reserve for oil which may be provided by law, other available sources of oil, and economies in the domestic consumption of oil which may be effectuated. The purpose of this title is to be certain that oil conservation which is obtained under this Act results in the reduction of oil imports and not in the reduction of domestic Oil produc- ~ion. 1 2 3 4 5 6 7 8 9 10 12 13 14 15 16 17 18 19 20 PAGENO="0022" 18 i In the case of the calendar year 1975, this subsection shall 2 apply oniy with respect to articles entered or withdrawn 3 from warehouse for consumption on or after the first day on 4 which the import licensing system established under section 5 112 takes effect. 6 (b) AUTHORITY To ~ Som~DuLE.- 7 (1) IN GENERAL-Whenever the President deter- 8 mines that, by reason of variations in domestic con- 9 sumption caused by economic factors or the weather, 10 by reason of delays in obtaining domestic production of 11 oil or in achieving p11 conservation goals, or by reason 12 of other similar factors, it is in the national interest to 13 vary the average daily quantity of oil which may be im- 11 ported during any period, he shall appropriately modify Li the figure set forth in subsection (a) applicable to such 16 period. 17 (2) LIMITATION.-Any modification under this 18 subsection for any period may not change the maximum 19 average daily nuffiber of barrels of petroleum and petro- 20 leum products which may be imported into the United 21 States during any calendar year to a quantity which is 22 above or below the figure for such calendar year set 23. forth in s~bs~otion (a) by more than~- PAGENO="0023" 19 1 (A) in `the case of 1975, 1978, or 1977, 2 1,000,000 barrels a day, 3 (B) in the ease of 1978 or 1979, 1,500,000 4 barrels a day, or 5 (C) in the case of a calendar year after 1979, 6 2,000,000 barrels a day. 7 (e) SAVINGS IN DOMESTIC CONSIJMPTION To BE 8 REFLECTED IN REDUCTIONS IN IMPORTS.-The President 9 shall establish quantitative restrictions lower than the quan- 10 titative restrictions set forth in sul )see'tlon (a) to the extent 11 necessary to ensure that savings in United States con- 12 sumption of oil will be fully reflected 1)y at least equivalent 13 rednetions in the imports of oil. 14 (d) PETROCHEMICAL FEEDSTOCKS.-For purposes of 15 the quantitative restrictions imposed pursuant to this see- 16 tion, petrochemical feedstocks shall not be counted against 17 the maximum average daily number of barrels of petroleum 18 ruui petroleum produet~s which may be imported iIlt() the 19 United States. (e) NEims OF GEOGRAPhICAL AREAS AND INDUS- 21 TRIES FOR PARTICULAR PRODUCTS To BE TAKEN INTO 22 ACC0UNT.-Thie President shall divide any quantitative 23 restrictions imposed pursuant to this section for any period 24 among petroleum and petroleum products where such divi~ 25 sion is necessary ~p avokl substantia' ~lv~e ii~paet cni 1~h~ PAGENO="0024" 20 various economic and health needs of geographical areas and 2 industries within the United States. 3 (f) CERTAIN DISTILLATE AND RESIDUAL FUEL OIL$ 4 IMPoRTED FOR USE AS FUEL.- 5 (1) MINIMUM QUANTITIES iMPORTED BEFORE 6 1978.~-Nothing in this section shall prevent the im- 7 portation into the United States for use as fuel (other 8 than for the propulsion of motor vehicles) of distillate 9 fuel oil and residual fuel oil (provided for ifl item 475.05 10 or 475.10 of the Tariff Schedules of the United States) 11 in average daily quantities which are equal to 2,000,000 12 barrels per day in the years 1975, 1976, and 1977, of 13 which not more than 400,000 barrels per day in any 14 such year may be for such distillate fuel oil. 15 (2) COORDINATION WIT11 SUBSECTION (a) .-Any 16 quantities of distillate fuel oil and residual fuel oil re- 17 ferred to in paragraph (1) which are imported into the 18 United States during any calendar year before 1978 and 19 which are not greater than the applicable minimum quan- 20 tities set forth in paragraph (1) shall be charged against 21 the quantitative restrictions set forth in subsection (a) 22 which apply for such year. 23 (g) APPLICATION OF QUANTITATIVE RESTRICTIONS.- 24 No quantitative restriction imposed pursuant to this section 25 shall apply with respect to any quantity of oil which is PAGENO="0025" 21 1~ imported into the United States during any period for storage 2 in any strategic reserve for oil which may be provided by 3 law. 4 (h) QUARTERLY REVIEW OF QUANTITATIVE RESTRIC- 5 TIONS.-Not less frequently than once each calendar quarter, 6 the President shall review the quantitative restrictions estab- 7 lished by subsection (a) and any modifications made pur- 8 suant to subsections (b) and (c). 9 (i) PROCIAIMING OF QUANTITATIVE RESTRICTIONS; 10 CERTIFICATIONS.- 11 (1) QUARTERLY PROCLAMATION OF QUANTITA~- 12 TIVE BESTRICTIoNS.-Before the beginning of each cal- 13 endar quarter, the President shall proclaim the aggregate 14 quantities of petroleum and petroleum products which 15 under subsection (a) may be imported into the United 16 States during such Calendar quarter (as modified par- 17 suant to subsections (b) and (c) ). 18 (2) OER~IFICATION.-Tbe President shall certify 19 any modification made under subsection (b) or (c) to 20 the Secretary of the Treasury and to the Deputy Admin- 21 istrator for Petroleum Import Licensing. 22 (j) ADMINISTRATION-The Secretary of the Treasury 23 shall take such actions under the customs laws of the United 24 States as may be necessary and appropriate to ensure that 25 the aggregate quantities of oil imported into the United PAGENO="0026" 22 * 1 SVates during any period do not exceed the quantities estab- 2 lished by sttbsectiOn. (a) as modified pursuant to subsections 3 (b) and (c). 4 SEC. 112. ESTABLISHMENT OF I1~[I'ORT LICENSING 5 SYSTEM. 6 (a) IN GENERAL.-Before December Si, 1975, the 7 President shall establish an import licensing system for petro- 8 leum and petroleum products which are imported into the 9 United States. Import licenses issued under this subsection 10 shall be distributed on the basis of public auctions in which 11 bidding is by sealed bids, and such licenses shall be fully 12 marketable. 13 (b) SEPARATE LICENSES FOR SMALL REFINERS AND 14 INDEPENDENT MARKETERS.- 15 (1) ESTABLISHMENT OF SEPARATE LICENSING 16 SYSTEM.- 17 (A) The President shall establish a separate 18 import licensing system for `small. refiners and in- 19 dependent marketers of petroleum or petroleum 20 products. Except as provided in subparagraph (B), 21. *, * irñport licenses issued tinder this subsection shall 22 * * be distributed on the basis of public auctions in 23 ` which bidding is by sealed bids. Import licenses 24 issued under this subsection shall not be marketable; 25 ~xc~pt that, under the circumstances and to the cx- PAGENO="0027" 23 1 tent provided l)y regulations, they may be resold to 2 the Deputy Administrator for Petroleum Lñport 3 Licensing. 4 (B) In any case in which any small refiner or 5 independent marketer establishes to the satisfac- 6 tion of the Deputy Administrator for Petroleum 7 Import Licensing- 8 (i) that be has made reasonable efforts to 9 secure the import licenses necessary to carry out 10 his business at its regular level of operation but 11 has riot been able to secure such licenses, or 12 (ii) that the destruction of, or damage to, 13 any of isis business facilities or any other emer- 14 gency situation requires that he he issued im- post licenses in order to continue isis busmess 16 operation, 17 the Deputy Administrator may issue one or more 1.8 import licenses to such refluer or marketer. The 19 price for import liceimses issued under this sub- 20 paragraph shall be time average, price for import 21 licenses established at public auctions conducted 22 pursuant to subsection (a) 23 (2) SMALL REFINER AND INDEPENDENT MAR- 24 KETER DEFINED.-FOr purposes of this section- (A) SMALl4 REFTNER~-Th~ term "small PAGENO="0028" 24 1 refiner" means a refiner whose total refinery capac- 2 ity (including the refinery capacity of any person 3 who controls, is controlled by, or is under common 4 control with such refiner) does not exceed 50,000 5 barrels per day. 6 (B) INDEPENDENT MARKETEB.-The term 7 "independent marketer" means a person who is 8 engaged in the marketing or distributing of refined 9 petroleum products, but who (i) is not a refiner, 10 and (ii) is not a person who controls, is controlled 11 by, is under common control with, or is affiliated 12 with a refiner (other than by means of a supply 13 contract). 14 (c) PROCEDURES FOR LICENSING SYSTEM.- 15 (1) IN GENEBAL.-The Administrator of the Fed~ 16 eral Energy Administration shall establish procedures 17 for the administration of this section through the pro- 18 mnulgation of regulations. 19 (2) REGULATIONS FOR SUBSECTIONS (a) AND 20 (b) .-The regulations promulgated under this section 21 with respect to subsections (a) ami (b) shall include 22 provisions authorizing the Deputy Administrator for 23 Petroleum Import Licensing- 24 (A) to schedule frequent auctions during each 25 calendar quarter; PAGENO="0029" 25 1 (B) to require that the bidding be for small 2 units, but to permit persons to bid for a number 3 ofunits; 4 (0) to establish a maximum limit on the nuin~ ber of units which may be acquired by related per- 6 sons during any period; 7 (D) to establish a time limit on the period 8 during which the rights under any import license may be exercised; 10 (E) torejectbids- 11 (i) where there is evidence of collusion as 12 to the bidding or as to failure to bid, or 13 (ii) where such bids are substantially 14 below the market price which exists for the 15 resale of import license; 16 (F) to deal with identical high bids for any 17 unit by rejecting all bids, by awarding the unit to 18 the high bidder who has acquired fewer units during a specified period than any other high bidder, or 20 otherwise; and 21 (G) to bar from acquiring or using import 22 license issued pursuant to subsection (a) or (b) 23 persons convicted of committing any felony or mis- 24 demeanor under the laws uf the T5iiited States gov- 25 erning oil mports, oil allocations, or price controls PAGENO="0030" 26 i on oil, and to provide `procedures for removing such 2 bar in ap~iopriate cases. 3 (3) ADDITIoNAL ~EouLA~rIoNs FOR~ SUBSECTION 4 (b) .-In addition to the regulations referred to iii para- 5 graph (2), the regulations promulgated under this 6 SectIon shall include provisions- 7 (A) to ensure that small refiners and indepenci- 8 ent marketers applying for import licenses under 9 subsection (b) are bona fide refiners or bona fide 10 marketers who hav~ established distribution chan- 11' nels, and 12 (B) to limit import licenses under subsection 13 (b) to such additional amounts of petroleum or any 14 petroleum product as may be necessary to ensure 15 that- 16 (1) any small refiner can operate his re- 11 fineries at capacity; and 18 (ii) ~ny independent marketer can ade- 19 quately supply his regular distribution channels. 20 (d) PRESIDENT MAY REQUIRE USER OF IMPORT Li- 21 CENSES To REPORT COUNTRY o~ ORJOIN.-If the President 22 finds such action to be necessary or appropriate to the 23 imtional interest, the President may require each person 24 importing petroleum or a petroleum product into the United 25 States under an import license issued pursuant to this section LILJU~ PAGENO="0031" 27 1 to report to the Deputy Administrator for Petroleum Import 2 Licensing the foreign country of which such petroleum or 3 petroleum product is a product. 4 (e) REFINERS LOCATED IN THE PossEssIoNs, ETC.- 5 The President shall take such steps as may be necessary to 6 ensure that refineries located in the territories and possessions 7 of the United States and foreign trade zones of the United 8 States will participate in all appropriate aspects of the 9 provisions of this title upon terms not 1ess favorable than 10 those accorded to refineries and importers of petroleum 11 products located in the customs territory of the United States. 12 Nothing in this subsection shall be treated as removing any 13 quantitative restriction or duty imposed by or pursuant to 14 this title. 15 PART 11-DUTIES 16 SEC. 121. RATES OF DUTY ON OIL. 17 (a) STATUTORY RATES OF DUTY.-Effective with 18 respect to articles entered or withdrawn from warehouse for 19 consumption on or after the 60th day after the date of the 20 enactment of this Act- 21 (1) the rate of duty with respect to petroleum 22 shall be 2 percent ad valorem; and 23 (2) the rate of duty with respect to any petroleum 24 product described in section 133 (a) (3) shall be 5 per- 25 cent ad valorem. PAGENO="0032" 28 ~ Such rates of duty shall replace the rates of duty heretofore 2 provided by, or pursuant to, law. 3 (b) AUTHORITY To ADJUsT RATES OF PTJTY.-Sub- 4 ject to the limitations set forth in subsections (c) and (d), 5 the President may make, from time to time, such adjustments 6 in the ra.tes of duty established by subsection (a), and in the 7 rates of duty resulting from adjustment under this subsection, 8 as he finds are necessary to carry out the purposes of this Act 9 in the light of overall considerations of the national interest; 10 except that the President may not make any adjustment 11 under .this subsection before the close of the 2-year period / 12 beginning on the date of the enactment of this Act which 13 results in a rate of duty of more than 5 percent ad valorem on 14 any distillate fuel oil or residual fuel oil (provided for in item 15 4Th.05 or 475.10 of the Tariff Schedules of the United 16 States) imported for use as fuel (other than for the propul- 17 sion of motor vehicles). 18 (c) LIMITATIONS ON ADJUSTMENTS.-.--.NO adjustment 19 made under subsection (b) to any rate of duty may result in 20 a rate of duty which- 21 (1) is more than the higher of 10 percent ad 22 valorem or $1 a barrel, or 23 (2) is Jess than 2 percent ad valorein. 24 (d) ADJUSTMENTS INCREASING RATES OF DUTY.- 25 (1) SUBMISSION OF ANY PRGFOSEO INCREASE IN PAGENO="0033" 29 j DUTY TO TUE CONGEESS.-The President shall transmit 2 to the House of Representatives and to the Senate on 3 the same day, and to each House while it is in session, a 4 document setting forth any adjustment which he pro- 5 poses to make under subsection (b) which increases any 6 rate of duty. 7 (2) TAKING EFFECT OF ANY SUCH INCEEASE.-No 8 adjustment proposed to be made under subsection (b) 9 which increases any rate of duty may take effect sooner 10 than the close of the 60th day after the day on which the 11 document relating to such adjustment is delivered to 12 Congress under paragraph (1). 13 (e) PROCLAIMING OF ADJUSTMENTS TO RATES OF 14 DUTY.-Subject to the provisions of section (d), the Presi- 15 dent shall proclaim any adjustment to any rate of duty made 16 by him under subsection (b). 17 (f) 000IWINATION WITH OilER LAWS.- 18 (1) (A) Section 232 (b) of the Trade Expansion 19 Act of 1962 (relating to national security) is amended 20 by adding at the end thereof the following new sentence: 21 "Nothing in this subsection shall be deemed to authorize the 22 President, after the date of the enactment of this ~entence, to 23 adjust imports of petroleum and petroleum products; except 24 that the President may adjust imports of ~petroleum and 25 petroleum products during any period in which- 55-583 (Pt. 1) 0 - 75 - 3 PAGENO="0034" 30 1 "(1) the Congress declares war, 2 "(2) United States Armed Porees are ii~troduced 3 into hostilities pursuant to specific `statutory authoriza- 4 tion, 5 "(3) a national emergency is cre~tted by attack upon 6 the United States, its territories or possessions, or ~ts 7 Armed Forces, or 8 "(4) United `States Armed Forces are introduced 9 into such hostilities, situations, `or places, `orare ~ularged 10 in arty foreign nation, under circumstances which reqi4re 11 a report by the President to the Congress pursuant t~o 12 section 4 (a) of the War Powers Resolution (50 U.S~Q. 13 1453(a)), 14 but any adjustment made pursuant to this exception `shall not 15 apply with respect to articles entered ot withdrawn from 16 warehouse for consumption on or aft~r `the G0~th day ~fter the 17 closing date of the:hostilities eoncerned~" - 18 (B) Effective with respect to artic1es~.onterod ~r 19 withdrawn from warehouse for consumption on or after 20 the 60th day after the date of the enactment of this Act, 21 no adjustment action taken under section 232 (b) of the 22 Trade Expansion Act of 1962 before such date ol enact- 23 ment shall have any force or effect with respect to .24 petroleum or any petroleum product. PAGENO="0035" 31 (2) Section 101 of the Trade Act of 1974 shall not 2 apply to any rate of duty established by, or to any adjust~ 3 ment of any rate of duty made under, this section. 4 (3) Petroleum and petroleum products shall not be 5 designated by `the President `as eligible articles for pur- 6 poses of title V of the Trade Act of 1974. 7 PART Ill-ADMINISTRATIVE AND MISCELLANE- 8 OUS PROVISIONS 9 SEC. 131. IMPORT RESTRICTIONS AND RATES OF DUTY TO 10 BE REFLECTED IN TIlE TARIFF SCHEDULES 11 OF THE UNITED STATES. 12 The President shall by proclamation establish a new part 13 4 in the Appendix of the Tariff Schedules of the United 14 States (19 U.S.C. 1202) and shall reflect therein any quan- 15 titative restriction established by part I and any rate of duty 16 established by part II and any modification of any quantita- 17 tive restriction and adjustment to any rate of duty made by 18 him under part I or II. 19 SEC. 132. ANNUAL REPORTS. 20 On or before March 15, 1976, and on or before March 15 21 of each year thereafter, the President shall make a full and 22 complete report to the Congress on the operation of this Act. 23 Each such report shall include full and complete information 24 with respect to the economies in the domestic consumption of PAGENO="0036" 32 1 oil which have been effectuated, the increases in domestic 2 production of oil which have taken place, the factors taken 3 into account in making any modification under subsection 4 (b) or (c) of section 111, and any other information which 5 may be appropriate in assessing the way in which the pro- 6 visions of this Act are being administered. 7 SEC. 133. DEFINITIONS. 8 (a) IN GENERAL.-FOr purposes of this title- 9 (1) The term "oil" means petroleum and petroleum 10 products. 11 . (2) The term "petroleum" means crude petroleum 12 provided for in item 475.05 or 475.10 of the Tariff 13 Schedules of the United States. 14 (3) The term "petroleum product" means any arti- 15 cle provided for in part 10 of schedule 4 of the Tariff 16 Schedules of the United States, other than petroleum, 17 natural gas provided for under item 475.15, greases pro- 18 vided for under item 475.55 or 475.60, and mixtures of 19 hydrocarbons in other than liquid form provided for 20 under item 475.70. 21 (b) ADDITIONAL ARTICLES MAY BE TREATED AS 22 PETROLEUM PRODUCTS FOR PURPOSES OF QIJANTITAT~VE 23 RESTRICTIONS.-For purposes of this title (other than see- 24 tion 121), the term "petroleum products" may include; but PAGENO="0037" 33 1 only if the President proclaims such inclusion to be necessary 2 to carry out the purposes of this Act, one or more of the 3 following articles: 4 (1) Coal tar articles (benzene, cumene, toluene, 5 and xylene) provided for under item 401.10, 401.2~, 6 401.72, or 401.74 of such Schedules. 7 (2) Mixtures, consisting wholly of two or more of 8 the coal tar articles referred to in paragraph (1), pro- 9 vided for under item 401.80. 10 (3) Hydrocarbons provided for under item 429.50 11.' or 429.52. 12 PART IY-OFFICE OF PETROLEUM IMPORT 13 LICENSING 14 SEC. 141. ESTABLISHMENT OF OFFICE. 15 (a) Ii~r GENERAI.-There is hereby established within L6. tho~ Federal Energy Administration the Office of Petroleum 17, Import Licensing (hereinafter in this title referred to as the 18 "Office") 19 (b) ADMTNISTRATJON.-The Office shall be headed by 20 a Deputy Administrator for Petroleum Import Licensing 21 (hereinafter in this title referred to as the "Deputy Adinin- 22 istratur") who, in the performance of his duties under this 23 ~tle, ahali be under the supervision of the Administrator of 24 th~ Federal Energy Administration. PAGENO="0038" 34 1 SEC. 142. FUNCTIONS OF THE DEPUTY ADMINISTRATOR. 2 The Deputy Administrator shall administer the import 3 licensing system established under section 112. 4 SEC. 143. CONFORMING AMENDMENT. 5 Section 4 (e) of the Federal Energy Administration Act 6 of 1974 is amended to read as follows: 7 "(c) There shall be in the Administration three Deputy 8 Administrators (one of whom shall be the Deputy Adminis- 9 trator for Petroleum Import Licensing), who shall be 10 appointed by the President, by and with the advice and 11 consent of the Senate, and who shall receive compensa- 12 tion at the rate prescribed for offices and positions at level III 13 oftheExccutive Schedule (5U.S.C.5314)." 14 TITLE Il--OTHER ENERGY CON- 15 SERVATION PROGRAMS 16 PART I-AUTOMOBILE-FUEL MILEAGE 17 SEC. 211. DEFINITIONS. 18 (a) As used in this part: 19 (1) The term "EPA Administrator" means the 20 Administrator of the Environmental Protection Agency. 21 (2) The term "automobile" means a four-wheeled 22 vehicle propelled by fuel which is manufactured prima1~-' 23 ily for use on public streets, roads, and highways' PAGENO="0039" 35 1 (except any vehicle operated exclusively on a rail or 2 rails), and which is rated at ten thousand po.unds gross 3 vehicle weight or less. 4 (3) The term "passenger autnmo'bile" means any 5 automobile which has as its primary intended function 6 the transportation of not more than ten individuals. 7 (4) The term "light-duty truck and multipurpose 8 passenger vehicle" moans any automobile which is not 9 a passenger automobile. 10 (5) The term "average fuel economy" (except for 11 purposes of section 212 (a) (4) of this Act) means (A) 12 the total number of passenger automobiles manufactured 13 in a given model year by a manufacturer (including all 14 passenger automobi1e~ manukvctured by persons who con- 15 trol, or are controlled by or under common control with 16 such manufacturer, but excluding any passenger auto- 17 mobile exported in the model ye~ar) divided by (B) a 18 sum of terms, each term of which is a fraction created 19 by `dividing- 20 (i) the number of passenger automobiles of a 21 given model type manufactured in such model 22 year by 23 (ii) the fuel economy measured for such model 24 type rounded to the nearest mile per gallon, as 25 determined by the EPA Administrator, PAGENO="0040" 36 1 (6) The term "dealer" means any person engaged 2 in the business of selling new automobiles to purchasers 3 who buy for purposes other than resale. 4 (7) The term "fuel" means any liquid or gaseous 5 fuel. 6 (8) The term "fuel economy" refers to the average 7 number of miles traveled by an automobile per gallon of 8 fuel consumed, as determined by the EPA Administrator 9 in accordance with test procedures established under sec~ 10 tion 212 (d) of this Act. 11 (9) The term "manufacturer" means any person 12 engaged in the manufacture, assembly, or importation 13 of automobiles. 14 (10) The term "to manufacture" (except for pur- 15 poses of section 212 (a) (2) of this Act) means to manu- 16 facture in the United States or to import into the United 17 States. 18 (11) The term "model type" means a particular 19 class of automobile, as defined by the EPA Adminis- 20 trator. 21 (12) The term "model year" with reference to 22 any specific calendar year means the manufacturer's an- 23 nual production period (as determined by the EPA 24 Administrator) which includes January 1 of such calen- 25 dar year. If the manufacturer has no annual produe~ion PAGENO="0041" 37 1 period, the term "model year" shall mean the calendar 2 year. (13) The term "Secretary" means the Secretary 4 ~f Transportation. (h) (1) In calculating the average fuel economy under 6 subsection (a) (5), the EPA Admiiiistrator shall separate ~ the total passenger automobiles mnnufactureid by a mann- 8 faëtürer into two categories: (A) Passenger automobiles domestically manu- factured `by such manufacturer. (B) Passenger automc~bi1es not domestically mann- 12 factured `by such manufacturer. 13 The EPA Administrator shall calculate the average fuel 14 economy of each such separate category and each category 15 shall be treated a's manufactured by a separate manufadturer 16 for purposes of this part. 17 (2) For `purposes `o'f this subsection, an `automobile ~18 thall b'e considered domestically manufactured if at least 75 19 percent `o~ the cost to `the manufacturer of such ai~tomobi1e is 20 `attributable `to value add'ed in the United States or Canada, 21 unless th~ assembly of such automobile i's completed in 22 Q~na'da and `such automobile is not imported into the United 23 !Stastes prior to the expiration of 30 days after the end of such 24 model year. PAGENO="0042" 38 1 SEC. 212. AVERAGE FUEL ECONOMY STANDARDS APPLI- 2 CABLE TO EACH MANUFACTURER. 3 (a) (1) Except as otherwise provided in paragraph (2) 4 and in subsection (b) (3) (B), the average fuel economy for 5 all passenger automobiles manufactured by any manufac- 6 turer in any model year after model year 1977 shall not be 7 less than the number of miles per gallon determined under 8 the following table: Average fuel economy (in miles per Model year: gallon) 1978 18.5. 1979 195. 1980 20.5. 1981 Determined by Secretary under subsection (b). 1982 Determined by Secretary under subsection (b). 1983 Determined by Secretary under subsection (b). 1984 Determined by Secretary under subsection (b). 1985 or thereafter 28.0. 9 (2) On application of a manufacturer, who manufac- 10 tured (whether or not in the United States) fewer than ten ii. thousand automobiles in the second model year preceding 12 the model year for which the application is made, the See- 13 retary may by rule exempt such manufacturer from para- 14 graph (1). Such exemption may only be granted if (A) 15 such exemption will not significantly detract from the par- 16 poses of this part, and (B) such exemption is necessary to 17 avoid an unreasonable burden on such manufacturer. Simuj- PAGENO="0043" 39 1 taneously with the issuance of any such exemptions, the 2 Secretary shall establish alternative average fuel economy 3 standards for such manufacturer which shall represent the 4 maximum feasible level of fuel economy for such manufac- 5 turer. In determining the number of automobiles manufac- 6 tured by a manufacturer for purposes of this paragraph, there 7 shall be included all automobiles manufactured by persons 8 who control, are coi~itrolled by, or are under common con- 9 trol with such manufacturer. 10 (3) Beginning in 1977, the Secretary shall review, not ~i later than January 1 of each calendar year, standards pro- 12 mulgatecl pursuant to this part which will take effect in 13 future model years and shall publish the results of such re- 14 view in the Federal Register and shall send such review to 15 the members of the Commerce Committees of the Senate 16 and House of Representatives. The review required to be 17 published by January 1, 1979, and sent to the Congress i~ shall include a comprehensive analysis of the program re- 19 quired by this part. Such analysis shall include an assessment 20 of the ability of the Nation to meet the average fuel economy 21 requirements for 1985 as specified in subsection (a) (1) of 22 this section, and any legislative recommendations the See- 23 retary might have for improving the program required by 24 this part. 25 (4) The Secretary shall, by rule, prescribe average PAGENO="0044" 40 1 fuel economy standards for all light-duty trucks and multi- 2 purpose passenger vehicles manufactured by any manu.fac- 3 turer in any model year after model year 1977. Such a rule 4 may provide for separate standards for different classes of 5 such trucks and vehicles and shall be based upon the maxi- 6 mum feaslble average fuel economy level whioh the Secretary 7 determines manufacturers of light-duty trucks and multipur- 8 pose passenger vehicles or classes thereof are able to achieve 9 in each model year after year 1977. 10 (b) (1) Not later than July 1, 1977, the Secretary 11 shall establish, by rule, average fuel economy standards for 12 new automobiles manufactured in model years 1981 through 13 1984. The standards, which shall be equally applicable to 14 each manufacturer, shall be set for each such model year at a. 15 level which the Secrdta.ry determines is the maximum feasi- 16 ble level and shall be promulgated in a manner which will 17 result in steady progress toward meeting an average fuel 18 economy level of 28 miles per gallon for model year 1985. 19 (2) Any standard prescribed under paragraph (1), 20 and any amendment prescribed under paragraph (3), shall 21 be promulgated not later than 18 months prior to the begin- 22 ning of the model years to which such standard or amend- 23 ment will apply. 24 (3) (A) The Secretary may, from time to time, upon 25 the basis of new information, amend any average fuel econ- PAGENO="0045" 41 1 orny performance standard established under paragraph (1), 2 except that no such amendment, modification, or revision 3 may reduce the standard for average fuel economy below 4 that necessary to meet the model year 1980 average fuel 5 economy level specified in subsection (a) (1). 6 (B) If in the course of preparing the review required 7 to .be published on January 1, 1979, pursuant to subsection 8 (a) (3) of this section, the Secretary finds that the model 9 year 1985 average fuel economy level specified in subsection 10 (a) (1) should be modified because such level cannot reason- 11 ably be attained or because a higher level may reasonably be 12 attained, the Secretary may by rule modify such level, to a 13 level that represents the maximum feasible average fuel 14 economy level. The Secretary shall transmit to the Congress 15 notice of the establishment of such modified level. Such 16 modified level shall take effect 60 days on the date or dates 17 specified in such notice, but not sooner than the end of the 18 first period of fifteen calendar days of continuous session of 19 Congress (within the meaning of section 906 (b) of title 5, 20 United States Code) after the date on which such amend- 21 ment is transmitted to it; except that such an amendment 22 shall not take effect if, between the date of transmittal and 23 the end of such fifteen-day period, either House passes a 24 resolution of that House, the matter after th~ resolving clause 25 of which is as follows: "That the * does not PAGENO="0046" 42 I favor the modification of the average fuel economy standard, 2 transmitted to the Congress by the President on 3 19 .", the first blank space therein being filled with the 4 name of the resolving louse and the other blank spaces 5 therein being appropriately filled. 6 (C) Section 908 and sections 910 through 913 of 7 title 5, United States Code, shall apply to any resolution 8 described in subparagraph (B), and for purposes of con- 9 sideration of a resolution under this paragraph, the twenty io calendar days specified in section 911 of title 5, United States 11 Code; shall be shortened to five calendar days, any reference 12 to a resolution under section 908 and sections 910 through 13 913 of title 5, United States Code, shall be deemed a ref- 14 erence to a resolution described in subparagraph (B), and 15 any reference to a reorganization plan shall be deemed a ref- 16 erence to an amendment to which this paragraph applies. 17 (4) For purposes of this subsection, in determining the 18 maximum feasible average fuel economy, the Secretary shall 19 consider: 20 (A) technological feasibility; 21 (B) economic practicality; 22 (C) relationship to other Federal motor vehicle 23 standards (except as otherwise provided in subsection 24 (c) (4));and 25 (B) the purposes of this Act. PAGENO="0047" 43 :1 (c) (1) If the Secretary (after consultation with the 2 EPA Administrator) determines under paragraph (3) that 3 in any model year there will be an emission standards 4 penalty, he shall adjust the fuel economy rate applicable to 5 such year by subtracting a number of miles per gallon 6 (rounded off to the nearest tenth of a mile per gallon) equal 7 to the amount of such penalty. 8 (2) For purposes of this subsection: 9 (A) The term "emission standards penalty" means 10 the number of miles per gallon which the Secretary 11 determines is equal to (i) the average fuel economy 12 which all passenger automobiles sold in a model year 13 would achieve, if such automobiles were subject only to 14 the 1975 emission standards, less (ii) the average fuel 15 economy which all such automobiles are likely to achieve 16 while meeting the emission standards actually applicable 17 to such automobiles. 18 (B) The term "1975 emission standards" means 19 the following standards: 20 (i) For hydrocarbons, 1.5 grams per mile. 21 (ii) For carbon monoxide, 15 grams per mile. 22 (iii) For oxides of nitrogen, 3.1 grams per mile. 23 (0i The term "fuel economy rate" means the rate 24 under subsection (a) (1), as such rate may be modified 25 under subsection (b). PAGENO="0048" 44 i (3) The Secretary shall commence a proceeding with 2 respect to a determination under paragraph (1) on petition 3 of any manufacturer. Such a petition may be filed only within 4 the 18-month period preceding the beginning of the model 5 year to which it relates. The Secretary shall allow interested 6 persons an opportunity for oral as well as written presenta- 7 tions of data, views, and arguments. He shall render a deci- 8 sion in any such proceeding within 60 days after the filing of 9 the petition. 10 (4) The Secretary may not make any modification of 11 fuel economy rates to take account of any decrease in fuel 12 economy associated with emissions standards except in ac- 13 cordance with this subsection. 14 (d) (1) Oompliance by a manufacturer with subsection 15 (a) shall be determined by the EPA Administrator (in 16 accordance with test procedures established by the EPA 17 Administrator by rule) - 18 (A) by calculating for purposes of subsection (a) 19 (1). the average fuel economy of all passenger auto- 20 mobiles manufactured by such manufacturer during such 21 model year, and 22 (B) by calculating for purposes of subsection (a) 23 (4) the fuel economy of all light duty trucks and multi- 24 purpose passenger vehicles (or each class thereof, as PAGENO="0049" 45 may be appropriate) manufactured by such manufac- 2 turer in `such model year. ~ Test procedures so established shall be the procedures utilized ~ by the EPA Administrator for model year 1975 (weighted ~ 55 percent urban cycle, and 45 percent highway cycle) or 6 procedures which yield comparable results. Such procedures, ~ to the extent practicable, shall require that fuel economy 8 tests be conducted in conjunction with emissions test con- ~ ducted under section 206 of the Clean Air Act (42 U.S.C. ~o 1875f-5). The EPA Administrator shall report the findings ~ of such compliance determinations to the Secretary. 12 ` (2) In determining whether a manufacturer has corn- 13 piled with subsection (a)- 14 (A) if the average fuel economy of a manufacturer is less than 0.5 miles per gallon less than the applicable 16 standard under subsection (a), the manufacturer shall 17 be deemed to have complied with subsection (a), and 18 (B) if the average fuel economy of a manufacturer 19 exceeds the applicable standard under subsection (a) for 20 a model year by more than 0.5 miles per gallon- 21 (i) he may carry back such excess to the pre- 22 `ceding model year to the extent that his average fuel 23 economy was more than 0.5 miles per gallon less 24 than the applicable standard for such preceding 25 year, and 55-583 (Pt. 1) 0 - 75 - 4 PAGENO="0050" 46 I (ii) to the extent such excess was not carried 2 back to the preceding year, he may carry forward 3 the excess to the year succeeding the year of the 4 excess. 5 The Secretary shall prescribe rules to carry out this sub- 6. section. To the extent that a carryback under clause (i) 7 reduces a manufacturer's liability for a civil penalty paid 8 under seotion 216, the Secretary shall refund to such mann- 9 facturer an amount equal to the amount of such reduction. 10 (e) (1) Any person who may be adversely affected by 11 any rule promulgated under this~ section may at any time 12 prior to 60 days after such rule is promulgated file a petition 13 in the United States Court of Appeals for the District of 14 Columbia, or any circuit wherein such person resides or has 15 his or her principal place of business, for judicial review of 16 such rule. A copy of the petition shall be forthwith trans- 17 mitted by the clerk of such court to the officer who prescribed 18 the rule. Such officer shall thereupon cause to be filed in such 19 court the record of the proceedings upon which the rule which 20 is under review was based, as provided in section 2112 of 21 title 28, United States Code. Upon the filing of such petition, 22 the court shall have jurisdiction to review the rule in accord- 23 ance with chapter 7 of title 5, United States Code, and to 24 grant appropriate relief as provided in such chapter. PAGENO="0051" 47 (2) If the petitioner applies to the court for leave to 2 adduce additional evidence, and shows to the satisfaction Df 3 *the court that such additional evidence is material and that 4 there were reasonable grounds for the failure to adduce such 5 evidence in tire proceeding before the officer who prescribei 6 the rule, the court may order such additional evidence (and 7 evidence in rebuttal thereof) to be taken before such~ officer, 8 and be adduced in a hearing, in such manner and upon, such 9 terms and conditions as the court may deem proper. Such io officer may modify any earlier findhig as to the. facts, or ii make new findings, by reason of the additional evidence so 12 taken, and shall file such modified or new findings, and rec- 13 ommendations, if any, for the modification or setting asid& 14 of the previously promulgated rule, with the return of such 15 additional evidence. 16 (3) The judgment of the court affirming. or setting 17 aside, in whole or in part, any such rule of the officer. who 18 prescribed the rule shall be final, subject to review by the 19 Supreme Court of the United States upon certiorari or certifi~ 20 cation as provided in section 1254 of title 28, United States 21 Code. 22 (4) The remedies provided for in this section shall be 23 in addition to and not in lieu of any other remedies provided. 24 bylaw. S. . S 25 (f) (1) The Secretary shall prescribe regulations requir- PAGENO="0052" 48 i ing each manufacturer to submit a r~port to the Secretary 2 during the 30-day period preceding the beginning of each 3 model year, and during the 30-day period beginning Oil 4 the 180th day of each model year. Each such. reliort shall 5 contaiti a state~nent as to whether such manufacturer will 6 comply with applicable requirements under subsection (a) 7 a plan which describes the steps the manufacturer intends 8 to take in o~der to comply with such requirements; and such 9 other matter as the Secretary may require. 10 (2) Whenever a manufacturOr determines that a plan ii. submitted under paragraph (1) which he stated ~as suf- 12 ficient to insure compliance with applicable requirements is 13 not sufficient to insure such compliance, he shall submit a 14 report eontainhig a revised plan which specifies' any addi- 15 tional me~sures whieh he intends `to take in order to comply 16 with such requirements, and a statemetit as to wh~ither such 17 plan is sufficient to insure such compliance. 18 SEC. 213. DUTIES' AND POWERS OF THE SECRETARY AND 19 ADMINISTRATOR. 20 ` (a) (1) For the purpose of carryitig `out the pro- 21' visions Of this part, the Secretary or the EPA Administra- 22 toi, or their duly' designated. agent~, may hold such hear- 23 ings, take such testimony, sit and act at such times and 24' places, administer such oaths, `and' requite, by `subpena or 25 otherwise, the attendance and testimony of such witnesses PAGENO="0053" 49 1 and the production of such books, papers, correspondence, 2 memorandums, contracts, agreements, or other records as 3 the Secretary, EPA Administrator, or such agents deem 4 advisable. The Secretary, EPA Administrator, or their duly 5 designated agents, shall at all reasonable times have access 6 to, and for the purpose of examination, the right to copy any 7 documentary evidence of any person having materials or 8 information relevant to any funet~on of the Secretary or 9 EPA Administrator under this parL The Secretary or EPA 10 Administrator is authorized to require, by general or special 11 orders, any person to file, in such form as the Secretary or 12 EPA Administrator may prescribe, reports or answers in 13 writing to specific questions relating to any function of the 14 Secretary or EPA Administrator under this part. Such 15 reports and answers shall be made under oath or otherwise, 16 and shall be filed with the Secretary or EPA Administrator 17 within such reasonable period as he may prescribe. 18 (2) The district courts of the United States for a judi- 19 cial district in the jurisdiction of which an inquiry is carried 20 on may, in the case of contumacy Or refusal to obey a duly 21 authorized subpena or order of the Secretary, the E?A Ad- 22 ministrator, or their duly designated agents, issued under 23 paragraph (1) of this subsection, issue an order requiring 24 compliance with sucl~ subpena or order. Any failure to obey PAGENO="0054" 50 I such an order of the court may be punished by such court 2 as a contempt thereof. 3 (3) Witnesses summoned pursuant to this subsection 4 shall be paid the same fees and mileage that are paid wit- 5 nesses in the courts of the United States. 6 (b) (1) Every manufacturer of automobiles shall estab- 7 lish and maintain such records, make such reports, conduct 8 such tests, and provide such items and information as the 9 Secretary or EPA Administrator may reasonably require to 10 enable the Secretary or EPA Administrator to carry out 11 their duties under this part and under any rules or regula- 12 tions promulgated pursuant to this part. Such manufacturer 13 shall, upon request of a duly designated agent of the See- 14 retary or EPA Administrator, permit such agent to inspect 15 finished automobiles and appropriate books, papers,, records, 16 and documents. Such manufacturer shall make available all~ 17 of such items and information in accordance with such 18 reasonable rules as the Secretary or EPA Administrator may 19 prescribe. ., 20 (2) The district courts of ~he United States for a judi- 21 .cial district in which an inspection is carried out or requested 22 may, if a manufacturer of automobiles refuses to accede to 23 any reasonable requirement or request, issued or made under~ 24 para~ra.ph (I) of this subsection, issue an order requiring PAGENO="0055" 51 1 compliance with such requirement or request. Any failure tO 2 obey such an order of the court may be punished by such 3 court as a contempt thereof. 4 (e) (1) Except as provided in paragraph (2), th~ 5 Secretary or EPA Administrator shall `disclose information 6 obtained under this part to the public in accoi~dance with see- 7 tion 552 of title 5, United States Code, except that infor- 8 mation may be withheld from disclosure on th~ ground~s 9 specified in subsection (b) (4) of such section only if it 10 ~ontains a' trade secret which if disclosed would result in 11 significant competitive damage. 12 (2) Information contained in a report submitted under 13 section 212 (f), disclosure of whiëh the Secretary determines 14 may cause significant competitive damage, may not be dis- 15 closed until after the close of the model year to which such i6 report relates; except (A) in a proceeding under section 212 17 (b) (1), (b) (3), or (c) ; (B) to duly authorized officers or 18 employees of time United States; or (C) to committees of 19 Congress. 20' SEC. 214. LABELING AND ADVERTISING. 21 (a) (1) Beginning no later `than 90 days after the date 22 of enactment of this Act, each manufaeturer shall cause to 23 be affixed and each dealer shall cause to be maintained on ~4 each new automobile, in a prominent place, a sticker mdi- ~ eating th~ fj~ej economy `~hieh, a prospective purchaser can PAGENO="0056" 52 1 e~pect from such automobile, representative average aniiual 2 fuel costs associated with the operation of such autornobil~, 3 and the range of fuel econom.y performance of automobiles 4 of similar size and weight (as determined by the EPA 5 Administrator). If the fuel economy of an automobile mana- 6 factured in a model year is less than the miles per gallon 7 level specified in the average fuel economy standard specified 8 by rule under section 212 (a) (1) of this Act, such sticker 9 shall disclose that such automobile's fuel economy is less 10 than the Federal standard for average fuel economy. Such 11 sticker shall include a written statement that written in- 12 formation respecting the fuel economy of other automobiles 13 manufactured in such model year is available from the dealer 14 in a simple and readily understandable form in order to 15 facilitate comparison among the various model types. The 16 form and content of sueh sticker shall be prescribed by the. 17 EPA Administrator by rule, after consultation with the 18 Federal Trade Commission and the Secretary. 19 (2) The EPA Administrator, not later than Feb- 20 ruary 1, 1976, shall by rule establish procedures requiring 21 dealers to make available to prospective purchasers informa- 22 tion compiled by the EPA Administrator under paragraph 23 (1). 24 (b) Section 3 of the Automobile Information Diselo- 2~ sure Act (15U~$~C~ 1232) is amended by striking out in PAGENO="0057" 53 1 thc first paragraph "disclosing the following information con- 2 cerning" and inserting in lieu thereof "disclosing the informa- 3 tion required by section 214 (a) of the Energy Conservation 4 and Conversion Act of 1975, together with the following 5 information concerning". 6 SEC. 215. PROHIBITED CONDUCT. 7 The following conduct is prohibited: 8 (1) the failure to comply with any requirement 9 of section 212 (a) of this Act; 10 (2) the failure to comply with any provision of 11 this part (other than section 212 (a) of this Act) or 12 any standard, rule, regulation, or order issued pursuant 13 to such a provision; 14 (3) the failure to provide information as required 15 in accordance with this part; 16 (4) the failure to permit inspection pursuant to 17 this part; and 18 (5) the failure to comply with any requirement 19 under section 214 (a) (2) of this Act. 20 SEC. 216. CIVIL ~`ENALTY. 21 (a) (1) If through te~fing, inspection,' investigation, or 22 research carried out pursuant to this Act, or otherwise, the 23 Secretary deteriniiies that any manufacturer has i~ot corn- ~t plied with aiiy requirement of Section 212 of this Act, he 25 sl~lj immediately flQtify stwli mnnufacturer and shall pubhisil PAGENO="0058" 54 1 notice of such determination in the Federal &gister. The 2 notification to the manufacturer shall include all information 3 upon which the detennination of the Secretary is based. Such 4 notification (including such information) shall be available 5 to any interested person. The Secretary shall afford such 6 manufaetur~r an opportunity to present data, views, `7 and arguments to establish that there is no violation of S section 212 and shall afford other interested persons an 9 opportunity to present data, views, and arguments respecting 10 the determinations of the Secretary. ii (2) If, after such presentations by the manufacturer 12 and interested persons, the Secretary determines that such 13 manufacturer has not complied with any requirement under 14 seictión 212 of this Act, the Secretary shall assess the penal~ 15 ties provided for under subsection (b). 16 (b) i~ 1) (A) Any manufacturer who the Secretary de- 17 termines under subsection (a) to have violated ~ provision of 18 section 212 (a) (1) of this Act, shall be liable to the United 19 States for a civil penalty equal to (i) $5.00 for each tenth 20 of a mile per gallon by which the average fuel economy of 21 the automobile manufactured by such manufacturer during 22 such model year is exceeded by the applicable average fuel 23 economy standard established under section 212 (a) (1) of 24 this Act, multiplied by (ii) the total number of automobiles 25 manufactured 1y such manufacturer during such model year. PAGENO="0059" 55 1 Such penalty shall be assessed by the Secretary and cólk~cteU 2 in a civil action brought by the Attorney Gei~ietal. 3 (B) Any fuel economy measurement for purposes ~f 4 paragraph (A) shall be rounded off to the nearest one-tenth 5. gallon (in accordance with rules of the EPA Administrator). 6 (2) Any per~on who the Secretary determines after o~- 7 portunity for presentation of data; views, and arguments to 8 have violated a provision of section' 215 of this Act, oth~ 9 than paragraph (1) thereof, shall be liable ta the United 10 States for a civil penalty of not more than $1O~QOO~toreach~' 11 violation; each day of a~ côi'itinuing violation c~slituting ~ 12 separate violation. ` . . 13 (3) The amount of such. civil ~ena1ty sh~ffl be ~ssess~d 14 by the Secretary by written notice. The Secretary ~hall have 15 the discretion to compromise, modify, or remit, witkor with2 16 out conditions, any civil penalty as~es~ed agah~s't a mann- 17 f~icturer `oiily to the extent (A) ` necessai'y to prevent the 18 insolvency or bankruptcy. of such manufacturer, or (B) such 19 mai:iufacturer shows that noncompliance restilmd from a~n 20 act of God, a strike, or a fire. ` 21' SEC. 217. RELATIONSHIP TO STATE LAW. 22 After the effective date of any standard igsued or effe~ 23 tive under this part relating to fuel economy peiforinance' 24 standards for any automobile or to fuel economy labeling or 25 a4vertising of any new automobile, no State or political `sub-b PAGENO="0060" 56 i division thereof may adopt or enforce any law or regulatioh 2 relating to such matters which is applicable to such auto- 3 mobile, unless such law or regulation is identical to a stand- 4 ard under this part. 5 PART lI-INTERCITY BUSES, RADIAL TIRES, AND 6 REREFINED OIL S 7 SEC. 221. REPEAL OF EXCISE TAX ON BUSES USED IN 8 INTERCITY PUBLIC TRANSPORTATION. 9 (a) GENERAL RULE.-Paragraph (6) of section 4063 ito (relating to exemption from excise tax for local transit buses) 11 is amended to read `as follows: 12 "(6) PuBLI0 TRANSPORTATION BTJSES.-The tax 13 imposed under section 4061 (a) shall not apply in the 14 case of automobile bus chassis or automobile bus bodies 15 which are to be used predominantly by the purchaser in 16 public passenger transportation service." 17 (b) EFFECTIVE DATE.- 18 (1) IN GENERAL.-The amendment made by sub- 19 section (a) shall apply with respect to articles sold on 20 or a~fter the date of the enactment of this Act. 21 (2) WHEN SOLD.-For purposes of paragraph (1), 22 an article shall not be considered sold before the date 23 of the enactment of this Act unless possession or right to possession passes to `the purchaser before suc1~ 4at~, PAGENO="0061" 57 1 (3) TRANSITIoNAL RULE FOR LEASES, INSTALL- 2 MENT CONTRACTS, ETO.-In the case of- 3 (A) a lease, 4 (B) a contract for the sale of an article where 5 it is provided that the price shall be paid by in- 6 stallments and title to the article sold does not pass 7 until a future date notwithstanding partial payment 8 by installments, 9 (0) a conditional sale, or 10 (D) a chattel mortgage arrangement wherein ii it is provided that the sale price shall be paid in 12 installments, 13 entered into before the date of the enactment of this 14 Act, payments made on or alter such date with respect 15 to the article leased or sold shall, for purposes of para- 16 graph (1), be considered as payments made with re- 17 spect to an article sold on or after such date, if the 18 lessor or vendor establishes that the amount of payments 19 payable on or aft~r such date with respect to such 20 article has been reduced by an amount equal to that 21 portion of the tax applicable with respect to the lease 22 or sale of such article which is due and payable on or 23 alter such date. If the lessor or vendor does not establish 24 that the payments have been so reduced, ~l~e.y shall b~ PAGENO="0062" 58 1 treated as payments made with respect to an artiole 2 sold before the date of the enactment of this Act. 3 SEC. 222. REPEAL OF EXCISE TAX ON RADIAL TIRES. 4 (a) REPEAL OF TAX ON NEw RADIAL TITRES.-Section 5 4073 (relatiag to exemptions from tax on tires and tubes) is 6 amended by adding at the end thereof the following new 7 subsection: 8 "(d) RL~wIAL Tn~Es.-The tax imposed by section 9 4071 shall not apply to radial tires." 10 (b) REPEAL OF TAx ON TERAI) RUBBER USED To 11 Rm~nEAD OR RECAP RADIAL TIRES.-Subsection (c) of 12 section 4073 (relating to exemption from tax on tread 13 rubber in certain cases) is amended by striking out "such 14 person" and all that follows and inserting in lieu thereof the 15 following: "such person-~ 16 "(1) in the recapping or retreading of radial tires, 17 18 "(2) otherwise than in the recapping or retread- 19 ing of tires of the types used on highway vehicles." 20 (c) DEFINITION OF RADIAL TIRE.-Section 4072 (re- 21 lating to definitions) is amended by adding at the end there- 22 of the following new subsection: 23 "(d) RADIxi~ TIRE.-For purposes of this part, the 24 term `radial tire' means a tire of the type used on highway PAGENO="0063" 59 i. vehicles in which the ply cords which extend to the beads 2 of such tire are laid at substantially 90 degrees to the center 3 line of the tire's tread." 4 (d) TECHNICAL AMENDMENT.-Subparagraph (L) of 5 section 6416 (b) (2) (relating to specified uses and resale:s) 6 is amended to read as follows: 7 "(L) in the case of tread rubber in respect of 8 which tax was paid under section 4071 (a) (4), 9 used or sold for use (i) in recapping or retreading 10 radial tires (as defined in section 4072 (d)) or (ii) 11 otherwise than in the recapping or retreading of' 12 tires of the type used on highway vehicles (as d&- 13 fined in section 4072 (c) ), unless credit or refund of 14 such tax is allowable under subsection (b) (3) ;". 15 (e) EFFECTIVE DATE.- 16 (1) IN GENEIIAL.-Thè amendments made by this 17 section shall apply with respect to sales of radial tires 18 (as defined in section 4072 (d) of the Internal Revenue 19 Code of 1954), and tread rubber (as defined in section 20 4072 (b) of such Code), after March 17, 1975. 21 (2) FLOOn STOCKS REFUNDS.-Se~tion 6412 (a) 22 (relating to floor stocks refimds) is amended by insert- 23. ing immediately before paragraph (2) the following 24 new paragraph: 25 "(1) RADIAL TIEES.-Where before March 18, PAGENO="0064" 60 1975, any radial tire (as defined in section 4072 (dfl 2 subject to the tax imposed by section 4071 (a) has been 3 sQid by~ the manufacturer, producer, or importer and on snob date is held by a dealer and has not been used and 5 is intended for sale, there shall be credited or refunded (without interest) to the: manufacturer, producer, or mpQrter an amou~tt equal to the tax paid by such mann- ~facturer, producer, or importer on his sale `of such tire if 9 claim for such credit or refund is filed with the Secretary or his delegate on or before IDecember. 31, 1975, based ii upon a request submitted to the manufacturer, `producer, or importer before October 1, 1975, by the dealer who held such tire in respect of which the credit or refund is 14':.. ;."çiab~xed~ and, on or before December' 31, 1975, reim- ~5. ,`. bursement has been made to `such dealer by such mann- 16. * fact~irer, producer, or importer for the tax on such tire or 17 written consent has been obtained from such dealer to allowance of such credit or refund." ~9 SEC. 223. REREFINEP LUBRICATING OIL. 20 (a) IN GENERAL.-SectiOfl 4093 (relating to exemp- 21 tion of sales to producers) . is amended to read as follows: 2~. "SEC.. ~O93. EXEMPTIONS. 23 ` `~ (at)' S~&LEs TO MANUFACTURERS OR PRoDUCERS FO1~ 24 RESALE.-TJnder regulations prescribed by the Secretary or 25 his delegate,' no tax shall be imposed by section 4091 on PAGENO="0065" 61 1 lubricating oils sold to a manufacturer or producer of lubri- 2 eating oils for resale by him. 3 "(b) USE IN PRODUCING REREFINED OIL.- 4 "(1) SALEs TO REREFINERS.-Under regulations 5 prescribed by the Secretary or his delegate, no tax shall 6 be imposed by section 4091 on lubricating oil sold for 7 use in mixing with used or waste lubricating oil which 8 has been cleaned, renovated, or rerofined. Any person 9 to whom lubricating oil is sold tax-free under this para- 10 graph shall be treated as the producer of such lubricat- 11 ing oil. 12 "(2) USE IN PRODUCING REREFINED OIL.-Under 13 regulations prescribed by the Secretary or his delegate, 14 no tax shall be imposed by section 4091 on lubricating 15 oil used in producing rerefined oil to the extent that the 16 amount of such lubricating oil does not exceed 55 per- 17 cent of such rerefined oil. 18 "(3) REREFINED OIL DEFrNED.-For purposes of 19 this subsection, the term `rerefined oil' `means oil 25 20 percent or more of which is used or waste lubricating 21 oil which has been cleaned, renovated, or rerefined." 22 (b) CONFORMING AMENDMENT.-Section 4092 (a) is 23 amended by striking out "4093" and inserting in lieu thereof 24 "4093(a)". 25 (c) CLERICAL AMENDMENT.-The table of sections for 55-583 (Pt. 1) 0 - 75 - 5 PAGENO="0066" 62 1 subpart B of part III of subchapter A of chapter 32 is 2 amended by striking out the item relating to section 4093 3 and inserting in lieu thereof the following: "Sec. 4093. Exemptions." 4 (d) EFFECTIVE DATE.-The amendments made by this ~ section shall apply to sales after March 17, 1975. 6 PART ill-TAX INCENTIVES FOR CERTAIN 7 ENERGY-RELATED IMPROVEMENTS OF BUILD- 8 INGS 9 SEC. 231. INSULATION OF PRINCIPAL RESIDENCE. 10 (a) GENERAL RULE.-Subpart A of part IV of suh~ 11 chapter A of chapter 1 (relating to credits allowable) is 12 amended by inserting immediately before section 45 the 13 following new section: 14 "SEC. 44A. INSULATION OF PRINCIPAL RESIDENCE. 15 "(a) GEwEw~ RULE.-In the ease of an individual, 116 there shall be allowed as a credit against the tax imposed by 17 this chapter for the taxable year au amount equal to 30 per- 18 cent of the qualified insulation expenditures paid by the tax- 19 payer during the taxable year with respect to any residence 20 to the extent that such expenditures do not exceed $500. 21 "(b) LIMITATIONS.- 22 "(1) APPLICATION WITH OTHER CREDITS.-The 23 credit allowed by subsection (a) shall not exceed the 24 amount of the tax imposed by this chapter for the tax- PAGENO="0067" 63 able year reduced by the sum of the credits allowable 2 under- 3 "(A) section 33 (relating to foreign tax 4 credit), "(B) section 37 (relating to retirement in- 6 come), 7 "(C) section 38 (relating to investment in cer- .8 lain depreciable property), 9 "(1)) section 40 (relating to expenses of work 10 incentive programs), ii "(E) section 41 (relating to contributions to 12 candidates for public office), 13: "(F) section 42 (relating to credit for personal 14 exemptions), and 15 "(0) section 44 (relating to purchase of new principal residence). 17 "(2) PWoR EXPENDITURES TAKEN INTO AC- 1~. COUNT~-If- 19 "(A) the taxpayer made qualified, insulation 20. , expenditures with respect to any residence in any 21 prior taxable year, or 22 "(B) any prior occupant of any residence made 23 qualified insulation expenditures with respect to such 2' residence, 25 then subsection (a)' shall be applied with respect to PAGENO="0068" 64 such residence for the taxable year by reducing (but 2 not below zero) the $500 amount contained in such 3 subsection by the aggregate of the expenditures de- 4 scribed in subparagraphs (A.) and (B). 5 "(3) VERIFTCATJON.-NO credit shall be allowed 6 under subsection (a) with respect to any qualified insula- 7 tion expenditures unless such expenditures are verified in 8 such manner as the Secretary or his delegate shall pre- 9 scribe by regulations. 10 "(c) DEFINITIONS ANT) SPECIAL RULES.-For pur- 11 poses of this section- 12 "(1) QUALIFIED INSULATION EXPENDITUEES.- 13 The term `qualified insulation expenditures' means any 114 amount paid by an individual for any installation (other than pursuant to a reconstruction of the dwellluig unit) 16 which occurs after March 17, 1975, and before Janu~ 17 ary 1, 1978, of insulation in any dwelling unit which- 18 "(A) at the time of such installation is used liy 19 the individual as his principal residence,; ~wd 20 "(B) is in existence on March 17, 1975, and 21 used on such date by one or more individuals as a 22 residence. . 23 Such term shall only include amounts paid for the 24 original installation of any insulation in a dwelling imit. PAGENO="0069" 65 1 "(2) INSULATION.-The term `insulation' means 2 any insulation, storm (or thermal) window or door, or 3 any other similar item- 4 "(A) which is specifically and primarily de- 5 signed to reduce, when installed in or on a building, 6 the heat loss or gain of such building, 7 "(B) the original use of which commences 8 with the taxpayer, 9 "(0) which has a useful life to the taxpayer 10 of at least 3 years, and U "(D) which meets such performance standards 12 as the Secretary or his delegate may prescribe by 13 r~gu1ations after consultation with the Administra~ 14 tor of the Federal Energy Administration and the 15 Secretary of Housing and Urban Development. "(3) JOINT OCCTTPANCY.-IIi the case of any 17 dwelling unit which is jointly occupied and is used 18 during any calendar year as a principal residence, by 19 two ~r more individuals- "(A) the amount of the credit allowable under subsection (a) (after applying subsection (b) (2)) 22 with respect to any qualified insulation expenditures 23 paid during such calendar year by any of such mdi- 24 viduals with respect to such dwelling unit shall be 25 determined by treating all of such individuals as one PAGENO="0070" 66 1. taxpayer whose taxable year is such calendar year; 2 and 3 "(B) each of such individuals shall be ~allowed 4 a credit under subsection (a) for the taxable year 5 in which such calendar year ends (subject to the 6 limitation of subsection (b) (1)) in an amount 7 which bears the same ratio to the amount deter- 8 mined undei~ subparagraph (A) as the amount paid 9 by such individual during such calendar year for 10 such expenditures bears to the aggregate of the iii amounts paid by all of such individuals during such 12 calendar year for such expenditures. "(4) TENANT-STOCKHOLDER IN COOPERATIVE ~14 HOUSING CORPORATION.-Iil the case of an individual 15 who holds stock as a tenant-stockholder (as defined in 16 section 216) in a cooperative housing corporation (as 17 defined in such section), such individual- 18 "(A) shall be treated as owning the dwelling unit which he is entitled to occupy as such stock- 20 holder; and "(B) shall be treated as having paid his tenant- ~stockholder's proportionate share (as defined in sets- tic~n 216 (b) (3)) of any qualified insulation éx- 24 penditures paid by such corporation. 25 "(d) REDUCTION 01? B4&sis,-The basis of any prop- PAGENO="0071" 67 ~t `ert3~' shall not be increased by the amount of any qualifi~d 2 insulation expenditures made with respect to such property 8 to the extent of the amount of any credit allowed under this 4 section with respect to such expenditures. 5 "(e) TEBMINATION.-This section shall not apply to 6 any amount paid after December 31, 1977." "7- (b) TEChNICAL AND CoNFoRMING AMENDMENTS.- 8 (1) The table of sections for such subpart A is 9 ` amended by Inserting immediately before the item relat- 10 ing to section 45 the following new item: "Sec. 44A. Insulation of principal residence." iii (2) Settion 56 (a) (2) (relating to imposition of 1t2 ~``, minimum tax) is amended by striking out "and" at the ~nd of clause `(vi), by striking out "; and" at the etid 14 of clause (vii) and inserting in lieu thereof ", and", and `by inserting after clause (vii) the following new clause: 16 ` "(viii) section 44A (relating to: insulation S 5 of principal residence) ; and". -18 ~" ` (3) Section 56 (c) (1) (relating. to tax carry- 19 overs) is amended by striking out "and" at the end of subparagraph (F), by striking out "exceed" at the end -21~. of subparagraph (0) and inserting in lieu thereof "and", -22 ` and by inserting `after subparagraph (0) the following new subparagraph: S PAGENO="0072" 68 11 "(II) section 44A (relating to insulation of 2 principal residence), exceed". 3 (4) Subsection (a) of section 1016 (relating to 4 adjustments to basis) is amended by striking out the 5 period at the end of paragraph (22) and inserting in 6 / lieu thereof a semicolon and by inserting after para- 7 graph (22) the following new paragraph: 8 "(23) to the extent provided in section 44A (d), 9 in the ease of property with respect to which a credit 10 has been allowed under section 44A." 11 (5) Section 6096 (b) (relating to designation of 12 income tax payment to Presidential Election Oampaign 13 Fund) is amended by striking out "and 44" and in- 14 serting in lieu thereof "44, and 44A". 15 (c) EFFECTIVE DAPE.*Phe amendments made by 16 this section shall apply to amounts paid after March 17; 17 1975, in taxable years ending after such date. 118 SEC. 232. RESIDENTIAL SOLAR ENERGY EQUIPMENT. 19 (a) GENERAL RULE.-Subpart A of chapter IV of sub~ 20 chapter A of chapter 1 (relating to credits allowable) i~ 21 amended by inserting immediately betore section 45 the 22 following new section: * 23 "SEC. 44B. RESIDENTIAL SOLAR ENERGY EQUIPMENT. 24 "(a) GENERAL RULE.-In the case of an individual, PAGENO="0073" 69 i there shall be allowed as a credit against the tax imposed by 2 this chapter for the taxable year an amount equal to 25 3 percent of the qualified solar heating and cooling equipment 4 expenditures paid by the taxpayer during the taxable year 5 with respect to aiiy residence to the extent that such ox- 6 penditures do not exceed $8,000. 7 "(b) LJ1uITATI0Ns.- 8 "(1) APPLICATIoN WITH OTHER CREDITS.-The 9 credit allowed by subsection (a) shall not exceed the 10 amount of the tax imposed by this chapter for the 11 taxable year reduced by the sum of the credits allowable 12 under- 13 "(A) section 33 (relating to foreign tax 14 credit), 15 " (B) section 37 (relating to retirement in- 16 come), 17 "(0) section 38 (relating to investment in cer- 18 tam depreciable property), 19 "(D) section 40 (relating to expenses of work 20 incentive programs), 21 "(E) section 41 (relating to contributions to 22 candidates for public office), 23 "(F) section 42 (relating to credit for personal 24, exemptions) PAGENO="0074" 70 1 "(G) section 44 (relating to purchase of new 2 principal residence), and 3 "(Ii) section 44A (relating to insulation of. 4 principal residence). 5 "(2) PRIoR EXPENDITURES TAI~EN INTO AC- 6 COUNT.-If- 7 "(A) the taxpayer made qualified solar energy 8 equipment expenditures with respect to any resi- 9 dence in any prior taxable year, or 10 "(B) any prior owner of such residence made 11 qualified solar energy equipment expenditures with 12 respect to such residence, 13 then subsection (a) shall be applied with respect to 14 such residence for the taxable year by reducing (but 15 not below zero) the dollar amount contained in such 16 subsection by the aggregate of the expenditures described 17 in sabparagraphs (A) and (B). 18 "(c) DEFINITIONS AND SPECIAL RULE$.-For par- 19 poses of this se~tion- 20 "(1) QUALIFIED SOLAB ENERGY EQUIPMENT EX- 21 PENDITURES.-Phe~ term `qualified solar energy expend- 22 itures' means any amount paid by an individual for any 23 installation which occurs after March 17, 1975, and 24 before January 1, 1981, of solar energy equipment, in PAGENO="0075" 71 any dwelling unit which at the time of such installation 2 is owned by the individual and used by him as his prin- * cipal residence (within the meaning of section 1034). 4 "(2) SOLiU~ ENERGYEQ1JIPM1~NT.-The term `so- 5 lar energy equipment' means equipment-~- 6 "(A) which, when installed in or on, or when connected to, a building- 8 "(i) uses solar energy to heat or coOl 9 such building or provide hot water for use with- 10 in such building; and * "(ii) meets the interim or definitive pe~ 12 formance criteria prescribed by the Secretary of 11~using and Urban Development under the * Solar Heating arid Cooling Demonstration Ac1 is of1974; * * * "(B) the original use of which commences 17 with the taxpayer; and 18 "(0) which htis a useful life of atleast 3 years. 19 `~ (3) JOINT OWNERSITIP.-In the case of any build- ing which is jointly owned, and is used during any 21 calendar year as a principal residOnce, by two or more 22 individuals- 23 - "(A) the amount of the credit allowable mult~r 24 `~ sub~ection (a) (after applying subsection (h) (2) ) 25 with respect to any qualified solar energy equipment PAGENO="0076" 72 expenditures paid during such calendar year by any 2 of such individuals with respect to' such building 3 ` shall be determined by treating all of such individ- 4 uals as one taxpayer whose taxable year i.s such 5 calendar year; and 6 "(B) each of such individuals shall be allowed 7 a credit under subsection (a) for the taxable year 8 in which such calendar year ends (subject to the 9 limitation of subsection (b) (1)) in an amount io which bears the same ratio to the amount deter- ii mined under subparagraph (A) ~as the amount paid 12 by such individual during such calendar year for 13 such expenditures &ears to the aggregate of the 14 amounts paid by all of `such individuals during such 15 calendar year for such expenditures. 16 "(4) TENANT-STOCKHOLDER iN COOPERATIVE 17 HOUSING CORPORATION.-Tn the case of an individual 18 who holds stock as a tenant-stockholder (as defined in 19 section 216) in a cooperative housing corporation (as 20 defined in such section), such individual- 21 "(A) shall be treated as owning the dwelling 22 unit which he is entitled to occupy as such stock- 23 holder; and 24 "(B) shall be treated as having paid his tenant- 25 stockholder's proportionate shard (as defined in see-' PAGENO="0077" 73 I tion 2i6 (b) (3)) of any qualified solar energy 2 equipment expenditures paid by such corporation. 3 "(d) REDUGPION. OF BASIS..__The basis of any property 4 shall not be increased by the amount of any qualified solar 5 energy equipment expenditures made with respect to such 6 property to the extent of the amount of any credit allowed 7 under this section with respect to such expenditures. 8 "(e) TERMINATION.This section shall not apply to 9 any amount paid after December 31, 1980." 10 (b) TECTINICAL AND CONFORMING AMENDMENTS. ii (1) The table of sections for such subpart A is 12 amended by inserting before the item relating to sec- 13 tion 45 the following: "Sec. 44B. Residential solar energy equipment." 14 (2) Section 56 (a) (2) (relating to imposition of 15 minimum tax) is amended by striking out "and" at the 16 end of clause (vii), by striking out "; and" at the end of 17 Clause (viii) and inserting in lieu thereof ", and", and 18 by inserting after clause (viii) the following new clause: 19 `~ (ix) section 44B (relating to re~idenfial 20 solar energy equipment); and". 21 (3) Section 56 (c) (1) (relating to tax carry- 22 overs) is amended by striking out "and" at the end of 23 subparagraph (G), by striking out "exceed" at the 24 enc~ o~ snhparagraph (H) and inserting in lieu thereof PAGENO="0078" 74 "and", and by inserting after subparagraph (H) the 2 following new subparagraph: 3 "(I) section 44B (relating to residential solar 4 energy equipment), exceed". 5 (4) Subsection (a) of section 1016 (relating to 6 adjustments to basis) is amended by striking out the 7 period at the end of paragraph (23) and inserting in s lieu thereof a semicolon and by inserting after paragraph (23) the following new paragraph: "(24) to the extent provided in section 44B (d), in ii the case of property with respect to which a credit has 12 been allowed under section 44B." 13 (5) Section 6096 (b) (relating to designation of 14 income tax payment to Presidential Election Campaign 15 Fund) is amended by striking out "and 44A" and in- 1.6 serting in lieu thereof "44A, and 44B". 17 (c) EFFECTIVE PATE.-The amendments made by this 18 section shall apply to amounts paid after March 17, 1975, 19 in taxable years ending after such date. 20 SEC. 233. QUALIFIED ELECTRIC MOTOR VEHICLES. 21 (a) GENERAL RuLE.-Sub$rt A of part IV of sub- 22 chapter A of chapter 1 ~relating to credits allowable) is 23 amended by inserting immediately before section 45 the fol- 24 lowing new section: PAGENO="0079" 75 I "SEC. 44C. QUALIFIED ELECTRIC MOTOR VEHICLES. 2 "(a) GENERAL RULE.-In the case of an individual, 3 there shall be allowed as a credit against the tax imposed by 4 this chapter for the taxable year an amount equal to 25 per- 5 cent of the amount paid 1)y the taxpayer during the taxable 6 year for a qualified electric motor vehicle to the extent that 7 the aggregate amount paid by the taxpayer during such tax- 8 able year and all prior taxable years for such vehicle does 9 not exceed $3,000. 10 *" (b) LIMITATIONS.- 11 "(1) A~PPI~IoATION WITh OTIIE1~ CREDITS.-The 12 credit allowed by subsection (a) shall not exceed the 13 amount of the tax imposed by this chapter for the tax- 14 able year reduced by the sum of the credits allowable 15 under- 16 "(A) section 33 (ielating to foreign tax 17, credit), 18 "(.B) section 37 (relating to retirement in- 19 come), "(C) section 38 (relating to investment in cer- 21 tam' depreciable property), 22 "(D) section 40 (relating to expenses of-work 23 incentive programs), PAGENO="0080" 76 "(E) section 41 (relating to contributions to 2 candidates for public office), 3 "(F) section 42 (relating to credit for personal 4 exemptions), 5 " (O-)~ section 44 (relating to purchase of new 6 principal residence), 7 "~ (II) section 44A (relating to insulation of principal residence), and 9 "(I) section 44B~ (relating to residential solar 10 energy equipment). ii "(2) VERIFICATION.-No credit shall be a'lowed 12 under subsection (a) with respect to any qualified 13 electric motor vehicle unless such expenditures are 14 verified in such manner as the Secretary or his dde- 15 gate shall prescribe by regulations. 16 "(c) QUALIFIED NEW ELEo~Io MoToll VEhICLE 17 DEFINED.-For purposes of this section, the term `qualified 18 electric motor vehicle' means any highway vehicle- 19 "(1) which is powered primarily by an electric 20 motor drawing current from rechargeable storage bat- 21 teries or other portable sources of electric current, 22 "(2) which is purchased by the taxpayer after 23 June 3, 1975, and before January 1, 1979, for the per- 24 sonal use of the taxpayer or a member of his family, and PAGENO="0081" 77 1 "(3) the original use of which begins with the tax- 2 payer or a member of his faniiiy. 3 " (d) T1~MINATIoN.-This section shall riot apply 4 to any amount paid after December 31, 1978.". 5 (b) TECIINJCAL AND CoNFol~MTNG AMENDME\ TS.- 6 (1) The table of sections for such subpart A is 7 amended by inserting inimediately before the item ic- 8 lating to sectioii 45 the following new item: "Sec. 44C. Qualified electric motor vehicles." 9 (2) Section 56 (a) (2) (relating to imposition of 10 minimum tax) is amended by strikiiig out "arid" at time 11 end of clause (viii), by striking out "; and" at the end 12 of clause (ix) and inserting in lieu thereof ", and", and 13 by inserting after clause (ix) the following new clause: 14 "(x) section 440 (relating to qualified 15 electric motor vehicles) ; aiid". 16 (3) Section 56(c) (1) (relating to tax carry- 17 overs) is amended by striking out "arid" at the end of 18 subparagraph (TI), by striking out "exceed" at the end 19 of subparagraph (I) and inserting in lieu thereof "and", 20 and by imiserting after subparagraph (I) the following 21. new subparagraph: 22 " (J) section 440 (relating to qualified electric 23 motor vehicles) , exceed". 24 (4) Section 6096 (b) (relatimig to designation of 55-583 (Pt. 1) 0 - 75 - 6 PAGENO="0082" SO (1) in the case of any fiscal year ending on or 2 before September 30, 1983, $5,000,000,000; and 3 (2) in the case of the fi seal year ending September 4 30, 1984, $2,500,000,000. 5 No amount shall be appropriated to t.he Tnist Fund after 6 Septeniber 30, 1984. Any amount which, but for this sub- 7 section, would be appropriated to the Trust Fund shall re- s main in the general fund of the Treasury. (d) OvEnAi~T~ LIMITATiON ON A~IouNn11 IN TIID TIWsT 10 FUND.- ir (1) IN GENERAL-If at aiiy time during a fiscal 12 year ending oii 01 hcfme September 30, 1.984, the Secretary determines that the amount in the Trust Fund 14 which is not obligated for expenditure exceeds $10,000,- 15 000,000, the Secretary shall transfer the amount of such 16 excess to the general fund of the Treasury. 17 (2) FISOAJJ YEAR 198 5.-If at ally time during the 18 fiscal year enmding on Septeiiiber 30, 1985, the Secretary 19 determines that the amount in the Trust Fund which 20 is not obligated for expenditure exceeds $5,000,000,000, 21 the Secretary shall transfer the amount of such excess 22 to the general fund of the Treasury. 23 (e) MANAGEMENT OF T1~usT FUND.- 24 (1) REPORT.-It shall be the duty of the Scene- 25 tory to hold the Trust Fumid, and to report to the Con- PAGENO="0083" 81 1 gress each year on the financial condition and the results 2 of the operations of the Trust Fund during the preced- 3 lug fiscal year and on its expected condition and opera- 4 tions during the next 5 fiscal years. Such report shall be S printed as a House document of the session of the Con- 6 gress to which the report is made. 7 (2) INVESTMENT.- 8 (A) IN G:ENERAL.-It shall be the duty of the 9 Secretary to invest such portion of the Trust Fund 10 as is not, in his judgment, required to meet current 11 withdrawals. Such investments may be made only in 12 interest-bearing obligations of the United States or 13 in obligations guaranteed as to both principal and 14 interest by the United States. For such purpose, such 15 obligations may be acquired (i) on original issue at 16 the issue price, or (ii) by purchase of outstanding 17 obligations at the market price. 18 (B) SALE OF OBLIGATIONS.-Any obligation 19 acquired by the Trust Fund may be sold by the 20 Secretary at the market price. 21 (0) INTEREsT ON CERTAIN PROCEEDS.-The 22 interest on, and the proceeds from the sale or re- 23 demption of, any obligations held in the Trust Fund 24 shall be credited to and form a part of the Trust 25 Fund. PAGENO="0084" 82 1 (1) Tnn~rINATIoN.-The Secretary shall transfer from 2 the Trust Fund into the general fund of the Treasury any 3 amount in the Trust Fund on October 1, 1985, which is not 4 obligated for expenditure. 5 SEC. 312. EXPENDITURES FROM TRUST FUNDS FOR 6 ENERGY PROJECTS AND PROGRAMS. 7 (a) IN (3ENERAL.-Amounts in the Trust Fund shall 8 be available, as provided by appropriation Acts, for making 9 expenditures before October 1, 1985, for purposes of con- io serving energy resources and expanding energy supplies ~ throughL.~* 12 (1) basic and applied research programs related 13 to new energy technologies, including (but not limited 14 to)- S S (A) solar energy, 16 (B) geothermal energy, 17 (0) advanced transportation power systems, :i S (I)) environmental impact (and human 19 safety), 20 (E) energy conversion, 21 (F) energy transmission, 22 (G) energy conservation, 23 (II) synthetic fuels from fossil sources, 24 (1) utilization of solid waste, 25 (3) fusion, and PAGENO="0085" 83 (K) an engine for an efficient pollution-free 2 automobile; 3 (2) development and demonstration of new energy 4 technologies, including (but not limited to) - 5 (A) coal liquefaction and gasification demon- 6 stration projects, 7 (B) aid for powerplant conversions to coal, 8 (0) loans or subsidies for solid waste energy 9 conversion plants (including production of methane 10 gas from organic wastes), 11 (D) loans or subsidies for shale oil production, 12 (E) price guarantees on long-term purchase 13 contracts for other new energy sources, 14 (F) strip ruining reclamation and mine safety 15 programs, 16 (0-) engines for efficient pollution-free auto- 17 mobiles, 18 (H) loans and subsidies relating to solar energy 19 systems, and 20 (I) demonstration and development of hot wa- 21 ter heating systems, or space heating and cooling 22 systems, for home use; 23 (3) programs relating to the development of energy 24 i~esources from properties (including offshore properties) PAGENO="0086" 84 1 in which the United States has an interest, including 2 (but not limited to) 3 (A) geothermal energy development, and. 4 (B) energy related environmental protection 5 programs and research; `and 6 (4) research projects, or capital expenditures for 7 demonstration projects, relating to local and regional S transportation systems, including (but not limited to) - 9 (A) mass transit by bus, 10 (B) fixed guideway mass transit, 11 (C) commuter rail transportation, 12 (D) intercity rail passenger service, 13 (E) mass transit terminal facilities, 14 (F) mass transit operational facilities, and 15 (1) exclusive or preferential bus lanes. 16 Nothing in this `subsection shall be `deemed to authorize any 17 program, project, `or other activity not otherwise author- 18 ized by law. Amounts required for purposes of this subsection 19 shall be included in the appropriation requests of these Fed- 20 eral agencies authorized to carry out the program, project, or 21 activity. 22 (b) PnOGI?~M EVALUATION CRITERIA, ETc3.-1~'Tot later 23 than 270 days after the date of the enactment of this Act, PAGENO="0087" 85 i the Energy Conservation and Conversion Trust Fund Re- 2 view Board shall- 3 (1) develop criteria for evaluating the programs, 4 projects, and activities referred to in paragraphs (1), (2), (3),and (4) of subsection (a), 6 (2) evaluate potential programs, projects, and 7 activities on the basis of such criteria, and 8 (3) submit to the Congress a report containing the 9 criteria developed under paragraph (1) together with 10 the Board's recommendations for the proportion of the 11 Trust Fund which should be available for expenditure for 12 each fiscal year for programs, projects, and activities 13 referred to in each paragraph of subsection (a). 14 SEC. 313. ENERGY CONSERVATION AND CONVERSION 15 TRUST FUND REVIEW BOARD. 16 (a.) ESTABLISHMENT OF B0ARD.-There is hereby 17 established a review board to be knowi~ as the "Energy 18 Conservation and Conversion Trust Fund Review Board" 19 (hereinafter in. this section referred to as the "Board"). 20 (b) MEMBERSHIP.- 21 (1) Nu~tiuEn AND APPOINTMENT.- 22 (A) IN GENERAL.-The Board shall be corn- 23 . posed of 5 members appointed by the President by 24 and with the advice and consent of the Senate. PAGENO="0088" 86 1 (B) LnVrITATI0Ns.-An individual may not 2 be appointed as a member of the Board if- 3 (1) at any time during the 5-year period 4 ending on the date of his nomination such in- 5 d~vidual held interests in one or more energy 6 related industries and the aggregate fair market 7 value of such interests exceeded $2,500; or 8 (ii) for any taxable year beginning or end- 9 ing during such 5-year period such individual 10 received or accrued gross income in excess of 11 $10,000 from one or more energy related 12 industries. 13 Any individual who after appointment as a member 14 acquires any interest in, or receives or accrues any 15 income from, an energy related industry may not 16 thereafter hold such position. For purposes of this 17 paragraph, an individual shall be deemed to hold 18 any interest held by such individual's spouse or by 19 any child of the individual who has not attained 18 20 years of age. 21 (0) ENERGY RELATED INDUSTRY.---For pur-. 22 poses of this paragraph, the term "energy related 23 industry" means an industry engaged in the trade 24 or business of-~~- PAGENO="0089" 87 1 (i) the generation, transmission, distribu- 2 tion, or sale of electrical or other energy, 3 (ii) the production, transmission, distribu- 4 tion, or sale of oil or gas, or primary products 5 of oil and gas, 6 (iii) production, importation, distribution, 7 or sale of motor vehicles, or 8 (iv) the furnishing or sale of transportation. (2) TERMS.- 10 (A) Except as provided in subparagraphs (B) 11 and (0), members shall be appointed for terms of 12 5 years. 13 (B) Of the members first appointed- 14 (i) one shall be appointed for a term of 1 15 year, 16 (ii) one shall be appointed for a term of 2 17 years, 18 (iii) one shall be appointed for a term of 3 19 years, 20 (iv) one shall be appointed for a term of 4 21 years, and 22 (v) one shall be appointed for a term of 5 23 years, 24 as designated by the President at the time of 25 appointment. PAGENO="0090" 88 i (C) Any member appointed to fill a vacancy 2 occurring before the expiration of the term for which his predecessor was appointed shall be appointed 4 only for the remahider of such term. A member may serve after the expiration of his term until his 6 successor has taken office. (3) PAY AND TRAVEL EXPENSES.- 8 (A) Except as provided in subparagraph (B), 9 members of the Board shall each be entitled to re- ceive $100 for each day (including traveltime) dur- ing which they are engaged in the actual perform- 12 ance of duties vested in the Board. 13 (B) MenTbers of the Board who are full-time 14 officers or employees of the United Stutes or Mom- 15 bers of Congress shall receive no additional pay on 16 account of their service on the Board. 17 (C) While away from their homes or regular 18 places of business in the performance `of services for 19 the Board, members of the Board shall be allowed 20 travel expenses, including per diem in lieu of sub- 21 sistenee, in the same manner as persons employed 22 intermittently in the Government service are allowed 23 expenses under section 5703 (b) of title 5 of the 24 United `States Code. PAGENO="0091" 89 1 (4) Cu~JRMAN.-Phe Chairman of the Board shall 2 be elected by the members of the Board. 3 (c) DUTIES.-The Board shall review the expenditures 4 made from the Trust Fund under section 312 and report to 5 the Congress each year regarding expenditures so made 6 during the preceding fiscal year. Such report shall contain 7 evaluations of the programs and projects for which such 8 expenditures were made, and such recommendations for such 9 changes as the Board considers necessary to ensure that 10 future expenditures made from the Trust Fund best carry out 11 the purposes of this title. 12 (d) SrrA.r1~.-The Board shall appoint such employees 13 as it deems necessary. Such employees shall be appointed 14 subject to the provisions of title 5, United States `Code, gov- 15 erning appointments in the civil service, and shall be paid in 16 accordance with the provisions of chapter 51 and subchapter 17 III of chapter 53 of such title, relating to classification ana 18 General Schedule pay rates. 19 (e) APPnoPRL~TIoN AUTII0RIZATION.-There are 20 authorized to be appropriated from time to time such sums 21 as may be necessary to carry out the purposes of this section. 22 SEC. 314. REQUIREMENT OF ANNUAL AUThORIZATIONS 23 AND APPROPRIATIONS. 24 Amounts required for the purposes of this title (other 25 than section 311) shall be established by annual authoriza- 26 tion and appropriation Acts, PAGENO="0092" 90 1 TITLE IV.--ENCOURAGING BUSINESS 2 CONVERSION FOR GREATER ENERGY SAVING 4 PART 1.-BUSINESS USE OF PETROLEUM AND 5 PETROLEUM PRODUCTS 6 SEC. 411. EXCISE TAX ON BUSINESS USE OF PETROLEUM 7 AND PETROLEUM PRODUCTS. 8 (a) Ix GENEn~1.-Subtitle D (relating to miscel- 9 1an~ous excise taxes) is amended by adding at the end 10 thereof the following new chapter: 11 "CHAPTER 45-TAX ON BUSINESS USE OF 12 PETROLEUM AND PETROLEUM PRODUCTS "Sec. 4991. Imposition of tax. "Sec. 4992. Definitions and special rules. 13 "SEC. 4991. IMPOSITION OF TAX. 14 "(a) Ix GDNERAL.-There is hereby imposed a tax on 15 each taxable use of a taxable petroleum or petroleum product. 16 "(b) AMOUNT OP TAx.-The amount of the tax im- 17 posed by subsection (a) shall be- 18 "(1) Fon NATURAL GAS.-In the case of natural 19 gas- "If the taxable use occurs The tax per 1,000 during calendar year cubic feet is: 1977 4 cents. 1978 8 cents. 1979 12 cents. 1980 or thereafter 18 cents. 20 "(2) Fon CRUDE OIL AND OTHER PETROLEUM PAGENO="0093" 91 I I'RODUCTS.-In the case of crude oil and other petroleum 2 products- "If the taxable use occurs The tax per during calendar year barrel is: 1977 17 cents. 1978 33 cents. 1979 50 cents. 1980 67 cents. 1981 83 cents. 1982 or thereafter $1. 3 "(c) LJABIUTY FOR TAx.-The tax imposed by this 4 section shall be paid by the user. 5 "SEC. 4992. DEFINITIONS AND SPECIAL RULES. 6 "(a) TAXABLE USE.- 7 "(1) IN OENFJIIAL.-FOr purposes of this chapter, 8 the term `taxable use' meaiis any use as a fuel in a trade 9 or business other than a use described in paragraph (2). 10 "(2) CERTAIN USES EXCEPTED.-For purposes of 11 this chapter, the term `taxable use' does not include any 12 use as a fuel- 13 "(A) in a vehicle, vessel, or aircraft, 14 "(B) in an apartment, hotel, motel, or other 15 residential facility, 16 "(C) for the extraction of a mineral to the 17 extent such extraction constitutes mining within the 18 meaning of section 613 (c), 19 "(D) on a farm for farming purposes (deter- 20 mined in a manner similar to that provided by see- 21 tion 6420 (c)), PAGENO="0094" 92 1. "(E) in a facility for the generation of dee- 2 trical power if- 3 "(i) such facility is acquired by the user 4 before January 1, 1976, 5 "(II) the physical construction, recon- struction, or erection of such facility by the 7 user is begun before January 1, 1976, or 8 "(iii) such facility is constructed, recon- 9 structed, or erected for the user, or acquired 10 by the user, pursuant to a contract which is on ii December 31, 1975, and at all times 12 therea~ter, binding on the user, 13 "(F) by an organization described in section 14 501 (c) (3) which is exempt from tax under section 15 501 (a) other than in an unrelated trade or business 16 (as defined in section 513), 17 "(0) in the preparation process and drying, 18 bleaching, dyeing, and printing and finishing proc- 19 esses for textiles, including carpets, and apparel 20 products, and 21 "(II) in the process of melting, fining, feeding, 22 conditioning, polishing, ginzing, coating, annealing, 23 or other industrial finishing of glass manufactured 24 products. PAGENO="0095" 93 1 Subparagraph (E) shall not apply to any use after 2 December 31, 1981. 3 "(b) TAXABLE PETROLEUM OR PFFI'ROLEtTM PROD- 4 UCT.-For purposes of this chapter, the term `taxable petro- 5 leum or petroleum product' means any petroleum or petro- 6 leum product other than gasoline (as defined in section 7 4082(b)). 8 "(c) PETROLEUM AND PETROLEUM PRODtrCTS.-For 9 purposes of this chapter, the term `petroleum or petroleum 10 product' includes natural gas." ii (b) CLERICAL AMENDMENT.-The table of chapters for 12 subtitle D is amended by adding at the end thereof the 13 following: "CHAPTItR 45. Tax on business use of petroleum and petro- leum products." 14 (c) REPORT BY THE ADMINISTRATOR OF THE FEDERAL 15 ENERGY ADMINIsTRATIoN.- 16 (1) IN GENEBAL.-The Administrator of the Fed- 17 eral Energy Administration (hereinafter in this subsec- 18 lion referred to as the "Administrator") shall conduct a 19 study of the uses of petroleum or petroleum products (in- 20 cluding natural gas) to identify- 21 (A) the industries or industrial processes where 22 there is no economically feasible alternative to the 23 use of petroleum or petroleum products, 55-583 (Pt. 1) 0 - `15 - 1 PAGENO="0096" 94 1 (B) the areas of the country where conversion 2 to the use of fuels other than petroleum or petroleum 3 products is not feasible because of Federal, State, or 4 local laws relating to pollution, and 5 (C) all other factors bearing on uses which 6 should be exempted from the application of section 7 4991 of the Internal Revenue Code of 1954. 8 (2) REPORT.-Not later than June 1, 1976, the 9 Administrator shall submit to Congress a report of his 10 findings under the study conducted under paragraph (1), 11 together with such recommendations as he may deem 12 advisable. 13 (d) EFFECTIVE DATE.-The amendments made by sub. 14 sections (a) and (b) shall apply to petroleum and petroleum 15 products (as defined in section 4992 (c) of the Internal 16 Revenue Code of 1954) used after December 31, 1976. 17 PART Il-AMORTIZATION FOR CERTAIN ENERGY- 18 RELATED PROPERTY 19 SEC. 421. AMORTIZATION OF QUALIFIED ENERGY USE 20 PROPERTY. 21 Part VI of subchapter B of chapter 1 (relating to 22 itemized deductions for individuals and corporations) is 23 amended by adding at the end thereof the following new 24 section: PAGENO="0097" 95 1 "SEC. 189. AMORTIZATION OF QUALIFIED ENERGY USE 2 PROPERTY. 3 "(a) ALLOWANCE OF DEDUCTION.-Every person, at 4 his election, shall be entitled to a deduction with respect to 5 the amortization of any qualified energy use property (as 6 defined in subsection (b) ), based on a period of 60 months. 7 "(b) QUALIFIED ENERGY USE PROPERTY.-FOr pur- 8 poses of this secfion- 9 "(1) QUALIFIED ENERGY USE PROPERTY.-The 10 term `qualified energy use property' means- 11 "(A) qualified waste equipment, 12 "(B) qualified shale oil conversion equipment, 13 "(C) qualified coal processing equipment, 14 "(D) a qualified coal pipeline, 15 "(E) qualified solar energy equipment, or 16 "(F) qualified deep mining coal equipment. 17 "(2) QUALIFIED WASTE EQUIPMENP.-Phe term 18 `qualified waste equipment' means any machinery or 19 equipment (of a character subject to the allowance for 20 depreciation) - 21 "(A) necessary to permit the use of waste as a 22 fuel in a facility burning only waste or a combina- 23 tion of waste and oil as its principal fuel (including 24 unloading equipment, fceding systems, and refuse- 25 firing ports for waste fuels), PAGENO="0098" 96 1 "(B) used to process waste into a fuel, or 2 "(0) used to sort and prepare solid waste 3 for recycling or used for recycling solid waste. 4 "(3) QuALIFIED SHALE OIL CONVERSION EQUIP- 5 MENT.-The term `qualified shale oil conversion equip- 6 ment' means any machinery or equipment (of a char- 7 *acter subject to the allowance for depreciation) nec- 8 essary- 9 "(A) to reach the oil shale, 10 "(B) to extract the oil shale, or 11 "(0) to convert the oil shale into oil or gas. 12 "(4) QUALIFIED COAL PROCESSING EQUIPMENT.- 13 The term `qualified coal processing equipment' means 14 any machinery or equipment (of a character subject to 15 the allowance for depreciation) for processing coal into 16 a liquid or gaseous state. 17 "(5) QUALIFIED COAL PIPELINE.-The term 18 `qualified coal pipeline' means a coal slurry pipeline or 19 any other pipeline (of a character subject to the allow- 20 ance for depreciation) for the transportation of coal from 21 the mine or other gathering point. 22 "(6) QUAUFIED SOLAR ENERGY EQUIPMENT.- 23 The term `qualified solar energy equipment' means solar 24 energy equipment, as defined in section 44B (c) (2). 25 "(7) QUALIFIED DEEP MINING COAL EQUTP- PAGENO="0099" 97 1 MENT.-The term `qualified deep mining coal equip- 2 mei~t' means any machinery or equipment or structural 3 component of a coal mine which is of a character subject 4 to the allowance for depreciation and which is neces- 5 sary- 6 "(A) to reach the coal, 7 "(B) to extract the coal, or 8 "(C) to bring the coal to the mouth of the mine. 9 Such term does not include any property used in the 10 surface mining of coal. lit "(8) COAL INCLUDES LIGNITE.-The term `coal' 12 includes hgmte. 13 "(c) AMOUNT OF DEDUOTI0N.-The amortization 14 deduction for any qualified energy use property shall be an 15 amount, with respect to each month of the 60-month period 16 within the taxable year, equal to the adjusted basis of the 17 qualified energy use property at the end of such month 18 divided by the number of months (including the month 19 for which the deduction is computed) remaining in the 20 period. `Such `adjusted basis at the end of the month shall 21 be computed without regard to the amortization deduction 22 for such month. The amortization deduction provided by this 23 section with respect to any qualified energy use property for 24 any month shall be in lieu of the depreciation deduction with 25 respect to `such property for such month provided by see- PAGENO="0100" 98 1 tion 167. The 60-month period shall begin, as to any quali- 2 fled energy use property, at the election of the taxpayer, 3 with the month following the month in which such property 4 was placed. in service or with the succeeding taxable year. 5 "(d) SPECIAL RULES FOR ADJ~LJSTED BAsis.- 6 "(1) For purposes of this section, the adjusted basis 7 of any qualified energy use property with respect to 8 which an election has been made under subsection (e) 9 shall not be increased for amounts chargeable to capital 10 account for additions or improvements after the amorti- 11 zation period has begun. 12 "(2) The depreciation deduction provided by sec- 13 tion 167 shall, notwithstanding subsection (c), be al- 14 lowed with respect to the portion of the adjusted basis 15 which is not taken into account in applying this section. 16 "(e) ELECTION OF AMOaTIZATION.-The election of 17 the taxpayer to take the amortization deduction, and the 18 election to begin the 60-month period with the month follow- 19 ing~ the month in which the qualified energy use property is 20 placed in service or with the taxable year succeeding the tax- 21 able year in which such property is placed in service, shall be 22 made by filing with the Secretary or his delegate, in such 23 manner, in such form, and within such time as the Secretary 24 or his delegate may by regulations prescribe, a statement of 25 such election. PAGENO="0101" 99 1 "(f) TERMINATION OF ELECTION.- 2 "(1) B~ TilE TAXPAYER.-A taxpayer which has 3 elected under subsection (e) to take the amortization 4 deduction with respect to any qualified energy use 5 property may, at any tim.e after making such elec- 6 tion, discontinue the amortization deduction with respect 7 to the remainder of the amortization period, such discon- 8 tinuance to begin as of the beginning of any month spe- 9 cified by the taxpayer in a notice in writing filed with the 10 Secretary or his delegate before the beginning of such 11 month. rfhe depreciation deduction provided under sec- 12 tion 1G7 shall be allowed, beginning with the first month 13 as to which the amortization deduction does not apply, 14 and the taxpayer shall not be entitled to any further 15 amortization deduction under this section with respect 16 to such property. 17 "(2) CONSTRUCTIVE TERMINATION.-If at any 18 time during the amortization period any qualified en- 19 ergy use property ceases to meet the requirements 20 of subsection (b) or becomes property with respect to 21 which an amortization deduction under this section is 22 not allowable by reason of subsection (g), the taxpayer 23 shall be deemed to have terminated under paragraph (1) 24 his election under this section. Such termination shall 2~ be effective beginning with the month in which such PAGENO="0102" 100 1 cessation occurs or in which a lease exists which causes 2 disallowance under subsection (g). 3 "(g) NONCORPORATE LESS0Rs.-No amortization de- 4 duction shall be allowed under this section with respect to 5 any property of which a person which is not a corporation is 6 the lessor. In the case of property of which a partnership is 7 the lessor, the amortization deduction otherwise allowable 8 under this section with respect to such property to any part- 9 ner which is a corporation shall be allowed notwithstanding 10 the preceding sentence and subsection (1) (2). For purposes 11 of this subsection, an electing small business corporation (as 12 defined in section 1371) shall be treated as a person which 13 is not a corporation. 14 "(h) LIFE TENANT AND REMAINDEEMAN.-In the 15 case of any qualified energy use property held by one per- 16 son for life with remainder to another person, the deduction 17 under this section shall be computed as if the life tenant 18 were the absolute owner of the property and shall be allow- 19 able to the life tenant. 20 "(i) APPLICATION OF SECTION.- 21 "(1) IN GENERAL.-Except as provided in para- 22 graph (2), the amortization deduction provided by this 23 section shall apply to that portion of the basis which is 24 attributable to construction, reconstruction, or erection 25 after March 17, 1975, with respect to property which is PAGENO="0103" 101 I placed in service after such date and before January 1, 2 1981. 3 "(2) PRE-1981 PORTI0N.-In the case of property 4 constructed, reconstructed, or erected by the taxpayer, 5 or for the taxpayer pursuant to a contract which is bind- 6 ing on the taxpayer on January 1, 1981, and at all 7 times thereafter, which is placed in service on or after 8 January 1, 1981, the amortization `deduction provided 9 by this section shall apply to that portion of the basis 10 which is attributable to construction, reconstruction, or 11 erection before January 1, 1981. 12 "(j) CROSS REFERENCE.- "For treatment of certain gain derived from the dispo. sition of property the adjusted basis of which is deter. mined with regard to this section, see section 1245." 13 SEC. 422. AMORTIZATION OF QUALIFIED RAILROAD EQUIP- 14 MENT. 15 Part VI of subchapter B of chapter 1 (relating to item- 14 ized deductions of individuals and corporations) is amended 15 by adding at the end thereof the following.new section: 16 "SEC. 190. AMORTIZATION OF QUALIFIED RAILROAD 17 EQUIPMENT. 18 "(a) ALLOWANCE OF DEDUCTION.-EVery person, at 19 his election, shall be entitled to a deduction with respect to 20 the amortization of any qualified railroad equipment (as 21 defined in subsection (b)), based on a period of 60 months. PAGENO="0104" 102 1 "(b) QUALIFIED RMI~1~OAr~ EQUIPMENT DEFINED.- 2 "(1) IN GENEBAL.-FOr purposes of this section, 3 the term `qualified railroad equipment' means equipmtnt 4 described in paragraph (2) of this subsection used by a 5 common carrier engaged in the furnishing or sale of 6 transportation by railroad and subject to the jurisdic- 7 tion of the Interstate Commerce Commission if- 8 "(A) such equipment is- 9 "(i) used by a domestic common carrier 10 by railroad, or 11 "(ii) owned and used by a car line corn- 12 pany or a switching or terminal company at 13 least 95 percent of whose stock is owned 14 by one or more domestic common carriers by is railroad, and 16 "(B) the original use of such equipment com- 17 mences with the taxpayer after December 31, 1974. 18 "(2) EQUIPMENT.-The equipment referred to in 19 paragraph (1) of this subsection is tangible property 20 which is of a character subject to the allowance for 21 depreciation provided in section 167 (not including a 22 building or its structural components) if such property- 23 "(A) is used as an integral part of- 24 "(i) a communications, signal, or traffic 25 control system; PAGENO="0105" 103 I (ii) a rolling stock classification yard; 2 3 "(lii) a facility for loading and unload- 4 ing trailers and containers on and from railroad 5 fiatcars; or 6 "(B) is an improvement or betterment in track 7 account. 8 " (c) AMOUNT ov J)EDUCTJON.-The arrioruzatiori 9 deduction for any qualified railroad equipment shall be an 10 amount, with respect to each month of the GO-month period 11 within the taxable year, equal to the adjusted basis of the 12 qualified railroad equipment at the end of such month divided 13 by the number of months (including the month for which the 14 deduction is computed) remaining in the period. Such z15 adjusted basis at the end of the month shall be computed 16 without regard to the amortization deduction for such month. 17 The amortization deduction provided by this section with re- 18 spect to any qualified railroad equipment for any month shall 19 be in lieu of the depre intion deduction with respect to such 20 equipment for such moo: I provided by section 167. The 60- 21 month period shall begin, as to any qualified railroad equip- 22 ment, at the election of the taxpayer, with the month 23 following the month in which such equipment was placed in 24 service or with the succeeding taxable year. 25 "(d) SPEbIAL RULES.- PAGENO="0106" 104 "(1) ADflJSTED BASIS.- "(A) For purposes of this section, the adjusted 3 *basis of any qualified railroad equipment with 4 respect to which an election has been made under 5 subsection (e) shall not be increased for amounts 6 chargeable to capital account for additions or 7 improvements after the amortization period has 8 begun. 9 "(B) Costs incurred in connection with a used unit of railroad equipment which are properly 11 chargeable to a capital account shall be treated as a 12 separate unit of railroad equipment for purposes of 13 this section. 14 "(C) The depreciation deduction provided by 15 section 167 shall, notwithstanding subsection (c), 16 be allowed with respect to the portion of the ad- 17 justed basis which is not taken into account in apply- 18 ing this section. 19 "(2) METHOD OF ACCOUNTING FOR DATE PLACED 20 IN SERVICE.-FOr purposes of subsections (a) and (e) 21 in the case of qualified railroad equipment placed in s.erv- 22 ice after December 31, 1974,' arid before January 1, 23 1980, the taxpayer may elect to begin the 60-month 24 period with the date when such equipment is treated 25 as having been placed in service under a method of PAGENO="0107" 105 1 accounting for acquisitions and retirements of property 2 whicIi~- 3 "(A) prescribes a date when property is 4 placed in service, and 5 "(B) is consistently followed by the taxpayer. 6 "(e) ELECTIoN OF AMORTIZATION.-The election of 7 the taxpayer to take the amortization deduction, and the dee- 8 tion to begin the 60-month period with the month following ~ the month in which the qualified railroad equipment is placed 10 in service or with the taxable year succeeding the taxable j~ year in which such equipment is placed in service, shall be 12 made by filing with the Secretary or his delegate, in such 13 manner, in such form, and within such time as the Secretary 14 or his delegate may by regulations prescribe, a statement of 15 such election. 16 "(f) TERMINATION OF ELECTION.- 17 "(1) B~ mi~ TAXPAYER.-A taxpayer which has 18 elected under subsection (e) to take the amortization 19 deduction with respect to any qualified railroad equip- 20 ment may, at any time after making such election, 21 discontinue the amortization deduction with respect to 22 the remainder of the amortization period, such discon- 23 tinuance to begin as of the beginning of any month 24 specified by the taxpayer in a notice in writing filed 25 with the Secretary or his delegate before the beginning PAGENO="0108" 106 1 of such month. The depreciation deduction provided 2 under section 167 shall be allowed, beginning with the 3 first month as to which the amortization deduction does 4 not apply, and the taxpayer shall not be entitled to any 5 further amortization deduction under this section with 6 respect to such equipment. 7 "(2) CoNSTRUcTIvE TRRM1NATION.-If at any 8 time during the amortization period any qualified rail- 9 road equipment ceases to meet the requirements of 10 subsection (d) (1) or becomes property with respect to which an amortization deduction under this section 12 is not allowable by reason of subsection (g), the tax- 13 payer shall be deemed to have terminated under para- 14 graph (1) his election under this section. Such 15 termination shall be effective beginning with the month 16 in which such cessation occurs or in which the lease exists 117 which causes disallowance. is "(g) NoNcoEPoI~TI~ LESSORS.-No amortization de- 19 duction shall `be allowed under this section with respect to 20 any property of which a person which is not a corporation 21 is the lessor. In the case of property of which a partnership 22 is the lessor, the amortization deduction otherwise allowable 23 under this section with respect to such property to any 24 partner which is a corporation shall be allowed notwithstand- 25 ing the preceding sentence and subsection (f) (2). For pur- PAGENO="0109" 107 j poses of this subsection, an electing small business corporation 2 (as defined in section 1371) shall be treated as a person 3 which is not a corporation. 4 "(Ii) LIFE TENANT AND REMAINDKRMAN.._IU the 5 case of any qualified railroad equipment held by one person 6 for life with remainder to another person, the deduction un- 7 der this section shall be computed as if the life tenant were 8 the absolute owner of the equipment and shall be allowable ~ to the life tenant. 10 "(i) APPLICATION OF SECTION.-ThIS section shall 11 apply to qualified railroad equipment placed in service after 12 December 31, 1974, and before January 1, 1980. "(j) CROSS REFERENCE.-. "For treatment of certain gain derived from the dispo. sition of property the adjusted basis of which is deter- mined with regard to this section, see section 1245." 14 SEC. 423. AMENDMENTS RELATING TO AMORTIZATION OF 15 CERTAIN RAILROAD ROLLING STOCK. 16 (a) EXTENSION OF PERIOD DURING Wuion RML- i7 ROAD ROLLING STOCK MAY QuAJ~n~y FOR 5-YEAR 18 AM0RTJZATION.-1Section 184 (e) (relating to amortization 19 of railroad rolling stock) is amended- 20 (1) by striking out "1976" in paragraph (1) and 21 inserting in lieu thereof "1980", and 22 (2) by striking out "January 1, 1976" in paragraph 23 (7) and inserting in lieu thereof "January 1, 1980". PAGENO="0110" 108 1 (b) CERTAIN CoAL CARS AND RAILR0AI) FERRY VEs- 2 SELS,-&bSeCtiOn (d) of section 184 (defining qualified 3 railroad rolling stock) is `amended to read as follows: 4 "(d) QUALIFIED RAiLROAD ROLLING ST0CK.-Except 5 as provided in subsection (e) (4), the term `qualified rail- 6 road rolling stock' means, for purposes of this section- 7 "(1) rolling stock of the type used by a common 8 carrier engaged in the furnishing or sale of transporta- 9 tion by railroad and subject to the jurisdiction of the 10 Interstate Commerce Commission if- 11 "(A) such rolling stock is- 12 "(i) used by a domestic common carrier by 13 railroad on a fall-time basis, or on a part-time 14 basis if its only additional use is an incidental 15 use by a Canadian or Mexican common carrier 16 by railroad on a per diem basis, or 17 "(ii) owned and used by a switching or 18 terminal company all of whose stock is owned 19 by one or more domestic common carriers by 20 railroad, and 21 "(B) the original use of such rolling stock corn- 22 mences with the taxpayer after December 31, 1968; 23 "(2) any railroad rolling stock not described in 24 paragraph (1) - 25 "(A) which is a car used by the taxpayer pre- PAGENO="0111" 109 1 dominantly in the hauling within the united States 2 of coal which is used (other than for resale) by the 3 taxpayer in his trade or business, and 4 "(B) the original use of which commences with 5 the taxpayer after May 7, 1975; and 6 "(3) any vessel- 7 "(A) which is used predominantly by the tax- 8 payer in hauling railroad rolling stock between ter- 9 minals located within the United States, and 10 "(B) the original use of which commences with 11 the taxpayer after May 7, 1975." 12 (c) DENIAL OF AMOETIZATION TO NONCORPOBATE 13 LESSOnS.- 14 (1) IN OENERAL.-Section 184 is amended by re- 15 designating subsection (g) as subsection (h) and by in- 16 serting after subsection (f) the following new subsec- 17 tion: 18 "(g) NONCORPORATE LESSOES.-N'O amortization de- 19 duction shall be allowed under this section with respect to 20 any property of whidh a person which is not a corporation is 21 the lessor. In the case of property of which a partnership is 22 .the lessor, the amortization deduction otherwise allowable 2~ under this section with respect to such property ~o any part- 24 iier which is a corporation shall be allowed notwithstanding 23 the preceding sentence and subsection (e) (6) For pur- 55-583 (Pt. 1) 0 - 75 - 8 PAGENO="0112" 110 I poses of this subsection, an electing small business corpora- 2 tion (as defined in ~eetion 1371) shall be treated as a person 3 which is not a corporation." 4 (2) CONSTRIJOTIVE TEIrMINATION.--Paragraph 5 (6) of section 184 (e) is amended by striking out "sub- 6 section (d) (1)" and inserting in lieu thereof "subsec- 7 tion (d) or becomes property with respect to which an 8 amortization deduction under this section is not allow- 9 able by reason of subsection (g) ". 10 (d) EFFECTIVE DATE.-The amendments made by ii this section shall apply to property placed in service by the 12 taxpayer after May 7, 1975. 13 SEC. 424. TECHNICAL AND CONFORMING AMENDMENTS. 14 (a) COORDINATION WITH INVESTMENT CREDIT.- 15 (1) IN GENERAL.-Paragraph (8) of section 48 16 (a) (defining section 38 property) is amended by 17 striking out "184,", and by inserting at the end thereof 18 the following 110W sentence: "Qualified solar energy 19 equipment with respect to which an election under see- 20 tion 189 applies shall not be treated as section 38 21 property." 22 (2) USEFUL LIFE.-The second sentence of section 23 46 (c) (2) (defining applicable percentage for purposes 24 of determining qualified investment) is amended by 25 striking out the period at the end thereof and inserting PAGENO="0113" 111 in lieu thereof "(or, if the taxpayer has elected an amor- 2 tization deduction with respect to the property, the 3 amortization period) ." 4 (3) EFFECTIVE DATE.-The amendments made by 5 this subsection shall apply to property placed in service 6 after March 17, 1975. 7 (b) CONFORMING AMENDMENTS.- 8 (1) Section 642 (f) (relating to amortization de- 9 duction for estates and trusts) is amended by striking 10 out "and 188" and inserting in lieu thereof "188, 189, 11 and 190", 12 (2) Section 1082 (a) (2) (B) (relating to basis in 13 certain exchanges) is amended by striking out "or 188" 14 and inserting in lieu thereof "188, 189, or 190". 15 (3) Section 1245 (a) (relating to gain from dis- 16 positions of certain `depreciable property) is amended by 17 striking out "or 188" each place it appears in paragraph 18 (2) and inserting in lieu thereof "188, or 189". 19 (c) `CLERICAL AMENDMENTS.~-ThC table of sections 20 for part VI of subchapter B of chapter 1 is amended by 21 adding at the end thereof the following: "Sec. 189. Amortization of qualified energy use property. "Sec. 190. Amortization of qualified railroad equipment." PAGENO="0114" 112 1 PART Ill-TAX CREDIT CHANGES RELATING 2 TO ENERGY CONSERVATION 3 SEC. 431. CHANGES IN INVESTMENT CREDIT RELATING 4 TO INSULATION, SOLAR ENERGY, AND AIR 5 CONDITIONING. 6 (a) INSULATION AND SoT~AR ENERGY.-Section 48 7 (relating to definitions and special rules for purposes of the S investment credit) is amended by redesignating subsection 9 (k) as subsection (I) and by adding after subsection (j) 10 the following new subsection: ii "(k) TEMPORARY RULES FOR INSULATION AND 12 SoL~ ENERGY.- 13 "(1) TREATMENT OF SECTION 38 PROPERTY.- 14 Any- 15 "(A) insulation installed (other than pursuant 16 to a reconstruction of the building) after March 17, 17 1975, and l)efore January 1, 1978, in a structure 18 which was in existence on March 17, 1975, and was 19 used on such date in a trade or business (or held 2u for the production of income) or 21 "(B) solar energy equipment installed after 22 March 17, 1975, and before January 1, 1981, 23 shall be treated as section 38 property, PAGENO="0115" 113 1 "(2) LODGING EULII~ NOT TO APPLY.-For pur- 2 poses of this subsection, paragraph (3) ol subsection 3 (a) (relating to property used for lodging) shah not 4 `apply. 5 "(3) DEFINJTIONS.-FOr purposes of this subsec- `6 tion- 7 "(A) INSUI4ATI0N.-The term `insulation' has 8 the meaning given to such term by section 44A (c) 9 (2). 10 "(B) SoI~An ENERGY EQUIPMENT.-The term 11 `solar energy eq'uipiiient' means equipment- 12 " (i) whicli, wlieii installed in or on a build- 13 ing, uses solar energy to heat or cool suth build- 14 ing or provide hot water for use within such 15 building and meets such criteria as the Secretary 16 or his delegate shall `by regulations prescribe; 17 "(ii) `the original use of which commences 18 with the taxpayer; arid 19 " (iii) which has a useful life of at least 20 3 fixed years. 21 rfhe `Secretary or his delegate shall initially pre- 22 ` scribe regulations under clause (i) not later than 23 2 years after the date of the enactment of this section. 24 "(4) TERMINATION.-ThjS subsection shall not 25 apply to - PAGENO="0116" 114 1 "(A) amounts paid or incurred with respect to 2 insulation after December 31, 1977, or 3 "(B) amounts paid or incurred with respect 4 to solar energy equipment after December 31, 5 1980." 6 (b) Ara CONDITIONING, SPACE IIEATER5, ETO.-&b- 7 paragraph (A) of section 48 (a) (1) (defining section 38 S property) is amended to read as follows: 9 "(A) tangible personal property (other than an air conditioning or heating unit), or". (c) EFFEcTIVE DAms.- 12 (1) The amendments made by subsection (a) shall 13 apply to amounts paid or incurred after March 17, 1975. 14 (2) The amendment made by subsection (b) shall 15 apply to property placed in service after the date of the 16 enactment of this Act. 17 SEC. 432. GENERATING FACILITIES POWERED BY PETRO- 18 LEUM AND PETROLEUM PRODUCTS. 19 (a) IN GENEBAL.-Paragraph (1) of section 48 (a) 20 (defining section 38 property) is amended by adding at the 21 end thereof the following new sentence: "Such term does 22 not include any electrical generating property fueled by 23 petroleum or petroleum products (including natural gas)." 24 (b) EFFECTIVE DATE.- 25 (1) IN GENERAL.-The amendment made by sub~ PAGENO="0117" 115 1 section (a) shall apply to property which is placed in 2 service after April 17, 1975. 3 (2) BINDING CONTRACT&-The amendment made 4 by subsection (a) shall not apply to property which is 5 constructed, reconstructed, erected, or acquired par- 6 suant to a contract which was, on April 17, 1975, and 7 at all times thereafter, binding on the taxpayer. 3 (3) PLANT FACILITY RTJLE.- 9 (A) GENERAL RULE.-If-- 10 (i) pursuant to a plan of the taxpayer in ii existence on April 17, 1975 (which plan was 12 not substantially modified at any time after such 13 date and before the taxpayer placed the plant 14 facility in service), the taxpayer has con- 15 structed, reconstructed, or erected a plant facil- 16 ity, and either 17 (ii) the construction, reconstruction, or 18 erection of such plant facility was commenced 19 by the taxpayer before April 18, 1975, or (iii) more than 50 percent of the aggregate 21 adjusted basis of all the property of a character 22 subject to the allowance for depreciation making 23 up such plant facility is attributable to either 24 property the construction, reconstruction, or 25 erection of which was begun by the taxpayer PAGENO="0118" 116 before April 18, 1975, or pro$rty the acqui- 2 sition of which by the taxpayer occurred before * 3 such date, 4 then the amendment made by subsection (a) shall 5 not apply to all property comprising such plant (3 facility. For purposes of clause (iii) of the preced- 7 ing sentence, the rules of paragraphs (2) and (4) 8 shall be applied. 9 (B) PLANT FACILITY DEFINED.-For purposes 10 of this paragraph, the term "plant facility" n~eans 11 a facility which does not include any building (or of 12 which buildings constitute an insignificant portion) 13 and which is- 14 (i) a self-contained, single operating utht 15 or processing operation, 16 (ii) located on a single site, and 17 (iii) identified, on April 17, 1975, in the 18 purchasing and internal financial plans of the 19 taxpayer as a single unitary project. 20 (0) COMMENCEMENT OF COI~STEUCTION.- 21 For purposes of subparagraph (A) (ii), the oon* 22 struction, recons'u~tiQ~l, or erection of a plant facil- 23 ity shall not be considered to have commenced until 24 construction, reconstruction, or erection has corn- 25 menced at thQ site of such plant facUity. The pro- PAGENO="0119" 117 1 ceding sentence shall not apply if the site of such 2 plant facility is not located on land. 3 (4) MACHINERY OR EQUIPMENT RULE.-The 4 amendment made by subsection (a) shall not apply to 5 any piece of machinery or equipment- 6 (A) more than 50 percent of the parts and 7 components of which (determined on the basis of 8 cost) were held by the taxpayer on April 17, 1975, 9 or are acquired by the taxpayer pursuant to a bind- 10 ing contract which was in effect on such date (and 11 all times thereafter), for inclusion or use in such :12 piece of machinery or equipment, and 13 (B) the cost of the parts' and components of 14 which is not an insignificant portion of the total 15 cost. 16 (5) CERTAIN LEASE-BACK TRANSACTIONS, ETC~- 17 Where a person who is a party to a binding contract 18 described in paragraph (2) `transfers rights in such 19 contract (or in the property to which such contract 20 relates) to `another person but a pai~ty `to such contract 21 retains a right to use the property under a lease with 22 such other person, then to the extent of `the transferred 23 rights such oIlier person shall, for purposes of para- 24 graph (2), succeed to the position of the transferor 25 with respect to such binding contract and such property. PAGENO="0120" 118 1 The preceding sentence shall apply, in any case in which 2 the lessor does not make an election under section 48 (d) 3 of the Internal Revenue Code of 1954, only if a party 4 to such contract retains a right to use the property under 5 the long~term lease. 6 (c) QuA1IFI1~ P1~OOEESS ExPENDITUnES.-Nothing 7 in the amendment made by subsection (a) shall be construed 8 to deny any investment credit for qualified progress expendi- ~ tures described in-léction 46 (d) `of the Internal Revenue 10 Code of 1954 for any taxable year beginning before April 11 17, 1975. Passed the House of Representatives June 19, 1975. Attest: W. PAT JENNINGS, Clerk. PAGENO="0121" 119 STATEMENT OP ELLIOTT M. ESTES, PRESIDENT AND CHIEF OP- ERATING OFFICER, GENERAL MOTORS CORP., ACCOMPANIED BY DR. HENRY L. DUNCOMBE, J1~., VICE PRESIDENT AND CHIEF ECONOMIST, GENERAL MOTORS CORP. S Mr. Esii~s. Thank you very much, Mr. Chairman. I am Elliott M. Estes, president of General Motors Corp. With me ~odav is Mr. Henry L. Duncombe, Jr., vice president and chief econ- omist of GM. We are pleased to have the opportunity to testify on H.R. 6860, and particularly on title II, part I, that promises to have a profoundly adverse effect on the automobile buyers and the na- tional economy. In the interest of conserving time. I will read a summary of our full statement, and I request that the full statement appear in the record. * The American consumer is just now beginning to see some signs of hope of economy recovery, and consumer confidence, as measured by national surveys, is beginning to increase. Yet the public remains cautious in two major respects: home buying and auto purchases. One contributing factor is the confusion about energy availability, energy prices, and national energy policy. For example, there have been con- fficting news stories about whether or not people are going to be able to buy gasoline this summer. Also, there has been a wide range of figures quoted for future prices of gasoline. Obviously, people are not going to buy new cars if they are not sure they will be able to drive them. Both the home building and automobile industries play important roles in national economic recovery and both industries are heavily influenced by consumer uncertainty. An additional reason for com- paring them is that H.R, 6860 applies two quite different energy policy philosophies for these two industries. That is, while consumers use about 22 percent of the national energy in their residential struc- tures, H.R. 6860 provides tax incentives for home insulation and storm windows. It does not impose an arbitrary or punitive limit on the size or fuel consumption of new homes, nor should it. In contrast, while consumers use about 13 percent of national energy for auto- motive transportation, H.R. 6860 establishes fuel economy standards that will, by 1981, result in substantial arbitrary restrictions on the types of cars that can be made available to the public. The turmoil in the energy situation is bringing about drastic changes in the importance that people attach to fuel economy in auto- mobiles. In order to meet the fuel economy demands of the public, GM has embarked on the most ambitious and costly new-design pro- gram in our industry's peacetime history. In all, General Motors plans to spend billions of dollars to provide the highest practicable fuel economy in cars of all sizes in the next few years. Since the oil embargo ended some 14 months ago we have intro- duced six new smaller models, which, taken together, average better than 21 miles per gallon, sales weighted, on the EPA composite urban/highway test. The 1975 model program is only the first stage in our efforts to meet the fuel economy demands of our customers. In the 1976 model *See p. 172. PAGENO="0122" 120 years, we will introduce America's smallest, most fuel efficient car. Still to come are programs to reduce the exterior size and weight of our larger cars while maintaining present levels of roominess arid of comfort. One result of our programs to provide consumers with improved fuel efficiency will be a major change in the weight classes of cars we will be offering in 1976 and later model years. Only about 20 percent of our current products are in inertia weight classes of 3,500 pounds and under, that is, a curb weight of about 3,000 pounds; by 19$0, we expect these classes to account for more than 70 percent of our sales. Looking at our full-size cars, about one-third of our total produc- tion in 1975 is in inertia weight classes of 5,000 pounds and up. By 1980 we expect cars of this weight class to represent a negligible per- centage of our sales. We are taking weight out of virtually every car we build-at least 700 pounds from our full-size cars. This drastic shift in the weight class of the cars we are building, along with changes in engines, reduced size engines, drivetrains and axles, improved aerodynamics and other fuel economy measures will, because of market demands, enable us to keep our commitment to the Federal Government to meet or exceed 53-percent improvement in the fuel economy of our cars between 1974 and 1980. As a result of these fuel economy improvements, made in response to consumer demands brought about by higher gasoline prices, total gasoline consumption for all cars on the road will decline between now and 1980. The projected savings in oil, as estimated by the Federal Energy Administration, is 587,000 barrels per day by 1980. There is no other energy consuming sector of our economy that is approach- ing this negative energy growth. If there were, our country would be well on its way to solving its energy problems. Why then do some people feel it is necessary to establish fuel econ- omy standards for automobiles ~ Because of several misconceptions about the automobile market and automotive technology. One of these misconceptions is that there is some magic new tech- nology that we could use, if only we would, to achieve fuel economy improvements of 50 percent or more in a given car. I assure you, this is not the case. Another aspect of the misconception about technological solutions is that European and Japanese manufacturers rely on superior tech- nology to achieve fuel economy that is generally better than the fuel economy of the American cars. This is simply not true. The high miles~per-gallon figures associated with some of the foreign cars result from the simple fact that they are smaller and lighter than any currently built American car. One needs only to examine the 1975 EPA fuel economy ratings and make a comparison between GM models and comparable imports to see that our technology is as good as any in the world. Note that in charts A, B, and C, which make up the last pages of this statement, in every weight class in which we compete, a domestic General Motors car ranks either at the top or near the top for fuel economy. Our analysis of this legislation has indicated that it could cause a substantial loss of sales and jobs as early as the 1980 model year. Much more drastic consequences could be expected in post-1980 model years PAGENO="0123" 121 as the standards jump an average of 1.5 miles per gallon per ye~tr to reach 28 miles per gallon in 1985. The idea that General Motors can build the kinds of cars it wants to build, then use its advertising power to somehow make the American public want to buy those cars is a myth. This point was amply proven by the experience in car sales in the 1974 and 1975 model years. On the contrary1 we try to put the kinds of cars on the market that the American people have indicated they want to buy. If we are required to meet standards that force us to build cars that do not conform with what the American people want to buy, they simply will not be sold and the entire economy will suffer. H.R. 6860 mandates 20.5 miles per gallon for 1980, which represents a 68-percent improvement over General Motors' 1974 level of fuel economy-28 miles per gallon mandated for 1985 represents an im- provement in fuel economy of 130 percent for GM. There is no evidence that such stringent fuel economy standards as called for in this legis- lation for the 1981-85 model years can be achieved without serious disruptions of the national economy and intolerable unemployment consequences. The 1985, 28 miles per gallon, standard cannot be achieved through techological developments alone. It must be achieved by restrictions on the size and weight of cars that can be built. Beginning this fall General Motors, as I said, will offer a small, light, relatively low- powered vehicle that is smaller than the smallest subcompact car now being produced in the United States. If we were required to meet a 28-miles-per-gallon standard for our entire production, the vast majority of our cars would have to be the size of the Vega and our new minicar or smaller. If the American public cannot purchase vehicles that will be suited to their needs, many owners of larger cars are likely to keep them rather than trading them in on new, more fuel efficient cars. Thus, rather than conserving fuel, standards in the area of 28 miles per gallon would have the effect of perpetuating the use of less fuel efficient ears, and this would result in increased gasoline consumption, contrary to the purpose of the bill. Mr. Chairman, I would like to turn now to comments directed specifically to the legislation before this committee, IELR. 6860. The Senate Commerce Committee also has reported out a bill, S. 1883, that would mandate stringent fuel economy standards. Most of our com- ments apply to that bill as well. We believe it is a serious mistake for Congress to set standards by legislation, and the problems encountered with the Clean Air Act bear this out. There is widespread agreement that the automotive standard for NO~ in the Act was established in error, is not necessary to achieve air quality goals and blocks the introduction of alternate power plants. Yet Congress has not yet changed that requirement, despite the urging to do so by the Environmental Protection Agency nearly 2 years ago. Section 212(c) (1) of the bill, as passed by the House, gives the Secretary authority to determine if an emission standards penalty exists for any model year compared to the fuel economy that would have resulted if the cars were required only to meet 1975 emission PAGENO="0124" 122 standards. This section correctly recognizes that there is likely to be a fuel economy penalty associated with meeting future emission standards that are more stringent than current standards. This section fails to recognize, however, that emissions requirements on auto manufacturers are made more stringent not oniy by lowering the numerical standards but also by changes in test procedures and other regulations promulgated by the administrative agency. Thus, unless section 212(c) provides for adjustment in the fuel economy standards for changes in emission regulations and procedures that adversely affect fuel economy as well as for changes in the emission standards, it will not be fully effective. If this legislation is passed, there is likely to be conflict between the EPA and the auto manufacturers over determining the magnitude of the fuel economy penalty. Since the punitive penalty for a manu- facturer of 4 million cars would be $20 million for each one-tenth mile per gallon below the standards, an accurate determination of the emission standards penalty could be of vital concern. It is extremely important that this committee understand the rela- tionship between legislation mandating fuel economy standards and legislation being considered by other committees of Congress that will establish the emission standards that the automobile companies will he required to meet in future model years. We have urged the Congress not to proceed with fuel economy standards until such time as con- gressional decisions on emission standards have been made. There are a number of other specific provisions in the automotive standards section of H.R. 6860 on which General Motors would like to comment. In the interest of conserving time, however, I will not cover these in my oral testimony today. In conclusion, General Motors currently is working as hard as it can to improve the fuel economy of its cars, and we plan to continue that effort on which we are spending billions of dollars. A 53-percent improvement in the fuel economy of our cars in 5 model years, which we have committed to achieve under the volun- tary program, represents a dramatic and unprecedented contribution to achieving the energy goals of the Nation. Automobiles account for only 13 percent of total energy use, and if similar improvements were made in other energy consuming areas that account for 87 percent of energy use, the energy crisis would soon end. We recognize, of course, that it is not reasonable to expect as much conservation in other energy consuming sectors as will be achieved in the automotive sector. That is why our Nation's energy policy must include measures to increase production of energy as well as steps to conserve energy. We in General Motors, urge that the following steps be taken in addition to the voluntary passenger car fuel economy im- provement program: One, decontrol energy prices to encourage production and reduce consumption. Two, if free market actions are insufficient, impose a tariff on imported oil for the limited time needed to effect greater conservation. Three, impose a tax on gasoline and other motor fuels if price decontrol and import tariff are inadequate. Four, legislatively enact a program to monitor the automobile industry's progress toward meeting the 1980 fuel economy improvement goal and require periodic PAGENO="0125" 123 reports to Congress. And five, continue the present 49-State vehicle emission standards through the 1981 model year. We believe these measures represent a sound, well-balanced program that would make a significant contribution to achievement of the Nation's energy goals. We urge Congress to direct its attention to these areas rather than to fuel economy standards that could have a drastic negative effect on the well-being of Americans. The CHAIRMAN. I am going to ask, in order that we might receive this in the proper context, and because we have full attendance at this moment, that we hear the statement in chief from the other three automobile manufacturers and that then we can direct questions at all three at the same time. I think that will expedite the procedure. So I will ask now that Mr. Fred Secrest, executive vice president of the Ford Motor Co. present the Ford statement, and then I will ask for the Chrysler statement, and then we will ask all three of you gentlemen to take the witness stand and field the questions. STATEMENT OP F. G. SECREST, EXECUTIVE VICE PRESIDENT, OP~ ERATIONS STAFFS. FORD MOTOR CO. Mr. SECREST. Mr. Chairman, and members of the Senate. Finance Committee, I am Fred Secrest, executive vice president of Ford Motors. I have filed with the committee an 8-page statement and in the interest of time, I will read a condensed version. The CHAIRMAN. Insofar as your statement merely repeats what Mr. Estes said, you could indicate that he has spoken for the two of you, and insofar as you have a different opinion, I think you ought to stress that part of it. Mr. SECREST. I will try to do that, Mr. Chairman, although I just read Mr. Estes' statement a few minutes ago, so I am not certain that I can isolate for you the areas of difference if any, between our posi- tion and that of General Motors. The CHAIRMAN. Well, you have got an old expert in testifying be- fore the committee sitting behind you there, in Mr. Mark. If he would help, I think you can concentrate on the parts where you might be at odds with Mr. Estes. Mr. SECREST. The bill before the committee, H.R. 6860, requires that motor vehicle manufacturers meet fuel economy standards be- ginning in model year 1978 at levels 32 percent higher than 1974 models. It provides severe fines for manufacturers whose average vehicle production does not meet these standards. It establishes even tighter standards for future years, culminating in a 28-mile-per-gallon average by 1985. It is Ford Motor Company's conviction that fuel economy improve- ment is one area where there is no need for regulation. With gasoline at 57 cents a gallon in June, increases just last week of 3 to 5 cents a gallon, and potentially much higher prices, consumers do not need a law to force them to look for the best fuel economy. Compacts and subcom- pacts are currently running 57 percent of ~ sales, compared with 41 percent in 1973. PAGENO="0126" 124 Nor does the manufacturer need a law to force him to provide what consumers are demanding. A few weeks ago, Ford introduced eight new so-called MPG cars giving the customer a choice of several models that deliver 27 miles per gallon in the EPA combined metro/highway test, or 34 miles per gallon on the highway test alone. During the past 5 years, we have spent nearly $2 billion to develop new small cars and to expand our small car capacity. By 1980, we expect to spend an ad- ditional $2 billion on more efficient car designs and better fuel economy, through engine and drivetrain improvements and product downsizing. We expect Ford's 1976 model average fuel economy to be 3 miles per gallon, or more than 20 percent, better than this year. These changes are expensive, but we are making them because we must respond to the demands of the marketplace. The cost of mandating and deadlining these changes by Government regulation is likely to be very high, for several reasons. First, conversion of facilities and redesign and engineerilig pro- grams to meet the timetables indicated in this bill would be enormously expensive and disruptive. In the 6 months ending March 31, 1975, Ford had before-tax losses of over $200 million. As a result we have had to increase our borrowing substantially. While we, of course, anticipate a recovery from the present automotive depression, the losses will have a significant effect on our investment capability. Our present plans for fuel economy improvement, the $2 billion I mentioned, represent the maximum we can afford, and some other manufacturers may well prove unable to do this much. Even with no limit on the capital available for investment, there would be a serious risk that a manufacturer might fail to achieve some of the standards under the rigid timetable prescribed in the bill. The risks include unpredictable variability of test results, wide variations in new car sales mix in response to consumers demands, which would change a manufacturers average car fuel economy, and the potential in~ ability of the manufacturers to put together on the stated date all of the individual technical improvements that may be required to achieve the overall target. Failures even briefly, or to a very minor extent, to meet the target for any of these reasons, would mean massive financial penalties. The consumer would pay the extra cost inherent in rush pro- grams aimed at meeting arbitrary deadlines. And he would also pay at least some portion of any penalties. Perhaps most importantly, the standards may discourage actions aimed at the real objective of the legislation, that is, continuing im- provements in fuel efficiency for the entire car fleet. Changes made dur- ing a model year might not count at all for the purpose of measuring the average results. The introduction of high-risk advanced technology would be slowed because the penalty for failure would be so much greater than in a free market. Under a mandated standard, manufac- turers would have to place their limited financial and technical re- sources almost entirely on sure things. Finally, the 28 miles per gallon standard could rule out efforts to improve the fuel economy of larger cars, forcing those owners who believe they have a genuine need for family sedans or station wagons to retaim as long as possible, their less efficient older models. We believe that mandatory fuel economy legislation is unnecessary, that it could prove costly to consumers and that it would impose an PAGENO="0127" 125 unnecessary and unreasonable burden on the domestic automobile in- dustry. If Congress nevertheless believes that mandating fuel economy is essential, we would hope that any bill would have three important objectives: First, to accomplish the goal with the least possible inter- ference in the marketplace and with minimum disruption to employ- ment; second, to set standards that are technologically and financially achievable; and third, to assure the availability of vehicles adequate to meet the transportation iieed~ of the people. Furthei~, the automotive fuel conservation goals should be consistent with whatever conservation actions may be mandated for pther energy uses. Accordingly, if such legislation is deemed necessary, we strongly urge the following modifications to ILR. 6860. First, delete the 28 miles per gallon standard for 1985. It seems prob- able that a 28 mile per gallon average cannot be achieved by 1985 across the range of vehicles presently demanded and needed by a large seg- ment of the U.S. market. Only 10 of th~ 320 passenger cars listed in the 1975 EPA Buyer's Guide achieve a Metro/highway average of 28 miles per gallon or better. All 10 of these are imports and all except the Peugeot diesel are in the 2,500 pound weight class or lighter. A manu- facturer could hardly make long-term investments in more efficient full-sized vehicles, because even with improvement of 50 percent or more, they still may not come close to the 1985 standard. The six-pas- senger sedan and the station wagon would disappear from the new-car market. Such a standard would require a total restructuring of the industry, including the writeoff of billions of dollars worth of facili- ties. Major unemployment would be unavoidable during the long fran- sition period. Further,, domestic vehicle prices would have 1~o reflect the enormous cost of this facility conversion; while most foreign manu- facturers, who are already building 2,500-pound cars for their home markets, would have considerably less task and cost. We believe, therefore, that a standard at this level would turn over a further large share of time market to the imports, with, of course, severe effects on U.S. jobs and the balance of payments. rfhe flexibility given to the Secretary of Transportation to modify the 28 miles per gallon goal would not resolve this problem. Product and facility plans would have to be based on the statutory standard until a determination of modification was made in 1979 or later. Any modifications would probably come only at the last minute. There is no doubt that continued improvement in automotive fuel economy is necessary and possible after 1980. We believe that this improvement will occur as a result of market forces, and that by 1980 it will become obvious that a costly regulatory structure is not needed to achieve the goal. If Congress wishes to assume a continuing need for regulation, however, it should authorize the administering agency to set post-1980 fuel economy standards only after careful assessment of technological and financial feasibility; a thorough analysis of con- sumer needs; analysis of the impact on safety; and reassessment of the Nation's energy requirements and supplies. There is simply no basis today for mandating a standard of 28 miles per gallon or any otl~er number for a period that is 10 years away. Second, we believe the penalties must be modified. The level of penalties in H.R. 6860 is exom bitant and cOuld be considered confiscatory. 55-583---75---pt. i-9 PAGENO="0128" 126 If Ford should achieve an average fuel economy of 19 miles per gallon in 1980, the shortfall of 1.5 miles per gallon or only 8 perccnt from the proposed statutory standard would result in a civil penalty of about $225 million, equi~aIent to before-tax profits of $450 million. Our dividend payments, at an annual rate, are $295 million a year today. Fines of this magnitude would deprive manufacturers of needed funds to make heavy investments in conve~sions and fuel econ- omy technology. In fact, such huge contingent liabilities would, in our judgment, seriously jeopardiz& our company's ability to raise the capi- tal funds needed to attain major fuel economy improvements. In view of our concern about the effect of these provisions on how investors and lenders would evaluate the industry's securities, we suggest that the committee might wish to seek testimony from Government and private experts on the subject. There are a number of ways in which the penalties could be mod- erated, such as use of the production-weighted average application of the penalty only to those cars not meeting the standard, which I think is essentially the suggestion made by Mr. Estes; reduction of the dollar amount of the penalty; provision that the maximum penalty should not exceed some stated percentage, perhaps 10 to 25 percent of a manufacturer's profit; or making the penalty tax deductible. Such changes could still result in potential penalties that would assure maximum effort to avoid them, without the shattering consequences of shortfall under the schedule set forth in 6860. Third, we believe that any requirements for truck fuel economy standards should be deleted. The lowest operating cost is a prime objective for truck operators, and fuel economy is therefore an espe- cially important purchasing criterion for trucks. Trucks are designed primarily to haul goods. A reduction in truck size which might be required to meet fuel economy standards would not neèessariiy result in an overall reduction in fuel consumption, if more trips would be needed to carry ~he same amount of goods. Further, today there are no EPA data indicating the average fuel economy of the Nation's new truck fleet, because EPA's testing meth- ods for many trucks d9 not yield meaningful fuel economy figures. The wide variety of truck usage patterns, loading conditions and ve- hicle configurations have dictated engine only rather than vehicle testing. r And fourth, permit inclusion of cars presently imported by the I manufacturer in overall fuel economy average. As initially proposed in the House by Representative Sharp, each manufacturer would have / determined an import base equal to his imports in 1973 or 1974 as a / percentage of the total vehicles sold by him in thQse years. This import base would be included in determining the manufacturer's average fuel economy in future years. The House, however, accepted a substi- tute provision requiring that all imports, except from Canada, be excluded in determining a manufacturer's basic fleet-average fuel economy. The provision as originally proposed would clearly prohibit a man- ufacturer from initiating so-called runaway-plant actions in order to achieve the fuel economy standard. We think this original provision seemed to be a reasonable safeguard, and we urge its incorporation. PAGENO="0129" 127 We are gratified that the House, in H.R. 6860, has recognized that there must be adjustments for the fact that, for any given vehicle and powertrain, tighter emission controls means a loss in fuel economy. And finally, we want to emphasize that the singlemost helpful thing that Congress could do to improve automotive fuel economy would be to act to defer any further tightening of emission standards and retain the ali~eady-stringe.nt present standards for 5 additional years. The President has recently recommended such a deferral, based on an analysis indicating substantial fuel economy degradation in moving to the 1978 statutory levels. I must stress that aS an absolute prerequisite for the degree of fuel econoniy improvement envisaged by this bill be- tween now and 1980 is a freeze in emission standards at or near today's levels. Mr. Chairman, we are preparing a copy of H.IR, 6860 with specific amendments to accommodate these suggestions we have made today that would, in our judgment, remedy the serious problems I have discussed and clarify and improve the bill with respect to a number of technical details. We have also included some additional suggested minor amend- ments, together with their rationale that time restraints have not per- mitted me to cover today. I request permission to file his document for the record. Senator TALMADGE [presiding]. Without objection. it is so ordered.* Mr. Secrest, if you will file those suggested amendments, the com- mittee will give it consideration. Thank you sir. *r~ he next witness is Mr. A. G. Loofbourrow, vice president of engi- ileering, the Chrysler Corp. STATEMENT OF ALAN G. LOOFBOURROW, VICE PRESIDENT, ENGINEERING, CHRYSLER CORP. Mr. Loornommow, Thank you, Mr. Chairman. Because of the limited time available to me, I would like to state our position briefly, and to submit for the record a more complete statement describing the engi~ neering eonsider~tions involved in improving gasoline mileage, and the drawbacks to legislative solutions to the problem. Senator TALMADGE. You may submit your full statement for the record. We would be delighted to have it, sir. Mr. LoorBouRRow. Thank you, sir. In our view, this legislation is unnecessary. It po~es a serious threat to the economic health of the automobile industry~ its thousands of supplier industries, ~ind to many thousands of their employees. Tt imposes unnecessary and arbitrary restrictions on the freedom of choice that has been a critical force hi the success of the free market system. Discriminatory legislation that effectively outlaws larger cars would unfairly penalize individuals and families who reauire these vehicles, and would limit the size and number of motor vehicles manufacturing operations in this country. Such drastic measures in the name of fuel conservation would appear to be obviated by the fact that Chrysler and other manufac- *See p. 189. PAGENO="0130" 128 turers have already pledged to improve fuel economy of their fleets by 40 percent by the year 1980. That represents a savings of more than 487 million barrels of crude oil a year by 1980. A comparable improvement by all other users of petroleum products would resnit in savings of additional hundreds of millions of barrels of crude oil annually. In recognition of these facts, the President of the United States has recommended that Congress hold automotive emissions standards at their present very strict levels, since any additional tightening of those standards must inevitably impede our efforts for greater fuel economy. Chrysler vehicles meeting today's California standards, for exam- ple. incur a 12 percent penalty compared with comparable vehicles meeting Federal standards~ More stringent standards necessarily pro- duce larger penalties. No law, no tax or civil penalty program, and no crash research development project can change that basic engineering fact of life. Despite the technical problems posed by today's stringent emissions standards, we have improved the fuel economy of our 1975 fleet by 15 percent over 1974. This industry dies not need standards or taxes or any other arti- ficial incentive to provide better gasoline mileage. We already have the strongest incentive a free economy produces-the demand of our customers. We do not need a law to echo what we hear in the market- place. At Chrysler we are now developing ways to meet today's stringent emissions standards while at the same time improving fuel economy through precise electronic control of the engine's operation. As a result of technological improvements and the shift in mix to small cars we are confident we can reach the goal of a 40 percent imnrovement in fuel economy on a sales-weighted basis by 1980. Our mutual objective-reduced fuel consumption-might better be met by revising existing laws, rather than writing new ones. The automobile industry is inundated with contradictory, mutually exclusive standards that work against improved fuel economy, A multitude of safety standards that have practically no identifiable benefit add hundreds of pounds to a car's weight and seriously pena- lize gasoline mileage. Proposed emissions standards could lead to fuel- economy penalties of 30 percent. Proposed noise and damageability standards could cause additional penalities. I think we all know from experience in both. government and in- diistry that you cannot legislate a technical breakthrough or solve a problem by simply throwing money at it. Technological progress usually requires careful and painstaking work. There are rarely dramatic solutions to our problems. To helu reach the President's 40 percent goal, we are taking a number of actions in addition to developing electronic controls for engine tim- in~ fuel distribution, and other engine operations. These modifications include reducing vehicle weight, improving aerodynamics, loworino' a~de ratios, improving transmissions, reducing brake drag, lowering idle speeds. and reducing rol1in~' resistance. None of these sound very exciting by themselves, but taken together, they can produce significant improvements in gasoline mileage. We are also PAGENO="0131" 129 planning new lines of smaller, lighter, more fuel efficient cars over the next few years. rllhe first of these new cars will be available this fall, and will sell alongside our present line of compacts. New laws in the form of fuel economy standards won't ge~ us back the mileage we have already lost, and won't prevent additional losses if safety and emissions standards are needlessly tightened. We urge this committee not only to reject additional and unneces- sary fuel-economy standards, but also to recommend a 5-year freeze on present standards so that we can attain our promised 40 percent im- provement by 1980. As I have said, the industry is still doing what it always has done- responding to the demands of the marketplace, and the requirements of our national objectives. And I believe that we can continue to advance toward the objectives of better fuel economy, environmental protection, and safe and eco- nomical transportation. All we ask is that Government establish clearly ordered priorities on the basis of the engineering realities of technological feasibility and the economic realities of cost-benefit studies. Thank you. Senator TALMADGE. Thank you very much, sir. Now, Mr. Estes, if you and Mr. Secrest will join Mr. Loofbourrow at the witness table, we will propound questions to any of you. And without objection, we will restrict the round of interrogations to 10 minutes per Senator. If any Senator desires more time than that, we will provide a second and if need be a third and fourth round, as many rounds as necessary. Is that agreeable to the committee? Without ob- jection, it is so ordered. Senator ClImTIs. Mr. Chairman. Senator TALMADGE. Senator Curtis. Senator CrIRTIS. I would like unanimous consent to insert an opening statement in the record following the statement made by the Chairman. Senator TALMADGE, Without objection, so ordered.? Gentlemen, as all of you know, we have a crisis in imported petro- leum. Domestic reserves are decreasing and the OPEC nations have quadrupled the prices for imported petroleum. And last year we paid about $25 billion for imported petroleum. There is justno way on Earth that we can earn the foreign exchange to do that. Now, the President ha~ suggested making fuel so expensive that the price will ration the product itself. And that seems to be the thrust of Mr. Estes paper that he submitted, as I saw it. But I think Congress is unwilling to buy that. If you take for ex- ample, the community where I live, 25 miles south of Atlanta. Virtually all of my neighbors work in Atlanta. That nieans a 50-mile round trip daily for gainful employment.~ A lot of them work in the Ford plant, some in the General Motors assembly plant, Delta Air Lines, Eastern Airlines, things of that* nature. They all are working peOple. And if they have to pay 75, 80 cents or a dollar a gallon~ for gasoline, it will place an intolerable burden on those people. They Would probably have to move back to town, dispose of their homes, or something of that nature. 1 See p. 1. PAGENO="0132" 130 And you have some similar situations throughout the country. Ours is pretty much a mobile society today. And since you gentlemen are manufacturers of principle automotive products in this country, you know it better than I. Our people are addicted to automotive transportation. So some action is going to be necessary to limit the imports of pe- troleura and to convert to coal and other resources that we have in this country in great abundance. As I recall, about 17 million barrels of petroleum is used daily in America. Is that about right. Mr. ESTES. Something like that. Senator TALMADGE. How much of that goes into gasoline or automo- tive transportation? Mr. Esn~s. About 13 percent. Senator TALMADGE. Only 13 percent of petroleum? Now, you stated 13 percent in the energy needs. Mr. E5TES. Thirteen percent of total energy, about 30 percelit of petroleum. Senator TALMADGE. Thirty percent of petroleum goes into produc- tion of gasoline or automotive transportation. Mr. E5TE5. Right. Senator TALMAD~E. So we are talking roughly about what? Five million barrels of petroleum daily? Mr. Es~rEs. Five or six. Senator TALMADGE. Automotive propulsion on that ordei~- Mr. ESTES. Five to six, that is right. Senator TALMAnoE. Five to six million barrels daily. Now, I think you make good arguments in your paper about trying to enforce technology by law. I doubtthat that is possible. How does your product compare with some of the best engineered German products, I guess a Cadillac and a Mercedes and what do they call it, Bavarian Motor Works over there in Germany, they are all about- Mr. E&rEs. BMW. Senator TALMADGE. They are about equivalent aren't they? Now I believe you got some good mileage on your new Cadillac Seville. What do you get per mile, per gallon on it? Mr. ESTES. It is 17.2 on a weighted average between the two EPA runs, 55 percent city, 45 percent highway that the EPA has deter- mined, 17.2. It happens to be the highest fuel economy of any foreign or domestic 4,500 pound car being sold in the United States today, according to EPA numbers. Senator TALMADGE. What does Mercedes get? S Mr. ESTES. Mercedes on a comparable basis is about 13. Senator TALMADGE. In other words,. you are doing better than the Germans are in that regard. Mr. Esi~ns. By a considerable amount. Now, Mercedes has a diesel engine. And to be fair to the committee, the diesel engine, I think on the same basis, gets about 24. But, their gasoline engines are con- siderably poorer in fuel economy than our Seville. S In fact, as I said in my statement, if you will examine the EPA in any weight class in which General Motors competes, and we do not compete below 2,750 pound weight class this year-we are going to PAGENO="0133" 131 next year--in any weight class, we are getting the highest fuel economy in the General Motors cars of any cars in those weight classes, includ- ing the foreign vehicles. Senator TALMADGE. What about the Bavarian Motor Works? Mr. ESTES. I cannot tell you specifically. We can check it. But we are leading in every single weight class. Senator TALMADGE. Do you have your tables that give the Bavarian Motor Works. Someone told me they got excellent mileage. Mr. ESTES. We will have to check. BMW gets 19 in the city and 30 on the highway and one of their jobs, 14 and 21. But we need to get the composite number that we are talking about. But, in any given weight class, we will beat a BMW at the same weight. Senator TALMAD~E. I got the thrust from all of your testimony that without technological breakthroughs the principle way you could get better gasoline mileage would be to reduce the size and weight of your automobile. All of you agree on that. Mr. Esms. Really. I think the committee should know that there are a number of ways of improving fuel economy. But when we talk about improved technology in engines and transmissions and axles, we are talking about tenths of a mile per gallon from our current levels with any known technology. On the other hand, when we reduce the weight of a vehicle by 1,000 pounds, we save 20 percent in fuel economy. When we reduce the per- formance of a vehicle, and let us say that our average vehicle in the United States today has a performance level zero to 60 of 15 seconds, if we reduce that to 20 seconds-that happens to be the minimum-as far as fuel consumption is concerned, we only gain 6 percent. So our program to reduce weight in all of our vehicles is the most efficient way to improve fuel economy and the fastest. I would like to take this opportunity, however, to tell the committee. that maybe the most important thing, since our vehicles ma~ be the most post- ponable product in the market today, that we have got to be sure that whatever that car is, each new model, it adequately and more effectively serves the transportation needs of our customer, or he will keep his current car. And thi~t has been demonstrated in the last 2 years, I think very, very effectively. Senator TALMADGE. You have touched on a point that I myself have had some experience in, Mr. Estes. When we had the Arab boycott I decided to get real patriotic, and I have been a faithful customer of General Motors there in Atlanta for many, many years. Specifically John Mitchell's Oldsmobile dealership. Mr. Esms. We want to keep it that way, Mr. Chairman. Senator TALMADGE. Thank you, sir. 1 had been driving an Olds 98 so I got the smallest Cutlass. I could find. My 98 was 6 years old. It had relatively no trade in value. I have to go home quite frequentl~. So I took my 98 home and had it fixed up to where it would run. And it does still perform mag- nificently, I may say. But I get 15 miles to the gallon on my 98 that is now 7~4 years old and I get 12 miles to the gallon on my Cutlass that is 11/2 years old. Now what caused that drastic reduction in mileage even for newer and much smaller and lighter weight automobiles. PAGENO="0134" 132 Mr. EslEs. TJnfortunately the technology that was available to our industry to improve emission levels and reduce the emission levels to statutory standards through the last years and specifically between 1969 and 1974, and I assume your Cutlass was a 1974, because if it had been a 1975 you would be beating that 1969 job. During that period, we lost, as an industry average, or at least in General Motors sales weighted about 16 percent in fuel economy with the technology we were using to meet the emission standards during that period. In 1975, due to what we feel is the real accomplishment-that is the development of what I call garbage disposal for emissions: the catalytic converter-we were able to go back and retune the engines to improve and get back that 16, 17 percent that we lost, plus a little bit more fuel economy. So, now, if you will just trade that Cutlass in for a 1975 Cutlass, you will beat the 1969 job. And you ~vill get anxious to buy `a 1975 Oldsmobile 98 at the same time. Senator TALMADGE. Are you saying that Congress is responsible for that reduction in mileage now by emission standards that we imposed onyou? Mr. ESTES. Well, I guess, maybe you have to assume some of the responsibility. Maybe we have to assume some of the responsibility for not developing the catalytic converter earlier to prevent that decrease in fuel economy during that period. But we have made a dramatic improvement. lu the General Motors case, according to EPA numbers we are 28 percent better in 1975 than we were in 1974, sales weighted. It is a dramatic improvement. Our conCern, I guess, now, is that we do not want to lose that with some further tightening of the stand- ards until some new technology comes along that is going to give us another improvement of that type. Senator TALMADGE. Thank you. My time has expired, Mr. Estes. And following Senator Long's early bird rule, I believe Senator has- hell is the next to interrogate the witnesses. Senator Haskell is recognized. Senator HASKELL. Thank you, Mr. Chairman. All of you gentlemen seem to concur with the President's 40 percent voluntary improvement. To what base does the 40 percent apply? Mr. Estes? Mr. ESTES. I am sorry. Senator HASKELL. You apparently concurred with President Ford's yoluntary 40 percent improvement. All of you testified that it was satisfactory. I am just curious as to what figure that 40 percent is applied. Mr. ESTES. That figure is applied to the sales weighted 1974 in- dustry number, that was developed on a basis- Senator HASKELL. What is the industry number? Mr. ESTES. The industry number was 14 and the industry 40 percent improvement is 19.6. Our General Motors number on the. same basis was 12.~ in 1974. We go to 18.7, the General Motors portion of that imiDrovement is 53 percent. Senator HASKELL. You have testified, Mr. Estes, that your new Cadillac gets 17. You also testified you are bringing out a line of cars, six models I believe you said, that obtain 21 miles per gallon. PAGENO="0135" 133 Mr. ESTES. They are already on the street, Mr. Senator. Senator JIASKELL. You folks can do it. And yet, at the same trnie, Mr. Estes, you said that it would be a dreadful thing to force you by statute to arrive at a certain level because it would have an adverse impact on sales. Where would those sales disappear to? Would Ford get them? Would Chrysler get them? Would the Mercedes get them? What would happen to them? Mr. ESTES. Senator, I think I stated a while ago and I think our history backs us up, that we are selling a postponable product. Our average buyer has a 21/2-year-old car. The life of the car is 10 years. So, he has no incentive rather than a better product or better serving his need to buy a new car this year, he can wait till next year~ he can wait 2 years. he can wait 3 years, he can wait 4 years. And the poor person that gets hurt in this is the very person we do not want to be hurt. And that is the person that is buying a used car. Last year there were 34 million cars sold in the United States. The last 2 years of the life of the car, that is great transportation sold for between $400 and $800 currently. And the poor individual that we are worrying about most, the low-income buyer, is the person that is e'oing to get hurt in this. Not the buyer of the new car, he can drive it 4 more yea rs without any problem. Senator IFIASKELJJ. If this is the case, if it would postpone the pur- chase of new cars from General Motors when they begin making only lightweight, better mileage cars, how do you account for the dramatic increase in sales of imported cars? Mr. EsTE5. First, I would like to say that our program contemplates a big improvement in fuel economy and what we think is a maximum reduction in weight and size of our vehicles and still keep the buyer interested, because there is not any question that energy is going to be more expensive in the future. It has to be, and we have to conserve. We think our program- Senator HASKELL. Wl~at troubles me, Mr. Estes, is you say that com- ing up to these standards is going to hurt your sales. Yet, at the same time, over the past 5 years the foreign cars have made a tremendous irnnqct and have cornered 20 percent of the U.S. market. Mr. E5TES. Let me respond to that in a moment. In actual numbers, the foreign car sales have not increased that much. I think this year foreh~n cars are being sold at an annual rate about 1.4, 1.5 million, and that is not abnormal. The problem is that our buyers have been postponing the purchase of our cars and the domestic market has gone down so that the per- centage has gone up. But, in actual numbers, their volume is not a great deal higher than it was in the past. Senator HASKELL. But, their volume is holding up and yours is not. Mr. Esr~s. That is right, it is holding even, that is true: 56 n~rcent of the foreign cars being sold today we do not compete with. They are lighter, they are 2,000 pounds curb weight or lighter. That is the reason we are responding in 1976 with a ~ar that hits them right square where they hurt the most and that is right in the fuel economy area. Senator HASKELL. I guess, 1~fr. Estes, my question is, why did you not you do this earlier? I ca~mot quite get it through by head why making a lighter, more fuel-efficient car is going to ruin sales. It may postpone, I guess, a few sales. PAGENO="0136" 134 I cannot see your logic. I feel tlie way the chairman does. You caünot ration by price and be fair to people in this country. So, we must do something. General Motors has gone a long way, I gather, perhaps a -little further than Ford and Chrysler. But I cannot see the reason for delaying what you can already do technologically. You can bring it up to 21 miles a gallon. You have shown that. Mr. ~E&rEs. No question ~about it and we can bring it to 28 miles to the gallon, and we are going to do that next year. It is going to be a four-passenger vehicle with limited luggage space. It weights 2,000 pounds. We can do that. This is all a matter ~f degree. We are going to reduce the size and the weight of every single one of our vehicles but we are going to maintain the transportation characteristics of that car as far as six passengers, a load of luggage, a dog and cat, to go on a vacation. So this poor fellow that can only afford one car and does not want to take two cars to the airport to get his family, we are still going to maintain that vehicle but we are going to take up to 1,000 pounds out of that vehicle to improve his fuel economy and get our 18.7 average. We are still going to satisfy the customer. We are going to have a car that meets the 28 miles to the gallon next year. But we ate guessing, and we may be wrong, that we can sell 225,000 of those vehicles next year against the imports. The total market- Senator HASKELL. I think that is just great. Mr. ESTES. The total market of a 28-mile-per-gallon vehicle, I think Mr. Seerest mentioned, there are 16 models today. There are really only about three that have any volume. The total volume today is about 600,000 to 700,000 of the 28-mile-per-gallon vehicle. We are going after that market-with 225,000 vehicles. But tp try to sell 4 million of those we think would be an impossi- bility in 1976. If the market will support that, I will assure you we will move as fast as we can to do it, but it is going to take a tremendous expenditure. Actually, right now, we have more capacity for small cars than we can sell and we are doing everything possible to sell them. If anybody on the committee has any ideas how we can sell more fuel-efficient car~ today, I assure you we will build them. We will build them in a helluva hurry. Senator HA5KELL. I think that is just great, Mr.. Estes, but I still cannot understand why you folks object to these levels. I may have some questions next time around, Mr. Chairman. Mr. E5TEs. Did I not answer your question adequately ~ / Senator HASKELL. You sure did, you sure did, yes~ sir, you did. But you have proved to me that you folks can get these l~veis. ,Mr~ ESTES. We can build them but we cannot sell them. Now, you tell us how to sell them. Senator HASKELL. How do the foreigners sell them? Mr. EsT~s. They only sell 700,000, we are trying to sell 4 million vehicles to keep our people working. We can build those small cars in two plants. We have 26 ph~nts we are trying to keep running-2~- and all we say is we think we have got to move as far as we can in the PAGENO="0137" 135 area of fuel efficiency and still be able to satisfy the needs of that customer or he will keep that car another 5 years. And if he does, we are going to have massive unemployment, even twice as bad as we have had in the past year due to postponing of buying. I think this is the point we are really trying to explain; that it is a characteristic of our business, right or wrong, good or bad. Senator HASKELL. You really feel that somebody could postpone buying a carS years ~ Mr. E5TES, During the war they postponed 5 years, everyone got where they wanted to go. We were talking about it this morning, I guess the scrappage rate was negative. You know, they pulled cars out of the junk heap, put wheels on them, and used them for transportation. But in a reasonable sense, our vehicles, the average life of our vehicle is 10, 11 years and the poor fellow that gets hurt is the fellow trying to buy transportation for $800. And we do not know ho~ to furnish him transportation any other way except through our current process that has been developed over the years of the new buyer giving him a better product so that he in turn bUys it. There is an average of three and a half sales per vehicle during its Ii fe. Senator IJIASKELL. Mr. Secrest, do you have something to add to that? Mr. SECREST. I wanted to see if it' would help Senator Haskell to make this observation. I think we share your view, I do; that the market forces are operating in such a way as to make it probable that people who offer fuel-efficient cars will sell well and people who fail to do so will not sell well. Our internal target at Ford calls for, by 1980, a production weighted or sales weighted, fleet average fuel eConomy that is substantially better than that of today-in the range of 45 to 50 percent, reasonably consistent with levels suggested in this bill. My concern is that the bill takes a voluntary commitment by an industry and says, well, if you say you can do it and if we all ag~'ee it is a good thing, we will write a law and if you miss by, say, 8 percent, we will fine you $225 million. It is that that concerns me. I think that a potential contingent liability of anywhere near that magnitude would seriously hamper the ability of Ford, at least, to. carry out the kind of program we are pitinning because I think that with that sort of punitive fine hanging over your head for a shortfall that could be due to any one of four or five factors that would not have to be very great, it would be difficult to sustain the capital investment program to carry out our plan. And that is what I see as a penalty. That is embodied in an insistence to do by law what the market ought to be forcing us to do. Senator' HASKELL. My time is up, Mr. Chairman. Senator TALM~\DOR. Senator Packwood? Senator PACKWOOD. In a normal year, how many new cars are sold in Europe? Mr. Es~is. About 8 million, Senator PACKWOOD. And I assume most of those ttre smaller cars by our definition? Mr. ESTES. Yes. PAGENO="0138" 136 Senator. PAcRwooD. I am curious~ in each of your statements you have referred to the needs or what the average citizen requires in this country. How do you needs differ from what the average. European needs? Mr. FJ'STrS; Well, t.he major difference, I think, is distance. Distances in Europe are considerabl~r shorter, roads are sinafler, it is much more difficult with regard to back roads and so on. And then, of course~ the other thing you have to remember is that the price of fuel in ~urope for years. has been in the direction of improved fuel economy; whereas in t.he United States, I guess you would have to say that we have had artificially lower fuel costs which obviously is not an incentive to buy a smaller, more efficient car. Senator PAOKWOOD. But for the moment, I do not want to get on to wants, because maybe if Europeans had 25 cents a gal Ion gasoline and big roads, they would want big cars. Is there any reason an American needs, a big car? Isn't a 28-mile per gallon station wagon sufficient for me and my wife and my dog and kids to get around ~ Mr. EsTEs. A 28-mile-per-gallon station wagon? It would be mighty tight-you and your wife and a dog. We have 23 percent of our fami- lies in the United States, maybe 30 percent, I am talking about mainly automotive customers. that have five people or more in their. family. Senator PACTcWOOD. But how big a car do they need? Mr. ESTES. They need a car that will carry five, maybe six people, grandmother wants to go, six people and some luggage to go on a vacation, Senator PAcicwooD. And there are no 28-mile per gallon sedans that would do that? Mr. E&rrs. No, sir, foreign or domestic-diesel, yes. Senator PAcxwooD, I understand. I meant gasoline. Mr. EsrEs. I think here in our context, we have to exclude the diesel. The Mercedes diesel on the basis that we are talking about is between 26 and 27 miles per gallon, and it is a 3,500-pound car. That is the car you are talking about, 3,700 pounds. But that same car with a gasoline engine is in the 17 to 18 area, and our cars are in the 22 area on the same basis. Senator PACKWOOD. Last week when my family went home to Oregon, I went with them during the recess. Here we drive two fairly large cars. There we were living in my wife's brother's house. He left us a Volkswae'en which is a two-door car which we got around in adequately. I find that I had not forgotten how to shift, and I could indeed make the car go forward and backward. Mr. Esms. You did not need air-conditioning? Senator PACTcWOOD. It did not have air-conditioning. Mr. Esries. You did not need it? Senator PACKWOOD. I did not need ~t I got along. Mr. EsrEs. Did you bring it back? Senator PAclcw000. I left it there so my wife would have something to drive. And I am curious, if you were translating needs into wants. I like air-conditioning, I like an automatic shift, but I do not need it. And if we are really serious about fuel savings, maybe we are over- estimating our iieeds. PAGENO="0139" 137 Mr. ESTES. I do no~ think there is any question that in an evolution- ary way we can move families such as yours into smaller, more efficient cars. But I think we have got to be very, very careful today about putting a Volkswagen-sized car in, let us say, a Buick dealership and have the Buick owner come in with his air-conditioned car that is a reasonable size and comfortable and hope to sell him that car this year. Now, I think we have got to do this in an evolutionary way, Mr. Senator. We are doing our best to move just as far as we can. You know there thay be a judgment factor here on how far and how fast we can move. Senator PACKWOOD. But 10 years is a fair evolutionary period. If we say to you by 1985 you must produce cais that will get on a weighted sales average basis, 28 miles to the gallon, my hunch is you will pro- duce them and the imports will have to match you because the big cars are not there. I agree with Senator ilaskell, I do not think suddenly all the people are going to keep all of their big old cars fOr~ver. You may have a drop in sales for a year or two, hut when the Buick owner finally- Mr. ESTES. That could be very, very serious. We have had a serious problem this year as far as unemployment is concerned. So we want to avoid even a year or two if we can help it, you know. Senator PAcKwoon. We are going to give you a 10-year lead, and when the Buick owner finally comes in and he only has a choice of buying cars that will get 28 miles to the gallon, my hunch is he will buy one. Mr. Es'ri~s. Either that or he will. talk to you when you come home about it. Senator PAOKWOOD. lie talks to me all the time when I go home, But I think you are unduly pessimistic, one, about the sales potential. Mr. Esii~s. That is possible. Senator PACKWOOD. Two, I think you are transli~ting wants into needs that are not needs. Mr. DUNCOMBE. Of course, it is wants that are going to motivate peop~e to buy a car. You and I might have quite similar concepts about what the basic car is that would serve fundamental transportation ~ieeds, and you and II might agree on this perfectly. But John T)oe comes in to buy a car may say, well. whathver von and I think, I want this car over here. That is the thing that inspires him to buy. It is not your judgment or my judgment, and I think this is one reason why the automobile industry has such a variety of cars out there, What you think is important and what I think isimportánt may be quite different serving all of those varieties of wants. Senator PAclcwooD. That is exactly what you are saying, tho~e wants, not those needs. Mr. T)UN~OMBE. But, you know our society is based on that. Senator :PAc~çwooD That is correct. Mr. DUNCOMBE. And if you and I begin to impose o~ir ind~ments on what the American people should have, we are making' a very fi~nda- mental change in the w~iy we have operated in this economy of ours. Senator PACKWÔOD. That may be true, but if ~e are going to cet substantial reductions in oil imports and conse~rvation we are going to PAGENO="0140" 138 l~ave to start in a number of places. I thought all of your statements ~`ere excellent stating that the auto industry is not the only place to start. But we are going to have to do a number of thiugs if we are going to exercise the leadership that this Congress ought to. The people are not yet prepared to accept these measures, they do not want them. If we are going to cop out in Congress because they do not want them we are going to pass a bill siipilar to the house passed one which was inadequate. Mr. DuNcoM~. I would suggest in that connection that the pro- posals we have made-you know the greatest inconsistency we have today is controlling the price of 40 percent of our petroleum, and at the same time, exhorting people to conserve. The economic approach to this is to decontrol the price of oil and you will get people volun- tarily making new judgments on how they want to spend their money; and that is basic to our thinkiii~g. Mr. Es'rEs. And we will be happy to build that size ear at that time. But we think there ought to be incentives for the customer to want to buy them rather than to force us into a possible- Senator PAcKwoon. I want to come to the employrnept and the coil- version part, also, Assuming that the sales will not drop dramatically, or if they do they will drop for a year or two and finally pick up, where is the problem on employment? Isn't 10 years a long enough time to convert your facilities without dramatic economic dislocation? Mr. ESTES. We are makin~ a tremendous step in that regard in the next 3 years, as I have described. Senator PACKW000. Where is the economic disruption if you know 10 years down the road what you have to achieve? Mr. Es'rEs~ The economic disruption is a fact that if during this I)eriod the customer does not get oriented to trading in the larger car with the air conditioning for that smaller car at that time. And let us say that in the interim we have moved instead of 30 percent of our cars being 3,500 pounds~ which is a relatively small car in the standards of today, we have got 80 percent of them, and if by that time he is moving in that direction, that is fine. We will be able to do this giad- ually. But, we think it is unnecessary that you pass legislation so that come 1985, and let us say we are still selling even 30 percent of our cars at 3,500 pounds or 40 percent, and all of a sudden we have got to start building all 2,000 pound vehicles, it may be, it could be very dis- rupting at that time. This is not all a matter of economics. Senator PAcitwooD. Is this disruption that you are talking about from a loss of s~des? Mr. E5TES. That is true. Senator PACKWOOD. All right, but assuming no loss of sales, there is no problem of converting your plant. You could convert apparently in 9 months during World War II to making tanks and trucks. Mr. Es'rEs. We ~re building today about-we have a capacity to huild-25,000 V-8's a day and there are no V-8's in that 2,800 pound vehicle. So we have got to convert facilities and we have got to do it. We cannot do it on an if-come basis, we cannot afford to. Senator P~CKWOOD. I understand that. PAGENO="0141" 139 Mr. ESTES, So we have got to do it with the market each year. If we were sure we are going to move to four-cylinder engines each year, a certain percentage that can be done~ no question. What we cannot stand is an immediate, overnight shift from V-8's or small V-8's even to 4's. Senator PAOKWOOD. Nobody is talking about an immediate, over- night shift, this is not a standard imposed in 1~77 and you have to all turn out four cylinder, two-door cars without air conditioning next year. Where is the immediacy in what we are talking about? Mr. ESTES. The immediacy is going to be when it gets to be manda- tory rather than on the basis of the customer wanting it. That is our problem. Senator PACKWOOD. My time is up. Senator TALMADGE. Senator Roth? Senator ROTH. All of you gentlemen discussed at some length that it is better to permit these changes to he brought about in the market- place. And yet it seems to me that there is some desirability in target dates. All of us have a tendency, even big business, to procrastinate. I think even internally you set a certain target. One of you indicated that perhaps the automobile industry in it- self had not done as much as it should in the area of emission stand- ards until 1913-1974. I think, Mr. Estes, you made that statement. Mr. Esms. I did not say that we should, I said that our technological advancements maybe were not as fast as we would li]~e to. have them. I guess they never are. We were doing everything we knew how to do. And let me say this, we developed a catalytic converter in what we consider record time, even faster than the Government did. Senator RoTh. But, was that not after the Government set certain targets? Mr. ESTES. Emission standards, Sure, emissions and safety, we are going to have some l~ind of regulations. We hope they are reasonable regulations but we have to have them because those two items unfor- tunately are not saleable to the customer. Senator Roi'n. The only point I am raising, I wonder if there is not some desirability in attempting to set certain targets, whether they should be penalties or not is another question. But, I am not certain that the industry itself has moved as fast as it can due to the pressure of the marketplace. But be that as it may, what would be the position of industry if we took another tack, say instead of a penalty, we offered some kind of incentive. For example, we created certain targets and proposed that if a company met these targets that there might be some kind of tax incentive, either to the industry itself or possibly to the consumer. What would be the attitude of the industry toward that approach? Mr. ESTES. Well, obviously we do no want any handouts, we do not want any taxes, and we do not want any regulations. That is prob- ably an overstatement and you all probably recognize we do not like that sort of thing. On the other hand, we think it is important that the customet realize that the energy situation is difficult and it is going to be from now on. We are not in just a phase here with regard to the energy shortage and the difficulties in this area. And consequently, I guess, we would say that anything you can do, and we think that deregula- PAGENO="0142" 140 tion is one of the ways to convince the customer, our customers, that this i~ a problem. Senator RoTh. This is not the question I am asking, though, Mr. Estes. I am saying that- Mr,~ Esms. I assume you are asking about giving an incentive? For instance, I guess there is something in the bill with regard to electric cars which supposedly would benefit the customer if he bought a more fuel efficient car. Senator ROTH. Let me elaborate, if I may. Let us assume that we had a standard set, something along the House lines, maybe others, but the same approach, and we said to industry, to a company that if you reach these standards each year perhaps there would be a 1- or 2-percent tax advantage in your corporate tax. I am just thinking out loud. Would this create any incentive without the handicaps of a penalty to the industry? I wonder if any of the other gentlemen from Chrysler or Ford care to comment? Mr. SECEEST. Well, Senator~ I guess there would be no doubt that my concern about the impact of this legislation on ability to raise capital would be different if the, proposal were such thet sucec~s would bring a reward from the Government instead of failure bringing a fine. I have looked at a number of alternative legislative possibilities which try to assist the niarket in, doing what we think it will do. I do not believe that in this case an incentive of the kind you have described is necessary to get the job done, I think in contrast to the emission control situation, there is such a force in the market encouraging purchase of fuel economy cars that I would think that the sort of incentive you discussed would be better applied to, for example, the development and production of new forms of energy from source~ that apparently cannot or will not be developed under present economics. However, if you offered me ~the choice between penalties and incen- tives I would opt for incentives. Mr. LoorBouRRow. I think I would agree with the Ford position in~ that matter. There is one aspect in this whole matter which I think has led to a pretty broad misunderstanding on the part of the public. And that is that 40-percent fuel economy to which the industry is committed to. I am sure there are many people who are driving a 1974 New Yorker that figures in 1980 they will have that same equivalent automobile, same sizC, same weight et cetera, that he is accustomed to but they will be 40 percent more fuel efficient. And this. of course, is just not the case. I think we have lost sight of the fact tMt as Mr. Estes pointed out the most important item for improved fuel economy is weight reduc- tion and to accomplish the necessary weight reduction you have to go to smaller vehicles. I do not believe that these relationships are firmly implanted in the minds of the people who are talking about fuel economy. * Senator ROTH. Could I ask a question there that is somewhat relevant? We have a national speed limit `of 55 miles an hour now on the highways. Why do cars have to be able to go a 100 miles an hour or faster? If you kept that lower would that make any difference ~ PAGENO="0143" 141 Mr. LooFBouRRow. Limiting top speed by reducing power really would not make much difference on fuel economy. If you carry it too far, you begin to lose in fuel ecoliomy; if you underpower the vehicle too much. The activity in the car is really related to a safety aspect of the vehicle and the ~nvironment in which it lives. And if you have t1~ie necessary activity for safe operation at low speeds, you automati- cally get the capability at the top end. The higl~-speed capability of cars in recent years has been coming down since the horsepower raç~e of a few years ago. The first reason for it was the tightening Of emis- sion requirements, and then the fuel crunch which caused tradeoffs for fuel economy. High-speed capability is deminishing, but it is a byproduct, if you will, of a basically sound automobile which is safe to drive. Mr. Es'rrs. May I add something to that? Senator RoTH. Yes; please do. Mr. ESTES. Part of the savings, the 20-percent savings we are talking about in the 1,000 pounds of weighted vehicle is in the smaller engine that is provided. The engine automatically gets smaller, even at the same performance level. Now, as I stated a moment ago, we are also looking at what Is the optimum fuel economy level for performance, as Mr. Loofbourrow mentioned. And to put it in context, as I said a while ago, our cur- rent cars are somewhat in the 0 to~ 60 15-second area; hotrods are 10 seconds; and the average automobile is about 15 seconds. We are finding that by dropping that performance level down to 20 seconds, we are gaining fuel economy-not a great deal, but it is 5 or 6 percent. So what you are going to see in these new vehicles we are talking about, and to accomplish the 40 percent we are talking abon~t, all of our engine~ are going to get smaller in displacement; there is no question about that. Senator Ro~n. One question that concerns me very much: Having two plants in Delaware-General Motors and Chrysler-is what would be the impact of the House standards on employmeiit? We have had a lot of general statements, but has an actual study been made as to what would happen if these proposals became, in fact, law-on the employment picture? Mr. DUWCOMnE. We have already taken some preliminary cuts. As you might guess. it is a very difficult question to quantify and it could be illusory. I will say this: Just on the basis of what we have been doing, we have already lowered our estimate of the sales volume for 1980, relative to what we had before, by akout a million units. In other words, we are now thinking in terms of sales in 1980 of a million units less than we had projected earlier. Senator Ro~n. What had you projected earlier? Mr. DUNCOMBE. We had projected a total volume of 17 inilllon cars and trucks, W~ have lowered that to 16 millions cars and trucks, And it is about a million less on the passenger car level, and trucks are about the same. My guess is, and this a rough guess; that we can expect a loss in sales of ~it least a million units a year. In other words, we would be down at another lower plateau. We are doing more work on this, and as we do more work on it, I would be glad to give you whatever we come up with. But it has got to be a very, very substantial factor if, even 55-583--75---pt. 1-10 PAGENO="0144" 142 on the basis of the voluntary program, we see a loss of a million units a year. Mr. Es~s. I guess you are talking about the 20.5-mile-per-gallon level in 198&? 20.5 miles? Senator ROTIT. Yes. Mr. DTJNCOMB~. To get the 20.5 miles will mean a very important further shift down in the type of car that we can produce. Mr. ESTES. And some postponements, which accounts for the mil- liOn loss. Senator Horn. Mr. Chairman, I wonder, do we have a representa- tive of IJAW testifying on this matter before us at some time? Senator TAL~1ADGE. We will have, before the hearing is over; yes. Senator RoTh. Thank you, Mr. Chairman. Senator TALMADGE. Senator Ribicoff. Senator RIBIC0FF. Thank you, Mr. Chairman. Mr. Estes, I am intrigued by your statement on page 5: "We try to put the kinds of cars on the market that the American people `ha~e indicated they w~tnt to buy." And then you say that foreign imports have remained steady, but your sales have gone down. They represent about 21 percent, I under- stand, of the market today. Now, you idso mentioned the type of cars Americans want, that have five passengers and you can put alot of lugguagein and take the trip and maybe squeeze in grandma. I am looking at your charts that you left with us, and I notice that a Mercedes 300-D gets about 27 miles per gallon. That is a diesel. I have a friend who sells Mercedes in Hartford, Conn., who tells me that he has got a waiting list of at least 9 months for Mercedes. He could sell all he could get. I am curious; why have none of you made a diesel? What is there about a diesel that gives that extra mileage? And diesel fuel is cheaper. Why is it that not a single one of you giants have made a diesel automobile? Mr. Es~s. It is easy to answer. Senator RIBICOFF. I would like that. I think the American people would like that. Mr. ESTES, The very best that anyone knows how to make in the way of emissions-and I am talking about the NOx standards-it is one of the three constituents that is legislated cuf~rently at 0.41. The lowest anyone knows how to get a diesel, as far as NOx is concerned, is 1.5. We might be able to get to 1. So, until we have some assurance that we do not have to meet the legislated emissions standards in 1977 or 1978 or whenever-it would be ridiculous for us to spend a lot of money to tool a diesel. Let me tell you this. Senator, we are looking seriously at the diesel now, on the premise that possibly the emissions standards in the future will he straightened out to permit this. Senator Rnncorr. I am puzzled. Under tIme laws of this coi~ntry, do the imports not have to comply with our emissions standards? Does the diesel-the 300-1)-not have to live up to the standards set by EPA as well as your automobiles? Mr. ESTES. Mr. Senator, I am sure that Mercedes would have never tooled that diesel on the basis of the American market. Senator Rinicorr. But they have been in the- PAGENO="0145" 143 Mr. ESTES. They only tooled it on the basis of the European market, and they are bringing it in here. They will have to stop bringing in the diesel the day the standards go below, let us say, L 1.5. Senator RIBICOIT. They are living up to the standards now, are they not? Mr. Esms. Sure; the standards are *ell above that at the current level. The current st~tndard is 3.1, for instance; so the diesel fits ipto that fine, In the future, we are going down to 0.41, unless Congress does something about relaxing that. Senator RInIcoFF. I bet dollars to donuts, as the standards go up, Mercedes-Benz will come up with those standards and still sell the automobiles. Now, this is what puzzles me, that there is not the genius and the technology within the three of you, your companies, to make a diesel. I think this is a grave question on the minds of every Ameri- can. Why can you not make a diesel automobile? Mr. ESTES. We are building lots of diesel engines right now, and as I say, they just do not meet the standard that Congress says we have got to meet, as of today, in 1977. And Mercedes-you can ask Mercedes when they come in-I am sure they do not know how to get 0.41 NOx at the current time. Senator RiBIcoFF. in other words, are you saying that the Mercedes today is not meeting the standards required by law? Mr. E5TE5. Senator Ribicoff, you do not understand. Today's stand- ards in this constituent are 3.1. Senator Riniooiu~. All right. Mr. Esrrs. It is very easy to make a diesel meet 3.1. But in 1977 or 1978, when we get to the legislated statutory levels, that 3.1 goes to 0.4, amid there is no way to do it. Now, we cannot afford to tool a diesel engine for a passenger car, without considerable risk, on the basis of 2 or 3 years' production. And this, as I said in my statement, and I think we all agree, that the low level of NOx in the statutory emission standards is one of the reasons that is inhibiting alternate technology, as far as alternate engines are concerned right today. Senator Rimcorr. Let us take the emissions standards-this is pres- ently. Mercedes has been making diesels for years. You never have been. None of you have ever made a diesel. Mr. ESTES. We are making diesels in Europe right now. We are selling them every day. Senator RIBICOFF. Well, why are you not making them in the United States? Mr. E5TES. The reason we are not making them in the United States, Mr. Ribicoff, is the fact tlatt we are not going to invest milhi~ns of dollars on an engine that may be outlawed in a couple of years. It does not make sense. . Senator Rimcorr. But Mercedes has got a waiting list of 9 months today, and you are making them in Europe. Why are you not im- porting you1 diesels from Europe into the United States? They comply with the law now. Mr. E5TES. We have considered that, and if you look at the total volume of Mercedes-I do not know if you realize what you are talking about-but it is very~ very low, relatively. You know, they will sell 40,000 total vehicles' in th~ United States. and the diesel is running, what, 20 percent of that; so they are talking about very, very few vehicles in the United States. PAGENO="0146" 144 Senator RIBICOFF. But when you say we try to put the kinds of cars on the market the American people have indicated they want to buy, and if each and every one of you is making a diesel automobile and you could advertise it, you cOuld sell those cars in th~ United States of America, but you have never chosen to do so. Mr. ESTES. Why do you not say we have~ not chosei~ to bring in our diesel, our Opel, into the United States because, you have to agree, it is not reasonable to put a great investment in an engine that is going to be outlawed in 2 years. Senator RIBICOFF. I do not think it will be outlawed in 2 years. I am just curious, if there is' somebody from Mercedes here to say that they are not going to sell the Mercedes in this country 10 years from now. Mr. ESTES. As soon as Congress settles on the future emissions' stand- ards, that will get serioi~s consideration. Senator RIBICOFF. Well, to me it is a lack of all of you to be up to, date of what the American people want, The heavier the car, the more money you make, and you have been interested in selling heavy cars with low mileage because yOu make a lot of money on it-a lot more than the small ones. Mr. ESTES. I would like to remind you of a little history, if you would not mind. In 1961, we took 200 pounds out of our regular sized cars. We introduced a brand new small aluminum V-8, a small V-6, a Buick, an Oldsmobile, a brand new four-cyclinder engine in a Pontiac, and we increased the volume of 4's and 6's i~ Chevrolet: and 1965, in order to get adequate capacity of big V-8's to satisfy the market, because we could not sell the little ones, we sold the equipment on the V-8 to Rover; we sold the V-6 to Willy; we moved the four cylinder to Mexico-and incidentally, we just brought it hack again the other day because it is dohig a great job for us today. But we did not do all of that because of any other reason except that the customer had decided in 1965 he wanted V-8's. Senator RIBICOFF, You are a le~tding executive of a large company, but this shows exactly what is wrong with it, because you lost the market; so you got out of the market of small cars and the Europeans came in and grabbed the market and you were indifferent to it and now you wake up with egg on your face. Mr. ESTES. No, no, no; no, no. Senator RIBIcOFF. And now you are going back to the small ones after having .turned the market over to the European countries be- caii~e of your indifference. Mr. Es'ri~s. We have not turned any market over to the foreigners. Senator RIBICOFF. You sure did, because they came in while you were making the big ones; they came under the barriers with the small ones. And now they have 20 percent of the market. Mr. EsTES. Senator, they were here at that time. Senator RIBICOFF. But they were not going full guns as they are now. Mr. ESTES. They have not increased at all. Senator RIBICOFF. As Senator Nelson points out to me, 400,000 cars imported in 1963 and 2.5 million cars today. That is a pretty good market that I think you lost. PAGENO="0147" 145 Mr. EsTEs. 2.5? That will be a great year when they bring in 2.5 million. Mr. IDUNCOMBE. It is nowhere near 2.5 niillion, Senator. Mr. ESTES. It is 1.4 million. Senator RIBIC0FF. Before my time is up, one more question. If the President succeeds in decontrolling oil, I understand that will raise the price of gasoline about 8.5 cents per gallon. What will that do to the sale of your automobiles, if gasoline goes up by September 1, 8.5 cents above what it is now? Mr. DUNCOMBE. I think the primary impact; on that would be in a further shift of the mix. Currently, about 50 percent of the sales of cars are small cars. By that, I mean cars comparable to our Nova or smahieU-including the imports. And our feeling is that if the price of old oil were decontrolled and you got this, let us say, 8.5 cents-P- I have heard figures, incidentally, from about 5 to 8 cents-what you would do primarily is provide an incentive to buyers to go toward smaller, more fuel-efficient cars. And we believe that this is the right way to go about this problem, not only because of its impact ofl the new car sales, but I think the thing you must remember, Senator, is that there are 100 million cars On the road, and if the price of gasoline were permitted to reach-were decontrolled-it would have an impact on the. way all of us use our cars. I think it would encourage car pool- ing; I think it would encourage the discontinuance of what might be considered frivolous driving; it might discourage the sort of driving that the teenager does on a Saturday around town. And I think that in your thinking about this entire energy problem, it is important to keep in mind that these prposals such as you have here relate to on1y the fringe of the total car market; that Is, the new car market. And our goal ought to be to encourage conservation in the use of our transportation facilities-and that is 100 million cars that are cur- rently on the ioad. It would have an impact. It would shift the mix down. And I think that to that extent, it would contribunte to our long-range energy goals. But even more important than that, it would contribute immediately to the conservation effort which, in our company, we believe is impor- tant today. Senator RIBIcoFI'. Thank you, Mr. Chairman. Senator TALMADGE. Senator Hansen. Senator hANSEN. Was Senator Brock not here first, Mr. Chairman? Senator TALMADGE. I do not have it so recorded. Senator HANSEN. All right, fine. There have been a lot of questions asked of you gentlemen about legislation and whether we should face up to our responsibilities. They are very interesting. I am going to ask some of my questions to you, Mr. Secrest, because between the panel and Ralph Nader, I think GM has gotten more nttention than it really deserves at this moment, and I say that because I am a driver of a Buick and a Chevy. Is it not a fact if we wanted to do something about safety, Ralph Nader and the Congress of the United States, had we said we were s'oing to pass a tough drivers law that would revoke permanently the driver's license of anyone who was caught driving under the influence of alcohol, we would have taken a very dramatic step that PAGENO="0148" 146 would have reduced more than any other single thing that collid have been done legislatively? I ask that of you, Mr. Secrest. Mr. SECREST. Well, I think there is no doubt that all of the students and analysts of the vehicle safety issue agree that if we could find some way, through legislation or something, to reduce the use of alcohol by individuals operating motor vehicles, it would have the effect you suggest; no doubt about it. Senator HANSEN. One way to reduce it is to pass a law that says if a guy is caught driving while he is drunk, he loses his license, he cannot ever get it back. Now, if we want to face up to some tough decisions, I suggest there is a good place to start. I used to be chairman of the National Governors Conference on Highway Safety, and `at that time, it is my recollection that more than half of the fatalities on American highways were the result of someone driving while he was drunk. Mr. SECREST. I think there are some very useful statistics bearing on that, from the experience of some of the overseas countries, par- ticularly Sweden. I believe some of the other Scandinavian nations also have what appears to be an absolutely iron-clad proposition in- volving jail terms if you are driving with alcohol in your blood beyond a certain point on the measuring device. And I think it has been very effective. Senator HANSEN. My purpose in asking the question is to say that I think we are overreacting in our response to a very serious energy situation. I think it is serious, but I think it has to be approached in two ways. One is to take all such steps as seem indicated that will bring about conservation of energy, on the one hand. And the other is to take simultaneous steps that will do something about increasing supply. And I gather from the testimony that I have heard here this morning, that opinion is shared by you panelists. I am not certain. Did you address that point, too, Mr. Loofbourrow? Mr. LooFBolmRow. It was not in my prepared statements, hut I certainly concur with that approach. Senator HANSEN. It is `a matter of fact that without any legislation in Europe they have gone to using smaller cars, probably for two reasons: One, the sh9rter distances that they drive and secondly, the high cQst of gasoline. Is that opiflion shared by you, gentlemen? Mr. SEcREST. Yes, I think there is no doubt of that. Senator HANSEN. Has there been' any legislation by any of the European countries as to the size and weight of vehicles that you know of? Mr. SECREST. No, no country. Mr. ESTES. France and Italy. Mr. SEGREST. There have been some tax provi~ions in various coun- tries that relate `the amount of tax that a car owner pays, either each year or when he buys a car, which apply to the engine size, or some- thing like that. Most of the economic impetus to the development of the characteristics of cars overseas, has been related to the cost of fuel. This is particularly pertinent in relation to the real incomes of the people. In most countries, real incomes are lower than in the t~nited States~ but fuel prices have always been higher. And this has created ,incentives. PAGENO="0149" 147 Se~iator Ribicoff is no longer here to pursue the diesel analogy, but the Mercedes diesel is priced in the United States at $16,000. It is a wonderful car, but it is not cheap. Senator HANSEN. That was my next question. You said the cost of a Mercedes diesel is $16,000? Mr. SECREST. Yes, it is a fine car. But it was not in great demand until the price of gasoline in the United States moved off the plateau of around 35 cents, where it stayed for several years, and began to spiral at the time of the oil embargo. Gasoline is now at 57 cents or more, and surely going higher regardless of which set of options is chosen by the Congress. A diesel car is a heavy, expensive and costly unit and which therefore had no market in the United States as long as gasoline was cheap. Now however, there is a market for such a car. Even at a high price. Senator HANSEN. When we speak about steps that might be taken legislatively to induce greater conservation of energy, I am impressed, as I know the chairman is. You do not have to drive very far to observe the number of automobiles around schools-~_-not colleges exclusively, but high schools as well, and even grade schools. What would happen in your opinion if the Congress were to put the minimum age of drivers, excepting those employed in industry, up to, say, 18 years? Senator HASKELL. If the Senator would. yield, I think you might have a mother's revolution. Senator CrEns. You would save more gas if you would make it 28 years. Senator HANSEN. Well, the fact is-it seems to me to be a fact-that I notice that the insurance companies recognize a male under 21 or 24 as being the most hazardous of all persons to insure. Mr. Es~ri~s. Unmarried, too. Senator HANSEN. I should think if we want to get at the root cause of the problem and not take the car away from the working man, and he may be only 18 years, but to keep it out of the hands of youhgsters who do not need to drive-we could save a lot of energy. I am not recommending this, I have five grandkids and some of them are driv- ing, but tile point is that it is awfully easy to attack the industry and to criticize it. And I am i~iot one who thinks it is without blame, by any means. But, I think sometimes, as it Seems to me we did in safety de- vices and apnliances, we went completely overboard. We addeçl to the cost of cars. We added to the weight of cars; we increased the consump- tion of energy by cars to strike at one thing: Fatalities on highways. And if we had really wanted to look at the big problem here. I still say: Do something about drunk drivers. But, von know, every `2 years, or every 6 years. we start thinking about getting reelected. And I think that is why we do not take Senator Haskell's approabh: That we move the driver's age up. I gather from what you say that you do not think that the steps that have been indicated here to do the things that von believe are going to come about as a consequence of the operation of the economy are in th~ public interest. You do not think we should legislate these standards that, have been proposed and are before us now. Would you respond to that. Mr. Loofbourrow? Mr. LoornotmEow. We concur with that viewpoint completely, be- cause, as has been mentioned before, fuel economy with the increasing PAGENO="0150" 148 price of fuel is becoming an extremely marketable characteristic in automobiles. But there will remain a requirement for automobiles of all sizes, because of the needs of people who buy them. And, as has been pointed out, it is not necessarily the new car buyer who is going to be the one who bears the burden of the elimination of large cars. The fellow who is below average income-~a medium-class laborer with a family of six-he is waiting for that 4-year-old station wagon which he can buy on the used car lot. If the regulations make it impossible to put that new station wagon in the market 4 years before, that car is never going to get to him. So he is going to be the one that gets hurt. Senator HANSEN. What about SO2? I am told that when we started legislating on these emission standards, we apparently did not discern the significance of SO2 in the air. Now there seems to be great concern, particularly in a city like Washington, that people who have respira- tory problems could be seriously afflicted by that. Would someone respond to that? Mr. LooFBouRRow. SO2 is really not a meaningful item in automobile exhausts. However, SO2 is one of the measured pollutants in the air. In cities where they have an air quality measurement, which is recorded daily, they measure one or two pollutants. One of them is particulates which is always part, if not all, of such measurements. Many cities also measure SO2. But the SO2 primarily comes from fixed sources. And of course, the particulates are not part of the automobile's emissions. So the things that are used to measure the quality of the air are non-automotive associated. Mr. Es'ri~s. I would just like to add that automobiles, as far as sulfur emissions are concerned, only are responsible for about 1 percent of the total in urban areas. - The concern that has been expressed, is that the catalytic convertor, in doing its job on the regular emissiofls~ also converts SO2 into sul- phates that might be harmful. There are only about five labs in the country that can measure it, it is so low at the current level. There is some concern about 10 years hence when all cars have catalytic converters that someone standing near a crowded highway, with, I think, the parameter or the software that was used in determining this was a lO4ane highway for automobiles traveling at 60 miles an hour and a pedestrian standing about 10 feet away might be exposed to a severe problem. We do not question that this might happen. And, in view of that- we have coming this fall what we call a big experiment. We are going to fill our proving ground full of cars with catalytic converters. We are going to measure the sulphate emissions at the roadside under all kinds of atmostherie conditions. Incidentally, the EPA, and I think some of our competitors, have agreed to observe these tests. in order to get some facts in this case. And that is all we need. And if it is a problem, I can assure you we will step up to it. Right now at least, it is no problem. And it may not even be a prob- lem in the future, but there is a conversion in the catalytic converter from the SO2. Now, this all comes, of course from sulfur in the fuel. But there is a conversion from, let us say, less harmful sulfur compounds into PAGENO="0151" 149 possibly more harmful sulfur compounds, in going through the cata- lytic converter. That is what started it. Senator HANSEN. My time is up, Mr. Chairman. Senator TALMADGE. Senator Dole. Senator DOLE. I think it is interesting that there is basic agreement among all three or four witnesses at the table. Is that correct, insofar as the House-passed bill is concerned? Mr. SECREST. There appears to be; yes. Senator DOLE. Are there any disagreements? Mr. ESTES. With our position? Senator DOLE. Right. Mr. ESTES. I stated our position- Mr. SECREST. As far as I can see, Senator Dole, I believe we are in general agreement. I have not had a chance to read through the details of the longer statements of my associates. And they have probably not read ours, but certainly, in general, we are in agreement. Mr. ESTES. It seems to me from our verbal statements, we are in agreement. Senator DOLE. I think in your statement, Mr. Estes you indicated there was more energy consumed for residential purposes, But no one has recommended we be limited to five-room homes. Mr. ESTES. Or two-room homes, maybe. If we are going to be comparable to the 28 miles to the gallon, maybe it is even smaller than a 5-room home. Senator DOLE. I think you make a good point: if we are really going to look at the problem, we have to know the problem and we have to single out the- Mr. ESTES. Yes; we just ask that whatever incentives we have for conservation, let tis be sure that they apply to all uses of energy, rather than just gasoline. Senator DOLE. Do you have other examples, besides the residential use of energy? Mr. ESTES. Well, industrial uses. I do not think there is any ques- tion that in our industry~ and in all industries, we are using gas today, natural gas today, where we should be using oil. I think that ought to be looked at by all of us. And you say, well, why would you do a thing like that, when we have such a shortage of natural gas today. And the reason we did it is from an economic point of view, and our industry is highly corn- petitive, from an economic point of view from an emissions point of view, natural gas was the right way to go except for the fact that probably it was artificially priced too low and we are looking at the wrong economics when we use natural gas for certain operations. I am talking about electrical generations for instance, in heating and generation of steam in our plants. And on the other hand there are certain operations, where, with current technology, we do not know how to use any other type of energy. We say it should be con- served now for the operations where we know no other way. But let us look at everything. That is all we are saying. We are trying in our industry, in General Motors, at least to do everything possible we can to conserve all kinds of energy and to move as fast as possible, within economic constraints, to coal, And of course, we encourage the use of nuclear, because in both of these cases, PAGENO="0152" 150 we conserve two real critical situations we have: that is petroleum and natural gas. Senator DOLE. A general question that might be propounded to all three witnesses would be the state of the employment now in the auto industry, and what do your forecasts say in the next 6 months? Is there a reason for optimism? I might just start with you, Mr. lEstes, then go to Ford and Chrysler. Mr. Es~ri~s. Of course, as you know, I think, we publicly expressed optimism in the future. We have said all along that we thought that our industry, at least General Motors, had bottomed out in January or February. Senator DOLE. How m~ny are out of work now? Mr. Esrr~s. At the peak we had 225,000 on a temporary basis, in- cluding indefinite as well as temporary layoffs. Currently we have about 80,000 still oi~ indefinite layoff. We hope that in August that will be down to 70-to 72,000, somewhere in that area. And hopefully by the end of the year, we will have those back to work. Right now our plans are to be at about a 70 to 75,000 level of in- definite layoffs by the start of the model year 1976. Senator DOLE. So there has been a rather dramatic shift? Mr. Esi~s. We are improving the situation day by day. Senator DOLE. What about Ford? Mr. SECREST. Well, our situation, Senator Dole, is somewhat similar. Our peak months for layoffs were January and February. Counting indefinite layoffs and temporary layoffs, that is people off for a week or more but still on the rolls, we* had around 65,000 of our hourly workers on layoffs. This was in the rangES of 35 or 40 percent out of work in those months.~-In addition perhaps 8 percent of our salaried workers were unemployed. Now that 65,000 number is down to around 23,000 or around 13 per- cent. I think that through the remainder of this year, unemployment rates in our company will still be in the range of 10 percent to 15 percent. I do not see busi1ness recovering to the point where the problem is going to go completely away. We are forecasting a relatively slow recovery and not a dramatic turfiaround. Senator DoLE. The same with Chrysler? Mr. Loori~ounnow. We believe we are seeing the turn occur. We are presently at 30,000 layoffs. And the max figure was about twice th~tt at the first of the year. So this is the lo~west we have reached since the first of the year. We have added a second shift in two of our op- erating plants. So we believe that things are now headed upward, as has been said, it is not a dramatic change, but it certainly is in the right direction. Senator DOLE. I think Senator Backwood, Senator Haskell ear- lier, touched on another point. But if we assume by 1985 that laws are passed and we have to reach 28 miles per gallon, it would cause quite a change in your operation. Maybe it is too early to have any figures on what it might do to employment. I think you talked about units. But could you translate that into jobs. What would it mean, job-wise, if we mandate something that is going to mean smaller cars? PAGENO="0153" 151 Mr. DUNCOMBE. Well that million ear drop translates into about 250,000 jobs. Mr. Esms. It is about one for four. Mr. DUNCO~IBE. That is the direct employment effect of a million automobiles. Senator DoLE. Is that shared by Ford and Chrysler? It may be too early to pinpoint it. Mr. SECREST. I think the relationship between jobs lost to units of sales lost is about the same. We have not really done a projection of how much smaller, if any, the market would be under the presumed 1985 conditions. We seem to he considering here the assumption that all cars would be the size of a Volkswagen Beetle or smaller. I am not sure I can give you a valid estimate as to how serious a change that would be. I think it is important to keep in mind that the option we are sug- gesting is that we do not choose between forcing people to drive cars the size of today's cars with the fuel economy of today's cars versus Volkswagen Beetles. We think that it should be. possible to saite very, very substantial amounts of fuel and improve the fuel efficiency of today's so-called big cars by 50 percent or more, and still have vehicles that will be 1,000 pounds or more lighter than today's vehicles. They will do for the public what today's big cars do. I do not think that we have to go all the way to Volkswagens in order to reach an acceptable energy goal. Now, 28 miles per gallon fleet average is another thi~ng. And if we do go that far, I think we ought to make clear w'hat choice people are being asked to make and how much difference in petroleum constimp- tion would come from the two possible options. We cannot compare 28 miles per gallon with today's conditions because fuel economy in 1985 will he far better. Senator DoLE. I wanted to ask one more question before my time expired-do you have generally the same view? Mr. LOOEBOURROW, I think it is imperative that the pub~ic be advised as to what will be the consequences of these kinds of bills. I am sure that 90 percent of them out there are saying, great for you, Congress; you are going to get us better fuel economy. But they do not realize the rest of the things that go with it. Senator DOLE, I think you are right. I think what the House tried t~ do is to give the public at least the appearance that we were going to have energy independence at no cost. No one had to sacrifice, no one had to suffer. But we are not going to have energy independence by simply imposing quotas. Finally, do you all favor decontrol of natural gas and oil? Mr. E5TES. Natural gas is very serious. Senator DOLE. I think many of us feel that way in Congress, but I am not certain that over half of us feel that way in the Congress. I would like permission to make my statement part of the record following the statement of Senator Curtis. Senator TALMADGE. Without objection, so ordered,' At the hour of 11:30, this meeting will officially adjourn. Informally and unofficially, we will continue to seek the advice of th~ witnesses. Senator Nelson? 1 See p. 2. PAGENO="0154" 152 Senator NrLSON. Gentlemen, I have a copy here of a magazine' that I wonder if you happen to be familiar with. This issue is entitled, "A Lighter Car," published by Pittsburgh Plate Glass Industries, a recent number, and it includes an article on auto-emission standards. Have any of you seen that article? Mr. ESTES.' We are familiar, I think, with everything Pittsburgh is doing but I have not seen that particular publication. Senator NELSON. They do a lot of work with the auto industry? Mr. E5TES. Absolutely; we work very closely with them, particularly in the area of plastics and lighter materials. Senator NELsoN. It is a very brief article and it shows some `Pitts- burgh Plate Glass findings on their newly developed exhaust trap But, let me read just a few sentences from it: Tests of a new auto-enmissions control system, an alternative to the catalytic converter, give promise that tough 1978 Federal emission limits can be met. In December, the California Air Resources Board reported on six series of tests on a modified 1974 Ford Pinto station wagon owned by Pittsburgh Plate Glass Industries. In every test, as reported in the chart on the opposite page, the Pinto met the stringent 1978 limits with no reduction in fuel economy. Elsewhere in the article they state that they think that it will last `for 50,000 miles. It says that Pittsburgh Plate Glass has spent 5 years developing and testing the particulate trap which replaces the stand- ard muffler. Then they go on to say that this filter unit adds about $12 to the manufacturing costs. Life expectancy for the trap is 50,000 miles. Only the future holds answers to some questions, will Congress postpone the 1978 emission control limits, will auto companies adopt an emission control sys~ tern or a new type of engine that permits use of high compression ratios, leaded gasoline, and particulate trap? But, one question already is answered-the technology exists in experimental systems to meet the 1978 limits with good fuel economy and with promise for controlling sulfate emissions. Then they show the six tests that were done with the 1974 Ford Pinto. Now. as you all know, the current standard is 15 grams per mile for carbon monoxide. The tough 1978 standard is 3.4 grams. The Ford Pinto on six tests was not just at 3.4 grams per mile but at 2.99 in one test and at 2.24, 2.48, 2.26, 2.03 and 2.65 grams in the others. So, on `all these tests, the Ford Pinto with this equipment was well below the tough 1978 standards for carbon monoxide. Now, for hydrocathons the current standard is 1.5 grams per mile while the 1~78 stand,~ard `is 0.41. The Ford Pinto with this new equip- ment tested out at 0.17, 0.11, 0.11, 0.10, 0.11, and 0.13 grams per mile of hydrocarbons, well below 50 percent of the tough 1978 standard, and at less than one-fourth of the standard in one of the tests. On nitrogen oxide, the standard for 1978 is 0.4. In the tcs~s, the Ford Pinto did 0.26, 0.23, 0.27, 0.22, 0.23, 0.26. I am wondering, I thought you might be familiar with the equipment that Pittsburgh Plate Glass has been dealing with. Is anybody familiar with it? , Mr. SEOREST. I believe that the system referred to there, and ~ am relying on one pf my engineering colleagues who handed me a note on it, is the system developed by Questor, another compan~y that sup- plies components to the auto industry and I presume is working with Pittsburgh on this. PAGENO="0155" 153 Senator NELSON. That is correct. Mr. SEOREST. Ford is doing a lot of work with Questor and we have submitted for the record in the EPA suspension hearings, a great deal of information evaluating not only that device but dozens of others. The law, of course, requires us to meet certain standards by 1978, hut that report you read `uses the words, "on an experimental basis;" did I hear that read in there? Senator NELSON. Yes. Mr. SECREST. With each of the experimental devices to date the facts are, as we see them, they are not ready for production. That despite the fact that we would be delighted to find some way to resolve this prob- 1cm, and it is of no benefit for us to continue this long struggle to try tQ design systems that will meet the la~v unless such systems are produc- tion fundable. We are spending millions ~nd millions of dollars on an attempt to work out every conceivable alternative that might yield a technical solution. At the present time, as shown in our sworn testimony on the EPA suspension hearings, we have been unable to find a device that is proven in any sort of production basis to deliver the results necessary to meet the standards. In the particular case of the Questor device, we are concerned that the tests that have been run to date show very serious fuel economy penalties. Senator NELSON. In here they say not. Mr. SECREST. I think it would be `appropriate for us to submit for the record the information we have given the EPA on that particular one. I notice that in the press conference held a couple of weeks ago at which Mr. Zarb and others talked about the recommendation of the President for an extension of the current standards. Mr. Zarb was asked about new technology for the future which could get improved fad economy while meeting more stringent emission standards. He replied: I can just play the ball from where it is at the moment. No one has produced those technology improvements, no one has shown them to us and if they are hidden in the basement of somebody and they come out at some later date then we ought to take a whole new look. This is our view, we are sometimes painted as wishing that anyone who has an idea would stay away so we could not make any contribu- tion to solving the problem. The law requires us to solve it, the law requires a good -faith effort on our part to solve it and if we do not make a good faith effort to deal with anyone. Quest or is one such company, Gould is another, At the last hearing. a leading executive of the Gould Co., another supplier firm, appeared before one of the Senate Committees and said in effect that the auto companies were not testing hi~ product seriously enough. They just were not giving him the kind of cooperation that he ought to have and that led to a very, very extensive interchange of every telephone call and every visit and every possible contact that had ever been made be- tween this supplier and the Ford Company-_-I[ suppose the others as well. And I think the record will show, certainly we are willing to stand on it, that we are doing everything we possibly can to investigate PAGENO="0156" 154 every idea both from our own shops and from outside suppliers to see if we can resolve the problem. Mr. ESTES. Senator Nelson, I did not recognize Questor `as PPG~ Senator NELSON. This is not, they are working with them, Mr. Esi~s. Is there a fttel economy number in that? Senator NELSON. No; what they say o~i fuel economy, the sentence I read earlier, the last sentence was, "the technology exists in exper- imental systems to meet the 1978 limits with good ~uel, economy and with promise for controlling sulfate emissions." And I do not know what they mean by, "good fuel economy." Mr. ESTES. That may be. the problem becai~se our Pontiac division for 5 years worked very cibsely with Questior and prior to the impor- tance of fuel economy, it looked like that might have a chance of doing the job. And the principle on whith it works is a considerably richer carburetor in which it keeps the fire burning in the reactor to get rid of the emissions and it is kind of a dual setup. There was another reason for dropping it in our case and that was that the durability, we were never able to get the durability beyond about 20,000 miles and we did not think that was adequate. But the basic reason, as Mr. Secrest has said, is that it may be what they consider to be adequate fuel economy. It is not what we consider iii the concept of today, adequate fuel economy. Senator NELSON. They~ do not give the dates of the test, it is a recent publication, but it is a California test. Mr. ESTES. I can assure that we will doublecheck and make sure we are up to date. They may be comparing it with their 197* Pint& you know; and that is not very good. Mr. SECREST. Oh, I would not say that. IGeneral laughter.] Mr. LoorBounnow. Senator Nelson. I would like to say that Chrysler is also familiar with the Questor system and our results and expe- rienceS have been almost identical to what Mr. Estes has reported. The CHATEMAN [presiding]. Senator Brock? Senator BRoOK. Gentlemen, I have been most interested in your testimony. I am not familiar with the device mentioned by the gentle- man from Wisconsin, but I think you may be facing t~he dilemma between environmental and conservation objectives. I think the point was made about manadating a 28~mile~per-gallOn fleet average is something that could be met, if we were willing to comprOmise in other areas, size, weight, environmental standards, and the like. The point is, we cannot by statute mandate technology in all areas. I think that is the essence of your testimony. We are discussing today not just automobiles, we are~ discussing the whole energy problem and hopefully the Senate will do a com- petent job. The House has not. And I think we have to establish responsibility in this area. `I would like to point out, I think it was the statement of Mr. Estes, that you were using natural gas because it was a cheap energy source and it was chean because we had mandated a low price. Now the same is true of gasoline. We are holding the price below the market by law and as long as that happens, market forces cannot he brought to bear to correct the problem. And this is the most fundamental thing we need to do: To restore the market to its functioning plane by the PAGENO="0157" 155 deregulation of gas so that at least the market forces will be sup- portive o~f Government policy. Mr. ESTES. It will support us, too. Senator BROOK. And of course the industry as well. I might say I am a little bit weary of the discrimination against those of us who constitute the 28 percent of the families who have more than two children. I have four children, a beagle, and a half- beagle, and we have no idea what the other half is. We do have a problem when we want to travel. We have a 1970 Buick station wagon, Mr. Estes. It cost me a considerable amount of money yesterday to get back into operating condition, the transmis- sion went out. But I cannot afford to drive a Nova or a Pinto because that would require me to buy two cars and my wife would drive one with two children and the beagle and I would drive the other two children and the half-beagle. We would use more gasoline than we are using now and I would use more energy and have less of a family in the process. That is what bothers me about us saying that y~u cannot accommodate the needs, the disparate needs of the American people, get that is what we are beginning to reach toward when we say you have got to have a 28-mile-per-gallon average, because, I tell you something, in 1985 I still will want a car that will carry six people because that is the size of my family and I like to travel with them. If you cannot put them in a Vega wagon or ~a Pinto wagon, I am not going to be happy and I am not going to buy your product and I will keep this doggone Buick floating as long as I can; just because that is a personal requirement of mine, it is not a matter of needs or wants. It is a matter of physical necessity for me to keep my family together. I think that is why I raised some question about the mandation of these standards that are not in the real world. The Senator from Oregon is blessed with two children, and they are beautiful. He was smart. I am not as good at family planning as he is. I have got a different problem. I am just doggone weary qf the Congre~ss asserting its ultimate wisdom on some of these questions. General Motors and Ford and Chrysler have to face the market every day, every week, every year and you are getting the consumer's judg~ ment. The Congress faces it every 6 years and we are getting ours. Frankly you are doing better than we are. I question whether we should try--would it not be better to take the tack that Mr. Roth proposed, gentlemen? Let me ask you a different kind of a question. He proposed incentives as opposed to penalties. May I suggest n different approach entirely from that. Would it not he more feasible to nenalize pollution on the basis of its rea;l cost to the American people? Would we not be better to have a tax on the nercentage of excess emissions, noxious emissions, than it would be to have some set standard that may not be within technical feasibility? Would you like to comment on that? Mr. Es~ri~s. Certainly, Senator Brock, von have the perspective that we tried to put across; and, as I said, there is not any question that emission controls on vehicles and safety in some areas is not salable and, consequently, we need some Government regulation. PAGENO="0158" 156 We have said many times, and I will just say it again,, that all we ask in those areas is that we are sure that whatever regulations there are, are health effective, safety effective, and now, energy effective. And if we examine all of the regulations in that context we have no argument at all. We just say let us be sure of the facts, let us investi- gate our current vehicles in the field and see if everything we have done in the past several years which has increased the weight of our vehicles and our fuel economy, let us make sure that all of those regula~ tions are health effective, cost effective, and energy effective. And if you look at the emission problem, as you have suggested, we would, have no objection to that. I think it would be a good idea. Senator BRoOK. One of the problems I have with testimony from people such as yours~eIves is that, generally speaking, we get a state- ment that this is or is not technically feasible. But too rarely are we able to pin down the true cost of various policy alternatives. We do not have the mechanism in this Government for evaluation of our programs. You do but we do not. Is it not possible for you to quantify your testimony in terms of jobs, in terms of price per car, in terms of price to the ultimate consumer on the various alternatives that we are facing you with so we can hav~ some tangible things that we can see, and sense, and touch? Mr. ESTES. In some areas we can and in other areas it is very dif- I9cult. But that is the reason' I brought Dr. Duncombe along. Senator BROOK. To the extent that you can~ I would very much appreciate your responding to some of the questions that have been asked, as I say, to the degree you can in a quantified fashion. What does it mean, what do these various alternatives, in terms of the con- sumer. cost? I think Mr. Seerest mentioned that an 8-percent shortfall in this mileage figure would cost him a fine of $225 million. What does that translate into the consumer cost in terms of cars, what does it translate into in terms of consumer costs in reduced technology, the ability to invest in new and better techniques? Can we quantify that a little bit? Mr. DUN.OOMBE. In this whole area of emissions and safety we have stated publicly a number of times essentially two factors. Now, one is that the consumer is currently paying about $600 per car for the safety and emission equipment that has been put on since those programs- The CHAIRMAN. Would you mind speaking into the microphone? T cannot hear the answer~ Mr. DUNOOMBE. I was saying that on the basis of General Motors' costs, the buyer of a new car today has a cost, an added cost of' about $600 per vehicle for the safety and emission equipment that is on it- of that, $385 is safety. And as we look ahead to meeting the standards that are now on the books, on the basis of our current cost estimates, it will be approxi- mately another $600 of cost. In other words, this is over and above the current $600 of cost. So that if we were to go ahead with these stand- ~rds as they are now on the books, we are talking in the area of $1,000 per vehicle when all of those standards aie met. Those costs do not take account of some of the other penalties, that is, the fuel penalties that may he associated with meeting the PAGENO="0159" 157 weight or the emission standards on the cars in the future. And there may be other costs. Now those figures, I think, we have made public but, I think, there are other costs involved in this and I agree with you. Qne of the things I would like to see is a much fuller accountings Senator BlOCK. My time has expired, Mr. Chairman, but if I might, ask for the record so you could supply it at your convenience, would you give me a breakdown, by company~ each of you~ a listing of the mandated costs current and already enacted but not being app1ied~ yet and those which are proposed by type? I-low much does the 5-mile-per-hour bumper cost, ~not~ jU~t in terms of the consumer, gentlemen, if you could give me a little clearer esti- mate of what it costs in increased repair bills because ~icr~y son is. not smart enough to wreck at less than 5 miles an hour and that ~s a genetic defect he has to live with. We have that problem too, I weuld like to be able to spell out the exact cost by item~ jiot individual, part by part, but by the major system item. It you could give me that I would be very thankful. Mr. EsTES. The other thing, Mit. Senator, we have tried, to do in tMs,, and it is a little more difficult, ai~d that is to rate the cost ben~fit in each~ of these. But that is really. what yOu are talking abbut-~is the 5-mile- per-hour bumper worth it? We have testified n~any times that the 2½ is but the 5 is not. But that is the kind of information we will try to get for you. Senator BuocK. Thank you very rnuch.* The CI-IAIRi~?rAN. Mr. Curtis? Senator CURTIs. Thank you, Mr. Chairman, Personally, I happen to believe that our present trend in our legisla' tion here, what has been proposed are a blueprint for a c~ntinttation of unemployment and recession. Now~ we can eliminate some drivers whether we raise the age limit or not, We can do some other things, we can close some filling stations, we can go to the very, very small ear. But I am concerned about what that means in the way of jobs and I do not think we have to do those things. I would like to ask, how many man-hours are involved in making your smallest car? I will ask Chrysler first, or is it a trade secret~ Mr. LoorBourmow. I do not have that specific information at my fingertips at the moment, and this would have to go clear back to the raw materials as they lie in the ground, if you want to really get the total man-hours involved. Senator Cmt~i~. I will come to that, but I think we ought to know ~f it is a trade secret exactly how many man-hours----I would like to know something between the difference over the man-hours that-goes into one of these smaller cars and one of the~e full-size ears. Mr. LooFEotrulow. Within our plant, there is a sub~tantjal difference. Senator CURTIS. How much? - Mr. LooESotn~ow. I will get that informatioh. Senator CURTIS. Do you not have a guess.? ` . `,~ - - Does it take twice as many people to make it full-sized car than one of these little bitty ones? Because,' if that i~ the answer, we can all go to motorcycles or these three wheel things or rickshaw carts *TI~ information referred to was not `available at presstlme. Tn order to expedite the printitig of these hearings, the Information requested will appear in appendix B of these hearings. 55-583---75--pt. 1---il PAGENO="0160" 11ow~bout the Ford situation? Mr. S~ca~s~. In an1swer to. your specific question, S~xiator Ourtis, I would estimate-ai~d I do ho~ha d~thfle4 1~iformation on the subject ~iith me-that th~ man-hour content of a Pth/to, in the Ford system, is about 15 perce~nt less than th~ xuanpbw~ content of one of oth'lârger cars~ / Y~u might think it is. a great deal ~i'der ~iffei'euce than that, b~t t~e fact is that the~ Pinto will perform many of the funetion~ that a large car will perforhi, and we cth~not find smaller ~peopie~ to b~iild the smaller cars. Senator Chiç~s.You can ~ut some o~ those small people into p~litics, though. About 15 per~ent~ Mr. SEc~EsT. Yes. Senator Cr s.What is yotu~ cor~irnent on 4at~ Mr; E~r~ Well, I d~ not ha+e the munbere herebttt it ~s nOt 50 per- ceiit,I wili~ say that 1 ci~ hot~thinlt Mr. Se~rest is ~ off-.it really depends on where you start. If you~ start at the as~e~nbly plant, that is one thing; you go~ on to the engines, the axles, ~ncl so on, back to the raw mateI~ieds,you can go allthe way through. Senator CrR1'~s. I mean the whole business. S Mr. Es~s. `tthink 15, ~0 percent is probably a good figñr~. / / Seliator CrRTIS: Now, if you went cleat back to the raw materials, all the raw materials that go into a car, how much employment do we lose / by going to these tiny cars, as compared to what mo~t of us think &f as a full-sized car? S S / i / Mr. SEcRE5T. I think onerway to get at that would be to consider some of.the~ptioncal ec~nipthent~feature~ that ~are ~iow available in most caCes on e~ither small or/la~rge ca~ Some of th~m4 like air c~indl\tioning,, an * allegedto haire~~~you know, there~ is a'whoie industry that could be diè~ eln~loyed. i~s~ime itw~uld liwoivenot onlyautomlotive air condition- i~g, but air conditioning Mrbuildings and SCnate heuring chambers `and evercything else. Andif we have tO do that someday, I assume we will do it, / `Senator Otrn~is. 11 do not think my question is difficult. Does it take more~people to build a fuflI~si~ed car or ~ small one; and if so, how much more? / / / / / / / S ` Mr. ~si~s. lit ~s~ft good question. I think we should consider it and tr toget sem~ kiiid of an an~wer on/a~ percentage basis. I do not think we have-I know we do not have the information here to gi~re you' the 1~ind of ~ins*er you want. I think the thrust of our testimony, however~ though, Mr. Senator, was that inad~ition to the factor you `are talking about1 there is a possibility of postponCmeht for an dnde~nite period, maybe up to 5 years~ of buying intentions on the part o~ the. public, which i~ going to ~ tremendously sOvere in the way of unemployment' inthe/interim. S * * / Senator Cu~ris. That is exactly what I am getting at. Wh wilj the `e~eet on the industry be ~n employment if we force you to. go to.a 28- mik-'per-gallon a~era~ge? / / / S * / 5 / Mr;~Es'rrs..,We an~talkihg about2,000rpow~d ears. , * * / Senator CORnS. What is it' going to dote employhient?' / / / / Mr. Es~r~e. It is going to lmve a drastic eff ect, as Mr. Duncombe said. PAGENO="0161" 1~9 We say that even in 1980-and that is not the 28 miles per gallon, tl~tat ig the 20.5-we are looking ,at probably a million less vehic1e~ in the industry, sales, in 1980, because of the 20.5 number. Mr. DUNCOMBE. And that is about 250- Senator CURTIS. That is the sales of cars. Mr.. Dtnwo~rB~. That is 250,000 peoph~. Senator Cuwris. That is 250,000 people, but how much is going to the smaller ears? Senator BflOCK. Excuse me, that is 250,000 direct; and what would bethe indirect? Mr. OU~CO~BE. The indirect in various-~..-~.. Mr. ESTES. That is 1 to `4, and it gets up to the point where it is ftlmost 1.5 to 1; so you almost can doubli~ 250,000 if you are talking about supplier industry and the whole thing. The 250,000 is just "Gep- ~ral Motors. Senator Ctmrris. What I would like to know is, ~n the whole ball of ~wax, I think the Congress ought to know~ ho~ many man-hours it takes-Dr if it is a trade secret, put it ~in sOme other way-ta make a ~small car and how much to make a fuil-siz~d car, clear from scratch. I think we ought to know that. I think we arl~o ought to lçnow ~hether or not' you ~ouid pull ~a boat or ~ trailer `*ith these little cars, and who is. buydng the boats ~d ~the trailers. I clp not think the wealthy people. I am `serious; I think thi~ movement has got the seeds of making our recession and unemploy- ment permanent. I do not think there is any question that we have got to turn our attention to the production of more petrOleum and hat~ra1 gas in this cou~itry, and our conservation should be turned to a ques- tion of those industries where there is a substitute. Now, if they did all the things they have talked about under these sch~dules here, would it save as much petrolei~un as we would saye by using coal inStead of petroleum to produce our electricity in the cOufltry? It is my understanding we use' abo~it~that 40. J~erceut of the electricity is made by' burning petroleum. It is not necessary at all; coal, is cheaper. Now, what would be the comparison if we did all of these thiugs that they want to do, which I am cOnvinced meank con~ tinued recession and uner~iployment, because our `industry, our whole industry is built around the motor vehicle. There is another thing we have not touched here and that'is trucks and the like. If you make them smaller, you caunot haul very much. Would we save as much petroleum if we eliminated petroleum as a means of manufacturing electricity? Does a~iybody have an answer on that? . Mr. ESThS. We have looked at this. I do not have the numbers `at mv fingertips. Senator CURTIS. I would be glad to' have it supplied for the record. I do not mean any harsh criticism of not having these ready answej~, but I belie2ve you have been too defensive. You have been stepping backwarcl~ as we in the Congress have imposed this `managed economy~and that is what it. amounts to, Congress business should be to see that we~produee more. ~etroleum and als& a full utilization of substitute fus..' ` ` ~`. ` ` ` PAGENO="0162" 160 Mr. Du~coMBJ~. I was iust going to suggest in connection' with this `that the motorcar is taking about 30 percent of the petroleum. Now, a proposal such as w~ ha've been ~is~~sSing today would affect only ~ew cars. And let us say for a moment that it did not affect the sales volume. We have 100 million carS OU the road, sothat what this legis- latiou would be doing wouht ~~~ffeetiflg, let us say, io percent; that is, the first year's ~roduc~i01~ would be' 10 p~reeflt of the total. So that, of the 30 ~ercent of fuel, we would be affecting 3 percent. Now, of `thnt 3 percent, w~ might be making a 5-percent improvement, so that we are talking now about a first-year improvement in conservation o~ 5 percent of 3 percent of~the toted petroleiixti used i~ the United States. What we are ta'king about here is' a' proposal which will have a `major effec~ on the a~atouiObile industry and a mmii al effect on our national effOrt to~consèrve ~nerg~~ That is one way of looking at it. Senator Cui~rTh. Well, now, we use 30 percent of our petroleum to drive motor ~tehicles. And how mu~h do we use, or what percent of our * petrol~iim do we use for electricity? Mr. Es~s. Nine percent. Senator Orurris. How much? Mr. ESTES. Nine percent. Senator Cuirns. Nine percent. Mr. Es~rEs. If you eliminated all of that, it would be a a0-per~ent imptovement. Senator CtrnTIS. If you eliminated all c~f that you would conserve 9 per~ent of your petroleum. Mr. Esi~ES. About one-third of what we are currently using for automobiles. . Senator CunTIS. And if *e put you through the mill on this thing `and change our whole economy, because I do i~ot~ thinic it takes an ex- pert to figure out that these little cars cannot pull boats. If you cannot pull them, they are not going to buy theñi. There is an industry. The same~ thing is true with trailers, I think it is our middle class people that are using those things. The boat industry has been one of the most rapid growing' ones. But by producing electricity with coal, we could save 9 percent of our total petroleum usage. And by all of these things in the automobile iudu~try we would save 3 percent. Mr. DuwooMBE. Less than 3 percent. Senator CURTIs. Less than 3 percent. Do you think that if 5 or 10 years from now there is a massive move to very small cars, if it is accomplished by then, that you will be em- ploying as many people as you would be if you were still selling full- sized cars? Mr. Es'ri~s. No; no question about that. Senator CURTIS. I am sure that every where you follow along, that the insurance industry is cut down proportionately, the' financing of cars is cut down proportionately, and all qf the component parts, as well as its effect upon these other things. And I just believe we are `facing too grave a situation in reference to our energy supplies to waste time talking about these things, that when it is all said, and done, we do not change the picture very much. And this energy crisis has been with us now for almost ~ years and the Congress l~as not done anything to increase the production of petroleum by a single PAGENO="0163" 161 poiñt As a r~atter of fact, they have gone the other way. The produc- tion of oil has gone entirely down. I will not, take any more time. X do have sOme questions here that' I would like to submit for the record along this line that I have been asking, and that will give you a little more time, relating to the em- pJoym~nt situation, I would like to have that supplied to each one of the witnesses. Thank you, Mr. Chairman. The CHAIRMAN. Without objection, that is agreed. [The response of General Motors follows. The responses of the other two witnesses had not been received at presstime. In order to expedite* the printing of the hearings the information requested will appear in appendix B of these hearings.J QUESTIONS ASKED SY SENATOR Cunvis ro GENERAL MOTORS Quest~km. If the house btll becomes la~ what effect would it have on employ- ment in the auto industry? Answer. Establjsh~pg mandatory fuel economy standards, even as high as 20.5 mpg which H.hi. 6860 mandates for 1080, could have substantial adverse effects on auto sales and employment in the auto industry and throughout the economy. This would happen because, even at the 20 mpg level the kinds of cars automobile manufacturers would be able to build in response to consumer demand would be restricted, HR. 6860 would require standards as high as 28 mpg in 1985. It is difficult at this time to speculate over what kind of cars could be produced In 1985 to get a 28 mpg average. No car presently being built in the U.S. achieves 28 mpg on the composite EPA cycle. It is certain that there would have to be very many small, `very light-weight cars sold. If half a manufacturer's fleet consisted of ears averaging 24 mpg (`the best mileage for a low performance 1975, 3,000th. car) the other half of the fleet would have to average about 84 mpg. It is im~or- taut to recognize that no car, domestic or foreign, (even the lowest performanCe nian,ual transmission cars) presently being sold in the U.S. achiev~s fuel economy as 1ii~h as 34mpg on the composite cycle, While `cars that can attain fuel economies in the range of `28 mpg can be de- signed and built, there is no assurance that they can be sold in `sufllcleut numbers to avoid substantial disruption `and unemployment in the automobile ~ndu~try, At this time it is not realistic to speculate on the magnitude of the unemploy- ment that would be generated by any particular standard a'deca~de in the future, Oke thing, however, is certaig. If the `American people demand 28 mpg cars, it is in the best Interest of the automobile companies to meet that .d~maud. If they do nt demand caius' `of the kind but the auto eothpanies are force4 to limit their production tO such oars, tim effect on tho economy could be catastrophic. Question, What impact will current emission standards ha~re on yOur ability to meet the fuel economy standards in the House bill? Answer, GM has Indicated that we can achieve a 5~% imnro\~ement in auto fuel economy between 1974 and 1980, provided there are `no additiOnal fUel ecOnomy penalties Imposed by emission standards and safety standards more stringent than those applicable to the 1975 model year vehicles. Any more stringent emission standards would make tbCt ~goa1 extremely difficult, if not impossible to reach, GM Ms informed EPA and C~lifornin officials that we will attempt to meet' that state's standards in 1977 and "we intend; to market 1977 models in Cali- fornia in as many size ` and Weight categories as we can under the regulations, recognizing that some current engine/transmission combinations now being,. offered in California may have to be dropped." GM has added further that we expect fuel economy penalties of approximately 20 to 25% to result from meeting California's 1977 emission standards. Present levels of emission standards currently required by law for the 1978, model year nationwide are more stringent ~than the 1977 California standards,' PAGENO="0164" 162 Neither GM nor, to our knowle4ge, any other manufacturer has the teclrno1ogy~ In hand to meet these 1978 emission standarçls. Until the technology !s developed,. we can not reasonably estimate the fuel econOmy penalties. Question. If there are fuel economy standards, should they be applied to an entire ear fleet, or shcaiI~l penalties be applied only to the low mileage cars? Answer: Proposals l~a~e been advanced before the Senate Finance Committee' to: aj~p1y ,p~~alt1es o~y to loW mileage cars rather than to a manu~a~tnrer'~ entire fleet. One approaéh would be to tax cars at a rate based on the, fuel economy they achieve in relationship to the industry-wide .~ales-wetght~d &~eTh~e' for that model year as determined by the Environmental Protection Agency In its certification tests While ~ tax on low fuel economy cgrs is u~necess~ry because of the voluntary efforts being made by the auta m~umufacturer~ to Improve the fuel economy of their cars, this system would be much more fair than the penalties under ER. 6~60. Question. Ig it "too early" to tell what fuel economy stand~rd can bO met in 1985 and whether any standard will in fact be needed? Answer. We:'believe it is a serious niistake for Congress to set standards by legislation. It is, particularly inadvisable for standards to. be set as far as 10 years in the future when cOnditions, econon~ic forces and the state' ~of the technplogy, can not be foreseen. It is apparent that the post-1980 staiidat~ds In a1~ ti~qo ar~ arbitrary `and uz'i$uppOtte~1 by anpi,ysis of the way in whbth `they will affect `energy cbnsuln~tibn or the Anieric~an ~5nsumer. As a result of fuel economy I4n~ro~rement~' `now being made' in re5~iOn'se to consumer demands brought about by Mgher gasoiine prices, total gasoline con- suniption for all cars On the road will decline between now and fl~80. There is nu. other energy consuming sector' of our economy that is ajiproaching this "negative energy growth." If there were, our country would be well on its way to solving its energy problems. Certainly there Is no justification for these entirely arbitrary standard~ pres- ently written in HR. 68~0: , The CHAIIIMAN. I apologize for my absence. Ihad to, leave this meet- ing briefly to attend the Democratic caucus which is meeting on var1d~s and sundry matter~. Senator Cun~is. Did they cut down our supply of oil any this time'~' The ChAIRMAN. My purpose for atte~1diug `was to try to protect the tight of this committee to recommend a bill in~ line ~vith whatever the evidence an~1 the good judgment of its `members ~vould dictate. Seflator Grai~ei has made available to us a recent summary of the flarris Poll which indi'c~tes that a 46-to~31 per~cent plurality of t~ie" American people now favor "deregulation o~ the prices, oi~ a~l oil ~d n'atnral gas j~roduced, here." And that was a ,reve'rsai of mi ~previous poll~ takexi Jul~r of' last year, `when 42 to `28 `p~rceut opposed deregulation. , , . ` Over the last. 10 years, has the price of p11 gone `up much more relative to the price of the autotnobil&? ` `Mr. E~ms. These increases hate been sporadic, so I do not know if I, know. the answer. , ` Mr. DUNCOMEL The real price of oil went down, as you pretty regularly, up until the `time ~f the embargo. The big, change in the oil' prices comes since then. I think that gasoline and oil p~odi~icts in' the United States,, `without a' doubt, up, until the time of the' bargo, `were one .`of the Nation's,, biggest bargains. `We had them underpriced. ` ` `The CItAIRMAN~ I thinl~ that the evidence before this committee `is going to sh~w that' you cannot replace the existing oi'J and'gas at ~he price that the producers are being made to sell it for. In' other woMs~ the producer who is selling his oil for $5.25, in due cOurse will be. PAGENO="0165" 163 made to buy energy from a source, be it oil. or coal or whatever, and he will be payi4g at least twice that when h~ bu~s fer his own needs in the future, because the replacement.~ost of energy ju~t greatly exceeds the regulated prices. Now, it looks like the American public i~ow understands something that a lot of our fellows have not quite realized. The public knows it is not within our power to deliver them cheap energy indefiuite]y without. taxing their eyeballs off of them tç pay for it with a~ ~ :sides. ~n overwhelming .ma~ority. is now tired pf beu~ mish~d by politicians who believe they can buy energy cheap inde~1iutely~ There ~5: some cheap energy now, energy which was found wh~n it was much cheaper to produce it~ ~iit fi~o~n here on, ~JQt~ are going to have lo pay what it costs to prOduce the Onei~y. And *hen you pay wh~ it costs to produce it, you will find a ~ot of people who are ready to go produce it, providing that they ~u make the profit th~t they. ~would expect that they would if they invested their money in~ome- thing else. Now, few peo~le are great~ upset that they ~have to pay a g4eat deal more to buy an automobile than he had to pay. 10 years ago. But I do think in the long run the public would like to decide for. itsel,f whether it wants to buy a big automobile, a small automobile, an air-conditioned automobile, or one that i~ not air-condi~tioned, as the case may be. And they `cc'ould sort of like to decide for themselves whether to drive the automobile 65 or 70 miles an hour on in~erst~te highways or whether to be held down to 50 miles an hour or 55. And I t~ake it, basically what you gentlemeii are testifying for is that you ought to let the free çnterprise system work. Mr. SECREST. Precisely. Mr. Esms. Right, and it will do it, too. The CIL&IRMAN. .~nd in the last analysis, no matter what we, poll- ticians promise the public, we are not going to be able to provide,the public with energy much cheaper than it costs to prQduce it, are we? Mr. ESTCS. That is right. * The CHAIBMA~. I have no further questions. I may want. to submit some, and i.would.appreciate it if you ~wquld respond to them. Any further q~uestions, gentlemen? Senator IJASIULL. I have just~ one, Mr. Chairman. Mr. Secrest, you mentioned that it took about 15 percent more manpower to manufacture a big car as opposed. to a Pinto~ Can you give a rule of thumb relating to the material costs? Mr. SECEEST. Well, I think in materials, Senator Haskeli, kin~d of thinking off the top of myhead, you will find~-~-~ . I guess I would have to say if a 5,000-pound car were reduced to 2~5O0 pounds, either due to the pressure of the market or to the law- Senator HASEELL. No, I meant your present line. In other words, your Pinto. What is the material Cost of your Pinto as opposed to the, material cost of your Ford suburbanstation wagon?~ Mr. SEcREsI. I think thp material cost is going to be very, very pro-~. portional to the weight of the car, A Ford car today will probably weigh 4,000 pounds or more-4,000 to 4~500 pounds. It. will weigh much less than that in the future. A 2,500- or 3,0000-pound car will have a basic material cost that I think will be roughly proportional to the difference inweight. PAGENO="0166" 164 Senator ~ So, your Pinto is what? Q,500 pouiids now? Mr. SECREST. Well, tod~y'~ Pinto is closer to 8,000 poun~ds. Senator H~ts~u~. 3,000 pounds. And just to take the top ~f the line, youi~ LincOln Continental is what? Mr. S~cni~s~r. It is 5,000. Senator HASK1~U~. So it is a ratio prøblem. Mr. SEcrn~r. Sixty ~ercen~t of the'weight and probably 60 percent of the utiderlying basic material cost-sO there would be a very sig- nificantdiit~erence in nmterial,labor. Senator HA~ELL. So, if you had a 5,000-pound car versus ~,500, the material cost would be t~srice as great? Is that roughly a rule of thumb? Mi~. Si~oREsP. Ithhik that isi~ight. Mr. Loo~onnRow. It is probably ~light1y biased upward for the larger car. Senator H4SKELL. Roughly in relationship, if you have twice as heavy a car, your material cost is twice as much? Mr. SEOREST. ~ think to take the weight out, you have to take out rnate~iaL I think you would come out close to that, not necessarily exactly. Senatçr HASJ~ELL. That is all. The CITAIRMANS. Are there further questio~is? Gentlemen- S Senator TALMADOE. I would like to ask one or two, if I may, Mr. Chairman. S Senator Ribicoff, as you recall, asked ~you some questions about diesel automobiles. I believe the efficiency of the die~el engine is almost twice as gopd as tl~e ga~oline engine, is it not? Mr. ~ NO. On the basis of I3tu value, Senator Talmadge, the ~differei~e g~ts~down to~about 10 pp~cent, because the Btu or the energy value Of dies~l fuel is higher than that of gasoline. So~ if yot~ look at it on a II~t~i basis, energy unit basis, the diesel is only about 1~- Or 13- pex~ceñtbe~tér. On a thiles~per-gaflon basis, it is~bout 20- to 25-percent better. I a~t talking about ~vèrything~ else being comparabiC. Senator TALMADGE. Is it p~oss~ble tOproduce a diesel automobile with~ in the purchasing ~o*~r ô~ the a~ei~age~AmeHcan~ S ~1r. E~t~s. So fai~,there 15 a pena~1ty-~-lf we look at the'márketplace, there is a péha~lty foi~ the dies~l éngi~ie ove~ the gas~li7le engine some- where in the area of $100 to $~00, $~50; depending op the ~ Senator T~LMA~GE~ In ofheF *otd~, if ~ou put all ~!esels in your General Motors cars, it wOuld cost you &bout $150 to $200 more per automobile?: S S ~Mr. ~TE~ P~r c*r; right. S 5 S Senator TA~L~IADGE. Suppose COngress p~ssed a law ~d'saiçj, give on ~nOugh leadt~me~Vo do~it and geai~ up f Or it, that all ~utoinobiles had to be powerçd b3~ diesel engines HOw much petroleum could be saved? S Mr. Esms. I guess we would need to do a little figuring You are replacing about a ~0th o~ the vehicles each year, so that has to be put into thO for~niilà. I think we really ought to take a look at answering, Senator Tahuadge. S S S PAGENO="0167" 165 Mr. LQOFBc~URRoW. The yield of fuel oil from crude is such that if you have all of the automobiles as diesels, there simply ~is ndt'enoñgb erixde oil to supply them *ith diesel fuel, an~c1 you would have ~asolhie as a leftover byproduct that you would not know what to do with. Senator TALMADGE. In other words, you would h~~e tO have gasoline made in order to make the diesel fuel? Mr. I~OOFBouERoW. That is right. Mr. EsT1~s. We asked ~ll of the oil companies~indivlduauy, recently, how do we get the most transportation; the highest number of milth Out of a barrel of crude. I think t~iat is what we are talk±tig abo~it. Senator TALMADGE. That is ~Or~rect. J~f1~, ESTES. And we have liu~d various answers, arid I think'thCre are various answers depending on the refining capability and the refithng capacity~ of the industry, spread between.the varioths~ipplIers, We have had answers all the way from the fact that our current mix is aborit the optimum, up to the point where it would be better to have, let us say, a multifuel engine. Now, that is kind of a simplistic and easy answerto the question. If you have a muItifuel engine which will bui~n anykind of fuel, obviously as the mix changes in the various refineries, we get a little mere. But in an optimum bksis, I think we have a possibility, maybe, pf picking up 10 percent in this area by gearing our engines to the cui~rent capacity and the current heat value of the crude oil. Senator TALMADGE. Do any of you gentlemen have any idea ho* mUch petroleum and gasoline we could s~ive if we vigorou~iy e~for~ed th~ 55-mile-an-hour speed limit? Mr. ESTES.~ I think we said, when the 55-mile-an-hour limit caine iri, if it Were en~forced, as compared to a 70-mile-an-hour limits I guess, that w~s gex4eral at that time, we were talking about a 15- te 20~per~c~rit fuel savings. Seuator TALMADGE. That is about what I get on my OWn ~utoni~bile, So if we save 15 to 20 p~rcent of 5 to 6 milliOU barrels ~"d~y, tl~itt wpulcl be a cQnsidera,bie ~ayings, woui~ it ndt P Mr. ESTES. I think' maybe-Mid. DunconTibe rthdñd~ Tn~-~thØt.thatis while çlriving at 70 or 55~ and whe~i we look at'the ~ve~allpiet siri~e a lot of the miles are driven in city ope~atioii attd Trtu~be o4t~y t~i percent out on the hi~hway, that tl~at figure prob~bIycd ~vn in the area of 2 to 5, maybe. i think thkt wohid b~ ~ better figm~e) There i~ a savings o~i the highway when j~~tu are~ di~iving ?O'verSus 55 of maybe 20 percent. ` I Senator TALMADGE. Would you give us the best~giie~ that ydü c~irld, and supply it for the recOrd, if we vigorOUsly enfOrded tlke55-~il~-ah~ hour spç~ed limit, l~ow m~ich we~would save? Mr. ESTES. I would like to give ydu that later. Iwôuld rätlie~ d6it a little more ~ccur'ately than just to takeit o~ the top of thy he~d.* Senator T~LMAI~G~. All i~ight. ~ And let me give you another thought. It seeh~s to !ne If we ~anreh~tl courtesy cards, there would be an enormOus sâviñgs on gasohhie. What is your feeling on that? Mr. ESTES. I guess I have to have a definki6h óf~'a cdtd~te~ è~i~:' Senator `T4ALMADGE. Credit ca~d~, Mr. ESTES. I do not know. That is an economic question. Mr. DUNCOMBE. That is a petroleum economic question. *The Information referred to was not available at preasthue. To order to exnedjte the printing of these hearings, the Information requested will appear In appendix B of these hearinra. PAGENO="0168" Sena~to~ rwx~ I know ~f you go on the high school campuses and the college campuses you bd acres and acres ~nd açreso~ autd~ n~obiles. Young man or worna~ru~uaflyhas a credIt ~ard that theparent pays fpr ou a monthly basis. 1 believe if they bad to pay for i~ out of their allowances, we would fhui those ~a to~nobiiês pperatth~ le~s~ Would you agree with that ~? 1 , Mr. D riccoi~n~ `I cai~i ~oJ4f1rm that ~ ~r~onal ~*~t eM; SenatorTAA1~. I have had lots of mterest~ng e~~rien~e~ along the same line~ I may. sa~. Then how much could we save if we closed the ~Tli~tig stations ~h Sundays or weekeuds? Mr~ SEoREs~. We got s~m~ evidence !ç~ th~t, I think, dt~rthg the embargo, and also. in some of the !European coimtrxes, where they iu the past followed' Suuday elosi~gs and, sp on. It iS i feasible; method~ although in my judgment it is a method more suited to' dealni~ *ith temporary supp~y e~ergeucies tlwt as ~ long term. Senator TAL~DoL Would you supply that for the record? Mr. SEc1u~sa~~ Yes, slr.* Senator TA X~DO~. It seems to m~ ~e must mandate sOme ~igorqus conservation methods, an4' jt seems to me that, the easiest and sith- plest would be to enfprçe the 55-mile speed limit, clo~e filling st~twns on Sundays, cancel credit cards; and I beliOve that would lurkre less effect on unemployment than most any progi~am' we could' ado~t~ t believe' it would work because it is simple,' it is' practic~L The people would understand it. And if you closed Mling stations oft weekends; it would make the people realize that ~ a~e in an emergency, ahd I think they would react in other conservationniethods accordingly, As bug as they can drive up to a gas tank aiid' buy. afl of the ~ts th~y want, as long as the money holds out, there is no sense of eme~geii~y' or crisis whatever, a~ I `see~ it. , ` ` ` Mr. SECREST. Of course, there is another advantage to movjes of that kind. They can be instituted almost imiue~iately with',very little `lead time, an4 i~hey do not work,, they cau be elithjnate4 withdut any euormouseapjtal waste; whereas some of the other `$medies th~t `*e ~re grapplix~g with, if they turn out not tO work, if we have coi1~~ ~terted thø whole industry to build, let us say, the QuestOF b~r~th~ one o~f. these other propositions and it does not work, ~ve ~inio~'gO ~, because we have, used all of our money to try the ~ alt r~ti~è. Senator T~LMAnoE. That is correct. "~ ` I have r~o, .f~,ir~her quest~ons, Mr. Chairman. .` The CHAIRMAN. Senator Packwood. SenatorB~o.o~. Gentlemen,'I ask the Senator to yield becaiise .1 h4vè' to leave for a few minutes, and I will try to get bach. , , I want to say how much I appreciate your testimony. I *ould like to ask you one question that you might speculate on for me fOr the re~9rd, and that goes back to another personal problem with thy'~dds and dogs. Driving this full sized wagon back and forth to Tenne~de~ or whenever we want to go on a trip, if I am required tO ct~t. th~t vehicle back to a ~,5OQ-pound car, what is, it going to do with ~ safety problem? ,. ` ,,, *Tbe information referred' to waa not avniltthle at jireastime. In ord~r to' ~xped1tn the printing of these hearings, the information requested will appear i~ appendix B of these hearings. " , PAGENO="0169" 167 Mr.~ Esi~. Well, I guess there is nothing we can do about the physic~ book, and the physics book sa~ys ~ou ai'~ ~ingi to have more `d4~ci~1y with, the ~.5OO-p~un~t car `against a 5,~OO~poun~d car. $enator 13noci~. Can yoft meet o~r'Cmis~id ~t~pdards and our. gaso~ line~ ~o~s~mption reqi~irern~t~ f~r "198~ with ~ 2~OO~ponnd car that wi~ll. ~ea~ six adults and give th~in sa~ety ~ Mr. Es~. I think wC have said `that with current technoiog~ ft is next to inipossibie to do the ~rst' ~rt' of. `thtEt, to carry six people èomfortably. Senator NELSON. I might say that I have looked at the EPA stauci- ards, and here you l~ave got the Volkswagen bns'whieh will hold Sen- `ator Broçk, his `two dogs, his wife, hi~ two kids ~nd Senator Pack- wood's gamily, tOo. And that one gets 18 thiles per gallo~'i in the city and 25. miles on the t~oad. Senator BROOK. But it `does not do 28 miles~ `Senator. S~na,t'or N~LSON. N9,. but that is much bigger than you need, You do n~t~have to take Pack~ood~s family with you every time 3rou' are traveling.. ` Now you l~ave got the Dasher wagon, which does 23 in the city and 35 on the road. Now j drove the Dasher wagon last weekend~~-~-.-~- Senator BROOK. It does not seat six, Senator. Senator NELSON. Yes. It would take your children, your dogs, every- thing else. ~ drove it last week. Now if you take out the bucket' seats and had a straight seat across, it sits six easily. `As a matter of fact, all this talk about the space inside, the space inside a Fiat is about the size of a Seville. Just take the leg stays-~ senator BROOK. I do not have a Seville and I have got growing children. They. still eat. ` , ` ` Senator NELSON. What is all this nonsense that none of this can be done `without having a huge monster On the road ~ It is just p'ain nonsense and I think we are dealing with bandaides on a very im- portant problem. , ` ` Senator PAO~WOQD. Mr. Chairman, I `have ~ome more questiorisof. these witnesses and I have read the other st~t~,ment~' What is your plan,? Are you going to go right' straight through ~ Or are you going t~ come bapk? ,. ` ` " " ` ` The CIIA~Ri~AN We have other witnesses to be heard and I would hope that all Sthiators would asl~ the qii~stiO~s th~Wth~y~ M4~mni~t be ~ns red "here'ât this ti~ne; a~d then that t~iosè "that. ôonid' be"sub- mitted; tha~t they' wonid' be `wiiiii~g'to' submit' ti~at~ Senator PACRWOOD. `Is it' your plan "to' take th~ other' witne(sses straight on throu&h ~, Are you' `going to bt~e~k'? "`~` The O~TAIR~tAN.~' an~ pI~ining,to `hear every ~itnC~s We have sched- uled to hear today. ` " ` " `" ~` ` `` Senator PAOKWOOu Now? The CrtAIRMAN Not right now, but before the day is ont Senator. PAc1~OoD, That is what I ai~n `tryix~g to" get'at.: Are we' go-: ing to break for lunch Or anything ~ Are you going to go to 1 30 ~ 0r2? " ` ` ` ` ` ` "` `I'he C1IAJR1~tAN. I think we~ Ought `to cohcind~ the ~questions we `a~re going to ask these witnesses, in their testimony here' tode~ `aud'~tl%en if ypn want to go ahead proce~d with othe±~s go right on `ahead. PAGENO="0170" ~168 Senator PACgWOOD~ I .sensed~ when ~ou were responding to Senator Curtis' que~tion about employment a~id his e~ort to say how many ~people would. be unemployed if we mal~e smaller cars, that is not real- a significant factor i~ yow~ thinking? I j~dged. that from your answers. In 1985~ if you are mandatedto b~ve a 28Lmile~per~gallon stai~dard, ~then you are making n~thing but 2,5~O-pound~ ~ Yo~ will not bave significantly fewer people than we have now emp1oy~ a~uñ1~flg sales hold lip? Is~that~correct? ~ Mr. DITNCQM~E. If we accepted that ]~5 peroent,~ rough ~iaIlp~rk ~g- iire, ~l5 percent unemployment rate~ wo~ild be almost unprecec~ented. We are concerned today about unernpl9yment ~a~es th~t run~. in ~the area of 6 to 7 to 8 percent, and here if we are tall gabq~t~uiieui4~1oy- ing 15 percent of this ~iyen ~egm~nt, 1 think,~ou an~ I wbu~dboth agree that this `is a significant number, Senator PACKwO0D. I just want to know if that ~s ~h~t~yoii, are saying, that in 1985 if you have 28-mile standards and a 2AO~-pound soar, and sales are running fine, you will employ, about 15 pereé1~t fewer people? Mr. DtrNCOMBE. That was a horseback ~gure, I believe, wa~ ft not, ~Mr. Secrest? Mr~ SEom~s~r. Yes. I do not want to s~y tbaM 15 percent i~ the answer to that question, Senator Packwood. Senator P~CKWOOD, 1Vha~ I am gettuig at i8 that: it does not seem to be a factor so large in your thinking that it is of a niajor cOncern? Mr. DnNcoM~. It is dwar~d by the ~other ~onsiderations of the volume impacts. Senator P i~wooD. OK, because in all of the answers about the ieff~ct, you ~ha~ve `always premised this~-you bave brought yqur esti- ~mates down from 17 to 16, million~ It is always premised on the fact that people are going to postpone or they are not going to 1~iy. It is a sales answer that you relate ~o employment, not a production áns~er? Mr. Duw~QMBE. Th~i~ is true. ,~ ,` M~r. Esrns. That is true~ Mr. Dr5NcoMni~. They are both in there. As I say, the market ä~peets~ of this problem, in our minds h~v~ dwaded the ~tber~ asp~cts of theproblem. , ` Senat~x~ P~ci~ooi. In response to S~nator tong~s coth~ept awhfle ago, he said we ought to let the market take care of this. ~fr. ~es, you responde,d, "ti~at's right.~ and ~t will". , And yet in your answer just a few ~oments ~go~pr abQu,t ~nhour ago now, you said, "as far as safety, and emissions ~ere `cth~,èerned; the market would not take care of ~ They were nøt "sal&c4e items". If they were not mandated, you would not put ~h~em cn* Mr. Es~s. The wOrd "ma~idatecl"is kind of strong, but we't~ink we need regulation in the wreas-~-we have taken this position coritinu- ously~ that if the ibegulations in the area of `safety and emissions are health-effective, cost-effective, and energy-effective now, sure, that is the way it `should be done. , , We knve proven this in'thepast~-~ ` ` Senator PACKWOOD. As `I ut~dersband, you tried seatbelts at one time-it was not you, it was Ford-in the 1950's and they would hot :sell, and you took them off? PAGENO="0171" Mr. Es~s. ~Tbat is rb~ht. It was a long time ago. Sea~ator PA~I~WOOD. But, I meah it did not work. Mr~ 1?~Wn~s. We ~re offering the~ air bags today, passive restraints. Senator PAcKwooD'. And very few people buy it. Mr. ESTES. We have only been able to sell in a year and a. h~ilf.. about ~,O00. Senator PACEWO0D. T agree with you and I understand you have to mandate it, and you just mentioned energy now. This is what I am curious about. Mr. Es'n~s. To be sure they are "energy-effective," I said. Whatever these regulations are, we have alwnys said "health-effective" and we have always said "cost-effective." And now we think more important than ever before, "energy-effective" should also be included. And that gets into the weight of the vehicle and the energy consumed by the emissions system and so on. All of these things have to be balanced. It is a difficult balance ~ve are trying to reach and I guess all we are asking Congress to do is to take a good look at it in this respect, to try some of these things on a trial basis' to make sure that we do not go way overboard and to do everything possible to get all of the field and engineering information we can on these things. Do they work? Is it acc~omplishing what you want to accomplish? We are all trying to get to the `same place, with regard to all three of these factors. We are all trying to get there. It is a method of how we get there. Senator PACKW000. Assuming, as a matter of policy, we wanted to get to a 28-mile-per-gallon car. Would we get there with market forces alone? Mr. Es~ri~s. Well, it would have to be-we think it would have to be evolutionary, if that is the word that is required. We. think market forces can move us in that direction, but it is going to take some time. We are going to have to take a good look, technically, at how we ac- complish the transportation needs of Senator Brock and others in that category, as well its you, Senator Packwood. You have a different requirement than Senator Brock. We have got thousands and millions of customers out there, all with a different re- quirement, and we are going to try to meet it. Senator PACKWOOD. I come dOwn on Senator Nelson's side on this. I do not think I am counting myself, and I do not mean to count the public. I realize there is a tradeoff.. I am not going to get .in a Dasher what I get in a Buick, and I am going `to pay less money for it and I will get better mileage and it is not as comfortable. Maybe it does not have air-conditioning. But, as a matter of policy, if this Congress thinks that that is the way this country must move, will we get there in 10 years, by market forces? Or must it be mandated in order to get us there? Mr. E5TE5. We say the market forces are going to get us there. What you are talking about, really, are your constituents and what they want and what they need and how well they recognize the problem and how do we convince them. Senator PACKWOOD. We never `convinced them to have seatbelts until we finally mandated it. Mr. Esms. Well, seatbelts and fuel economy are two completely diff- erent animals here. There is not any question. but that the economic PAGENO="0172" 170 forces are telling us and the ~usthnier is telling u~ that fuel ~onorny is a. salable item. I said that in the beginning. It is ~most the ~xac~ ~pposite~ with safety ~nd emissions standards, as far as our ~verage customer 15 coneerned. Sena1~or PAcKwooD. But your answer to the question is, i~ w~. want this 28 mile fleet average as a polic~r t~ be achieyedJ~y 1985, y~ say that it will be achieved: by market fo~ees ~tnd you will make it &~nd that is what the market will demand in 1985? Mr. Es~i~. `Well; if it is really required,. and the constituency and the c~un~ry and ~ve~ybo~y ~g~ees azi~ci ourep~ergy si~atipn is~9~~ t~hbt6 it has to be, we will get there in a normal way, y~, sir~ Senator PAc~Ewoóo. I b~v~ no other questions. Mr.,Loo~ounnow. Senator Packwood, may I address myself to that thought for just a moment? I thin ~ the important things basically, is the matter of the ~oiwiction of the public and what they belieye to be necessary for this country. If they believe that the 28-miles-per~gallon is absolutely ~ccessary for this couiitry, the~i the fie~ market will see that we get there, Senator PAoI~wooD. If they. do not believe that it is neees~ary, theti what? MiS. Loornonuuow~ If they do not belieye it, and the iniustry tools up for 28-miles-per-gallon automobiles, you have a disaster on y~ur hands. Senator PACKWOOD, Right, but if the public does not believe it, we are not going to get there by market forces. Mr. Loo~norrnnow. If they do not believe it, you are not going to get there by regulation ~ither. Senator PACKWOOD. Why? Mr. LooFBommoW. Because they will not buy the product an~t you end up with a chaotic condition in the industry~ Senator P~c~wooo~ That is where we disagree. You are saying that if we man~late it and they do not like it, when 1985 comes they are not going to buy any cats or they are not going to buy very many cars. Mr. LoOr~ounuOw. That is right. Mr. ESTES. We will have another interlock. SOnator PAcKwooD. And they will, stop buying cars for years? Mr. LOOFEOTIEROW. is' the Congress of this country going to foi~ee these people to buy these automobiles? Senator PAOKWÔOu. We~foreed them tobny them with seat belts. Mr. Loo~aUnrtow. You did not force them to use them. You force them to buy them. It is a relatively small purchase price; but you do not force them to use them; Senator P~cu,wooD. We are forcing them to use the emission devices. Mr. Loorno'mmaw. That is right. They have no choice in the emission devices and they cannot avoid the fuel economy they cannot get because of the conttols, When they buy fuel econorn~r, they are buying some- thing that they cannot avoid using and they will buy something they think fits their particular requirements. If ~ou can cônvincethe public that this whole country has to be rid- ing around in 28-miles-per-gallon automobiles, and really convince them~ they will buy th~m. ButCongress had bett'ermake sure that they have got them convinced. PAGENO="0173" 171 Mr. Es~i~s. Senator, I do n$ want to be facetious, but th~ interlock is a typical example of what we ~re talking about. Senator N1~LSO~ Ipresiding.j The what?..~ Mr. Esms. The "{nterlo~k." Coiigress went home fOr recess,and bang it was gone. It cost us $~OO million in the industry, a1~ least in Genez~al Motors, to find out that the customer would not accept ~t. It was a great safety device. The customer had to buckle his seat belt befor~ he started the car. Senator Niu~so~. Do nOt blame Congress for all of that. That was ~the executive branch. We did not write in the statute that you had to i~ave an interl~k, and there was not a single word ~f debate in either House of the Congress suggestingit was so. Mi~. Es'ri~s. I have not heard a word about it since. Senator NELsoN. No, no. Congress did not like wh~t the bureaucracy ~did. If you read the statute, and the debate on the floor of the Senate, ~ou won't find a single Member of Congress who ever thottght that the regulatory agency was going to say you have to have an interlock. S~ we passed the statutory requirement that you could not have it. Mr. DUNCOMBE. We just waht the Congress to avoid making the same anistake the administration made. Senator NELSON. I must say, I realize that, of course, ~t is not the auto industry's primary function, or any other business' primary function, to make social policy. But what interests me is that all of the conversa- tion I hear, and all of the debate on this that I hear, both talking individually and listening to testimony `at hearings, is that the public and industry and business and all the editorial writers all over this ~country, the New York Times, the Was~hington Post, the Washington Star, my Milwaukee Journal, all over the country they are saying' you have got to do something about the energy crisis. And every single industry that comes before Congress say~, "Me, but ~don~t niandate anything for us." And then all of our constituents say, "do something and do it fast, you stupid jerks, or go home; but, don't inconvenience us, and don't increase the price of anything." So, we have got a situation where everybody says, "do something to :meet this terrible crisis, you fellows down tI~tere, but don't do any1~hiiig to inconvenience us." Now I understand your position, hut the tact of `the matter is, and this is what dismays me, that this is not a crisis, it is a disaster. And what dismays me more and that what amaz~S me even more, is one of the Senators here referring to this "reë~nt,crisis." ~This crisis has been here right along with cars. Twenty-five yeai~sago, ~anen like Harmson Brown and Julian Huxley, were predicting it. In- ~clustry paid no attention. Government paid np attention. No President ever gave a speech on it. A handful of people talked about it; and now it is here. It is not a crisis that you are `going to solve In 5 or i~0 years.' It is a ~matter ~of at least 20 years. And the automobile is a significant tart. I think it is perfectly clear that you can build a car as big as 5enator Brock wants and you can still get the mileage. In fact, you could double "the average mileage of all of our automobiles. But you are not going to do it without mandating it. Now the idea that the public would not buy it is nonsense; if that is all there is, that us ~vhat people will bny~ And, if somebody happened to be a buy~r~oI PAGENO="0174" 172 big cars all h~s life and u~v ~e has got to have a nOW car, a~d ~ll there is is the high-mileage, lighter ea~ that is what lie will~bu~i. No~w~iIl poue qf the,~eareas. is the public,' th~ `Con~gres~, or anybody else, it seems tç me, addre~sing hirnseH to ct in any significant `md di a matie way. Our ~utoinobilés are j'ust part of the ~oblem, but if all the automobiles jn this country ~got twice th~ a~rOrage mileage we ntw get; if the whole mix of cars got twice the average wenOw gOt, that would be a saving of al~o~t, 4~,0 billion gallons a year. WQ are using about 781/2 to 79~ so it would amount to almost 40 billion ~alloth' a year. That would be eq~iivalent to 1½ Alaska pipelines forevez~. N~ow that is dramatic. That is significant. You are not going to get it by this play in the marketplace stun. That is all there is to it. So' I think you arc going to have to bite the bullet and be tough about it. And that does not only apply to automobiles~ it applies across the hoard to activities in the conservation, the utilization of energy. Now this is a very important problem. It may be one that we cannot resolve. And yet it is not as, tough as what is coming right next, on its heels, and that is shortage in metals, fibers, and protei~s,~and we are doing nothing about them eIther. ~o all I. ~hear is testimony from people who want us to use some Band-Aids and, not disturb their way of life, or the way they act. All I say is, it ~m't going to wçmrk. It just ain't gOing towork. N'ow you in the auto indiistiy may prevail, as I suspect you will this time, becaus,e I think that is what most of the public thinks and what mpst of the leadership of the country thinks, but it just ain't going to work. We are going to be in one' hell of a mOss, worse than this, 10 years frorn no'~v, and that is all there is to it. We will adjourn until 2 o'clock, unless you want to comment. [General laughter.] ` Mr. ESTES. That isthe last thing.we need to comment on. Mr. Looi~puimow. I would' like to make ope comment. One thing that has nov~r been mention~d in any of these, hills, that involves fuel economy. rj~ name of the game is conservation, right? Aud there is nothing in the~e biiTh~ that would cause the foreign matiufacturer unak- ing that, sni~all~ar to make any improvements in his vehicle. And this is a ve~'y important factor. Senator, NiELsoN, You' mean improvements in his mileage? Mr. LoorBoutuuow. In the efficiency of his automobile. Senator NELSON. Well; if he meets the ~tandar,ds sOt by statute-- Mr. toornouintow. The assumption that the foreign builder is more te~hnicajly astute than we are is a' fiction. If we can make technical im- provements ,~n our cars, and we ai~e planning to do this, the bill should he such that it requires the foreign manufacturer to do~the Same thing. ~Fhey. should produce their share of the improvements. Senator NELSON. I *Ould agree with that. ,, ~r. Loo~ouuunow. Noneo~ the bills çlo that.,' [The prepared, statements Of Messrs. Est~s, `SOcrest, and' Loof- bourrow with attachments fbllou Oral testimony continues on p 20~ J SPAPBI~ExT 01? GENr5tAt~ Morens CO oluTIbTr, PRESEi~TBI) BY ELLIorT M. ESrus, fl ` fi , ` fi Good morning, Mr. Olià~nau, T áni ~lllott'~M. Esies, prOsidOtit, of General Motors Corporation. With me today Is Dr. Henry L. Duncombe, Jr., vice president and chief economist of GM. We are pleased to have the opportunity to testify on PAGENO="0175" 173 aR~ OS6O~ and~Tti~u1ar1y cni TFtIe IT, parU~ that ~rom~se~ to have a pr~foundIy ~i(jvezse effect on the~auton~obi1e buye±s and th~natio~ia1 economy. , rj~~1~ A~erieaIL con~wi~ier Is ji~t now beg.inniftg to se~ more signs of hope of economy recovery, and consumer eonfldblice1 au~ m ~as~lredi by national' surveyS, is beginning to increase. Yet the public remains cautious in two major respects- home buying and atito purchases. As a~ conseqi,tence of continued consumer reluc- tance to make "big-ticket" purchase decisions, economic and unemployment recovery `is being delayed. One contributing factor-though certainly not the only one-to the contiptied reluctance of the American public to purchase homes and new earn is the con~ fusion about energy availability, energy prices and national energy policy, which, in turn, leads to lack of consumer confldencd. For exafii~ple, there have been conflicting news stories about whether or not people are going to be able to buy gasoline this sumnier. Also, there has been a wide range of figures quoted for future prices of gasoline. Obviously, people are not going to buy new cars If they are not sure they will be able to drive them. Likewise, their purchase decisions can be influenced by whether gasoline prices are expected to be 70~I a gallon-or go to $1 a gallon, or drop to some other price. Both the home building and automobile industries play important roles in national economic recovery and both industries are heavily influenced by con- suiner uncertainty. An additional rOason for comparing them is that HR. 6860 applies two' quite different energy policy philosophies for these two industries. That is, while consumers use about 22% of the national energy in thei'i resi- dential structures, ILE. 6860 provides tax incentives for home insulation and storm windows. It does not Impose an arbitrary or punitive limit on the Size or fuel consumption of new homes-nor should it. In contrast, while consumerS use about 13% of national energy for automotive transportation, H.R. 6860 estab- lishes fuel economy standards that will, by 1981, result in substantial arbitrary restrictions on the types of cars that can be~made available `to the public. Unfortunately, neither of these provisions in HR. 6860 is supported by a thoughtful analysis of the ways in which `they will affect the American con- sumer-nor `the way in which they will affect energy constimption! While we are not oppOsed to' the home insulation `tax provisions of H.R. 6860, we do think that this provision-along with the fuel economy standards-~-1s baSed on an erroneous assumption about the economic wisdom of the American public. That is, these provisions assume that the car buyer dOes not respond to the fact of higher energy co~'t~ and will not adjust to market realities by conserving energy. If the experience of the past two years teaches us nothing else, it is that the con- ~umer does respond. The turmoil in the energy situation is bringing about drastic changes `in the importance that people attach to `fuel economy in automobiles-changes to which GM must respond if we are to be successful in business. In order to meet the fuel economy demands of the public, GM has embarked oü the most ambitious and costly new-design' program in our industry's peace-time history. In all; General Motors plans to spend billions `of dollars to provide the highest practicable fuel economy in cars of all sizes In the next few years. The first stages in this new design program are already in evidence. Since the oil embargo ended some 14 months ago we have Introduced six new smaller models, which, taken together, average better than 21 mpg, sales weighted, on the EPA urban/highway test. We also restyled our 1975 compact models, and we are offering new' smaller 17-6 and V-8 engines. The 1975 model program is only the first stage in our efforts to meet the fuel economy demands' Of our customers In the 1~76 model year, we will introduce America's Smallest, most fuel' efficient dar. Still to come are programs to reduce the exterior size of our larger cars'wbile maintaining presen't levels of roominess and of comfort. ` ` ` ` We are developing new, more efficient transm1ssion's~ We are working to improve the efficieney, and therefore, the power' requirements of air conditioners and other accessot~ies. And for the same reason, we are improving the aerodynamic design of our cars. One result of our programs to `provide consumers with improved fuel efficiency will be a major change in the weight cla~se8 of cars we will be offering in 1976 and later model years. Only about 20% of our current products are in Inertia weight classes of 3,500 pounds and under; by 1980~ we expect these classes to ac- count for more than 70% of our sales. 55-583-75-pt. 1-12 PAGENO="0176" 174 ~. Lookh~g at oiu~ tufl-s1~e cars~abottt ~ of ~iur .tota1~prod~uctiQn iii 1~75 is In inertia weight classes of 5,OO4~ pou~flUs and up. fly 1980 we e~peet ~az~s eZ this we%g~fl c'ass to represent a ~eglig~b~ ~percentage of our sales, We are t~tk1iig we1ght~out o1~, virtually every ~aj we bniId-~at least 700 ponnds~ro~n our ~u11$ize ears. * ~ ~ ~ . ~ . This cirastle shUt In. th~ weight class o~ the cars we are building, aióug with cbanges4n engi~ne~, dr~vetr~Uns and~a~1es, improved aerodynamics ~nd othe~,fuo1 economy measures ~i11-beeanse of ma~$et demands-erntble us to \k~ep our conunitruent to the federal goi~ernuient to meet. or e~cee~i 53% improvement in the fuel economy of our ears between 1974 awl 19$O-~-fi~oma sales weighted 12.2 miles per gall~on in197~ to a sales w~ghted 18.7 mpg~in 1P80. An %j p~rta~ ~actor in our improyein~uts, in fuel economy is that we are pl~1~ngi new~ ~n~rle~ In the 2 2~0 and 2 ~00 p~ufld WeIght classes thaI we do not have in 1975. Our go~iis to prorifte~ c s-~of~iI sizes~that are suited to the new and changed needs and demandsot the American people, in terms of passenger und luggage carrying capacity, and other attributes to meet family needs. These cars, however~ will be substantially lighter, and therefore more fuel e~1cient, than Our Current models. It should be understood that aebieveing the 18.7 mpg goal in 1980 assumes that the public wjll buy the cars we will be offering and that the 1975 emission stand- aids will be carried over through 1980. A requirement to meet any more stringent emission standards would. r~su1t in a loss of fuel economy, and the goal of achieving a 53% improvement in fuel economy would be much more difficult, if not out of reach. More stringent standards would make cars more costly to con~ sumers, as well. The reaaon for this brief ~IcscrIption of GM's product plans is to stress that wo are worlth~g as i~arU as we can to~ improve the fuel economy of our cars, and w~ plan to continue that effort-ami to invest the billions o~ dollars this entails-~t because it is the only way in which we can sell enough ~arsto earn a profit. As a resuitof these lid eeononiyimproyer~ents-~-~-made in renp~nue to consumer demands brought about by higher~ g~sol~ne pri~es-t~tal gasoline consumption for all cars on the road Will decline between now and 1980. That is, the gasoline consumed by all cars on the road in 1980 will be below the amount used In i973! ~be projected ~avthgn in ~iL-~as estimated b~ the Federal Energy Administra- tion-is 587~000 barrels pç~r day by 1980, There is no other energy co~sumlng sector of our economy that is approa~~ing this "negative energy growth." If there were, our country would be well on its way to solving It~ energy problems. ~hy then, do some people fenlit Is nec~s~ary to establish fuel economy stand~ ards for automobiles-a product that presently uses only 18% oftotal energy and is shnsvlng .d.eelin4ng rates :of cOu~umptipia? E~c~use of suveral misconceptions about the automobile market and automotive technology, One qf tl~e,se mi$cQiieeptioDs Is tii~tt there is some `~magic" new teelinoloar that we could nse-~-if o~iy WeWQuld~-'--tQ achieve fuel economy im~rovemeuts of 50% or more in a given car. ] assure you~ this is uol~ the case, an4 such a misconce~tlon Is not supported by e~glneertng studies. The c~anges * I mentioned earlier, such as lowering performance and improving aerodynamics, can~ in some cases, give us improvementsin fuel economy. For the most part, however, these technolog~caI chaug~s yield results measured in fractions of miles per gallon. Another aspect of the misconception about technological solutions is that European and Japanese nian,ifgctnrers rely o~ superior tecb~ology to achieve fuel economy that is generally better than the fuel economy o~ the American ears. This is simply not true. The high mpg figures ~~sociaiod~ with ~~fly of the foreign cars result from time simple fact that they are smaller and lighter than most American cars. One needS only t~ examine the 1975EPA funl economy ratings and make a comparison between GM models and comparable Imports to see that our technology is as good as any ih the world. *~ote that In Charts A, B and C, which m~kC up the last pages of this statement, in every weight class in which we compete, a domestic GM car ranks either at Ihe top or near thetop for fael economy, `Ibe~e charts-which summarize the 1~PA fuel economy results on the combined urban/ highway cycle for cars with automatic trMtsumlsslons--iilustrate that fuel econ- omy gains come maihly from sm~1ler nines and lighter weight. This is thO reason our product programs are emphasizing weight reduction of our exiCting coth~ pact, intermediate, and full-size cárs~ and we are planning tóbring out new cain that are much smaller. * * PAGENO="0177" 1~5 As we have iiidicated, lne(41ng the fuel economy Ol)jeCtiveS Of the voluntary prograni-1~.7 miles per gallon bY 1980-will require iliajor changes in t he kinds of products we offer. an~ especially in the size and weight of the cars we will Iflit Oil the market. hR. 68(~O calls for 20.5 mpg-almost 2 mpg more than the voluntary program of 18.7 mpg on a sales-weighted average basis. I~tablishing mandatory fuel economy standards, even as high as 20.5 mpg. i.~ Uk~ly to have substantial adverse effects on auto sales and employment in the auto industry and throughout the economy, because consumers will not be able to buy the kinds of cars they want. Evolution in car design dictated by con- sumer demand, not legislative fiat, will, overall, give us the desired results without market ~isruptlon. Our analyses of this ~legislation has indicated that, it could cause a substantial lose of sales and jobs as early as the 1980 mokl year. Much more drastic con- sequences could be expected in post-1~8O model years as the standards jump an average of 1.5 mpg per year to reach ~S mpg in 1985. Equally important, sales losses of this magnitude would result ill retention of older, less fuel eflicient cars. Gasoline consumption could increase above the levels that would be achieved without this legislation. Consumers today are demanding more fuel efficient cars, and we predict that the trend toward lighter, higher mpg care will cOntilme in the future. That is why we are committing billions of dollars to new tqodel programs to build more fuel efficient cars. I want to assure members of this Committee that we are putting the full efforts of the Corporation behind making our new smaller cars a success in the marketplace. The idea that GM can build the kindS of cars it wants to build, then use its advertising, power to somehow make the American public want to buy those ears is a myth. This point was amply proven by the experience in car sales in the i974 apd 1975 model years. On the contrary, we try to put the kinds of cars on the market that the American people have indicated they want to buy~ If we are required to meet standards that force us to build cars that do not con- form with what the American people want to buy, they will not be sold and the entire economy will suffer. If, as we hare ipdicated, the 20.5 mpg standard in 1980 could result in adverse effects on the domestic automobile industry, the standards required for 1981 to 1985 could have consequences that are beyond anything ey.en imagined~ so far by Congress. 20.5 mpg, which H.R. 6860 mandates for I ~J80, represents a 68% improvement over General Motors' 1974 level of fpel economy. 28 mpg mandated for 1985 represents an improvement in fuel economy of 1$O% for GM. There is no evidence that such stringent fuel economy standaydS ~s called for in this legislation for the 1981-1985 model years ci~n~ be jrel4eyed without serious disruptions of the national economy and Intolerable unemp~oym~nt consequences. Consumer demand for cars has never changed as rapidly in the past as this legislation would require it to change in the future to tivoid a negative impact on sales. The standards called for in the bill, insofar as we can determine, were established on an arbitrary basis without considering ei~ergy consequences or the negative impact on the Car buying public, No other segment of consumer ener~v consumption has been singled out for such a drastic action as the nuto- mobile, which accounts for only 18% of total energy use but is an Important part of the work, family, business and recreational life Gf America. The 1985, 28 mpg standard cannot be achieved through tech~ol0gical develop~ ments-~4t can be achieved only by restrictions on the size of cars that can be offered. It is important~that Congress have a very ~lear understanding of what these product restrictions are likely to mean for the car-buying public. Begin- ning this fall GM will offer a small, light, relatively low powered vehicle that is smalley than the smallest subcempact car now being produced In the flnited States. We hope that we can certify this car with the Environmenta' Protee~ tion Agency to meet current emiSsion standards and `with fuel economy in the area of 28 mpg, at the top of all cars sold in this country. * Note, however, that if we wei~e required to meet g 28 mpg standard for~our entire production, the vast majority of our cars would have to be the size of the Vega and our new mini car or ,smatZer. This 28 mpg standard would require the production of extremely small two or four-passenger vehiCles tltat do not bare adequate interior or trunk space to meet the needS of large tmmbers of Atherlcan families. If the American public cannot `purchase vehicles that will be stiited' to PAGENO="0178" 176. t~ie~r ~e4s, u~ar~y ~ow~iers ~f~J1-s~e cars are likely to keep them ~tther. than t~~ai~g them In oii new,. ~irn~ ;fi~1. etf~çient ca~ Thus, iilUler than eonserving fuel, standards ~fl tht~area ô~ ~ wo~1d ~b~yë tJie effect o~ p?~~et~atix~ tbe~ use of less Aiei eft~c~ent ears, ~n~1 this w~u1d ~e~itjn increaseçl gi~sO1ine coi~sump- tion, contrary t~~t~e purpose oi~ ~he bilL,. Uommeat$ on~ H.R.~ 6860 l~r. Cbalri~an; I would lik~ to 1±rn now to commentS directed specifically to the 1egislatio~ before this Con~initjee~ Hit. 6~60. Tjie Senate~ Comrnerc~ Corn- inittee al~o has reborted out a bill, S. 1883; that wouid mandate stringent fuel economy standards. Although the Commerce Committee bill differs in its approach, the effect it would baye on .th~e çoi~surner apd the econoiñy iS similar. Most of our eommepts, therefore, apply to th~t bill ~s welL "Section' 2t2' of H~Et: 6~8iQ Wonld e~t~i'b1ish minimum production weighted fuel economy `standardg of 18.5 mpg in 1978, 19.5 mpg in 1979 and 20.5 mpg in 1980. Tim Secretary of Transportation would be required' to establish the standards for the years 1981 through 1984 at the "maximum feasible" level and 28 miles per gallon would be required In 1985. We believe it is a serious mistake for Congress to set standards by legislation, and the problems encountered with the Clean Air Act bear this out. There is widespread agreement that the automotive standard for NO~ in the Act was established in errOr, is not necemary to achieve air quality goals and blocks the ifitroduction of alternate poWer plants. Yet Congress has not yet changed that requti~ement, despite the, urging todo so by the Environmental Protection Agency nearly two years ago. Several other government, academic and sdientific organiza- tions have made similar recommendations, Section 212(c) (1) of the bill, as pass~ed by ~the House, gi~es the Secretary authority to determine if an "emission standards penalty" e~dsts for any mode! year compared' to the fuel economy that Would have resulted if the cars were' required only to meet 19Th emission standards. In the event a penalty Is deter- mined, the fuel economy standards for that model year would be adjusted by the amount of the penalty. This Section correctly recognizes that there are likely to be fuel economy penalties associated with tneeting future emission standards that are more stringent than cur.rent standards. This Section fails to recognize, however, that emissions requirements on auto manufactui~ers are made more stringent not only by lowering the numerical standards but also by changes in test procedures and other regulations promulgated by the Administrative agency~ Changes in test procedure or enforcement regulations, such as the propesed Selective Enforcement Audit procedure, have `the same result as a drastic reduction in the numerical' standards, insofar as the manufacturer is concerned. These more stringent regulations require the manufacturer to lower his production line emission targets to be sure' of `meeting all the requirements. Thus, unless Section 212 (c) provides for adjustment `in the fuel `economy standards for changes in emission regula?' tions and procedures that adversely affect fuel economy as well as for changes in the emission standards, it will not be fully effective. Purthermore, EPA, as the agency responsible for promulgating and enforcing the emission, standards and regulations, would be inclined to minimize, any esti- mates of fuel economy penalties associated with the emission standards and regulations. If this legislation is passed there is likely to.:be conflict between EPA and the auto manufacturers over determining the magnitude of the `fuel econom~r penalty. Since the punitive penalty for a manufacturer of four million cars would be $20 million for each 1/10' mile per gallon below the standards, an accurate determination of the emission `standards penalty could be of vital concern. , ` I liavegone Into considerable detail in disCussing the emission penalty section because it is extremely impOrtant that this Committee understand the relation- ship between legislation mandating fuel economy standards and legislation being considered by other committees of Congress that will establish the emission standards that the automobile companies~ will be required to meet in' future model yearS. We have urged the Congress not to proceed with fuel economy standards until such' time as Congressional decisions on emission standards have been~ made.' ` Aside from the merit of any argument against' or' In favor of fuel economy standards, it seems clear that any proposal to mandate such standards before future emission requirements are established would be premature. PAGENO="0179" 177 There are a nuipbe~ of other specific prövisiohs lit the automotive Standards section of H.R. 6~3O on which Generaj Motors would like to comment. In the ihterest of conserving time, however, 1 will not cov~r these in my oral testimony today. Attached as Appendix A are GM's detailed comments on Title II, part L In conclusion, General Motors currently is Working as hard as it can ta improve the fuel economy of its cars, and we plan to continue that effort on ~vhic1j we are spending billions ~f dollars. As a result of the friel economy improvements that we are making In response to the demand of the car pur- chasers, total gasoline consumption by all GM cars on the road is going down, and will Continue to go down as our new fuel efficient cars make up a larger Share of the total car population. A 53% improvenient in the fuel economy of our cars in five model years, which ~4e have committed to achieve under the voluntary program, represents S dra- matic and unprecedented contribution to achieving the energy goals of the nation. Automobiles account for only 13% of total energy use, and if similar improve. ment~ were made in other energy coirsimiing areas that account for 87% of energy use, the energy "crisis" would soon end. We recognize, of course, that it is not reasonable to expect as much cOn- ~ervation in other energy consuming sectors as will be achieved in the auto- motive sector. That is why our nation's energy folicy must include measures to increase production of energy as well as steps to conserve energy. The Motor Vehicle Manufacturers Association, including General Motors, urges that the following steps be taken in addition to the voluntary passenger car fuel economy improvement program: 1. Decontrol energy prices to encourage production and reduce consumption. 2. If free market actions are insufficient, impose a tariff OD imported oil for the limited time needed to effect greater conservation 3. Impose a tax on gasoline and other motor fuels if price decontrol and import tariff are not adequate. 4. Legislatively enact a program to monitor the automobile industry's prog- ress toward meeting the 1980 friel economy improvenient goal and require periodic reports to Congress. 5. Continue the present 49-state vehicle emission standards through the 19~i model year to provide the maximum potential for achieving the goal of the passenger car fuel economy improvement Program, while avoiding unneeded additional costs to consumers. We believe these measures represent a sound, well-balanced program that would make a significant Contribution to achievement of the nation's energy goals. We urge Congress to direct its attention to these areas rather than to fuel economy standards that could have a drastic negative effect on the well- being of Americans. PAGENO="0180" I 1~78 19J~ M~ :~t ñ~! EPA: 55% ~ 45% HLG}IWAY ~4AT ~TT ~ ;~ MiIC~ Per i 29~ 2. 27~ 0 0 0 0 ~ 0 - ~`r `~ ~ ~C~) (~ uv ~ UU~ ~L) ~ccL~ ~ ~ `S ~ ~:~u~_ ~q~2 PAGENO="0181" PAGENO="0182" ~so (Olds)~ GM (Olds) GM (Chev) Chryskr GM (Pontio~) GM (Bukk) Chrysler GM (Pontioc) ~M (PorLtac) GM ~buC~) (~M (Chev) Chrysler ~M (~hév) ~hrysl~r V~td Chrysler Fotd lord GM(Old~ ~8) GM (Cod~1ac) Qt Chev) GN ~O~ds Tore) GM (Bukk) Chrysler ~A (Chevy GM ~Vontioc) GM (Pontiac) GM ~ød Eldo) Ford Chrysler Pord GM (Olds) GM (Bukk) GM (Cadillac) GM (PorUac) GM (Chev) Ford *1I~i~L~ (These comments are offered to assist the Committee in identifying defects in the bilL As indicated in our statement to the Senate Finance Committee, Gen- eral MotorS believes passage of legislation mandating automobile fuel economy standards is neither necessarY nor in the public interest ar~d adoption of these suggestions would not eliminate GM's opposition to H.1t. 6860.) Section 211 provides that in calculating "average fuel economy," the total number of automobiles produced by a manufacturer in a given model year (excluding those exported in the model year) shall be defined by a "sum of termS, each term of which is a fraction created by dividing (i) the number of passenger automobiles of a given model type manufactured In such model year by (ii) the fuel economy measured for such model type i~ounded tO the nearest rhile per gallon as determined by the EPA Administrator." Amendment of Section 211 (a) (5) (ii) to read as followS would provide for greater accuracy in fuel economy calculations: (inserting underlined portion) "(ii) the fuel economy measured for such model type rounded to the nearest 1/10 mile per gallon as determined by the EPA Administrator." .-` ..~ -.4 .~ -~ `~ - 0 ~ o .-~ r.S .~ ~ -~ *~o ~ ANALYSIS OF ~n C~MMRNTS~ MA~O~ SECvION~ o~ ~i~i~IT, PART I o~ ILR. 6860 APPENDIX TO GENREAL MOTORS 5TATEMENT-JULY 10, 1075 PAGENO="0183" 181 1~JPA fuel economy measurenients are calculated to the nearest 1/10 mpg, and when a number of different measurements are to be added together, the frac- tional calculation should be used. This procedure will result In a more accurate calculation than the procedure of rounding each number off to the nearest mile per gallon. Section 211(b) 1 & 2 reqtuires that the fuel economy for "domestically pro- duced" cars be calculated separately from imported cars in determining compliance. A car is considered to be "domestically produced" if 75% of the cost to manufacture is attributable to value added in the United States or Canada. If manufacture is completed in Canada, however, the car must be imported into theU.S. prior to 30 days after the end of the model year to qualify as "domesti- cally produced." Cars produced in the U.S. but exported are excluded from the fuel economy calculations. The separation of domestic and ~ cars would tend to benefit foreign producers, at least temporarily, if the demand for less fuel efficient cars exceeds the quantity the domestic manufacturers will be permitted to produce under the standards. Certainly, they are in a relatively better position to import some larger cars, whereas the domestic manufacturers would not be, permitted to use small-size imports to balance the larger, less fuel efficient domestic cars. Domestic manufacturers would have to make the management decision whether to cut back production of full-size cars toward the end of the model year to adjust the fuel economy average to meet the standard or to pay the fines. ProductiOn adjustments could result in a shortage of larger cars at the end of the model year and a quasi black market in this product segment. 5ECTTON 2l2-MINj1~fUM FUEL ECONOMY PERFOnMANCE STANDAiWS The proposed bill would set Into law specific fuel economy standards for passenger automobiles for model years 1978, 1979, 1980 and 1985 and allow thu Secretary to set standards by rule for 1981-1984. Then, under Secth~n3O2(b) (3) (B), the 1985 level can be raised or lowered to the maximum feasible average fuel economy by the Secretary if either House of Congress does not object. To avoid the experience of standards set by statute in the Clean Air Act, any fuel economy legislation should leave the specific standards to administrative agency rulemaking. The passenger automobile standards the Secretary sets for 1981-1984 must be at the maximum feasible level and must provide for steady progress toward the 1985 statutory standard of 28 mpg. Beginning on January 1, ~978, and continuing each calendar year thereafter, the Secretary shall review the standards and may make amendments to those he has set by rule if at least 18 month~ lead time is given to th~ manfifacturers. Section 212(b) relates to establishment of average fuel economy standards for 1981-1984, amendment of 1981-1984 standards and modification of the 1985 passenger automobile standard. ~Sectipn 212(b) (4) requires the Secretary to consider "technological feasibility, economic practicability, relationship to other federal standards and the purposes of this bill." Thrs l&nguag~ ais~ Should be included in ~ectfon 212(a) (4) relating to Ostablishment of light duty truck and multipurpose passenger vehicle standards. It is nalutory tMt the Committee chose to require the Secretary to cofisider ~`technologieaj feasibility, economic l~ractieablljty relationshlp to othem~ federal standards and the purposes of this bill" in setting stahdards. However, thi5 require~e~f may have little p'~aCtical effect in provldlhg relief to the industry, f~r the following reasons: 1. "Techne1ogic~~ feasibility" of standards as high as 28 mpg ha~ been demon- strated since there ar~ some cars now being sold in the U.S. which achie~ fuel economies in this range. 2. Our experience with the Congress to date indicates it is probable that `~eConomjc practicability" cannot be eon~incingly refuted pntil the dathave has been done to consnmej~~ and the eConOmy by reducing Sales Cnd increasing unemployment 3. As stated elsewhere in this paper, BPA ~ committed to minimizjn~ the fuel economy penalties associated with emiSsion standards ~`Relationshjp to other ~tandards" does not provide any clear language On what Is meant and would not provide much relief. PAGENO="0184" 182 4. `Purpo~s: of this ~ct'~ (li.R~ 68~3O) are to conserve~ oil. There is little relief promisec~t b~ this provision i~th~ than the argument that striugent stand- arcis niay ean~e pQtential new cer~uye~to retain their full-size ears that a~re more ne~1r1~ suited to the1rnee~s. Tbipr~øb~b1y cannot be co~wiw~ing1y argued until the sales fall to materialize. ~ ~ ~ Seetion 212(b) (3) (B) states tlutt a. modiftcat~on to~ the 1D85 fuel, ~eo~ipmy le~el by the Secretary can be di~approved by either Et~u~e of Congress within 60 days of transmittal to Congress or after 15 day$ of contint~ons ses~i~l * of qongres~, * whichever i~ the ~ 1onger~ pQriocL Tbi~ is ~ ~i~npx~svement o'~er the !Dlngell bill which just had the 60 clay perio~t whether congress was in sessipn ornot Tb~ Secretary is given arthc~lt~y in Section 212(e) (j) to det~rniine 11! an "emission standard penalty" exists for any model year and to~ adjust the ~iel economy standard fot', that model year by "~ubt~ac~lng ~. number of ~nies per gallon . . . equal to the amount of such penalty," This penalty is tl~ c~if(erer~ce between the average fuel eeono~uy of all autou~obiles sojd in the model y~ar1 assuming the 1975 federa~l emission standayc~s applied in that year, co~ipare~l to the average fuel economy the automobiles n~re likely to achieve under the emission standards that are actually applicable to automobiles in that later model year. A manufacturer zrjay ale a petitioxt with DPT for. a ,determi~lation that an "emisslans st~ndard penalty" exists and the DOT must decide the issue within 60 days. " ` ` r~hjs emi~sions standarc~s penalty provision does not go far enough. It should ~Uiow~eonside~ation pf `the effeqt pf ~egr~lati,on~ like ~elective ~luforcemer~t Au4it, changes `in test procedures and high altitniJ~ requitements 1tobe consldere~ by DOT, not just the absolute i9~5 emission nup~bers themselves. Moreover, th~s section mixes apples and drangés since it uses the defined word "automobiles" (covering both cars and trucks up to10,000 ~VW), but references ju~t the light duty (under 6,000 lbs. GVW) emjsskm standards. There should be separate means of computing the emission, standard ~enalty to accord with the grouping of vehicles under the Clean Air Act~. To accomplish this, 212 (c) (2) (B) should `be expanded' to include other rules and regulations that affect emissions and 212(e) (4) `should be deleted~ ` Section 212(c) (3) regarding petitions by manufacturers to have the Secretary determine an emissions standard penalty imposes an unrealistic time period for aung such a petition. This type of p~tition can only be filed ". .. within the 18-month period preceding the beginnit~g of the model year to which it r~late5." `That restricted period was not part of the Dingell btll. This is obviously more of the feet-to~the-f1re syndrome that will cause useless waste of resources, time and money within the automobile industry, A more reasonable time period should be specified, or ther,e should be none at all. The concept `of a "emission~ standai!d penalty" Is certainly 4esirablè. Inclu- slon `of suck a provision in the bill recognizes that there is a relationship be- tween more~strtng~nt emission' atandarda~and redaced fuel econqiny. Ifowever, itwill be very difilcult to i~pleme~t, .an~ asa~pxactical matter,, may not provi~ tany relief at all to ~iq autq n~a 1s~tui'ers ~on ~he$u~1 eccu1oxi~y con~saquenee~ of~ more $ring~nt lssion~sa~dards. There are a number of `re*son~ why this `provision' Wou141be Impracticable to implement: 1, The only way to obtain an acénrate measurement 4~f the fuel econOmy ~enalty of emission standards in a, gt~en year compared to what the feel economy would be if ears in that mode~ year were required only to meet 1975 standards would be t~ run two eertifiçatio~ fleets, one calibrated to the 1975 standards and the other fleet meeting those appliç~able ~o the year in question. ~ven this very costly and impracticable process would be pp~n to criticism since th~ baseline cars tested would not be produced, and, therefore, would never be subject ~o ~ud-of-l1ne tests and lleld surveillance, Thus, in the mOck certification processes `they could be set closer to the sta,u4ards and would obtain letter fuel economy than they would f they were actually~ going to be produced. , 2~ EPAbas consistently argued' that there is no inherent rela~ionsbip, bet*een tighter emissions and lower fuel economy. In an attempt to justify their r~gui~-' lions, EPA has consistently minimized an~ fuel ecopomy penalties. It apnears `that the emission standard penalty ~~rovisiqn `will ensure that there will ~e additional `conflict between EPA and the atIto jnanu~cturers. Since the pnn~tmy~ penalty for `a manufacturer of' ~our n'llllon~ cars would be $20 million per O~ mpg belowtbe amount of the standards, "emis~mions standard~ penalty" will ~e of great-If not vital-~-concern to the automobile manufactur~rs, PAGENO="0185" 183 3. The ~Oncept of an "~ver~ige penaIty~ 1~ Inherently ~nequitab1~ to some ~anüf~turers slnce'the ~tetrnt1 pena1t3~ will be different for difCerent mode' c~irs and all manufacturers have different model mixes. ~ Section 212(d) (2) provides that compliance with the fuel economy standard is achieved for each vear by coming within ~5O miles per gallon of the standard. The manufacturer is allowed to carry back or carry forward any amount of fuel eConomy ~erfotmance greater thaP .50 mpg~abave the applicabl~ standard. The athount Carried back or carried forward reduces any civil penalty which the nia~ufacturer may be otherwise subject to for the preceding or subsequent ruodelyear. ~I?his is a desirable provIsion which recognizes, to some extent, that manufacturers do not "conttolY' customei~ derna~bd. It~locs not go far ~enough in providing flexibility. This Section 212 is a classic example of establishing moving targets for the automobile industry. The difficulty of meeting such moving targets is com- pounded by the fact that the test procedures to establish manufacturer coin- pliance are not definite and are subject to constant revision by the Adminis- trator of EPA. While it is clear that this bill would require a fuel economy test such as conducted by EPA in connection With emissions testtug and the driving cycles of 55% urban and 45% highway used for 1975 eertif1eation~ the EPA can use instead "procedures which yield comparable results." It seems abundantly clear that' It is arbitrary and unreasonable to establish minimum' fuel economy standards without a corresponding definite test procedure since the outcome of meeting such standards is so dependent upon the test procedure fise&~ eOni~liance with minimum fuel economy standards is to he determined by EPA. ` As noted above, thern Secretary of DOT has `the authority to establish the standards. It seems obvious that the automobile industry under this proposed legislation would' be caught in an administrative agency cross-fire since one agency (DOT) has the authority to create unreasonable standards, while another agency (EPA) is given broad enforcement powers. The reporting provisions of Section 212(f) are onerous. Under these provi- sions, the DOT `could get almost any information a `manufacturer had relating to its product plans. Moreover, most of this information would he proprietary, and if it must be furnished, should clearly be required to be held in confidence by the DOT and EPA. Hence, Section 213(c) (1) should delete the. last four lines and, in that event,. Section 213(c) (2) is unnecessary. SectIon 212 (f) also requires' manufacturers to submjt "plans" describing the steps they intend to take to comply with standards. While this section doesnot specifically give the government the authority to ibvolve itself in individual com- pany pricing and marketing plans, it Is a step in that direction. This' section should be deleted. Auto companies are required to comply or face enormous consequences. Nothing can be gained by requiring needless paperwork. While this' proposed legislation gives any person the right to obtain judicial review Of any "rule" promulgated under the Act, the vehicle manufacturer Is not afforded any rights to request an administrative hearing `to protest or otber~ wise question such rules. This seems to `be in clear violation o~ the Adinin-' Istrative Procedures ~ct and ot~rer clue process rOqiai~i~etits. Th~~v~joLe manu~ faêturer Should be given the right to request n hea~ing,'thd the an~inti~tive~ agency should be required to support its rules with appropriate' flnding~ based upon substantial evidence.. FalIiire to provide these futidamerital rights to a ee~iicle manufacturer in ~the Act certainly ignores established legal "precedent in administrative law cases. Such omission `could ~ause technical disagreements, which could be resolved at the administrative level~ to wind up in' ~ourt"cases~ SECTION 213-DUTiES AND POWERS 05' THE SgCR5~TA5'Y AND ADMfl~TsTRATOii The agencies have the broad powers ~o hold' hearings, subpoena witnesses, require information, reports, dOCuments and' materials from inanutacturers an~I to inspect vehicles. There is authority for agencies to obtain a~ subpOena ~or any information covered by Section 218(a) (1) that the manufacturer, refuses' to furnish as well as to Obtain a court order to facillthtb authorized inspee- ti~ns. Nowhere is there any indication tha1~ the vehicle manufacturer has an~ right to request a hearipg if be ~be1ieves that he is being prejudiced by unrea~ soilable administratIve agency' a~ti~n~ In addition, `giving both EPA and DOT afithorlty to' `exercise these broad powers could easily yesult in administrative chaos that could bog down tbe~ PAGENO="0186" 184 regulatory functions of these administrative agencies. ~Uso, see the last portion of the comments regarding Seethn 212 for ~efictencies of the ~onficlentiaiity por~ tion of Section 213. SECTION 21 4-LAI3SLTNG AND ADVnRTIsI1~ This section requires a fuel economy label to be placed on each new automo- bile beginning 90 days after the Act is passed, TJ~is requivement could be effec~ tire long before the 1978 model year fuel economy standards. The Information required on the label Is: (a) the fuel economy for that ear "which a prospective purchaser - (could) expect; (b) represen~itive average an- nual fuel costs associated with the operation of such automobile; (c) the range of fuel economy performance of automobiles of similar size and weight; (d) a statement that the fuel economy is less than applicable standard, if that is the ease; and (e) a statement that fuel economy of other liutomobiles is. available fromthe-dealer. The form and context of the label, within the above constraints, are- set by EPA after consultation with the Federal Trade Commission There are many serious problems with the labeling provisiom l?ollowing are some specific problems associated- with such requirements: 1. Neither the manufacturer nor anyone else can indicate the fuel economy "which a prospective purchaser can expect." The ways in which ears ~re op- erated vary so drastically as to make it virtually impossible for a manufac- turer to present a single number representing "what a prospective purchaser can expect." Manufacturers can and do label their vehicles with fuel economy numbers obtained on specified driving cycles. Ideally, these indicated fuel econ- omies are expressed in two numbers representing the extremes within which most drivers can expect their experience -to fall. The EPA dynamometer tests repre~ senting urban and -highway cycles, while n~t ideal, do serve this ~purpose. - 2. The language, as written, appears to require specific fuel economy data for each car. The development of such Information would be -an impossible burden. - - 3. The language does not recoghize the lead time problems at - the beginning o~ the model year. It would be impossible to provide the labels at the beginning of the model year. 4. Average annual fudl cost information would be virtually meaningless. In addition to the variations in mpg that different drivers will experience, new cars wibl be driven varying numbers of miles by different driver~, and fuel costs vary in different geographical areas and seasons. The EPA omitted fuel cost information from its voluntary labeling ~frogram because the information was not useful to consumers. - - 5. Any~ fuel economy labeling re4uirement should provide that the informa- tiop shown does not cOnstitute a warranty. The bill as -written does not have that important p1~ovision. - - - - - - - 6. The requIrement that the label - contain information about the "range of fuel economy ~erfOrm'ance of automobiles of similar size and weight" is not real~ iStic. The range In most cases would be so wide as to be- virtually- meaningless. 7. It is not realistic to require the manufacturer to state- that fuel- economy information on other makes of -cars is available from the dealer. Since the dealer is not under the fria~n1facturer's control, the -manufacturer cannot re- quire the dealer to make such' infOrmation available. - - This entire- section shOuld be simplifIed to give EPAi authority~ to require fuel economy labeling by -rule after consuitation with the Federal Tra-d~ Commission- and the Secretary. `The -Committee Report - Should instruct tIlO E1-W that the Committee intends that the mandatory program be fashioned on the current voluntary labeling program. - - - - - - Section 214(b) requiresthat the fuej econon~y labeling tnformation of Section 214(a) is, to bç~ included - i~ the price sticker required by the 19~8 Act. -ThIs is a direct confii~ with the laSt sentence. of 214(u) which says the ErA nnd FTC -determine the forln~ and conteflt of the fuel eConomy sticker. i~he fuel- economy sticker must be separate and distinct from the price sticker because consider- able room is necessary to present the relevant etplai~ation~, qua1ific~tions and warranty disclaimers that are fundamental to a ~iie1 economy label requii~e- ment. Moreover, the information that goes on the price label is financially - ori- ented ~an~l may be developed ~ t different. times from other sources and on different data processing equipment than the technically oriented fuel iñformatioii. The PAGENO="0187" 185 fuel economy ififormation often is not available until start of production, thus allowing no lead time to set up and print the required labels6 Like Section 212, this section also lacks a public hearing opportunity for manufacturers and adequate due process procodures~ There has been no effort to comply with the minimum hearing requirements of the Administrative Pro- cedures Act. 5~CTrON 21 5-PROIIflIITIVE CONJYIICT This entire section is so vague that it is quite likely unenforceable. Substan- tial penalties of up to $10,000 per violation, with each day a separate and con- tinuing violation, could be assessed for failure to comply with "any provision of this part (other than Section 212(a).) or any standard, rule, regulation, or any order issued." In order to make such violations enforceable, it seems evi~ dent the language must be more specific. Other prohibitive `acts in tills section are also unreasonably broad. SECTION 21 O-~-CIV1L PENALTY The civil penalties set forth in this provision, for violation of fuel economy standards ~are so enormous that they may well be consideved punitive. The pen- alty for the automobiles of a manufacturer failing below the applicable average fuel economy standard during a model year woul~I be $50 times all' the auto- mobiles the manufacturer built that model year times each mile per gallon by which the average fuel economy standard is missed. This section does not recognize added Section 212(d) which provides that compliance is achieved if the standard is missed by up to .50 mpg, nor does it recognize `the carry back and carry forward features of 212 (d) discussed above. Fractional miles per gallon deviations (ih units of one-tenth per mile) are like- wise punishable at $5 per car per one-tenth a mile. In the event a manufacturer produced two million vehicles and exceeded the average minimum fuel economy standard by one mile per gallon, he Would be penalized up to $100 million, assum~- lag no carry over is available. This is clearly punitive for violating a law, particu- larly since the manufacturer does not have complete control over the factors tbht determine whether or not the manufacturer can comply. If a penalty is imposed, it should be only on those cars that exceed the standard. Section 216 could result in penalties being imposed even on some of the most fuel efficient cars. As indicated above, the marketj~lace will determine the types and sizes and fuel economies of vehicles produced during the model year. Pbe rights of the vehicle manufacturer to fundamental due process would be abused if the penal- ties were imposed after the fact. as proposed in this bill. Inci~edibly, the Secretary does not have discretion to compromise or modify the civil penalties Unless necessary to prevent insolvency or bankruptcy of a manufacthrer, or unless the "manufacturer shows that noncompliance resulted from an act of God, a strike, or a fire." This would enable the government to nearly confiscate industry mem- ber assets. At the very least, this section shoUld he broadenedto give the Secretary addi- tional discretion in compromising civil penalties. `~bere may be many reasons why a manufactui~er may fail to achieve an average fuel economy objective through no fault ,of his own. For example, a curtailment of `natural gas at the Wilmington GMAD plant for an extended period (a very real possibility) `could seriously reduce production of T cars needed to achieve a high production- weighted average. GM would not only, be penalized by lost sales, but would be confronted with having to choose between shutting down additional plants to adjust the production-weighted average or paying' enormous peflalties. While a manufacturer may appeal a civil penalty in a particular U.S. Court of Appeals, a full adjudicatory hearing on the recQaj under the Administrative Procedures Act is vital due to the massive civil penalties~ The prm~entations of data, views and arguments allowed th~ maniactui'er in oppo5ition to the penalty ~y Sections 216(a) (1) and 216(b) (2) falls far short of the due process hearing with full ~igbt~ to cross-examination, of government ,personnel and to obtaifi documents from the government that are necessary to test whether the penalty is properly assessed. On review by a cOurt, a full administrative hearing reëord i~ vital. Its absence is a clear violation of basic due process. By contrast, under the Safety A~ct, a presentation of vtews, etc., by `the manufacturer to the~Mmiu- istrator Is follçwed by a right to trial de nqvo on the issue of defect determination PAGENO="0188" 186 and that 4r1i~I,~ at which a ftill adversary reccrd is developeil, may ~thei~ be re~ viewed by the appe1late~ccfl1rt~ ~ ~ ~ ~ ~ . ~ ~ ~ ~ ~ ~ ~ ~ . ~X3TION 2 1 7~REL~TtO~S~P ~ro STA~ LAW ~ States are ~not preempted from est~b1ishing their owr~ fuel economy s~uidards,. 1~ibe1ing ~ requirements or ~ economy ad~ertisi4~g laws. however, any suth state law or regulation must be identical to a 1~ederal standard. Since this bill ~ ~ Uoes not ~Qn~aixi Uj~f op~ratiye provision reg~ftug advertising, t)~e states wQuld be left fi~ee to regula±e~fnel economy adverUsin~ It wouW be better to j~røl~iI~i~ all re~u1atiOn of fuel economy adve is.i~g b~ states and poi~a~. sqbdivisions thefe~f~ ~N~tétl~nt utates. cafl Mve th~kr~d~wu dtff~liig~la~s ozi~ any gf~he~e shbjectsuii~il the subject is covered b~r astançlard issued nnd~r this federal ia~ that has become effective. PhJs provjsiou shoul\d be amended to provjle~for ~re~ emption on all areas covered by the Act whether standar4s I~ave been issued or are effective. ~ven for a short period, the automobile inth~stry cannot live with differing state standards requiremetits. Any individUal state fuel economy stand- ards, etc., would necessarily result in an unreasonable burden on commerce. The automobile industry Is a mass productIon industry which simply canuot aecom- modate different sthte standards, notwithstandiitg the State of Oahforni&s sepa~ tate eUzis~ion standards. Finat~y~ identical state standards and rules serve 110 purpose other than to support duplicate bureaucracy and Increase the costs of business to the detriment of evetyone~ Sr~Mnrrc nr F G SECRECy E cv~rxyn V~ç~ ns~nn'vr-Oranauroy~ ~T4t~Fs Fomi Mouoa CO~P?ANv Mr. Chairman and meibers of U'c Senate Finance Com~iitte~. 1 am Fred C. ~eerest~ Evecutire Vice President-Operatidns Staffs, FOrd Motor Couipauy. The bill t~efore this eomi~ittee, I~E.R. 6S~O~ reqUires that motor vehicle mann- façturers m~et fuel ecopowy stgndard~ beginning in model year 1978 at levels 32% ~iigher than 1974 models. Tt~ptovide~ severe fines for manufacturers whose a$ráge vehicle ptoductlon does not meet these standards. It establishus even. tighter stand~ds for frittire years, culminating in A 28-mpg average by 1985. It. is ~For~I MOtQr Company's convictiçn that fuel economy improvement is one aiea where there is no need fey regu~aClon ~With ga~o1nie at 51~ a gallon In June increases la~t Week of 3~-5~ a gAllo~ and ppténtiall~ ±thich higher prices thro~g~ decbütrol and import fees, consumers don't need a 1gw to force them to look `for the best fuel econo~ny in a vehicle that me~ts their ttansportatlon needs. Cin- sumers b~vé already responded by buying a larger proportion of small cars- coinpact~ and subcompactS atecurrently ru11ning 57~ of Ford's saWs, comparCd with 41% In 1973. Fuel economy now tons the list of, buyer concerns. Nor does the manufacturer need a law to force him td provide what con~ ~un~ers are demanding. A few weeks ago, Ford introduced eight new "i~IP(i'~ cars giving the customer ~ choice of ~evera1 models that deliver 27 mpg in the ~PA combined metro/highway test, or 34 mpg on the highway test alone. During the past five years, we have spent nearly $2 billion to develop new small cars and to expand our small-cal' ca~aeity. fly 1980, we expect to' spend' an additional $2 billIon, cli" more efficient car designs and better fuel eeonqmy, through engine And ~lriye-trajn improvemelits and ptodnct dowlisizing. ~e expeCt ~`ord's 1976~ m~de1 average `fuel economy to be, thrc~ miles p~r gallon, Or more than 20%, better than in 1975. These chAnges are expensive, but we are making them becan~e, it is Imperative t~hgt we respond to tile demands of the marketplace. The cost of man~atiUg and dèadlining these changes by Government regulations is kèly tb be very high, fOr ~~veral~regsons4 First, equvem~on of facilities and re-d~sign and engine~rJng programs to inset tIm tinçietttbles indicated in this bill ~cvould be eflormoUsl~r ,expensiv~ and disrnp-~ live. In the six months endft~g ~arch 31, 1975, Ford had before-tax ~o.~es of over $200 nlUU.on. As a result, w~ baye bad tQ ~n~rease oUr borrowing snbstantia~iy. we anticip4te a recovery i!roui the present gutomolive depression the 1oSse~ wiLl have a sigu~1Ican~t effect on our long run investment capablliçy Present plans for `fuel óno~uymprevemez1t-t~ie $~2 `billion I melitiQned-re~te- sent the xnaximmxz we e~txt ~ffo~d-and sonic other mauufa~turers may well prove unable to do this thuch. Indeed, Congress may eventually neéd'to lOok at wheth~er PAGENO="0189" 187 the fuel-econolny im~ro~ements demandedby themarket can be tUianced In thU without some form of Government guarantee or Incentive. ~ ~ Even with no limit on the capital avai1ab1~ for investment, there would b~ a serious risk that ~ man~f~c~r.er might fall to achie~e some of the standards under the rigid tftnetable prescribed in H,R. 686O~ The risks include : (1) variability of test results (fuel economv tests are far from ~xact, and in this bill millions ~f do11ar~ will be riding on .1 mpg) ; (2) the ni4x of cars, whith can vary widely in r~sp'onse to eonsuiners~ cl~iinand thus changing the average fuel eeonow~ of the manufacturer ; (3) the ability of the manufacturers to put togetl~er, on the stated date, all of the individual techniciti linprovenients that may b~requircd to a~hi~ve ~t~bi~ ô~raI1 .target.Paiilure,eren. brief~r or to a, minor extent, to meet the targeth for any Of~the~erèasons ~v~u1d mean `massive financial penalties. Although thO bill describes these as fines or penalties falling on the manulactumer, In practice the xnanufa~turer would bare to recover some or all of them in the prices of his products. In addition, the consumer would pay the extra costs Inherent lu rflsh programs aimed at me~ting arbitrary deadlines. Perhaps most importantly, the standards may dthcourage actions alm~d at the real oi~ject1ve of the Iegislatlon-i.e~, cont~rmuing iniprorenients in fuel efficiency for the entire cam~ fleet. `Eunnln~ changes-those made `dum~tng a mOdel year- might not cthnt at all for the ptirpOse. of measuring the average results. `The introduction of high-risk advanced technology ~Ould be slOwed be~ause the penalty for failure would be so muth greater than In a free market-under a mandated standard, manufacturers ~eou1d have to place ~t1i~1r limited financial and technical resources almost entirely on "sure' timings, Finally, the long-term standard of 28 mpg in flit. ~8~3O could substautidily rule out efform to improvr the ftmel b~onomy' of tdr~r~&rs~ fOi~elht ~ ~i~r~s ~v4io beli~re the~ have a ~enuhie need for family sedans or station wagons to retain, as long as possible, their less-efficient older models-~-because manufacturers cotmldn't afford to develop improved versions. Consequently, we believe that `mandtttory fuel economy legislation is n~mneces- sary, that. it could prove cost~y to cotistyners and that it would impose an `unnecessary and unreasonable burden on the domestic automobile industry. If Congress nevçrtbeless beLjeve's that mandating fuel economy by legislation is essential, we would hope that any bill wouhi have three important objecthres: (1) to accowpllsh the goal with the least' pqssihle interference in the mar1~etplace arid with minimum disruption to empp~1o~ment; (2) to ~et standards tlmqt are fø~nd, after thorough study, to be te~hno1o~icahly and financially àehiiei?ahle,; and (3) to assure the availability of ~vebicle~ adequate to meet the transportation needs of the people. Further, thO automotive fuel conservation goals should be reason~biy commensurate with whatever conservation actions may be mgndated for other energy uaes~ Accordingly, if such legislation is deemed necessary, we strongly urge the following modifications to HR. 6860. 1. Delete the 28 mpg standard in 1985 It seems probable that .a ~S mpg average cannot be achieved by 1q85 across the range' of vehicles presently demanded and needed by a large segment of the 1J~. niarket. Only 10 of the 320 passenger cars listed in the 1975 EPA Buyer's * Gu~ide fOr' 49-state vehicles achieve a metro/h1gh~a~ ~erage of 28 mpg or better. All `ten of these are imports arid all, e~çcept the Peugeot diesel'are In the 2~00 pound weight class or l~ght~y. A manufacturer copid hqrdly make long-term lntvestment5 in improved engines or subatantial weight reductions fo,r full-sised vehicles because ~of the risk that, even with lm~rovemonts of 50% or more, the vehicle would pot come close to the 19~5 standard. ~he six-passenger, thmnhly `sedan and the station wagon would probably ~isappear ftom the new-car market. ,(These cars now make up about half of the vehicle population.) Such a standard would require àtotal re~tructuririg of `th~ ifidustry, including the writeoff of billions of dOllars worth of facilities. `Major unemploymefi't would be'unavoidable during time long transition period. `Prirther, domestic ~ehi~le' prices * *ould have to reflect the enormous co~t, o~ this facility conversion while ~iost foreign nmanufactflrer~, who are already building `2~&hpound cars for their bo~ne ~iarhets~ `would have ~opsidera1~y less task and ~ ~te,belleve, therefore, that a stami4ard at'thiis level would turn, ovqr a thrtber làr~ piece of' the mariret to the imports-~-witb severe effects on V.S~ Jobs and the id(lance o1~ payments. ,, * `The flexibility given to the Secretary of Trdnspprt'atlon to modify the 2$mpg goal does not resolve this problem Product apd facility plana would have to be PAGENO="0190" 188 based on the statutory stanU~rd until a determination o~ mod~fleatiQn. w~s made in 1979 or later. Any modifications would probably come only at~ the last mumte, after hmidred~ of millions of doi1air~ had been epe~at~ `and after o~pportunities to improve 1arger~car effieienci~s by 50% o~ more had been passed n~. . There Is no doubt that continued improvement in automotive. thel economy is necessary and possible after 1980 We believe that this impro~ememt will c~cur as a result of market fortes, and that by 1980 it will b~come obvious that a costly regulating structure is not i~eeded to achieve the goal. if Oongre~s wIshes to as~ sume a continuing need far regulation, however, it should ` authQrize ~the admju~ istering agency to set post-1980 J~ue1 economy standards only a~t~r (1) c~r~i~u1 assessment of technologicaL and financial f~asibi4ity ; (2) a thorough ana1ysis~ o~ consumer needs ; (3) ` anaiysi~ of the impact on, ea~ety ; and (4) reassessment of ` the nation's eaergy requirements and supp1ie~. Without `such assessments, there is no * more basis for mandating a 28 mpg ~eet average today ~or a period ten years away' than there is toda~r "for rnandwWig inlprovemehts o~ 100% in the efficiency of aircraft, home furnaces~ power plapts or crop Uryers~ ~ 2. Modi~f `the Y?enaltiea ` ` ` `: The' level o~ ilnancial penalties set forth `in HR. 6860 is exorbitant and could be conslderel confiscatory, If Ford should aç~lijeve an average ftel `economy of 19 mpg in 19SQ~ the shortfall o1~ L.5 mpg oi~ only 8% from tl~estatutory standard would result tn a civil penalt.y ~ oi~ al)OUt $225 milIion~ equivalent to hefo~e-ta~ l)rOfit.~ of $450. million. (As a reference, the Co~pab~r's ~nnunl dividends at the present rate total $224 million. ) Fines of this magnitude, of cour~e, ~vQuld de- . - ~ f ~ ~ in ~ to ke he- ~ ~ ttreu~ ~ ii] Lii rl( the iudu~try's securities, we suggest that the Conunittee seek testimony from Goveriimeut aiid private experts on this I)oint. ~ are a number of ways in whic,h the 1)e1Th1tie~ COU1(l b(~ moderated, siieh as ( 1 ) use production-weighted average but ~Pl)iy the ~)enalty Only to vehicles not mE~eting the standard ; (2) reduce the dollar amount Of the penalty ; (3) pro- vide that the maximum penalty not e~cee(l smne stated percentage (perhaps 10- 25%) of a rnanuft~cturer's profIts ; and (4) iiiake tile peilalty tax-çi~ductible. Such ~hanges could still result in potential ~enn1ties that would `assure maximum effort to avoid them, without the shattering eonsiequeiwes of shor~fa1l under the IJ.R. ~ 68~l0 schedule. We strongly drge that the Committee consider such modifications. . 3. Delete any requirement for truCk fad economy .standard8 Because the lowest possible operating cost is a prin~e ob~jective for truck op- erators, fuel economy is already an espeçiall~v impurt~ut ptirchasing criterion for trucks. Further, `as trucks are designed primarily t~ haul good~s, a reduc~tion in truck size Which might be Féquired to meet fuel economy standards wo~1d not ne~esSar1ly rCsult in an overall teduction in fuel consumption, if more trips Would be needed to carry the same amount of goods. Further, ac yet there is no, accepted ~nethod for measuring truck fuel economy~ There `are no ~PA data itidicating the `average fuel ecoi~omy of the nation's neW truck fleet, beeai~is'e tru~k~ rated more than 6000 g~w have only engine (not ye- hide) d~nomomete'r testing. Such testing cannot be e~t~apo1ated into meauing~ul fuel economy figures. The wide i~arièty of truck usage patterns, `oading coi~d1ti'ôns and vehicle configur~ttloxihave dictated this engine-only testing. Additionally, trucks presently ha~ve unique emission standärd~, and the entire approach would haveto be adjusted to this fact, 4." Perø~it ~nch~~sion of care pre~ntZy imported by the manufaot~rer in overa~1 fuel econo'iny average As initially proposed `by RepresentatFcre Sharp, each ma~flifacturer would hare a~termined ati "import base" equal to hii~ im~orth In 1073 oi~ i91~t as a per~entage~ of the total vnhicles sold by him in those years. This "impoi't basu" would be ~in~ ~luded~ in detérminin~ the manufaeti~er'a average fUel et~oflbmy ifl `futnre ~~rs~' The Hrnise,'however~ accepted a- sub~tlt~t~"prtMsi'oit ~i1irhig that al~ 1mport~ (except from Canada) be excluded in determining a manufacturer's basic fleet~ average fuel economy. PAGENO="0191" 189 The provision as originally proposed would clearly prohibit a manufacturer from initiating se-called "rwlaway-plant~' actjons, in order~to. ac1~üeve the fuel economy standard. For measurelnent against the ~tandttrd, he would be allowed t~ count no more than his percentage of imports in 1973 or. 1974. This seems t~ be a reasQnable safeguard. To exclude from the standards base the cars presenUy imported by a manufacturer is an undue burden. Present fuel economy averages include impotts of the domestic manufacturers, and to rule them out would make Ford's task up to .3 mpg greater than originally assumed, We are gratified 1~hat the House, in H.R. 6860, has recognized that there must be adjustments for the fact that, for any given vehicle and power-train, emission control technology that may be available in the foreseeable future will almost certainly exact fuel economy penalties if the standards are tightened beyond 1975 levels. Finally, we want to emphasize that the single most helpful thing that Congress -could do to improve automotive fuel economy, and also to help the antomotive industry recover from the current reces~ion, would be l~o defer any further tightening of emission standards and ret'ain'tbe present already-stringent stand- ards for five additional years. The President has recently recommended such a deferral, based on an analysis by the Energy Resources Council that Indicates substantial fuel economy degradation `in moving to the 1978 statutory levels. I must stress that an absolute prerequisite for the degree of fuel economy im- provement envis~iged by this bill between now and 1980 Is a freeze ia emission standards at or near today's levels. We request permission to submit for the record a number of specific suggestions for changes In HR. 6860 that would, in our judgment (1) remedy the serious problems I have discussed today and (2) clarify `and improve the bill with respect to a number of technical details. FonD MOTOR COMPANY STJGGESTED AMENDMENTS TO H.R, 6860 See. 211(a)(i) No change. Sec. 211(a) (2) The definition of "automobile" has been modified to include only passenger vehicles under 6,000 lbs. gvw. This change excludes all trucks, busses and some multipurpose vehicles from the requirements of the Act. (3)-(4) The deflaitions of "passenger automobile" and "light duty truck and multipurpose passenger vehicle" are no longer required and have been deleted, (5) The definition of "average fuel economy" has been renumbered (3), deletions reflecting the exclusion of trucks and mpvs have been made where appropriate, and a provision for greater accuracy in fuel economy calculations has been, added. BATION4IE Rationale for deleting truck fuel economy standards Because lowest possible operating cost is prime objective for truck operators, fuel economy is already an important purchasing criterion for trucks.. Since trucks are designed primarily to haul goods, a reduction in truck size which might be required to meel~ fuel economy standards would not necessarily result in overall reduction in fuel consumption, if more trips would be nee~led to carry same amount of goods. As yet there is no accepted method for measuring truck fuel economy. There are no EPA data Indicating average ftel economy of nation's' new truck fleet. because trucks rated more than 6,iJOO gvw are subject to only `engine `(not vehicle) dynamometer testing, which cannot be extrapolated into meaningful fuel economy figures. Trucks presently have unique .emission standards, `and the entire approach would have to be adjusted to this fact. . * Rationale for change in fuel economy calculations: EPA fuel eëonomy meas- urements are presently calculated to. th~ nearest 1/10th mpg and when a number of different measurements are to be added togethe~, the fractlonal cfileulqtiOn resultS in a thoré aectirate caichiatloli' `which could be e,itrelnely ithportant when penalties are computed for each 1/lOthinpg. ` (6)-(12) Tliese,subsections have bonn redesigtiated to rOflect earlier deletions. (13) Renumbered to reflect earlier deletions. " ` 55~-iiS3---75-pt. l-~----13 - PAGENO="0192" S~b. 211! (b~) ~X) ~ t~t re~f!~&~ e*d~i~iofr of truc1~ ~ui~1~ Ixip~rs. (2) ~ ~u1~s~ct1~n) `!1~h1S La t itew siib~e~tion fneo~rpor~ting the o~1ghiai ~ri~6~i~ of th~ a!r~ ~n ~thL~iW. It ~78~i~ a~1io~ th Ef~tfl1~Th th ii~hiM~' ~ fô~tYo* of~ ~ ti~é~ caM ,t~etI~ t~ th~ ~e~ti~ inl~órted! fia~~g~~ eaf~ fat' ~ of ~t~ththb~g~ o~E~r~11 1t~1~ ~oiitirn7 e~g~ Tlfi~ pFm1~h~W*ottl~ ithi~1t t4~ 1~ iY~iOi~ of o~t~efl' ~éff1c1es th~ tb~ manü- ftuct1fr~W f~l rmth~ ~ th ~ ~h1~l~ t~t1~r lnlptted. ~d1~1k1!~r tM~ th4~*~t l~ ~ ~ i~t~a M~rnffáetTli~er will ndt be able to Import a larger percentage of vehicles in any given year to meet a fii~l 1IO1Ii~ ~t~rd~ ~ ft~ef ~ a~é~g~ ~4fttl~ ln~l~d~ Ii ~ta; to è±c~Itt~è thei!o wotflt1~ ~ ~f~s~ta*d~ tt~ ,3~ ~ ~) I kh~Ibè~ek!1! t~1 t~eY~f~ táItk~ ô~ x~e~ l~ectiOi~i (2). Sec (1) `J?h~a suhse~eThm ~ 1*eni á~rm~T~ded as follows: ~a~) A~ s~&fIe. refetrei~ tO~ t1t~ e~t~uton ~ta!nthLrda p~1talt3~ ~ro~1~1o~ ~ L2~) ka~ bee~i a~Iell~ to a~1d a &tion~ r~a~lm~ It~ allt~kbIllt~r to all years and all fuel economy standarda ll~hed i~i!le1~ th~e 4~ct. (b> M~di1led) t&refler4~ th~ u~f~nof tn~wst (~q) Al1~ ap~dlll~ st~m8 rtl~aftar the 198O~ n~io~1 ~~eat ár~ to be Cst~ThllShet3J by the See~ret~ry wad~ ~ 212~tlb)~ of the A~t. BATIONALE Rot~onaZe for adm'tnistratiDeZy eetti~g post-1980 standards A 28 mpg standard in 1985 cannot be achieved by 1985 across tbe range or vehicles presently demanded and needed by a large segment of tb~ U$: iittblie. If the American public cannot purchase vehicles suited to their needs, in~ny owners of full-sized vehicles are likely to keep them rather than t~ading them lfr è* fi~v n~or~ff el ~ie~s~rW(~atid eh~aner ottes~). This Woi~tld lI~ë an ad~ter~e effOtt Oh a to~~alê5 &edt~ ehd1~ik~ohs' eeon6nilc disruptioll ati(t bO contfar~ t~ tflo~ purpose of the bill. Such a ~t~an~r~ *WaId require total r ettiring of tine *hWth~1~ a~b!~ In~j~ u plo~nt~nt ~vould lie uh~avoidable cluHng the long tMnsi-~ tion ~i~i~od~ DOfi1(et1~i~ ~elifi~le~ ~icOs *oi!tl!d bave ta reflect the eni±nions cost of eoi~vM%1O~4 *hi!1~ 1!O~eig~ i~iauin1!aettrrèrs, who arO already buiIdth~ ~5~0 pOund~ eaFa for thêii~ home markets could have lltl~le or no task or coa~-thls could tttrh a fiix~tinèl~' large pieee of market to inn~brts with sr+ere ef~ect~ on U.S. job~ and balance of payments. The nation would be better ser+èd by ~bngress authorizing DOT to admin- istratively set post-1980 standards Qnly after (1) careful assessment of tech- nological and financial feasthility; (2) a thorough analysis of consumer needs; (&~ any~ ~f ~ ~n~fikf ~ ah& (4) ±~e e~meht of the nàtio~i'~ ehergy~ requiremefits ~i~d ~lie~, (2LY N~O ~lia~i~. (~) Llile 2ftkflilekl tO~ reflect etifuhiatlon of tl~e s~e~lfi~?i~iS5 i~&iuIr~m&it.~ ~ I)~el~têd~ttr reflect e~efu~ioh%of trucks frOth t~e rd li~th~t~ts of tk1~ ~ct. See. 21~(l~> (1)! Ashemlad to toflecb the expanded airthurity of the S~lctetary to ettithli~h post-1D8~) stahdords thrd t~ nndte direCtl~ ixIttMct the So tart t~d e~tinbhis~ stamlardsbat~dt t!ipOn~ a reaF, ~ (2) No change. (~) (A) Amended to direCt tliie ~ecr~thr~i!o c~0h ef ha!tlOtiaa ehO1~g~~ iieêds in amendtpg any standards established pursushf to tli'e Act. RMrxe~fAtlt %i~f4,iônoZe fo~~ a6~U~g po~siiler~ition of national enorq~ needs tostendards orite$ow The automotive fuel economy goats mt~st b~ doris&doi'Cd ~imt ett i~h~ th~ a m~*n4r con~t~tei* With~th i~ation't~euergy eonsCrvatiou Øegrati~. Fb~td~ belIeves the goals set forth in H.R. ~t8EG se~tn to ~bâ~ve bOOiI~ fst itskdd ~1~tlioti% Con- sidering the total context of the energy problem. Certainly, no other segment of consumer consumption has been singled out for suck drastla aettom Qonslsteucy~ PAGENO="0193" with other energy use policies and ~oaIs m1~t be part of the criterion for estab- lishing long-range standards. (3) (13) The authority of the Secretary to mOd1f~r thd U~ stand~M would not ~e reqfiirud lii light Of earlier ehangea and h~5~ th~refO~e, beei~ t~kieted. (3) (C) Deleted iot~ the reusoa~ noted in ~nll1e~t1dn with the d~lM!on o~ § 2~± (b)(3)(B) oiipage28. (4) Ainernled to reflect earlier ehktiges and to spO~1fi~all~ dl~e~t th~ Sêcretar~ to consider national energy ~o~crvdttan huod~ v~rh~h esrEtbiWiffig fh~l e~onom~~ perforiflan~e standards. Sec. 212 (c) (1) No change in view of the recognition that in the short term, tighter emis- sion standards will probably exact fuel economy penalties. (2) (A) and (B) (a) Amended in view of the exclusion of trucks and mpvs. (b) Modified to reflect the fact that changes in certification flctd otix~' test procedures beyond those applicable to 1975 vehicles such as require- ments for high altitude testing and testing of vehicles ott a~sambly lines may also create an emission standards penalty. ~(2) (c) No change. RATIONALE Rationale for ecpanding emissions standards penalty to include lest procedures Ford has estimated, for example, that even if emission standards remain at the 1975 l~te1s, a~piicatIon of 1~PA's proposOd ~el9~tive Enforcement Auditing Procedure (SEA) [39 Fed Reg 4t380 et. seq.], *otild sigttlfieantly tighten th~ e4ilssion control rO~u1remen'ts anti ~teute thel etOtto1~ p~iiaIties up to ~%. (see Section III, page 4 of Ford's Response to ~A'~ PtO~O~d ~EA pr~~edtires A~ri1 17~ 1975.) (3) No change. (4) Amended to reflect the addition of test procedures in § 212(c)' (2) (A) and (B). Sec. 212(d) (1) Amended to reflect the exclusion of trucks and mpvs. Specific reference should be made to section 206(a) of the Clean Air Act which contains the aU- thority for prototype certification testing conducted by EPA. (2) No change. RATIONALE Section 2D6 refers to other EPA ~1nTh~ion testing but In order tO be fOasibl~ and practicable, the development of fuel economy figures for labeling afid other purposes must be associated with emission testing prior to the time that vehicles are produced and offered for sale to the public. sec. ~12(e) (1) Amended to include administrative determinations in ~u'd1cial review process. flATtONALE' Modified to make it clear that important `administrative determinations suc~i as those involved in establishing an emission standards penalty ate "a~ifeaIable along with other rulemaking `actions `to the appropriate United States Court of Appeals. Such determinations would, of course, be appealahie to a United Staten District Court, under t~he genetal ~to~is~ons of the Admini~tratlve Procedures ~ Act. 1-lowever, there a~éar5 to hO riO 1~eason to Create suCh a dlk'elslfy Of review ~roeeduires. In the intereSt `Of 5udicial ef~eienc3~ It wott~d Seeitt ~lesrr~b1e to have ap~ea4n from all questlOnt ttttd~r the Act treated ~n the ~aire fashion. (2) No chahge. (3) No change4 (4) No change. ` `(1) ~nd~'(~) The momitpring provisidtit `apfear t~i be Si ttou~ Iti~ light el the pOñalties for failure `to meet standards stated in objeetWé, ~e~f6rrfrabce terms, and, therefore, Section 212(f) has been deleted. PAGENO="0194" 192 R~ONAT~E Rationale for deleting ~nonitori,ng We believe thia section is a carryover from a preitious draft of the bill which set up a fuel economy monitoring procedure with no penalties. Since the bill jrovides after-the-fact assessment of average fuel economy over .a model year subject to substantial penalties In the event ~f noncompliance, monitoring during a model year would be unnecessary. The bill would require a lengthy process of reporting with possible attendent disclosure of confidential future plans. Sec. 213(a) (1) No change. (2) No change. (3) No cbange~ Sec. 213(b) (1) Nochatige, (2) No change. Sec. 213(c) (1) No change. (~) No change. ~Sec. 214(a) (1) Amended to reflect thef act that EPA f~él economy numbers Swill not neces- sarily reflect what can. be expected from each individtlal vehicle but rather t~tie performance of test vehicles selected to represent a range of vehicles including the one that carries a particular label. Amended to limit the information on the label to a presentation of the fuel economy performance attributable to the vehicle carrying the label. (2) N~ change. Sec. 214(b) No change BATIO~TAL5 Rationale for cl~ange tin labelling provision An overly-detailed and complex label will be confusing to the consumer and therefore less effective. Average annual fuel costs are almost meaningless given lIhe vari~bility in miles driven, price of gasoline and driver habits (cit3~ orhigbway driving, etc.). Sec. 215 (1) No change. (2) Amended to delete the double jeopardy aspect of penalties tinder this Act and the Automobile Informatioti Disclosure Act for labelling failures. (3) N~ehauge. (4) No change. (5) Deleted. See comments under (2) above. Sec. 216(a) (1) No change. RATIO~tLE Rationale for delot*tg double jeopardy aspect.s of labelling penalties currently, 11.R. 6860 amends the Automobile Information Disclosure Act to require fuel economY labelling information on the r~tail price ~sticker and to sub- ject fuel economy labelling failures by manufacturers and dealers to penalties. under the Disclosure Act. In addition, however, present sectIons 215 and 216 oJ~ fl.R. 6860 would also subject stich failures to civil penalties of up to $10,00U~ per occurrence. Thus, a manufacturer or dealer could be subject to being fined twice for the same action. This is unfair and Ford believes that EI.R. 686Q.should, therefore, be modified to delete the double jeopardy aspect of penalties under this ~Lct and the Automobile Inforniation DisclosurC Act for labelling failures. (2) No change. PAGENO="0195" 193 ~ee,21O(b) (1) (A) Amended as follows: (a) The civil penalty has been modified to provide for a penalty equal to $5.00 for each ~ mpg shortfall. Other means of minimizing the import of the massive potential penalties applicable to average fuel economy short- falls, might include (1) A new section 216(b) (1)'(C) providing for tax deductability of the fines; or (ii) A new section 216(b) (1) (C) placing a "cap" on the total fine that could be levied against a single manufacturer. (b)A reference to the "deemed to meet" provisions of ~ 212(d) (2) has been added to clarify that the fine is to be applied only to the extent of the `shortfall from the adjusted leveL RATIONALE Rat~onaZe for limiting penalty The penalties in the bill are exorbitant. A manufacturer of four million cars would pay $200 million for missing the standard by only one mpg-a shortfall that could easily occur by an unforeseen change in consumer preference or a less than adequate adjustment for tightened emission levels. Penalties of this magnitude, if incurred, would deprive manufacturers of needed funds to make heavy investment in plant conversions and fuel economy technology-thwarting their ability to make the necessary changes. Further, just the contingent liability of that magnitude of penalty would jeopardize a ~ompany's ability to raise capital funds needed for conversions and technology. (1) (B) No change. (2) No change. (3) Amended to authorize the Secretary to take action with respect to a civil penalty that would otherwise `be due where the manufacturer can show that his failure to meet the requirements resulted in unanticipated consumer demand which existed despite his efforts to influence the marketplace. RATIONALE S. 1883, as approved by the Senate Commerce Committee contains a provision similar to this amendment proposed by Ford. Under 11.11. 6860, a sudden mix shift in the middle of the model year or in the event consumers simply do not purchase the percentage of small cars planned for production, a manufacturer would be faced with either producing vehicles be could not sell or the potential of massive penalties. Sec. 216(b) (3) (C) See preceding comments. Sec. 217 Amended to provide preempt all state fuel economy standards and enforce- ment procedures. RATIONALE Rationale for preemptiofl change Energy is a national problem and there Is no need for identical state stand~ ards. On the contrary, adoption of identical standards by a state would create costs and administrative burdens associated with attempting to calculate fuel economy averages by state. If purchases within a state constituted a differetit sales mix than the national mix, a manufacturer could conceivably face fines, even though the national average met the standard. STATEMENT BY ALAN G. LOOTBOIJEROW, VICE PRESIDENT-ENGINEEItING OHEYSLER C0EP0RATI0N I am Alan Loofbourrow, Vice President of Engineering for Chrysler Corpora~ tion. I appreciate the opportunity to elaborate on my remarks before the Finance Committee regarding proposed automotive fuel economy legislation. As you may know, we testified before the Senate Commerce Committee last December on the bill to mandate a 50 percent improvement In fuel economy by 1~80. At that time, I discussed Chrysler's long standing commitment to better fuel economy, described the engineering considerations involved in improving gasoline mileage, and outlined drawbacks to legislative solutions to the problem. I would PAGENO="0196" u;~4 like to submit for the record a copy of that statement. I think it will be ~ as you consider whether fuel economy standards ~ ~ ~ ~4 ~n U~e 1~st ipterç~st ~ X1~ ~ Sjj~ &~mt~w, UM~ hP~S 11~E?1~ ~ ~4~ft~t 4~or~i~it ~~4A*~ 4uto- motive ~ e~nowy that L wçi~ flke ~ di~~s~ J~i~ ~ ~ t1~ ML~X11fl~ istrator ~ of ~ the 1~hi~ironmenta1 i?roteetion Agency gran~ i~s ~tj~ ~~e~3~TL to prese~4~ ~t~j4~r4T~ i~Qr hy~r~ç~~s ~w4 ~c~a~*p~ ~ M~4 ~u~g~d Gougres~ to edntiTiW~ these standards th~rough fl)79. Since that time 1~i~ ~.~~1ent has recQ~~e4c1j~U ~ ~y~t~J~op, q~~i ~ * ~4 ~xi~s o~ ~ni~o- gen standards at today'~ ~ s-p~r~i1~ ~ ~ g~iin~-per~ mile c,~ybp~n ~ ~4 3~ ~ra -~pe~~~h3es ~ r~j~ ~ Oo~i~ø~S Will act q~I ~ ~e~e ~l~i ~ça~o~i ~d c~ii ~cid~ st~nd~ ards at their present levels, and also hold f~st to t~s p~e~n~t ~cii1es ~ r~i~rc~gen standard of 3.1 grams-per~mile, we can significantly improve gasoline mileage over the next few years while continuing ~ ~y~~ess toward cleaner air. railure to carry over all these standards-espeoig~47 ~ ~4ps ~ ~ standard-will serjo~sly hign~jicap ou~ eftp~t~ to ~XI1p~QVO fgel 4cOuQ~y, ~io ~aw~ no ta~c nt~ 1flcent1vv~ prog~atn, and no crash r~seat~ ~nd 4eYel~p3m~t ~iro~ect ~afi, change that ba e~ehgineer1ng ~aet of jife., Let me e~In4n ~ht~t bt4~fi~. T&ie ãtr is composed pidn~ar~l~ of two b~lc ~eoiW elements: oxygen and ntr~g~, whic~i at ahout 30 D~ ~ ~ to n~M ~ gen ox1de~. ~eoa~use an engine Is n~ore e~ieler~t and sets ~ett~ gp~oljIl~ ~ when 4d is ~ ~ iilghe* b~stiO4l teniperatuvi, iirO seel~ ot~t W~LyS t5~ ~ that te~iuk*w~. ~inwtw~r, ~ eofitrol d~id~s of ntt~~gØs~, w~ 1o~er t~u~peta- tUreS-~4~tl tl~at means lowev g~solh~~ ~il~ge, i~il~e it oi~ i~ot~ we ~p't repeitl t laws of I imodyMmies. That Is wh~ the evAdes of nitrogen staflda$ o~ 3.~E ~rgzfi5 per mile is so essential to improved fuel economy. At Chrysler we are developing ways to meet to~ty's stringent standard while ~~proving taej ~om~n~ h~ px*else e1eeti~osie control of the engine's o~peration. As h nesdlt of oar eitgiaeeithsg aehIe~ernet'ts, we ha~ve told th~ Adn4n s~mttfoli. that with a 3.1 NOt siapdasd, we believe we can reae~ ti~e goal of ~ 4Q percent improvement in fuel economy on a ~~es~vtd1ghtëfi basis by 1~O, In making that commitment we assumed that we could successfuily develop sophisticated elec- tronic controls for spark timing, fuel tilstribtPtlofl, and other engine operations. 4s you know, Chqs]cr pio~eere~ the ~lrsj p~or i~pp1ic~tmn of ejectroale teehnólO~Y when 1j ~ the electçonic lgtiitiqii systeip stgpdard on all epgi~i~ `ii~ the 1t~'T3 rnbdel year. We helleve tim next majØr development will come in the ~ model year. ~ hope to tptrodiice on several models an electronic sparh~ t~m~1ng cont~'oI which will make possible a pew non-C ghy~j emission ~ptrol ~aysIe~l. The electronic control adjusts spark timing very precisely for a number of variables including engine temperature, throttle position, and engi~c spe~4, ~he precision of this control permits us to modify our engjges tQ imrp ~ p)ixjure of 18 to 2& pounds of air to one of fuel, rather than the present ratio of 1 to 1. At ratios of about 18 :1 and above the nitrogen oxides drop off signifinantly. ~V~hj1O there ~s ~o ~p~l ~OflO3PY b05~ wbmi en i~ `i en ~ ~ ~is lean. it is not as great as the loss from other methods used to copt~'e1 o*1$es of nitrogen. If the development of this ~oti~d1ii~ spark timing control and several ether engine modifications are successful, we bej~ve we cen dliøøt nrasent ~da~ ~jo~ stapdarda withept mpst ~f t~ e34~bi,On enflrAlt 4~YiCe5 Qfl C3~$ jod~S, ipc~ld- ~ the cntglytio cev~rtey ~p4 the ~ p~m~p. ~r pslpg this system ~e ~e we çi~ ge1~ l~ttpr fiW1 ~cqpep~y awl * (aghility t1~en on today'~ ~ ~u4QmobflCs~ ~acalise th~ engine ruPLOB a lean mb~t~vc ~f f neT tQ air we hilve bO$n I*r11B~ to this a~prOach as a leOn burn system. ~iwe the leau hl3rn sy~teip wç~g1d elimi, nate the catalytic converter, we could use leaded gas wIth Its higher octane ratings, design our engines for higher compression ratios, and regain some additional economy. It is eepeeiuUh~ e~sentia1 that Oeng~es5 act to ~~~ry over tim oxides o~ p~trogen standard. ThO recommendati0fl by the aclmiaisti~atQr of the Environmental Pro- tection Agency to allow the oxides of nitrogen standard to drop to 2.0 grams pe~ mile In lOfl sdr4oimsly jeopatdizds our commitment to improved fuel economy. As you kmiow, the admltlist~atOr'5 de~iMon implicitly requires us to develop non.catttlyst cirlisslOn contr~il tecbnolo~v as qiilcklh~ as possthlO~ If the etandards x~eihain at 1.5 grams per mile hydroCarbOns, 15 grams per mile carbon monoxtde~ PAGENO="0197" 1~5 ~a~U ~U gji~n~i~ p~r ~ o~U~&e~ o~ nit~oge~, w~ b~Ji~1Te ~we can reuiove ;~ta1y~t~. :t~çq41 rn~t-~f ~w~t a~-~ ~Thr~g~es ~ tk~ M~7~ ~i~i~~4e1 7~r. 4~ii~J w~e e~n im- prove fuel economy by introducing lower axle ratios, lock-up torque oquy~ert~rs, and aipt~er e~igi~e~ ~ moiie ~ ~owes~er, ~thesQ el-~pvi~g ~ch~ng~s ~ 4~l~e 4qai"~ ~o3~a~qe. ~i~If th.~ D~Ji4e~ ~f ~iitrpgen st ci i~ 2.0 ~ per ~niJ~ i~ 1~7, w~ m~y ppt ~e n~b1~ t~ mØ~ tJ~se o~g~ gji ~J ~eq~u~ l~w~~ig t1~e NO~ ~a~I~l ~U ~ ~p a ~i~gi~j~t1- e~qit lc~s~s in ~r~ve~bility tJ~a~t co~I~1 ~p cii~e ~ ~ç~r',s ~y' ~iv~t~ we ca~ implement t]ie~e Qhanges, they wçzul4 l~e 1e~s eet~we ~ ~we qØgip~ljy ~ because of the stringent NOx requirement. Any rec~c~qp ~ Q~CS o~ ~ ~ni~M~ ~It~ 1~p ~ ~ ego~py p~p~ *a~lty-regngØle~~ ~f ~ ~ W~e~~g te ~l~t ~ Q1~1~r p~w~t 4~Qpt~p1 systems, the administrator's recommendation of 1.5 grarns ~y~roe~rjip~s, ~5 grains carbon monoxide, and 2.0 grams oxides of nitrogen would produce a fuel ecoiiomy penalty of u4iout seven pencent from toda~s ~ley~ls, ~OjF1Tà ~lme, me might be able to reduce tha4 pep~aIty-~ut me can ~neven ~ereo~ue it nnti~el~i through engineering changes alone. Accondthgiy, we urge Congress to hold t~ the 3.1 grams level for NOx through ~ at leant so that we cap aeb1ei~e ou~ fuel economy ebjectives by the end of iLbis~decgde. That etandard is ~sMngent e~wugb ~tQ protact ~pub1ic be~j~. St~dles by the Na- tional Academy of ~ejence~ and otlier~ show that ev~p at tdiat level, the rapid trend to clean air M~jl~l continue. The i~~us~g~ is ~lnqa~y WQri5ipg ~v~tjiQu~ *epe~t Q~f Ja~Y ~sia~lQ~ ~ prove fuel econojny. A~ a result of t~Qj~~i~al i~pgov~q~f~ ~i4 ~ ~bj~t in xnb~ to small cars, we estimate that 1975 Chrysler models average ~S ~p~re~i~I ~ fuel ~conomy than i97d models. Not only nro fuel econpjny s~a4dauds unpeqes$agy, ~UleY ma~ ~be o~blo as well. They :Igpore au the othej~ consi~ergUop~ that an ~qngipgg~r Ms t~ taice into account when designing a ~ve~ic ~ ~iq~s, pnmnce, and cost to the eon~wp~r. The fact i~ the ~ugi~~r will be eo~p1etel~r ham- strung if absolut~ly coutrsdjgto~y ;nttrndav4~ ~ire iI~top i~nt~ ~Igw. Yet this could easily ,ba~pep if C~~gr~s~ sets j~ f~t~l ~ ~pcln~4 and ~tt f~m same time allows the statutory standards for pxi4es ~f uit~qgeil ~pli5~i~ps to c~rne info e~eot. T~iis induafry ~lqss not noesi ~py a~ti~t1~iql i~peeutf~ve to ~i~p~r~ve fuel ecopo~y. We already have the strongest incentive a free economy produces-~~~ 4q~nf ~f our customers. We've answered the demand for energy-efficient cars over the years. Even when gasoline ~sas selling at half of today's p~ic~s, Chrysler based successful advertising and marketing campaigns on the ~fact that its cars delivered more miles per gallon than the competitiop'~. Today, with gasoJi~e mileage more im- portant than ever, the demand is greater than ever. And we've responded to that demand. We are improving the efficiency of our vehicles. We have increased : our production capacity of small cars and smaller engines. If we could get 20 to 30 percent better fuel economy than our competitors~ we would do so-and we would proclaim it as loudly and aggressively as we could. That's the way our free enterprise system works-and there's no need to tamper with it. I think we all know from experience in both government and industry that you can't legislate a technical breakthrough or solve a problem by ~lmply thrpw- ing money at It. Teelino1ogi~al progress nst~a1ly requires careful and painstaking work. There are rarely dramatic solutions to our problems. T~ help reach the President's 40 percent go~1, we are taking a number of actions in addition t~ developing electronic controls to fine t~ne our engines. ~bese modifications in- clude reducing \yehicle weight, ~nproving aerodynamics, iowerin~ axle ratios, improving transn~issions, reducing brake drag, lowering idl~ speeds, and re- ducing rolling resi~tance. None of these so~ncl very e~citlng by themselves. But taken together, they can produce significant impi~ovements bi gasoline mile- age. We are also planning new lines of smaller, lighter, more fuel-efflcien.t cars over the next few years. The first of these new carp will be available late this year, and will sell alongside our present line of compacts. The National Science Foundation has said nothing could provide a greater incentive to better fuel economy than a freeze en today's en~i ssions stand~rds A stable outlook for emissions st~pdards, an organized apprc~q1~ to detertai~ing PAGENO="0198" 196 new standards, and a realistic timetable for implementing those standards would provide the greatest possible incentive for development of more fuel-efficient motor vehicles. I hope that this committee will resist the temptation to find some easy legis- l5tive solution to our energy problem. There is none. Rather, I urge you to take the lea4 in doing the one thing will move us dramatically closer to our fuel economy and energy conservation goals: freeze emissions standards for h~drocarbbns, carbon monoxide, and oxides of nitrogen at today's stringent levels. This will assure better gasoline mileage-and clean air as well. STATEMENT' BY ALAN (I. LooFflouSnow, Vicu PEE5IDENP-ENGINEERING, CHRYSLER CORPORATION, BEFORE THE SENATE COMMERCE COMR~(ITTEE, WASHINGTON, D.C.,~ DECEMBER 10, 1974 I am Alan Loofbourrow, Vice President of Engineering for Chrysler Corpora- tion. With me today are Harold L. Welch, Chief Engineer-Engineering Pro- gram Planning, and Victor C. Tomlinson, Senior Attorney-Legal Staff. I ap- preciate this opportunity to give you my views on the Energy Conservation Act of 1974 which would mandate a 60 percent improvement in fuel economy by 1980. In light of the ceuntry's energy problems, I can understand why the govern- ment would ask automotive engineers: what can you do to improve the fuel econ- omy of your vehicles? Chrysler engineers have been answering that question for years. We have always believed that fuel economy 15 a marketable item- and so wO provided superior fuel economy long before It became a matter of government concern. Even when gasoline was selling at half of today's prices, Chrysler based successful advertising and promotion campaigns on the fact that our cars de- livered more miles per gallon than the competition's. And they do. As a result of our continuing efforts, we have cohsistently~ led the Mobil and Pure Oil fuel economy trials, not only with our small cars, but with our mid-size and full- size cars as well. Today, with gasoline mileage more important than ever, EPA tests show that 1975 Chrysler-built models offer better average fuel economy than those of either of our major competitors, I'd like to describe how we have improved e~ine efficiency over the years, so that you can appreciate our technical problems in making improvements in- fuel economy. (Graph: Fuel Cons~nption 1926-1968) FULL THROTTLE FUEL CONSUMPTION 1926 TO 1968 CHRYSLER 6 CYL. ENGINES SPECIFiC FUEL CONSUMPTION POUNDS FUEL PER H.P.-I4OUR .8 - 1926 C,R. 4.5:1 1936 CR. 1956 C.R. 7.6:1 .5 1968 C.R. 8.4:1 4 0 1000 2000 3000 4000 5000 ENGINE SPEED - R.P.M. PAGENO="0199" 1,7 This graph will give you some idea of our progress in improving the internal combustion engine. It shows the amount of fuel a six-cylinder' engine with its throttle wide open requires at different engine speeds to produce one horsepower for one hour. The lower the curve, the less fuel the engine needs, [f you corn- pare the 224 cubic inch engine of 1926 at the top of the chart, with the 225 cubic inch engine of 1968 at the bottom, you can `see that oUr engineers have improved engine efficiency by about 40 percent in 40 years. In addition the maxi- mum power of the engine more than doubled. I want to emphasize that this 40 percent was all technical improvement within the engine-it does not take into account the trend to smaller cars or improve- nients to the vehicle itself. Improvements to the vehicle include reducing its size and weight, improving its aerodynamics, reducing its rolling resistance, and modifying its drive train. For example, because of the Jh~rease in engine power our engineers were able to reduce axle ratios over the years from 4.61 :1 in the 1920s to 2.76:1 in the 1960s. So fewer revolutions of the engine are required to drive the car each mile down the road. To help use fuel more efficiently, we improved Our carburetors and redesigned the combustion chamber. We developed the vacuum spark advanCe to vary igni- tion timing according to throttle position and other factors. We helped the en- gine breathe in air more efficiently by modifying the intake manifold, cylinder head, valve timing and size, and exhaust system. We went from an L-head valve arrangement to overhead valves. And while we were redesigning the engine for better efficiency, the petroleum industry was raising octane ratings fOr regular gasoline from about 55 in the 1920s to as much as 95 in the lOGOs. Because of this improvement in the fuel, and our better control of the combustion process, we were able to increase the coin- pression ratio of our 6-cylinder engine from 4.6 :1 in 1926 to 8.4:1 in 1968, That gained for us both better economy and better performance. As a result of changes of this kind in all of our engines the 1968 engines were., generally the most efficient automobile engines the industry ever offered. These engines were about as efficient as a comparable size diesel engine under some test conditions, and more efficient than the Wankel or any other alternate engine we might be able to consider for production. This is history and it is factual. (Graph; Urban Fuel Economy 196&-1975) TREND OF URBAN FUEL ECONOMY 1968 TO 1975 (ROAD TEST DATA) COMPACT CAR WITH 225 CiD. ENGINE INTERMEDIATE CAR WITH 318 CLD. ENGINE AVERAGE OF FULL SIZE CAR WITH 383 OR 400 CiD. ENGINE ~PERCENT LOSS FULL SIZE CAR WITH 440 C.LD. ENGINE o - .O.2Q9 `3.5 22.0 I I 1968 1969 1970 1971 1972 1973 1974 1975 PAGENO="0200" tbet~en~I to better ~tie1 ecoi~om~ was reve~ed in ~9~& As t~is cbair4r o~s~ the ~ fo~ Qilrysler Cq~potatioll ~rebIe1es iii city ~ and 19~ Part of that loss-about `~ pereent~resuits from weig~it added fo ot~r cars~ Mi~eil 01! tile weight is requiret1~ by tede~a1~ safety and emissioun mandt~tCs. l~or e~a~mple~ b~tW~fl 19~8and4~5~We bad toadl 21~ pounds tö~a tdIl siz~ st,àn~1ar~i four-door sedan as a result of federal rOq~i1remeflts. All out other prOd~~t ftn~ prOv~ements added less than ~OO pounds to the vthic1~e weIght. ~bere *êrB c~rd parable weight inereasea fo~ eornpa~tan~I mid-size earn. The emissions control systems effectively mandated: by the ~iean £irAcVc~tu~èd a 15 percent penalty becausetbe engine modifications available that fulfill its re- ~ Engix~eeriflg involves- a series of compromises: Whenevey we design a ~ehieIè we have to consider a number of lactors: emissionS~ fuel economy, performance, driveability, cost, ava4labi~ity of materia's, weigbt safety, durahillt~, malnifac- turing feasibility, and so on. What we do in one area often ini~Qlvest~adè-Off5 ih anetber~. In the past, the engineer could balance his goals to get gqod performau~, good economy, good driveability, and so on. But now, be has lost c~ntro1 over these trade~offs. He must go albout for emissions, and he must ad~ weight to comply with safety and ,da~age~bility regu1atior~. tie cannot get tile kind of i~erfc~rfrt- ance and economy out of the~ engifie he used tO get and th4t tli~ ~tbllc e~Ci~eeted. He may be completely hamstrung if two absolutely contradictory st~ndkrds for emissions and fuel economy are written into law. T~t me give yOu ofle exaitple~ (~raph: Relationship of combustion temperature and NOx emissions) RELATIONSHIP OF COMBUSTION TEMPERATURE MJb Ox!b~S OF NI OG~t~ ~M~SSIONS - This graph shows the relationship between temperature and the creation of oxides of nitrogen. Whenever air is heated to about 30000 F, its two principaP gasses, nitrogen and oxygen, combine to make nitrogen oxides. Yet, the engine is more' efilcient at higher combustion temperatures. To improve fuel economy over' tile years, we had increased average combustion temperature so that in 1968 co1n~ bustion reached lev~ls of about 4200 degrees. Consequently emissions of nitrogen oxides had also gone up. It is self evident that if we are to reduce these emissions, we will have to reduce the combustion temperature and lose efficiency and fitch economy. - With that btidkground~tO give u~ Øèrspecthre, I wouth like now~to review~ some of our objections to the Fuel Economy standards in the Energy Conservation Act. N$T~HC oxIDE: CONCENTF+A~UE~ ppnl TEMPERATURE, ~F PAGENO="0201" My th'st QbjE~ctiex~ t~ the bill i~; that *e do not ~e~c1~ i~utndat~ory frn4 emiicirny stai~tard~ `J~Iie incIust~y i~ aheady workihg ~rtthotit b~nefit of an~y 1~g1~1ation th~ regain fuel economy lost over the past six years. And we've made progress~ TIIt~ progress is the result of the Sttongest iire&iare a fr~ ~eon0my prödt~de5-the~ attraction of customers. Does anyone honestly believe that if Chrysler Corporation~ knew how to produce cars that had 20 percent or ~0 percent better fuel economy than our cornpetitors~ that we would hesitate to do sO and proclaim loudly to the~ buying public that we had this product advantage? Anyon'e who does so belicv& simply does not understand h~w oflr fr~e enterprise system works. In support of this the Environn~ental Protection Agency on the basis of its own tests estimated that 1975 model passenger cars get about 13.5 percent better fuel ecOnomy than 1974 models, and we did this without government mandates. Last year Chrysler reSponded to the public demand in a free market for re- duced fuel consumption by increasing production of small cars, and by making economical six and small eight cylinder engines available in more models. We lowered axle ratios on many of our models. We equipped full size models with radial tires as standard equipment, and offer them as options on all cars. Radial tires generally reduce rolling resistance arid can increase mileage by up to six- - tenths of a mile per gallon on the highway. We offer a Fuel Pacer System that helps the driver develop the good habits that will conserve fuel. We will soon offer an overdrive manual transmission that promises additional significant savings. As a result of technical improvements and the shift in mix, we estimate that 1975 Chrysler models average 15 percent better fuel economy than 1974 models. We don't need a law to force us to do what we are already doing in response to thq demand in the market. My second objectiOn to this bill is that it makes no acknowledgement of the Clean Air Act. Yet the emisSions standards already scheduled for the next tew years by that Act will wipe out all of the fuel economy gains our engineers will make by 1980. Earlier this month we trOd thO Administration We helieire we can meet its goal of a 40 percent sales weighted improvement in ftel economy by 1980. For Chrysler that means an increase in average fuel economy from 13.8 miles per gallon in 1974 to 18.7 miles per gallon. It should be completely understood that in making that commitment we assumed some things Unit are beyond our control: that there would he no federally mandated weight increase from safety, noise, of damage~ ability Standards, and most important, that enllssion$ standards would remain at 1975 levels .through 1980. In n~aking that commitment we also anticipated the developrnent of electrOnit~ contjrols that will enable us to fine tune our engines for loWOr emisSions and bet- ter fuel economy. *Chrys~er pioneered the fll~st major application of eleCtronic thchnology When it made the eIectronl~ Ignition system stahdard on 511 engineS In the 1973 model year. We believe the next major de~relopment Will come ih thb 1976 model year. We hope to introduce oil several thodels an electronic spark timing control Which will make possible a nCW noh-catalyat emission eohtrol sl~stem. The ~iectronje conttol adjusts Sparlt tlthini~ tnry precisely for S nunibef of ran- ables including engine temperature, throttle position, and engine apeed. The precision of this control bertnits us to modify our engines to burn a niikture of IS to 20 pounds of air to ond of fuel, rather than the yresent ratiO of 16 to 1. At ratios of abottt 18 :1 ~lnd above the nitrogen Ok1de~ drop tiff SighifleSutly. While there IS some. fuel economy `1pm irlien an engine Is thu on a nlixturè this l~am1, it is iot as great as the lOss froni oth~ methods uSed to cOntrol OXIdes of ffltrogen, If the development of this ~4et~trOnlc spark timing control an~ general other ~lngine modifidationS arti 5uct~essful, We beiie~se we carl Irlect present mrils- sion Standafd~ withOut most of the ~rmise1on eontllol derides orl ears tbday~ ineltl(Iirlg the catdlytic conventgr and the air pump. By using this System ~e are cOlififlent we dSn get better fnel economy and dniveability than on today's 19Th ai9-omoblles, Because the engine runs nil a leah mixture of fuel to aIr we have been refernin~ to this ap~lroscb as a lean berrl system. Since the lean bath systeM would eilin4~ nate the catalytic converter, we could use leaded gas with itS higher octane rblings; mlesign o-ur dugineS ~ftir higher cOmpression ratioS, and regain sonic additional ecohomy. PAGENO="0202" 200 While this is a very promising approach to emissions control and fuel economy, the fact is that we can offer it only if emission standards are held at present levels. (Graph: Effect of Emissions Standards on Fuel Economy). PROJECTED FLEET FUEL ECONOMY VS EMISSION STANDARDS CHRYSLER FLEET FUEL ECONOMY MILES PER GALLON 20 18 16 14 12 10 1976 1977 1978 1979 1980 MODEL YEAR This graph Illustrates the effect of emissions standards on fuel economy. The top line shows the average mileage improvement we can reasonably expect by 1980 if standards remain at present levels. The next line shows the fuel economy we can expect if the standards are tightened up in 1977 to 0.41 grams per mile hydrocarbons, 3.4 grams per mile carbon monoxide, and 2.0 grams per mile oxidea of nitrogen. Fuel economy would be about 16.3 miles per gallon-only slightly better than today. The third and bottom line Is our best estimate of what will happen If the oxides of nitrogen standard drops to 0.4 grams per mile in 1978. Fuel econoflay will be less than 13 miles per gallon-a loss from today's levels. In this case the question of fuel economy is actually academic. No one yet has a system that will meet a 0.4 grams per mile oxides of nitrogen standard for more than a few thousand miles; The Environmental Protection Agency, the National Academy of Sciences, and other independent organizations have all pointed out that the standard is more stringent than necessary. But despite these facts, it remains on the books and will be imposed on the industry unless Congress acts to change it. My third objection to the bill is that a standard mandating a 50 percent improve- ment in fuel economy In five years would produce severe economic disruptions. Next to emissions, size and weight are the most important factors affecting fuel economy. We estimate that to meet the bill's goal of 24 miles per gallon in. 1980, assuming 1977 emissions standards, 93 percent of the fleet of cars we could sell would be in the subcompact range, and only 7 percent could be mid-size. If we wanted to sell full-size cars, that percentage would be even smaller. In effect, this bill would outlaw a number of engine lines and car models Including most full~ size sedans and station wagons. It would restrict the industry to producing sub- compact size cars-or even smaller ones-within five years, even though the nation does not have the tooling capacity or capital resources to make such a change so quickly. With the variety of car sizes severely reduced, millions of~ our customers could not find the right size new car to fit their needs. The projection of greater fuel economy based on a sales mix of fewer large cars and more small ones Is mean- ingless if people don't buy according to the projection. 18.7 16.3 H .41 HC, 3.4 CO. 2.0 NOx 1975 .41 HC, 3.4 CO .4 NOx PAGENO="0203" 201 Currently, more than 20 percent of the households in the country have more than five people. Subcompacts simply cannot accommodate these families. The result is that they will have to continue to drive their older and larger cars thereby delaying further improvements in fuel economy and emissions control, and cutting automobile sales thasticafly. We are seeing today what happens when automobile sales drop substantiafly-more than 200,000 people are out of work today in my industry and the number is still going up. The effect of this stamidard on auto sales and employment could be even worse. My fourth objection is that there is no assurance that these standards will flwet the bills goal of saving one million barrels of oil a day. Standards alone will miot insure a significant reduction in fuel consumption by 1980. Too many other iacters affect economy. The driver, for instance, is the single most important factor in inmproving gasoline mileage. By careful driving, he can improve his fuel economy by 15 to 20 percent-more than engineers can save in the next few years with all their technical improvements. (Graidi : Fuel Economy Ranges) FUEL ECONOMY RANGES~ URBAN CYCLE TO ROAD LOAD MILES PER GALLON 40 r 40 MPH r~ :~ ~ I R0AD~ L0A~J I 70 MPH --------`--~ 25.1 iOAO I I OAO ~L____-_,._~21.2 4O!~P;i----~----~-~22.3' ROAD 20 h~ URBAS LcAD I ct------- 11.1 7Ci5~~[ ~.-__il6.7 40~PKr~-._~~.117.2 I 76 MPH ~---- 2.7 1oF~ I UR0A~I `~`L:~i ~ S~JB-C0MPAC I NT~RMED'ATE LUXURY SEDAN 4 ~YL. ENG~mE V8 ENGNE VO ENGINE MANUAL TRANS. ALTO. TR~~NS. AuTO. TRANS. APPROX. 2100 LBS. APPROX. ~5C0 1 CS. APrROx. 5200 LOS. This graph compares time fuel economy ranges for subcompact. mid-size, and full-size luxury ~~`s For each type you can see the gasoline mileage in the worst kind of city conditions at the bottom of the bar, and the mileage at ideal highway conditions at the top of time bar. In the case of the mid-size ear, we estimate, on the basis of EPA test cycles, that the average fuel ecomiomny is in time neighborhood of 14.5 miie~ per gallon. But as you can see, the actual economy ranges from a low of 10 miles per gallon under stop ammd t~o conditions, to more than 22 miles per gallon at a steady 40 miles per hour. Actual fuel commsumption depends on how the car is driven. In somne circunistances the luxury car weighing 5,200 pounds can actually get better mileage i-han time sub-compact weighing 2,100 pounds. 1 would like to point out that there is a trade-off between snte~.y and fuel economy. Small cars which gener'mily have better fuel economy ane also rn- lierently less safe than larger ears. Studies of more than 420,000 real-life a ci- dent ~how- that occupammts of a 2000 poumid car involved in an accident are three tmmes as likely to be seriously injured or killed as are the occupants of a 4,~00 pound car. We raise false hopes whenever we give the Impression that fuel economy standards will solve our energy problems. Speed limits, traffic mimanagement, PAGENO="0204" th~ rium~er ~f ~ ed~Fp9n each ~ear,~ the ~1ee of ~as~liit~, and the drt~e~'~ e~ ~wh*t $ do ~e skye fuel e&n ~tave ~ ,g~ater ~ftect thin fu~ eO~41oin~ fldftrds, 1~'1tth, t~e blil se~ ~n h~ipessfl4e tetg~le. It 4~es riot ta1~o t~tt~ ~t<~eoi~iit the ~ i~t~sions ~rtftJeati9n test e~e1o. it pr~sttmes lhe ~çret*i~y pf a~r1~porta~lon wilt ~wt fact ecoliom~ ~tanda~ds for a given model sear the ~1anuarT ¶~efore we int,~o5uoe that model. Pb~t fact is we caumlot make ~ changes that close ~o ~e st4rt of ~roduction. it takes abrn~t 4 year tç ceipptcte th~ enutssi9ns ~ertIiicatiori proces~ for J~IPA. ~ are forbiddep t~ p~ke thaj~r changes wltho~it l~vft~ tg stafl the test procedure all over ~ig4jn. Let ~i~e relew qulc~y the ti1netaj~le we a*e follqwj~ for our 197T ~io4eIs. ~En ~e ~9~5-~-si~ rno~iqis from now-u make thial oi~r `d~i$o~s on the engines we wifi o1fe~. In September 1975 we file an application wjth ~ givln~ theni eo~prellen- ~sive technical data on the engines and vehicles we will offe~. In October 1975 we begin 50,000 mile durability test runs for our vehicles on an EPA specified scbe4ul.e wl~~i mea~is ~ey oalrnot be confldeted until March ~f 1976. In February 1976 we begin a series of 4,000 mile tests to measure emission levels of engines that have passed the 50,000 mile durability test. These so~ cafled data car tests can run up to the start of production. As we complete our tests, EPA runs its own series of tests to verify the dat~u~~ reviews all the information that has been generated over the past year, apd on the basis of its findings approves our engines and issues a certitlc4te e~ conformity. As you can see, any law establishing fuel economy standards in ~anuary+-~ ~when we are in the middle of the emissions certification procedure-is completejy ~ unrealistic. Even if the law did not conflict with the EPA schedule, we could not me~t the timetable set by this Bill, because It does not allow sufficient time fer research and development. We normally require up to three years for an ~m tensive program 1Q reduce an existIng vehicle's weight through the use of new niaterials and new parts. We need at least five years to design, engineer, te~t, and introduce a new engine, Even a major change to an existing engine e~n take un to three years to complete. In light ~f all these facts, I urae you to w'~t the fuel economy standar~ proposed ip the Energy Conservation Act of 1974. We do not need manclato~y standards-the industry is already maktu~ 1~ecd urogress in Improving fu~el economy. We will keep on making progress. Because of a number of seriops ~ the proposed standards are not realistic. They would create severe economic disruptions. And perhaps most importarlt, they would no~ accomplish the bill's. ~bjectives. The marketplace will probably accomplish them more e~Wieptly. In its place, I would like to suggest two recommendations we can discuss later if you wish. First, support proposals to bold emissions ~aim~lards at present levels t~rougb 1980. No ofliar ~i~g~e aetim' Cougre~s *n tal~e will hayc ~ueh a beneficial e~ect en fuel ea0pefl~y, P~sent standard~ are more then st~lp~e~t ~pough to sa~eguar~ the publiC health. ~ ~rprs4~~g n4mnb~r of pepple outside the in~ps~ry recognise this. ~aoeuf1y~ a utudY by Mi~P, ~i~verd and columbia for the Ns4opal Science Foundation ~co~c1nded that forcing tite automobile companies to ~~opt tije cata- lNtlC converter now, because Lt ~s the only ~iatdly feqeible tecIj~Ølogy to the ~t4nuinrds, is an "unwise ~ambie." The ~mudy ~ecppnpen~ed deferring tIre 77- staIhd~sm1s to give us time ~o develop b~tcr tec~fioiqgy or new power sources. It ~v~o~i~4 g~o glyc the ~o~~try time to d~teripin~ What cipis- sbus staMards aye aatr~gJly necessgry tg protect public health. I hope the Congress will act anickly qn ibis proposgi. Second, tbi~ committee egn ~ajce the J~ead in ~aplor~pg w~ys goverpment and business can work U~~~thc~ t~o ~M somn~ps to the conntry',s energy and environ- mental problems. The p~~ji~ i~ ~ of ~u~rputatjons, ~ o? hearings that turn into adversary proceedings. It ~oesn~t want to see business and gove~riment locked in cOmbat~ The piThile sl~cmb~ e~pact 135 t~ work getljpr to esti~1iSh realistic loug?tl~~e ~~ala which e~~n J~ ~3cl~ev~4 ~~thi the most e~cient Use of our resources. Because our society~s problems demand increasingly coteplex PAGENO="0205" 2Q~ te~ica1 so1ut~ops, the country news a cjose partn~rs~Ip between government an~I du~try~te~hnoiogy. I'm sure all e~us here today reallae that w~t1o~it~se coope~ation between public and pi~YAte ~eetO~, ~ere e~~t1 * W) 1~4~tt~ ~ ~p~*qW~a1 1oti~ns to tb~ ~ ~ot1ew~ fa~t~g the ~crnW15~3~ ~Q(hW~ I 1 ow froiji r~y own e~perjexicgs with U~e W~iIba~t4n P~rpject d1~rii~g `Wo~id War ~I th~a~ ~goveriimeflt and bus1jie~s eau work toge~3ier i~i hai'~~iony and 1irust~ In that case, w~ were p~tners~the1~lxFe~terY sen~eo~E the wo~L ~r~t~gftQge1~r ~we successfully carried out ~n e~brar4tp~ar&ly ~ ~iuol~~leal jo~ ~in record ti'pc. `I beijeve we can ~rebU1ld that par~p~rs1~ip te~ay-th)~4 we sho~ld ~f we hope to resOlVe the Øjfflenit q~pe~tjQP8 O~ n p~tjonal enei~y null Cn~lrofl- ~menta1 ppllcy. it oftly remains for men of gpod ~wil1 to start censtr~~ting thait ~partnership. This committee is in an Ideal position to provide that nee~led ~taad~rship. You can be sure that Ohrysler ~Oorporatian will ~u~port ~opr efført in any way we can. ~Wheretipon, at 12:40 &dock p.m., the committee recessed t~ re- ~eonvehle at 2:20 &cloekp.m., the same day.] AFTERNOON SESSION The CHAIEMAN~ Mr. Millet and Mr. Mc~lwaine have indicated they ~can summarize their statements in five mjniite~s. I will call the two together, because they speak to a related subject. ~STATEMENT 01? ~RAL~?iI T. 1VUIAI~ET, ~R~$P~NT, ~k1JT0aVIOBIL~ I~ POBftERS 01? AMERICA, II QBP01~A~ED Mr. MILLET. Mr. Oháirman, my mame is Balph Millet. ~I am presi- dent of the Automobile Importers of America, and also representative in the TJnited States for the Swedish automobile manufacturei~, sAAmSCANrA. I will summarize the points in my statement, and then, if I do h~ave tithe within the five minutes, I would like to make some statements onth4~ morniug"spresentatiofl. In summary, my statement su~gestsithat the committee might want ~to consider a graduated increase in the gasoline tax-~and/or, I might personally add, decontrol of oil piices-~over the next 4 or 5 years, as ~an effective way of conserving fuel. However, such an increase should be geared to Detroit's ability to produce greater quantities of smaller, more efficient cars. I feel that the marketplace should be allowed to determine the fuel efficiency of motor vehicles. However, if Congress feels that legislation is required, it should establish only general goals and objectives related to fuel-efficient ears, and delegate td one agency the authority to imple- ment the legislation. I might compare here the Clean Air Act and 1the flational Traffic and Motor Vehicle Safety Act. Thestandards are set in concrete in the Clean Air Act, while the discretion t~ set standards is left to the agency in the Safety Act. However, whatever measure is finally enacted, it is important that It ~be applied equally to imported and to domestic cars alike. Any dis- ~criminatory treatment in favor of domestic cars would he contrary to the national interest~ and in particular inimical to the ~ause of fuel ~conservatiou, the well-being of the imported car industry, the succe~s ~of the multilateral tra4e negotiations, and the present export level. I would like to ma~ke some other comments regarding this morning's Ilearing, First. I would like to clarify the question about the volume ~of imported carssdld in~the United States, There were some statements PAGENO="0206" 204 made by members of the committee thi~ rno~nIng that tI~ie imported industry *as dohig e~tr~mely wells ai~d if you look' at it from the point of view of share of market, that~may well be true.~ But this is because of the fact that tl~e d~me~ti~: industry has declined gre~t1y. Actually, the number of imported `cars sQld' in 1974 *a~ ~ibstaiitiafly below that sold in 1973. 1 believetlmt 1,720~000 eai's~were sold in 1973, and in 1974 that dropped do'wi~ to.' 1,370,~00O. In all probability, the sales for the year 19Th, if they proceed at the rate at which they are now going, will reach about 1,500,000. So I think it is somewhat of a misunderstand- ing to say that the imported car industry has taken over a very large share of the American market. The other point which I would like to touch on is the question whether you can build a small car which has a fuel economy of, 28 miles per gallon, as proposed in the legislation you are considering, and can still carry comfortably six passengers and even tow a trailer or a boat, or what have you? There are a number of imported ears that can very adequately perform this function, although they might not now meet 28 miles per gallon. They certainly would be able to do that by 1985. / I might cite a personal experience. I happened to drive my family, which con~ists of myself, a wife, and five children,.ail overth~ountry towing a trailer weighing. 1,000 pounds, in a car which weighed 2,750 pounds. It was a small imported car, a station wagon. Certainly, the ability does exist within Detroit to build cars which can meet the standards in the bill before you. I think it ~hould be realized that Europeans are, accustomed to a car in which ~hey are using a large percentage Of the engine capacity tQ perform the func-. tion they have to perform, ~nd also using a large part of the' capacity of the size of the car. We have a tendency here to use big cars to carry one or two persons,~ plus a lot of extra horsepower and torque which may not be needed. Thank you, Mr. Chairman. ~The CHAIRMAN. Thank you very much, Mr. Millet. Now, we will hear from Mr. Robert McEiwaine of the American Imported Auto- mobile Dealers.Association. STATEMENT OP ROBERT K 1YIoELWAINE, 4MERICAN IMP~BTEfl AUTOMOBILE DEALERS ~ASSOCI~TION Mr.' MCELWAi~E. Thank you~ Mr. Chairman, Senator Packwood~ We have submitted fairly detailed, testimoi~y on our position on this bill `befOre the committee~, and I will confine my remarks to one par- ticular proposal that has `been put forward, which is to provide bonus incentives for the purchase of fuel-efficient domestic ~automobiles. In this~ the `American businessmen who' sOil and service imported cars are in agreement with the representatives of `the domestic manufacturers who spoke here this morning. We feel the strongest possible incentive for the production, of fuel-efficient automobiles is the spur of the marketplace. Public demand and open `market competition have al- ready forced manufacturers to the production of more efficient auto- mobiles, and this trend can only accelerate in the futurO, unless artifi- cial restraints alter the developing product mix. We arehere today' to~protest, in the ~trongest possible terms, against legislative proposals that would discriminate against imported auto- PAGENO="0207" 205 mobiles by providing domestic subsidies to support the purchase of United States and Canadian-produced ~utomobiles providing ml- proved fuel efficiency. We do this not merely out of self-interest, but in the conviction that such subsidies would be counterproductive, that they would increase rather than decrease gasoline consumption, and would remove the single most effective incentive to the production of more fuel-efficient vehicles, which is unhampered competition in the open marketplace. Now, such proposals as S. 2046, which would provide Government- subsidized bonuses for the purchase of fuel-efficient domestic auto- mobiles would impose an artificial pricing structure on the automotive market, and by placing the most efficient products at `a price dis- advantage, disrupt the normal competitive operation of a free market, This legislation, in addition, would be destructive to the 5,000 small American businesses who sell and service imported cars, and jeopardize the employment of 150,000 U.S. workers in those businesses. in addi- tion, it would increase the consumption of gasoline in the United States by transferring the sale of more fuel-efficient imported vehicles to those of less efficient domestic cars. This measure would, according to our analysis., increase the consumption of gasoline in the United States by 50 million gallons in its first year. A further increase in gasoline consumption probably would result from blunting the competition from the more fuel-efficient imported vehicles, thus removing the incentive to domestic manufacturers to provide truly fuel-efficient automobiles. At the present time, th~ average miles-per-gallon performance of small imported cars, accord- iug, to EPA highway figures, is 83 miles per gallOn. Under S. 2046, domestic cars delivering only 26 miles per gallon in 1978 would be eligible for the maximum $300 Government-paid bonus. What this does is establish a $300 bonus for a purchaser who chooses a 26-miles- per-gallon domestic car over an imported model delivering as higlt as 39 miles per gallon. Or, to look at it conversely, he would have to pay a $300 premium in order to buy a car that delivers 50 percent better performance. Domestic manufacturers, under the spur of imported car competi- tion, have recently committed $5.5 billion to developing more fuel- efficient vehicles. If the Federal Government w.ere tQ provide a built-in premium for the purchase of domestic vehicles less efficient than the imports, one has to wonder what percentage of this commitment would the 1)etroit manfacturers then feel required to spend? Indeed, the Detroit manufacturers have already demonstrated that by modifying their existing models, they can deliver miles-per-gallon figures of from 34 to 37 miles per gallon. But such models make up only a tiny percentage of their overall production. In General Motôrs~ case, the much-advertised Chevrolet Monza Town Coupe, with a 5-speed ransmission, which delivers 34 miles per gallon on the high- way,. has yet to be delivered to a customer, The 37 miles-per-gallon Chevrolet Vega Notchback Coupe constitutes only 3 percent of total production of all Vegas in this country, which is not even enough to provide each Chevrolet dealer with one such model. All CM's and Ford's small cars, however, would qualify for the maximum $300 bonus im~ 1978, giving Ford and GM little incentive to increase production of their more fuel-efficient models. `--75----pt. i-14 PAGENO="0208" No~, this ~p~ppQsec1 Joi~is w~o~ilU also have ~ U~o1eterious ~effect on ~ tJ~e ~U~i te&St~te~. ~Tsix~gaeee~p ~gwes o~n 1~E~e ~lastic- ity of pT'ice d~rnand, we assume the bonus woifid trans~er ~t~b~e saie of ~396,000 o~obiles fi~r~ th~pprted to ~doi~stic mske, and reduce .~m- ported car sai~shy 25 ~p~rcQnt~ Now~ such a redi~tipn coul4 close from 1,000 to i~O0 ;~p~r~te~d ca'~ dQaler5hipS, with a cpiisequeut ~os~ of e~n~- ployment j~~r as many a~ 3~,0O~ TJ.S. workers, and we do ~ot se~ any countervaj~i~g ~nerease in domestic employment in the ~Jnited States, for reasons ~c&ii Q~plaiu o~ qi~estionix~g~ hefa~ ~ ~3l ~of this evidei~e, ~ r j~ctful1y urge this corn- mit~e ~ot to in&iide such a proposal in the. energy `bill. Thank iou, ~fr, Chairman. The CHAiRMAN. Aiiy questions, gentlemen? Senator Packwood ~ Senator ~?AcKwoo~. I have no questiqns. The CiiAn~r~T. Senator Nelson? Senator NELSON. I have no questions. The CHAIUMAN. Tba~k yen very much, gentlemen. Senator NELSON. I am sorry, Mr. Chairman. I did have a question. Do you have the statistics on the imported passenger cars for the past `few years~? Mr. MCELW4INE, Yes. ~Mr. M1L~ET. I gave thosebefore you came in. Senator NELSON~ What was 1973? Mr. MILI~ET. 1973 is 1~20,000 cars. That does not include Canadian cars. That is just imports from outside of United States and Canada. Senator NELsoN. With Canada what is it? Mr. Mit~~i'. I believe with Canada it was approximately 21/2 million c~trs. Senator NEt~soN.' That is what puzzles me. This morning I asked, I read froni the Commerce Department statistics 2.4, and one o~ the representatives, General Motors,said no; no that never ~vas ~hovc 1.4 million cars. Mr. MILLET. Yes, I heard that exchange this morning, Senator Nelson. I thiph the figure you are referring to is probably a j973 figure for all imports, from Canada and other ~ountries. Senator NELSON. I said foreign imports. Mr. MILLET. Total imports were 2~/2 million in 1973, of which j,720,000 were imports from outside of Canada. Interestingly enough, in 1974 total imports went up to 2.6 million. But imports from countries other than Canada went down to 1,370,000. There was a very sharp increase in imports from Canada in 1974. In 1973 we imported from Canada 780,000 cars. In 1974 we imported ~ ,230,000. There was an increase of about 50 percent in Canadian cars. Those come in duty free, I might mention. Senator NELsON. Is my memory correct? In 163 it was about 400,000 foreign imports? Mr. MILLET. Yes~ I believe it was. But I do not know what the fig- ures were for Canada at that time. Senator NELSoN. I say foreign imports. You, have counted Canada a~ a proviflce or something ~ Mr. MILLET. No~ no. I said the figure for imports in 1963 was about 400,000 cars. PAGENO="0209" 207 Sew~tor NiasoN. `Ycni ~id ~ou du not-~--oh, you mean ineluding Canada. Mr. M~JL~T. No, ~ do ~ot~now Whether that- Senator NET~SON. Wlw~ I ~ ~ore~ign ~ T ~ne~i~ ~ny cQw~t~y other than the United States, Mr. M1LT~t~ I see. Mr. MCELW~!NE, That woui~ n~t iziclu4e Cana4i~n irnpo~t~, I d~ not think, Senator. Senator NELSON. The 400,000 does not iolude~-~-~-- Mr. MOEL~vAINE. Does not. The Canadian imports are always car- ried in industry fi~res as ~ donie~tie automobile becai~e th~ sold, they are indistinguishable from the dox~aestic product. They ar~ sold on the same basis. Senator NELSON. Do we have in the record all foreign imports, 1963 through 1974, as well as a segregation from Canacja~ apd, all, of the countries. Did you present thi,s? Mr. MILL~. No. We will he very ple~secl, fo s~jbmit that. Senator NELSON, Do you have the statistics t Mr. MILLET. Yes. I do not have them with me. Senator NElsoN. If the Chairman does not Ol)je~t, I ~yo~ild lilçe t~ have thern printed in the record ~t this point. The CIIAIR~N. Without ob~eetion, so ordered. [The information referred to follows:] M~ORTED cAR SALES WSTORY IN U.S. MARKET-1960 75 . `Year Non-ca cfkaa~ im~r~s 1 O~nadi~p imports 1960 1961 - 1962 1963 1964 1965 - 1986 1961 1968 1969 197Q__.ac 1971 ~ 1973 1974 1975' 497,~~ 178,622 339, 160 385,624 4~4 131 589,415 658, 123 779,220 9$5, 767 4 1,1161,617 1, ~3S, 962 4 ~,497,5~3 4 1,516,183 1,719,913 4 1, 369, 148 ~3~,703 NA NA NA 145 NA 21 809 163, 252 360968 511,084 676, 7~5 681,872 766,432 844,956 913,808 819, 813 NA 1 Europ~an and Jaaanesn cars rog~~tared ~n U.$. mar1~at. (S~u~ce: R. I.. Polk registratjons.) 2 Cars built in Can Ida Or sale In U.S. market. (Source: Automotive N8ws.) 2 Through June 1975. 4 Oklahoma registrations not inckfde4 (from April 1969). The CHAIRMAN. ~py ~urther questions, gentlemen? Thank you very much. Mr. MILLE'r. Thank you very `much. Mr. MCELWAINE. Thank you very much. [The prepared statements of Messrs. Mill~t and M~Eiwaine follow. Oral testimony continues on p. 215.] STATEMENT OF RALPB ~r. ~L~T P~E5IDEN~, AuTo~Q~E I31~QaTERS - OF ~ iNC, Mr. Chairman and Menobers of the Committee, my' natne Is Ralph P. Millet. I am the U.S. Representative of SAAB-SCANIA, AB, which manufacturers the PAGENO="0210" 208 SAAB car. I appear before you today in my capacity as President of the Auto~ mobile Importers of America, Inc.-AIA-which consists of all the major foreign autom~bile manufacturers, except Volkswagen an~1 Mere~cles-Benz (see attached list of members). I hope that my views will assist the Committee in its delibera- tions on the `subjé~t of automobile efficiency and energy conservation. For a number of years, most foreign car manufa~turers have concentrated on building a small, light, and maneuverable car that is rel~ittively inexpensive to run and maintain. This has been due primarily `to the higher cost `of gaso- ~[ine abroad, which has generally been more than a dollar per gallon, as well as to lower income levels. As a result, the vast majority of imported cars are relatively efficient users of gasoline. In short; the imported ear makes a signi~cant contribution to the cause of fuel conservation. Foreign manufacturers as a whole are committed to making further strides in the conservation of fuel, while continuing to ipake cars that are safe and clean as required by Federal and state laws. In fact, the benefits afforded by imported cars certainly demonstrate that our free enterprise system works out for the good of all. Over the past 15 years imported cars have given Americans a choice in terms of price, economy, size, weight, efficiency, and technical innovation. Turning now to the bill before you, H.R. 6860, AlA first suggests that the Committee might wish to consider amending the bill to provide for a graduated increase in the gasoline tax over `the next four `or five years. In the near term, at least, this would appear to be an effective way of conserving fuel, bringing about less use of the heavier, less-efficient ears, and hastening `their, retirement. I would emphasize, however, the AlA is not suggesting the consideration of an increased gasoline tax in order to try to obtain a preferred position over do- mestic ears. AlA believes that any such increase should ~be geared to Detroit's ability to produce greater quantities of smaller and more-efficient cars. While the imported car industry has stressed the need for fair legislative treatment, by the stme taken it is not seeking unfair advantages. AlA is naturally most interested in that part of H.R. 6860 that would estab- lish fuel-economy standards. It is AlA's position that the marketplace should be allowed to determine the fuel efficiency of motOr vehicles. In recent yCars, the availability of the more efficient imported cars has induced the American con- sumer to purchase such cars in greater quantities. This in turn has led Detroit to place greater emphasis on `the production of similar ears. Indeed, the major domestic manufacturers have announced plans to n~ake substantial new invest- ments to render themselves more competitive with imported cars. If, however, because of the energy crisis, Congress feels that legislative measures are required, AlA would urge that it follow example set by the Na- `tional Motor Vehicle Safety Act and not the Clean Air Act. That is, the legisjn- tio~ should establish only general goals and objectives related to fuej~efficient cars and should delegate to an agency like `the Department of Tran's~ortatiofl the authority to implement the legislation. AlA's experience with both Acts indicates that it would be f'ar better to have the administering agency determine the specific fuel-efficiency standards in the light of changing ci~rcumstances, `such as new technology, shifting energy sources, and differing transportation needs~ A specific fuel-economy standard for model year 1985 that appears sound and practical today may well turn out to be either `too lax or to'o demanding ten years from now. Whatever measure or measures may be finally enacted, it is important that they be applied equally to imported and domestic ears alike. Whether they are in the nature `of incentives or disincentives~ they must operate in a non-dis- criminatory fashion, for several reasons. First, a discriminatory measure, such as a bonus for more efficient domestic cars, would in `all likelihood result in far less fuel conservation `than a non-discriminatory measure, since, in comparison with domestic models, imported models are generally aeh'iering' hieher levels of fuel economy. Earlier this year, nineteen models attained more than 30 miles per gallon in `the Highway cycle, and of these only one wa's dometically-made. Since that time, the pressures of the market place have stimulated Detroit to brine mit su~yer'tl new models that achieve this level of efficiency. An incen- tive granted `only to domestic cars would clearly disCourage `the purchase of the efficient imported cars. Likewise. a disincentive imposed only on imported cars would not effectively encourage the purchase of smaller, ef!lcient American cars. PAGENO="0211" 209 Second, a discriminatory measure would harm the imported car inuustry. Consisting of importers, distributors, and dealers, it Is a significant domestic industry. In 1973, for example, it employed more than 143,000 persons, had an annual payroll of $1.44 billion and sales of $9 billion, of which over half remained in this country. Third, a discriminatory measure would be an outright violation of the "national treatment" obligation in our treaties of friendship, commerce, and navigation with Italy, Japan, and West Germany and in the General Agreement on Tariffs and Trade. Under the national treatment obligation, the United States must accord to products of other countries treatment no less favorable than that granted to domestic products in all matters affecting internal taxation, sale, dis- tribution, and use. Such a blatant violation of this obligation affecting all im- ported cars would seriously harm the efforts of the United States in Geneva to obtain the elimination of discriminatory practices of other countries that inhibit our export potential. Fourth, a discriminatory measure affecting a major sector of international trade would, in my judgment, probably lead to retaliatory action-of an overt or covert nature-that would hurt present U.S. exports. in other words, there are very concrete reasons why it would not be in the national interest to impose discriminatory measures on imported cars. In dealing with this question of discrimination, I am aware of an inclination to try to assist Detroit and the energy problem at the same time. Why not, in other words, use an energy bill to give Detroit a shot in the arm? This attitude is based upon two fallacies. The first fallacy is that imports- that is, all nomOanadian foreign cars-will take a far larger share of the market in 1975 than they did in 1974. In fact, for the present calendar year, it is now very likely that the import share will be about 18%, up only modestly from 15.7% in 1974. It is true that in the first four or five months of 1975, imports were as high as 22% of the market. This was due, however, to the disposal of large inventories of 1974 models. In general, imports are not expected to have a particularly good year, and the absolute number of imports sold in 1975 will be less than the number in 1973, which was 1.7 million. The second fallacy is that imports are the primary or, at Ieast~ a significant cause of Detroit's present difficulties. In fact, Imports are not responsible for these' difficulties. The domestic automobile industry has been severely hit by the combination of recession and inflation that has affected the entire domestic econ- omy. Indeed, these same forces have hurt the imported car industry, and sales in 1974 and 1975 will be below the volume in 1973. In conclusion, I would emphasize that imported cars have done much to dem- onstrate to the American public and automotive industry that efficiency, safety, and low emissions are not incompatible. They can and, I am sure, will continue to serve as a salutary guide and example, so long as discriminatory measures are not enacted or promulgated. Attachment: AUTOMOBILE IMPORTERS or AMERICA, INC. Members Alfa Romeo, Inc. Bayerische Motoren Werke A.G. British Leyland Motors Inc. Oitroen Oars Oorp. FIAT Motor Oo., Inc. General Vehicle, Inc. American Honda Motor Oo., Inc. Jensen Motors Limited Lotus Oars Ltd. Mazda Motors of America (N.W.) Inc. Mitsubishi Motors Oorp. Nissan Motor Oorp., in U.S.A. Peugeot, Inc. Renault, Inc. Rolls-Royce Motors Inc. SAAB-SOANIA of America, Inc. Subaru of America, Inc. Toyota Motor Sales, U.S.A., Inc. Volvo of America, Inc. PAGENO="0212" 210 Associate mernbei~s Bridgestone Tire Co0 of Amorieh~ Ihe. Joseph Lucas North Aznerloa, Inc. Michelin Tite Corp. Nisonger Corp. l~ireiIi Tire Oorp~ Semp~r1t of Americafl Inc. Toyo rflre (USA.) CoflE Yokohama ~ubber Co.~ Ltd. £ba)serl beis Chamb~r~ Syndleale des Constra~testri~ D'Automoblles (CSCA) Van Doorne'~ ortehautofabrirk DAF B.V. (DAF) Japan Automobile Manufacturers Associktiofl (JAMA) Satra Industtlal Co~p. The Society of Motor Manufacturers and Traders Limited (SMMT) U.S. Suzuki Motor Corp. Yamaha International Corp. rJIESTIM0NY OF Ronenr M. MCELWAINE, ON BEHALF OF, THE AMERIcAN IMn0RTED' An'ro~romLE ORALEISS AssociATIoN The subject of energy consOrvation is a matter of the utmost concern to the 4,750 American businessmen who sell, and service, imported automobiles. These businessmen are proud that they have pioneered in educating the American public to the behefits of fuel-efficient autothobiles over the past two decades, It is the position of our members that the strongest possible incentive for the production of fuel-efficient vehicles is the spur of the ma'~ketplace. Puh1ic demand and open-market competition already have forced manufacturers to the produc- tion of more efficient automobiles. The trend can only accelerate in the future- unless artificial restraints alter the ddveloping product mia. We a~ear here today to protest in the strongest possible terms against legislative proposals that would~ discriminate against imported automobiles by providing domestic subsidies to support the purchase of U.'~. and Canadian-produced automobiles providing im- proved fuel efficiency We do so 1191 merely out of self-interest, but in the conviction that such sub-' sidies would be counter-productive, Increasing rather than decreasing gasoline' consumption and removing thO single most effective incentive to the production' of more fuel-efficient vehicles. That incentive is the tried and true method of' unhampered eomp~titi'on `in the open marketplace. Such proposals as S. `2046, the bill to provide govetnment-si~tbsiclii~ed bonuses for the purchase of fuel-efficient dothestic automobiles would impose an artidci~l pricing structure on the automotive market and, by placing the most efficienh products at a price disadvantage, disrupt the normal competitive operation of a~ free market. This legislation, in addition, would be destructive to 5000 small American' businesses, jeopardize the employment of 150,000 U. ~, workers-and increase- the consumption of gasoline in the United States. ~y transferring the sale of more fuel efficient imported vehicles to that of less efficient domestic ears, this measure would, according to our analysis, increase the consumption of gasoline' In the United States by 50 million gallons in its first year. A further increase in gasoline consumption probably wou'ld result from blunt- ing the competition from the more fuel-efficient imported vehicies~ thus removing the spur to domestic manufacturers to provide truly fuel-efficient automobiles. At the present time, the average miles-per-gallon performance of small imported cars, according to EPA highway figures, iS 33 mpg. Under ~, 2046, domestic cars delivering only 26 mpg in 1978 would be eligible for the maximum $~00 govern- ment-paid bonus. This would establish a $300 bonus for a purchaser who elects to buy a 26- mpg domestic car over an imported model delivering as high as 39-mpg. Or, to look at its conversely, he would have to pay a $300 premium in order to buy a car tha t delivers 50 percent better performance ip terms of fuel consumption To describe such a measure as a bill "to provide tax incentives for the . . . pur- chase of automobiles which use fuel efficiency" is a misi'momer of awesome proportions. Domestic manufacturers, under the spur of imported car competition, have recently committed $5.5 billion to developing more fuel-efficient vehicles. With PAGENO="0213" 211 the Fèderal~ Government providing a bull-in premium for the pttrehase of domestic vehicles less efficient than the imports, what percentage of this com-~ mitment would the Detroit manufacturers then feel reqiiired to spend? inde~d, the Detroit ulanufacturers have demonstrated receutfy that by modify- ing their existing models, they can deliver miles-per-gallbn figures of from 34~ to 37 nipg~ But such models make up only a tiny percentage of their overall pro- duction. The so-called MPG model Ford cars constitute only an undisclosed. fraction of their total production. In General ~1otor~' case the much~advertised Chevrolet Monza Town Coupe, with 5-speed transmission, which supposedly delivers 34 mpg on the highway, has yet to be delivered to a customer. ~lhe 3~- mpg Chevrolet Vega Notolihack coupe constitutes only three perc9nt of total ~rega production, not even enough to provide each Chevrolet dealer with one such model. All of GM's and Ford's small cars, however, would qualify for the maximum $300 bonus in 1978, giving Ford and GM little incentive to increase production of their more fuel-efficient models. Such practical consideration aside, this legislation also would: Nullify and impair previously negotiated tariff arrangements; Violate the national treatment obligation of the GAT~j~ And result in the revocation of the GATT waiver for the U.S:-Canadian Automotive PFoducts Agreement. The proposed honu~ also would have a deleterious effect on employment in the United States. Using accepted figures on the price elasticity of demand, we as- same the bonus would transfer the sale of 396,000 automobiles from imported to domestic makes and reduce imported car sales by 25 percent, Such a reduc- tion could close from 1,000 to 1,20() imported car dealerships, with a consequent loss of employment for as many as 38,000 U.S. workers. Domestic manufacturers have displayed' many times, the capacity to increase production by substantially greater amounts thaa this indicat~d t~5nsfer with' little or no Increase in employment. For each of the 25,000 domestic automobile dealerS, a transfer of 396,000 sales from imported' cars would mean Only 1.3 addi- tional new car sales per month-hardly enough to justify army meaningful in~ crease in employment. We ausume, therefore, only a minimal increase in em- ployment on the domestic automobile sale side, which could not balance out the1 substantial job loss among imported car dealers. All these statistics are based on studies by Hdrbridge house, "The Imported Automobile Industry: An Assessment of K~y Aspects of its hinpuct on' the U.S. Economy and the American Can~umer" (I~73) and "Employment and the Im- ported Automobile Industry" (1974). In the face of such evidence that' S. 2046 would: Increase gasoline consumption in the United States; Remove incentives for the production of more fuel-efficient automobiles; Increase unemployment in the U.S.; And violate previously negotiated trade agreements, We respectfully urge thig committee not to include such a proposal in the Energy fill. I. ANALYSIS It has been proposed that the 1~'ederai Government pay a bonus to purchasers of'~ domestic automobiles which are relatively fuel-cOnserving in nature. There are four reasons such a prOposal should be rejected: (a) The bonus would be in effect a dothestie subsidy for the U.S. automobile industry which would introduce an Srtiflcial eomimtitlve advantage fOr tl.~. producers and ihtroduce Serious' distortions itito the marketplace'; (h) The bonus would result In windfall lirofits to an ohigopolistically-con- trolled industry for doing.wbatif should have done'a: generation ago'; (c) The bonus could result in the revoCation of tIt1e GA9~T waiver for the United States-Canadian AlltomothTe Products Agreement of 1965; and (d) The bonus would violdte the pational treatluent obligation of the GATT. TheSe ~olnts are extilained in morn detail below. It Aif A~rALYSrS O~' A BONliS Fofi DoMns~ric ATIrOMOhILE PrRCItAS~R5 A. The eoonosmion of domestic snfsidie~ The proposed bonus is in effect a domestic subsidy for manufacturers of auto- mobiles in the United States. Domestic subsidies differ from export subsidies' PAGENO="0214" 212 in that they are made to producers whether they export or not. However, those that do sell abroad obtain an artificial competitive advantage in export markCts over foreign producers just as if they alone had received the subsidy. Domestic producers are also given a special advantage in competing against Imports. In short, doniestic subsidies have the same directional effect in distortions in the marketplace as do export subsidies and import duties.' The question that must be considered iS whether the effort to subSIdize special groups or activities is a desirable economic policy in the long run, despite certain arguably worthwhile short run objectives. Surely the current US. subsidy pro- gram for the shipping and shipbuilding industries has indicated the dangers involved in subsidizing special interest groups.2 The economic flaw of the proposed subsidy approach is its introduction of artificiality into the domestic marketplace. By giving a price advantage to some producers and not to others, competition ~based on the relative merits of the products involved is removed. Competition on the merits is the linchpin of our Iree market neonomy. Competition on the merits should be lessened only fOr an overriding social good. The production of fuel-conserving cars by com1~anies that should have been producing them years ago hardly falls in that category of worthwhile objectives. B. Windfail profits Economists have long criticized subsidies as inemcient. But subsidies are obnoxious on moral grounds as well-it is simply unfair to further bolster the income of one segment of the ecokomy through windfall profits while not making ~eommensurate benefits available to other segments of the population. It Is par- ticularly inappropriate to give large tax subsidies to an industry that has consistently refused to provide* the smaller fuel-conserving car that consumers have desired over the years. The anterior question here is why Detroit emphasized the production of large cars and deemphasized the production of snlaller fuel- conserving cars in the first place. The answer is found in the revealing statistic that General Motor~ can produce a Cadillac for only $300 more than it costs to build a fulbsize Chevrolet, and yet it can sefl a Cadillac for $3,000 more than It can sell a Chevrolet. For two decades, then, the prevailing philosophy of Detroit has been that big ears mean big profits. It is clear that over the years General Motors, Chrysler, and Ford have maximized their profith by playing the role of yielding oligopolists, ceding market shares while maintaining a higher price structure for their larger automobiles. Given the rational profit-maximizing strategy of the U.S. automobile manufacturers in the past, it now seems incon- gruous to ask the U.S. taxpayers to pay the price of a tax subsidy. If this were to occur, U.S. taxpayers would be providing windfall profits to producers for doing what they should have been doing a generation ago. -C. The United States-Gahiadian Automotive Açflvement ~&t the time the United States-Canadian Automotive Products was negotiated~ it was widely recognized that the Agreement, by providing different tariff treat- ment for the automobile products of ~lIfferent countries, violated the Most- Favored-Nation principle in Article I of the GATT. Accordingly, the United States sought, and received, a wais~er from the Contracting Parties of the GATT under Article XXV (5). The Contracting Parties, after serious misgivings, finally gran~ted the waiver on December 20, 1965. It was granted on the condition that there would be no significant diversion of trade in automobiles away from the historical patterns of the world automobile market. The waiver states: "lit the event the parties to consultation in accordance with paragraph 2 above agree there has been a significant diversion or is an imminent threat of diversion of trade, the waiver shall terminate in accordance with paragraph 5, with respect to the automotive product or products in question. If the parties to consultation fail to reach agreement, either may refer the question whether there has been a significant diversion or is an imminent threat of diversion of trade to the contracting parties. If the contracting parties decIde that the requesting country has a substhntial intereSt and that there has been a significant diversion or is an imminent threat of diversion of trade, the waiver shall terminate in accord~ 1 Robert B. Baldwin, "Nontarilr Distortions of International Trade", in Williams Corn- nileslon Report (1970), Papers I, at p. 650. 2 For an excellent study. of the futility of the current U.S. ship subsidy program see Gerald rantscher, "Bread Upon the Waters" (The Brookings In~t1tutlcn, Washington, D.C., 1975). PAGENO="0215" 213 ance with paragraph 5, with respect to the automotive product or products In question." The proposed bonus would result in a "significant diversion" or "imminent threat of diversion of trade". Accordingly, the bonus would "open up" the Agreement to a revocation of the GAPT waiver by other contracting parties such as Japan and West Germany, who would justifiably feel that a "substantial diversion of trade" would result from the proposed credit. Moreover, the waiver~ by its own terms, would be ended whenever there is "a significant diversion or is an imminent threat of diversion of trade" in automobiles and parts. D. The National Treatm~ent Obligation of the GATT The bonus would violate the national treatment obligations of the General Agreement on Tariffs and Trade (GATT). The application of the bonus for only domestlcajiyproduced automobiles is a clear violation of Article III, q 2 of the GATT which provides that imported goods must be accorded the same treatment as goods of local origin with respect to matters under government control, such as internal taxation,4 The GA~T. clearly defines the national treatment obliga- tion with respect to internal taxes: "The products of the territory of any contracting party imported into the terri- tory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied,. directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in para- graph 1." Moreover, it has been acknowledged that the GATT ruh~s on national taxation preclude granting exemptions from such taxes for domestic goods but not for im- ported goods. In 1950 the Netherlands, for example, complained to the GATP Contracting Parties of the "Utility System" used by Groat Britain, under which certain domestically produced consumer goods were exempted from the tax while imports were not. Significantly, Great Britain agreed that the tax system was improper under the GATT and one year later abolished the utility system, thereby removing the discriminatory aspects of the purchase tax.5 Apart from violating the national treatment obligation of the GATT, the dis- criminatory credit arrangement which has been suggested by some would amount to the nullification and impairment of previously negotiated tariff concessions. Under Article XXIII of the GATT the other affected contracting parties such as Germany and Japan could request that the application of prior trade conces- sions made to the United States be suspended or that other appropriate remedies be given. In other words, the suggested bonus mechanism would probably trigger a trade war, a trade war in which the other contracting partiea of the GATI~ would be entirely justified in withdrawing trade concessions from the United States. Since the withdrawn trade concessions might well be in markets other than automobiles, it is likely that U.S. exporters totally unrelated to the auto- mobile market would be made to suffer for the discriminatory taxing arrangement that has been suggested. III. INOEISA5ED FUEL CONSUMPTION If the proposed tax credit for purchasers of new automobiles is applie~1 solely to domestic automobiles, there would be a substantial net fuel loss to the U.S. econ- omy. This would result from the superior fuel economy of `foreign automobiles, which, accoMing to BPA statistics, are averaging approximately 3~3 miles per gallon. Thus, even if a credit is given for "fuel-conserving" domestic automobiles, there would be a net fuel loss to the U.S. economy. In order to estimate the fuel losses that would occur, the following general assumptions were made: (a) The pvice elasticity of demand for domestic automobiles is -0.9; (b) The average imported automobile obtains approximatey 33 miles per gallon; and (c) The price of' domestic automobiles would rise in the lower fuel-consump- tion categories, as such automobiles tend tO be larger and more expensive. See in general Jackson, WorZd Trade and theLaw of G4TT,Chapte~ 12 (1969). General Agreement on Tarthh and Trade, Article III, paragraph 2. ~ See Jackson, supra note 1, at p. 284. PAGENO="0216" 214 The calculatk~n was n~o4~ o~r' a "siat" ba,~i~s, ~ p~.e mi7st aclçi ~ip t1~e t~npact -separately ~for the ñve differeht cathgories for which the credit wo~rld be givaii. . Miles per gallon category Additional dqpie~t~ cars sold 1 Additional ~grdlon~ of gasollne used and oyer ~. r3to24 - 22 to 23 21 to 22 20to21 359, 2fffi 173,880 113,647 77, 789 36,287 g5,1$3, 615 19,832,320 15,001,404 41,829, 92 6,2/4,10 Total - 060, 87~ 78073,452 1 See tabb,1 to 5 ibm: 3~l~sejgbles M(ejie~figured on4he~basLs of-a~sliriing sca1ecreditpffront$100to~509, depesding onfual efficiency. It is not possiblg to m~he similar estinnatesbased on 1978pmgd,~aetiqn, ~sjgce no ftpa~s otrfp~l gffj~jobcyof 1978modets -era available. ~4~W~E I ~4 ANn OVER BRA~3~ET 1. $500 credit (tints, aasu~~4ug a $~,000 a omobUct), is a 16%% Reduction in price; 2. There is an increase in demand for domestic autOmobiles of 15,03%, assuming a -0,9 price elasticity of dewau4; 3. There iti a correlatiVe Uecrep~e in demand for imports of :I~.03% or 259,295 (.153 x 1,694,740). 4. There is tj~efo~lowipgiossof fi~eI.per ~a1r, assu~mir~g; (a) The av,er~ge'~~PGof the repJaeedXoreig~v autowo~Ues is ~3 MPG; (b)'The aver~ge MPG ~f the cPT~mest,ic autospoltiles ~ ~5; (c) Pheaver~ge us~go ofeach itomohile r~hasedis U14000miles per year; d) * * * aver~.ge import uses 303 gnflons per year; averAge domestic would use 400g~ilousper year; (e) 97 (400-a03) x259295=2~,i5L615 gallous, or 508$48 b~rrm~ of gaso1ix~e (4~ gallons=1 barrel). 23-74 ~ACX~RT 1. $400 credit (thus, assuming a $8;500 automobile), is an 11.4% reductiOn in ~priee; 2. There 18 an increase' in demand for domestic ~utom~bile8 of -10.20%, ammp- lug a -0.9 ~ricee~astlclty of demand; `3. There is a correlative decrease i~i detnantl for imports of 10.26% or (.1026X 1;694,~40) 173,880 4. There is the following loss of fuel per year, assuming: (a) The average MPG of the repiace~1 foreign automobiles is 33 MPG; (b) The average MPG of the domestic automobiles is 24; (c) The average usageof each ~utorpobi1e plirchased is iA000 ~j1es.4per year; (ci) * * * ~e1nge import t~s~s 303 g~~lious per year; a~e~e dQ3I4e~ttC would `use 400 ga~loiis per year; (e) i1~4 (41~7-~Q3) x17a,880~19,~~20 ~a~Jons, or ~7d,060 h~rr~is pf 1g~po- line (~2gallons~s1 harrel). ~L~AP~E 8 22-23 BRAOKR1~ 1. $300 ci~edit fthns, assthnin~ a $3'70~ antornohlle), is an 8:1% red?e~on in price; 2. ~here is an ic~e~a~e in d~ai~i~1 ~ dop~e$tic. ~utO o~hil~S o~ ~ as suming a -~-09perceiit el48t1~it~ p~~1dui~$; 3. There is a eorrelath~e dectea$e in demand for Ithpoi'ts of 7.29%, or (.0729 X l,604,Z40) , ~,l3,647. 4. There is the foi1owi~g~Q$s~Qf fu~lper$eaR, a~su3nIa~; (a) The average MPG of the replaèed ~ PAGENO="0217" 21~ (b) The average MPG of the domestic automobile is 23~; (c) Avevage use of ear=~iO,0~0 miles pe~ year; (d) * * * average import uses 303 gallons per year; average domestic would use 435 gallons per year; (e) 132 (435-303) x113,047=15,001,404 gallons, or 857,176 barrels of gasoline. T~nLs 4 21-22 BR~CKEP I. $200 credit (thus, assuming a $3,~00 automobile>, is a 5.1% reduction iii p~iee; 2. There is an increase in demand for domestic automobiles of 4.59%; 3. There is a corr~lative decrease iii the demand for imports of 4,59%, or (.0459>< 1,694,740), 77,789. 4. There is the following loss of fuel ncr year, as~umine: (~) Tile average MPG of the repLuced foreign automobiles is 83 MPG; (b) The average MPG of the domestic automobiles is 22MPG; (c) The average usage of each automobile purchased is 10,000 miles per year; (d) * * `~ average import uses 303 gallons per year; average domestic would use 455 gallons per year; (e) 152. (455-303) X77,78911,S23,928 gallons, or 281,522 barrels of g~so1ine. TABLE 5 20-21 BRACKET 1. $100 credit (thus, assuming a $4,200 automobile), is a 238% reduclion Lu, price; 2. There is an increase in demand for domestic automobiles of 2.14%; 3. There is a correlative decrease in the demand for imports of 2.14%, or (.214x 1,694,240), 36,267. 4. There is the following loss of fuel per year, assuming: (a) The~ average MPG of the replaced foreign automobile is 33 MPG; (b) The average MPG of the dowest~e automobiles is 21 MPG: (c) The average usage of each automobile purchased is 10,000 miles per year; (d) * * * average import uses 303 gallons ~er year; a~rerage domestic woutd use 476 gallons per year; (e) 173 (470-303) x36,207=6,274,191 ga1Jon~, or 149,385 barrels of gasoline. The CHAIriMAN. Now, Senator Packwood has told to me the fact that Mr. William Johnson. professor of economics from George Washington TJniversity has to catch a 3 o'clock airplane. So I will call Professor ~Johuson at this time. Could you summarize your stat~rnent in 10 minutes, Mr. Johnson? STATE~'LE~1T OP MR~ WILLIAM A.. ~OR~SO1~ P~OF)~$~O~ OJ~' ECO~ NOMICS, GEORGE WA~Ei~GTON ~iNIV1il~$ITY, D1~ECTO~, ~UNI- VEBSITY EERGY ~OLXC~ R~SEARCE PROZCT Mr. JoHNsoN. Mr. Chairman, I want to thank you very much, first of all, for letting me speak earlier. I do have to catch a plane in about. 1½ hours from now. My name i5 William A. Johnson. I was formerly an Assistant Ad- ministrator at the ~`ederal Energy Office and I am currently a profes- sor of economica at George Washington University and director of the university's energy ~mlicy research ~rojeet. I appreciate very much this opportunity to appear before yon today to discuss H.R. 6~60 and, miore generally, various energy problems th~Lt now confront the Nation. On January 15, 1975, President ~ord~ announced major new initia- tives intendedto reduce imports of oil by I million bdrrels per day by PAGENO="0218" 2l~ the end of 1977. AccOrding to the President, were the administration program adopted, the United Stares could become invulnerable to for- eign supply interruptions by 1985. Although one might disagree with certain features of the program, it does contain several important initiatives which, if fully imple- mented, probably could have adcomplished many of the objectives set for it. Especially important, in my judgment, was the administration's~ emphasis on price incentives rather than volumetric controls to achieve a reduction in demand and an iftcrease in the supply of energy. H.R. 6860 was to have been a congressional alternative to the admin- istration program. In fact, it would do very little to help achieve our longrun national objective of energy security. Many of the bill's stronger provisions have b~en dropped, including most of those that used price and fiscal means for reducing U.S. dependence on foreign sources of oil, In my judgment, H.R. 686Q will not result in the reduc- tion in consu~n~iption anticipated in the original administration pro- po~al. It would also crea1~e an extremely complex, exception ridden sys- tem of taxation and import quotas that would allow many users of oil to avoid the sacrifices that will be ne~ssary if the United States is to~ reduce its dependence on foreign sources of energy. I will confine my formal comments on H.R. 6860 to two of its provi- sions: first, the establishment of import quotas and an import license auction and, second, the industrial use tax and various tax credits in- tended to encourage greater supply and more efficient use of energy. First, import quotas: H.R. 6860 would place a ceiling on imported oil of 6 million barrels per day in 1975 and 1976, raise this ceiling to 6.5 million barrels per day in 19~7, lower it to 6 million barrels per day in 1978 and 1979, and raise it again to 6.5 million barrels per day in 1980 and thereafter. The President would be empowered to adjust this ceil- ing by 1 million barrels per day from 1975 through 1977, 1.5 million barrels per day in 1978 and 1979, and 2 million barrels per day in 1980 and thereafter. Let me observe, first, that one of the common problems with any quota system is its inflexibility. It is difficult to fine tune quota levels,. and it appears to me that this problem has not been avoided in 11.R. 6860. Certainly this is the implication of these rather precise limits that have been set in the bill. These limits may be sufficiently generous, so that for all practical purposes, no import restrictions exist. Or they may prove overly restrictive, in which case the nation would face seri- ous shortages. In this latter case, it is likely that Congress might simply enact higher import ceilings as the need arises. Of course, in this case, the quotas would also come to have little meaning, especially in indus- try investment plans. H.R. 68t0 does contain a provision for allocating supply reductiona to end users. The bill would establish public auctions for import licenses, with a separate auction for small refiners and independent marketers. It would also allow import tickets to be resold, thus pro- viding some flexibility in what could otherwise be a highly inflexible system for controlling imports. The prices paid at auction would, presumably, be passed on to the final consumer in the form of price increases. In this way, the shortages created by the Government would be distributed, imperfectly perhaps, by a market mechanism. PAGENO="0219" 217 Two points should be stressed. First, the belief that quotas will ~make it possible to avoid price increases is mistaken. Because of the auction provision, there will be some price increases unless, of course, the quota levels are so high that they are ineffectual and bids are insignificant. Second, in theory a quota auction system should yield the same price and import levels as the tariff license fee approach adopted by the administration. The choice between the two boils down to a dhoice between different forms of administering an import control program tu~id the differing incentives and disincentives that each form creates. In early 1973 the Oil Policy Committee considered both the quota auction and tariff license fee approaches. It chose. the latter for several reasons, perhaps the most important being that, with a tariff or license fee, companies would be assured that they could ~purchase the ~oil they need at some price. This is important because the single most important factor in deciding whether to construct a refinery is the availability of crude oil. However, with the quota auction system security of supply would be less certain. This, in turn, might deter needed investment in domestic refining capacity. Indeed, this is pre- cisely what occurred under the old oil import quota system. The reimposition of a quota system by H.R. 6860 would also subject the Government to su)~stantial pressures by various interest groups. Everyone would want special treatment, rI\he same interests that re- ceived exemptions from the old oil import quotas would dernaud these exemptions once again. This has already happened. H.R. 6860 would establish separate quota programs for small refiners and independent marketers. There would also be 2 million barrels per day set aside for distillate a~d residual fuel oil imports used in home heating and generating elec- tricity, while petrochemical feedstocks would be exempted altogether. Perhaps the worst failing of the old oil import quota program was the numerous exemptions granted certain privileged groups, including heating oil importers, electric utilities, and the petrochemical industry. Primarily because of these exemptions the east coast, a~d the North- east especially, became heavily dependent upon imported Qil. When the Arab embargo was imposed, the east coast imported over 90 percent of its residual fuel oil, while New England imported nearly 40 percent of its home heating oil. Because the exemptions were heavily weighted toward refined products, the United States, in effect, began to export its refining capacity. The easiest way to beat the quotas was to build a refinery in Europe, Canada, or the Caribbean based on foreign crude and then to ship the refined products to U.S. markets. This made the United States doubly vulnerable to the Arab embargo. Even before the Arabs cut off oil to the United States, several European countries aud Canada began to restriet exports of refined products in order to build up their qwn inventories in anticipation of supply interruptions. The quota system in H.R. 6860 would create the sa~ie disincentives to refinery construOtion because of the preferential treatment afforded product imports. 11 also question whether the exemptions contained in H.R. 6860 are justified. Why, for example, should the petroehewical industry receive special treatment? During the embargo the industry demanded ainl received preferential treatment under the allocation program. PAGENO="0220" 2~iS One of th~ arguments i~sed by the industry w~s that petrochemft~als are essential to the national security and the well-being of te~onomy~ I think this i~ eorrect and, for this reason, believe that the petrochemi~ eals in4ustry ~h~uId ai~o be subject to quota restrictions, except for that portion of imports used in the manufacture of products for export.~ I :am not argu*hg for the free importation of oil. Fer from it. As long as oil will be used as a political weapon, it is imperative that we take measures to safeguard our national security. I am argui~ig that quotas are not the. best way to achieve this objec- tive. A major advantage of the price and fiscal measure proposed by the administration is that they would be relatively immime to favori- tism and privilege4 It is surprising to inc that memories of the old oil import quota system, arid all its deficiencies, have dimmed so quickly. rrhc program was the subject of trciiwnclous political controversjr throughout its e~istenee. When it was abandoned in April 1978, there was gen~rai acclaim by those who were familiar with it and how it operated. Mr. Ohairman~ let me if I may, siimmari~e very briefly the remain~ der of what I say, since my time has run out. I go on to talk about the various tax provisions that are contained in 11.R. 6&6~. These tax provisions seemto ale, `to~be rather anomalous. First of all, the industrial use tax contains a mwiber of exemptions. It is difficult for me to understand which uses of oil by industry would be subject to tax after the exemptions are tallyed up. The purpose of the tax is to encourage greater conservation through higher prices; yet many potential sources of conservation will be eliminated because of thes~ exemptions. Various other tax provisions and tax credits in ILR. ~86O* also sufFer from a selective bestowal of special privilege. There are tax credita for a number of things~ ranging from using waste as fual to the pur-~ chase of electric-powered vehicles, and the development of oil shale. One problem with these tax incentives is that they apply to only a few of the ways of conserving energy or of pro4ucing alternatives to oil and gas. Why, for example~ are there not credits for the installation of more efficient oil and gas furnaces, or the production of heavy oils, or secondary and tertiary recovery? It also seems rather strange that having iust eliminated one tax loophole, the depletion allowance, which favors more conventio~al ways of produ~cing oil, we are now in the px~ocess, in H.E. ~86O, of creating. a number of other loopholes for unconventional ways of'pro- ducing oil. I would think thatthè path of&insisteneywould either be to bring back the depletion allowance Or' to avoid tax loopholes altp- gether and to attempt to develop various ways of cn~couragbrg the production of oil that are neutral with res~peet to technology. I am con- cerned that the emphasis on noneonveational thethOd~ of producing oil will lock us imt~ high-cost alternative m~th~ds that ffia~ ih the futAiie to be less thaii ~ptirhal. Thø best ap~roaeh~ in m~o~in1on, is to m~se the ~rioes of all forms of energy and to provide equitable price and tax inc5I1ti~res for eon- servati~n and domestic ii~n~ of tall energy `sources. Atid to this ~nd~ I urge the senate I~'inanee Cothi*itte~e~o avoid s~lcctit~ ta~t~tedft~ aaa way of ~awiding incentives f~ greatet' neervatioli or PAGENO="0221" 219 tion ai~d to adopt inste~ad rneasure~ that are neutral with resp~et to teehnolO~y. The C~tAIRMA~. I asm sorry, sir, but you have exceeded your tim& lirrdt. We Will print tire entire statement. Mr. JOi~r~stu~. Yes; please, if. you would I W~uld appreciate it. rr.he Cimnu~rAN. Do the Senators have any questions? Senat~r Ero~k. Senator BROOK. Mr. Johnson, you were in the Federal Energy Of- ~ce, aM I would like to just take you from that e~periehce tO your cur- reid proposal. Would not a quota system inevitably lead back, then, to the bureauc- racy and the inefficiencies that come therefrom? I would cite, for e~ample, the fact-and I do not know if you had it in your testimony-I do not recall it, anyway-that we have lost new refineries t~ a rather considerable degree. I do not know if you know how many barrels pei~ da~ of re~finery capacity has been lost in the last couple of years. I)o you have that? Mr. ioTixso~. it do not know about in the ia~t couple of years~ Do you mean new projects that have been canceled because of one reason and another? Senator ~uOoi~. Yes. Mr. JoHNSoN. I did a tally about 6 months ago, which estimated that in excess of 2 million barrels per day of new refinery capacity, or rather plans for building new refinery capacity, has been canceled. That is an estimate as of January, and there have been more cancel- lations since then. In some instances, these were new refinery plans that were never announced and which have been quietly scrapped. Senator BROCT. Well over 2 million barrels a day in lost capacity as a result of the existing allocation system, in conjunction. With the previous controls. Mr. Jorixsox. It is a result of several factors that enter into the decisions of the various oil `companies. There have been, throughout the existing oil controls, uncertainties about what the prices will be. The entitlements program, makes it highly uncertain that companies will be able to utilize the crude oil they develop for themselves. And if they have to sell it, it makes it uncertain as to what price they will be allowed to sell at. All of these factors have created uncertain-- ties and greater hesitancy to build refineries in the United States. Senator l3iiOcK. All right. Now, let me take you tø the second step of a logical sequence. If you deregulate, as Some of us belieye we should and as you have tes- tified, arid ~et leave on, quotas, are you not going to be forced to reimpose `pricC controls? ~ecause, by the very nature of quotas~ if you lia~e lesS supply than you have demand, whether it is mandated by Government or not, then there is going to be maSsive competition for ~hat available supply. Are you not going to run into an explosive inflationary sin io~i~caused by the very quotas which you hope wi~l1 reduce the prbblètd? Mr. i~orth~so*. We t~eu1d ~eF~r well.1 If ~ou aFe going to restrict ithports, that c~u1d very Well,lead to ~r~i~cial sliorta~ges~ which would teM to d1riire uj~ priees. PAGENO="0222" 220 Let. me make, if I may, the observation that, if we deregulate ~il prices, at the same time, 1 would think that there would be every justification for the President to remove the $~ license fee on imports. The notion that there would be a price increase resulting from deregu- lation of something like 9 cents a gallon is, I think, rather excessive. Theoretically, this could occur. But, I think more likely, particularly if the license fee were removed, the price increase would be consid- erably less and probably no more than 5 cents. To me, all we need, really, is the removal of the ceiling on old oil. This would create price equality. It would create a greater amount of ce1~tainty. It would do, away with the need for entitlements and, in turn, with much of the need for an allocatiQn program. at the present time, And we would not have to h~ive the massive bureaucracy that we now have in FEA to administer th~ distribution and pricing of oil. Senator B~iocK. Let me talk ivith you jusf, for a moment about the :p.resent oil allocation problem itse~f. It is my ~1eep conviction that States such as mine, and the Senator from Louisiana's, are being re- ~quired now to subsidi~e States in the northeast because of the forced reallpcati~n of domestic crude on a formula basis to the consumption in those area~ where it was not natura~fly there, Is that a fair thing for me to say, or is it wrong?. Mr. JOHNSON. No, I think it is a fair statement, The subsidy oc- curs partially in the allocation program. It also occurs in the entitle- ments prograth which was established by the administration in order to offset the bad effects of the two~tier price system. We have here one ~control begetting another. Tinder the entitlements program, refiners that had the foresight ~several years ago to invest in oil in the tTnited States have been forced by the Government to first purchase the right to use that crude oil from someone else. And who is it that they have to~ purchase that right from? They have to purchase it from companies that chose instead to, rely on other sources of oil besides domestic sources. It is ~primarily importers of crude oil that are now being subsidized by refiners who used domestic sources of oil under the entitlement program. Now, it happens that a lot of the companies who have used im- ported oil have been from the northeast, as well as from the north- ern tier States. The effect of the entitlements program is to subsidize ~these refiners, and certain marketers, who have served the northeast. Whether the subsidy goes ultimately to the consuther is a question mark. No one knows, and FEA will have to conduct an audit to deter- mine that. But there is a subsidy that ié taking place, which is being ~paid primarily by consumers, in the southern part of the TJnited States. The southern States seem to be getting hit the hardest, and ~foliowing them, States in the Midwest and the Rocky Mountain area. The snb~idy. h~i~ig~ paid primarily to consumers or oilmen in the northeast. . . . Senator BROCK You. may gather why-.---be advised that I. have writ- ~ten Frank Zarb and asked him to give me a factual breakdown of ~the amount that people in my State, and States throughout the South and the Midwest, are subsidizing northeastern States.. I want to know ~how much it costs my consumers in terms of pennies per gallon of PAGENO="0223" 221. gasoline, just because, first of all, our States are poorer than those States. We have a lower per capita income now. I ~hi~k it is ~n ab~ solute fraud that the admirdstration ~uid the* Oqugress ha~ve created a situation where the poorer States of this country are being required to carry the more affluent ones on their hack. Mr. JOHNSON. I did a paper a while back that showed that the State that w~s most adversely. affected by the entitlements program was Alabama, followed by your State, Tennessee, whereas,. I recall that, on average, the entitlements program has cost Tennessee some- thing like six-tenths of 1 cent per gallon for gasoline. Following Tennessee was Mississippi, North Carplina, an.d Florida. Then several Rocky Mountain and midwestern States. Senator BROOK, Maybe the Senator from Colorado would have a problem here, too. Mr. JoRN$o~, Colorado, I think, ranked about sixth or seventh highest on the list of States that were adversely affected by the pro~ gram. Senator BROOK. But even Colorado is affected by this entitlements program in terms of higher consumer prices-adversely affected. rrhat is what. both~rs me about this system of layering one control on top of another. It seems to me we have reached the point of where we are defrauding the people-certainly, in my instance-the people of the lower income States in order to assuage the political problems of those elsewhere, Mr. JOHNSON. I think you are right. Senator B1~ooK. That is all I have, Mr. Chairman. Senator HASKELL. Mr. Chairman, I have just two questions. Dr. Johnson, is it your view that in the United States, we should, try and work toward ways of using less anergy~, whether it be petroleum or otherwise? Mr. JonNsoN, Most certainly. I think we consume altogether too much energy. Senator HASKELL. All right. I just want to lay a foundation, If that is what you believe, how are we going to go about it? Mr. JOHNSON. The only way I think you can really enforce effective conservation is to provide an incentive for people to conserve. And the best way to do that is to raise the price of energy tO the level that reflects its real costs to society. Part of these costs ~re environmenal; part of these costs are the threat to our national security created by imports. Senator HASKELL. OK. Thank you very much. I have no further questions, Mr. Ch~tirman. The CiJAIRMAN. Thank you very much, sir. Mr. JbHNSON. Thank you. [The prepared statement of Mr.Johnson follows:] TRSTIMoi~T OF Da. WILLIAM A. JOHNSON, PROFESSOR OF EOONOMIC$, GEORGE WAsnINGT0N `uNIVERSITY My name is William A. Johnson. I was formerly an assistant administrator at the Federal Energy Oñlce `and am curreptly a professor of Economics at the George Washlngton university and Direetôr~ of the UniVersity's Energy Policy Eese~rcb Project. I appreciate this ~opportunlty tQ appear before y~u today to 55-583-7~-pt. 1-15 PAGENO="0224" 222 rathe~ than in the supply of energy. U 1~ ~86O was tq b~v~ l~eext a Oong~re~touaJ a1te~rnatlve to the Adist~tion p~gr~th. itt ~ t1~ *~u1'd ~tb ver~t iith~ tti be1~ Lt~Mç~t~ oW' tdna.1ktil ii~t1~o1~a1 objective of energy ~èetirit~. ~i4~ o~ t1i~ ~ F~t~r k*~ihiMl~ l4ài1e T~è~* ~ 1~nd&ng i~ast c~ those tlxait t~e*~i ~ afl~i ftseal t&~Shs~ fOr ~~educing U.S. dependence on foreign sources of oil. In my ~ud~ment, ~ ~ wfl~ i~ot ;e~1t In tb,ered~1çtion In eonsix~Xip~~qn a~ti~lpa*ed in the cLri$Iñal A~1winistratIO11 ~diyo~a1. it~ would itL~,o ërbulth aii~ E~ r~±nE~ ~ ~*cê~t~oii-± ~tef~ system of t~tic~ñ ki~t1 Ii1~tMi~i~ ~uot&~ ~ ~u3ttPL~ at1o~# th~th~' ttsëi~s ó~ ~14 ~d kv~of~ th~ ~ flees that will be necessary if the United States is to reduce its dependei1~ on f~u~eig~ ~dutees ofetier~y. I will confine my formal cQrnmellta on II1j~. 68~Oio two pr~isleIi$: j) the est~b- li~hment o~ I~nport quotas and as iw~ort Iiee~i~e a~ietIch and 2) ~he thdustri~l n~fi fk~ t~u4 +kH&IIh tax credith ii~teui~d to ~h&*~a~ ~r~a~èu~ ~i~b aild WoM rn~i&iit ~~`6nOg~. I~LPoRT QUOTAS ft~t. t~t~ wotrM place a de1Ith~ ~i ~e~e~k tuft ~3 iffih1fo~I bt~4 In l~fl5 und iWtt3, raise this ceiling to 6.5 million bpd in 1977, lower it to 6 million bpd in 19~8 ahd 1979, and raise it again to 6.5 million 15~ptLi1t .1980 o~nd~t~hb±eafter. ~J?~4~ Pu~eeftPent would be empowered to ~djusI~ tbi~ ~ei4ii~~by ~ne milliDnbpd ~rom~ i9'~ through 19~7~, ~.5 i$llion bp~ in 1978 aii~l jP7~ añd'2mtilion~ lii 1~8~E kIM t1xere~ftcr. Let the obserVe, first, tluuJt th~of, th~ c hrtho~t :pr0~e~~ *Illli ~hy qu~6tk 5~tet~i ~s its ~Lfllbl1Ity. It is d~iCult tO fftre-ttOle ~u~ot~ ad~retn~ aM ft spfie~rS to' ]l1~ thnb thiS problem has notbuen avoi'dui~r II.W ~860~ i~he 1in~ts ~ay ~e su~ci~ntly generous that, for all practical pui~pb~es, no impott restrictionS exist. Or, they. may proye QVOrIy pe~rictiVe, iu~ whicl~ ~ tl~e Nation w9u1~t face serious s~brt~O~. tn this lhtte~ &Se, It th ~inlik'41~t ttt~kt (*atgr~'s~ I~ht Sithlil~ errSct hrgii~er i~port ceiilñgs as the need arose. Of course, In this case the quotas would ~I1SO colta~ t~l have little meaning, especially in Industry investt~1e~t;i*fl5.. ~ fi8 Mes'~ent~W ~ vt~i~31 fO~ onptIn~ kfipp~y ~`o~çtiona t~ endus~rs~ The Bill would establish public aucti~i for lüif~dr~ Ti&s~, ~yiili ~ C tiqn fpr sipall reflne~a and thdepend~nt ~afketerS It ~ii~M~ ~1bb .~ktlb~t In~*~ ~kckets to be r~ola, tIMS `fir~r4~fi~ ~&M `llb~i1~IiY~ 1)1 ~Wkt~ Couf~d oWC~*isO ~8e a hfgh~ ?fiflO~llbTh `~r~f~hr ~ e~ont~olmrg tm~r4ia. ~he price~ ~akd ~fi ~vo*1d~ pe~suuMbli' be passed on to~ th~ fipwi corisuIfi~r in 1the foi~m of p~rice ~ t1~ts ~ sho~tfl~e~c1~t$ by tbe goverWnent woi~1d be distrib- ut~d~ iq pex~ec~1 ~rh~r4s1~ O~ ri~k~l~1 rneellaiil~lfi. ô ~ià1irts sThitIM be ~t~s*t~f. 1~ft5t, the IIE4TiCf `that tji~otas *111 ~uih~e it ~pes~ sihie to avoid prices increases is mistaken. Because of the auction provis~O*h tl~]i~ `~iiktie `Sdtitb hirtM i~ic~a$j~5 u~i1~a~s, of~ eo~bsi, The tj~Oia 1ev~1s aro so high that they are ineffectual and. bids are insignhIl~aflt. ~ ` Second. in theory a quota-auction system should yi~M th~e~p~tcè df4I 1ub~fzM~t levels as the tariff-license fee ~ ~ ~ ~1te thubice between the two boils down to a choice between dHTE~eI1t f~rms of. atlilainiW~er- jag an import control pi~OgMn~kUd' tire if e~htg~ ineefltiV~ aM disüieentiY~l5 that each form has. 1i early ~t1Te Oil ~o1ie~ Cgr~mlt~e corisi4er~d ~otb-'tll~ q~Qta-aUfitlOfl and tariff-licen$e fee apprOa~ehO~ It cImse~ ~he lntter for ~e~al ee'asous, `~!ie~fIlkps the mnst imiTortant being that, with a tariff or license fee, companiøS would be assured t1b~t the ii~j~ut~ch~5h tbC Oil ft n~eda~t Some ~rlo~. ~hi ~lntiiortant be~au~se The sj~~ i~hpbtthtit fithtOr In d Itbirig whether t~ ~fiI5truet ~ ref}nE~nS~ t~ th~ ~i~ftb!1it~ oi~ `~fndê 61L ~ro~e~'er ~V#h thO aiinttvauC~tiOfl ~~steth ~ueurit~v. of ~kur~bly *&ditl ~ `YCss ~Ct~tbtn'. Pb1S,~Ih turn, urilgirt t1etu~ ne~ec1efi `1 atment i~L~ c1omest~ c refining capacity. Indeed, this is precisely what occurred under the old quota system. 15o aeiuireV~ & re u~uuoh~n aethawd attn an i~crëaSC PAGENO="0225" 223 /~ ~ r~L1;I~Lpos~pn q~ ~ c~uo~a ~sy~ten~ under B.R~. ~ would ~1~o ~nhjég1~ Ithe ~g~w~rI:~meRt to substaiitial ~res~ires by vark~u~ ~mtere~t groups~ Ei~ryone wou~ want speccal freatme±~t. The same ~~rests tJa~* rei~eived e~e~i~tjc~is ~1~roin the o1c~ 41 imporl; q~Gtas won~14 d~emai4 these ex~nptioia~ once agaJ~n~ ~ th~ 1~as ~];1~L~Y happened. ~EI~tL 6~Q Wo1L1~1 establish separate ~ t~r srn~fl re1~ner~ and in~Teperi~nt market~rs~ There woukj also be a ~ 2 ~r~1Mon bpd ~ ~i4~?i~r d~U1&t~an~1 i~&sidua1 ~ue~ei~l imports ttse~ ~ ]aome beMing auLgenerat- i~ e~eetriei~y, while ~etroQhen~eal fee I~oeks wo~1i~ be e~empte4 ~itog&ther. Perhaps theworst ~ail~ng of ti~e old oil import quota program wau the nwnerona enemption~ granted certain privieg~d. g;oupo, ineludink heating oil iniijorter~ eleetaie utt1jites~ and the petrochemical industry. P~rimarily because of these exu~irptidns the East Coast, an~ the Northeast especially, became beaMiiy de~ pe~dent on im~ported oiL Wti~n tb~ Arab embargo wuu iaapoaod~, the East Coast ~mpor~ed ~ver 9~% of its resid~ual fuel oil, while New England imported nearly 40% of its hothe heating oil. Because the exemptions were heavily weighted toward refined products the U$ted. ~tates, in effects began to export Its refining capacity. The easiest way to beat the cijuotas was to build a refinery in E~rope, ~aua~da or the C5~ibb5ftflf based~n.foraign crude and then. to ship. the refhjed products to tJ~S. markets. ~I1~L~ ~n~de the United Stat~s doubly vulnerable to the Arab embarg.o. ~ven before'tbe Arabs eut off all oil to the United States, several ~uropea~ countries and Cena4a began to. restrict ~xports of refined. products~in orcjcer tvbuil4 up their own 1nvem~ tories in anticipation of supply interruptions. The quota system in H.lt. ~ would create the same disincentives to refinery construction because of the. pref~ erential treatment ~fferded~prodnct imports. I ai~so q~stion whether the exemptions contained in ILE. (38(~O are justified, Whty,~ for example, should the petrochemical industry rQceIve specIal treatment? During the embargo the industry demanded and received preferential treatment !lnder the allocation program. One Qf the arguments used by the industry was that petrochemicals are essential tothe national security and the wefl-bein~ of~th~ eepnomy~ I think this is~ co~rect and~ for this re~nom, believe that the petrochemtcal industry sh~Ld also he subject to qneta restrictions, except for that portiOn of imports used In the manufacture of product~for export. I am not arguing for the free importation of (41. P~ar~tom it. As, lOfig as, oil ~4li be us,ed ~a a potit~~l weapon; it. is impevittivé that ~e take m~asnres to ~afe~fiard our national security, ~ am arguing that quotas' are not ~tIiè beSt W~ty tO aelifiWe this objective. A malor advantage of the price and fiscal xnèasure~ ~ropOsed by' the Adhthrisfra. tion is that they would be relatively' immune' to ~av'oritisur and' privIlege, ft l's siir~ prising to me that memories of the etd oil fin~nrt `quota system, and all `its deficiencies, have dimmed' so quickly. `The program was the Sub~eet. of fremend~us political' controversy throughout Its existence. When it `was abandoned in A~rfl 1973, there was general acclabn by those who *ere familiar *lth' it' ~tId heW It operated. By 19~18 exemptions hafi become so ifuitlerona that. marry in the in~d'U~tr~ no. longer took the program seriously. There Was a ~t.evafiing fe~l4iig in' `the industry thet, in' a shortage, a~dttitioitaI' imports `~bu1d' ái `be' pet.nit~d1ly the goverumeat, The public would' not ~tflnfi the cold; n'er~ `cOuQ t4ie~ vn~terrt stand the beat, The qu'ota may sehm' teore d'lrtct than `~ tariff. BOW~Wr, It i~ a156 Wore"suhjeet to po1itical pressures. Former Secretary of the Interior Stewart TJdall, Who had the responsibility for admirilst'erlrrg the' OM' O~*ohr system nndm" the 3ohnson Adteinistration remarked `in ~fi69 that lie WAs fertttee~fe in aveMhtg a Political scandal because Of the quota jirog~thm O~ANOE$ I~ t'A~ Ov~teita `H.fl. ~S~O womid also make a number of eha'nges hr the-tax code taxing certain hrdusErial' fistrr of peirolcutn arid natural gas' and prorMii~gc~rent1v~s, for eert~in types of prodtctlonand conservation. First, the~indust.rial~ use tax. Under' this. Bill, taxes on industrial users' Wou1~ tnereaue'over a period' of years. Exem~tod 1~rom the tdx, `however, are a number of industrial users. Once again, H.P. GS~o makes a number of special' cacep~tLons for apaciaãr irterests: Aineag~ these eteeptidma- are oil and~gaa consumed by the petro~ chemical industry and oil used~ as a iCe-i `far ~`eineiss4 vessels and- aircraft. Also ~"-chrd~c1 iegl4 imsd~as a fuel `Ia `farming anduMnine, saweli as all used by various tflx~exenipt sad' ebavitable tfiStitutk'ns, apartunents, hotels- and manufacturers of PAGENO="0226" 2~4 textiles and glás~. It is'diffici~lt for me tO th{i~k of whaf industrial users might be covered by this tax. And any that are have another change ti escape, fOr J3~EA is authorized to recommend further exemptions. The purpose of this tax is to encourage greater conservation through higher priceS. Many of the industrial users exempted from the tax are capable of greater conservation if gFven an incentive. Under H.R. 6860 they a~e not. The various tax provisions in H.R. 6860 also suffer from the selective bestowal of special privilege. There will be tax credits or other tax advantages for the use of Waste as a fuel, the' purchase of electric powered vehicles, the extraction of oil from shale and coal liquifaction and gasification~ as well as credits for the installation of `solar energy units and home insulation~ One problem with these tax incentives is that `they apply only to a few of the ways of conser'ting energy or producing alternatives to oil and gas. Why, for example, are there not tax credits for the installation of more efficient oil and gas furnaces? Or the prodifetiofr of heavy oils? Or secondary or tertiary recovery? Also,' it scOrns inconsistent to me that having just elimin~ited one tax loop-hole-- the depletion allowance-which gave a special tax advantage for conventional ~ways of producing oil and gas, the government will now enact new' tax loopholeS for uneonvOntional way of prOdttcing oil and gas.' Drilling f~r oil in the United states is not inherently less desirable than processing shale. In tact, from the ~ttandpoint of the environment it may be more desirable. It i~ also much cheaper, The various tax provisions in E.R. 6860, in effect, reward certain technologies and ignore others, For this reason, they may help to saddle the Nation with high cOSt and less than optimal energy sources over the long run, The best approach, in my pinion, is'to raise the price of all forms of energy and to provide equitable price or tax incentives for cOnservation and the domestic productIon of all energy sources. To this end, I urge the Senate Finance Committee to avoid selective tax credits `as a wa~t of providing incentives' for greater Ocuser- vation or production and to adopt, instead, measures that are neutral with respect to technology. The most effective way to accomplish this is to deregulatç the price ~f oil and natural gas and, If it IS thought necessary, ta~ away the windfall profits that would result. This and the benefits to all segments of the industry. Let me focus on deregulation of the price of "old" oil. Deregulation would, jn my judgment, be the single mast Important step that the Congress and the Administration could take `to red~uce tLS, dependence on foreign sources `ot energy. The President is to send a deregulation program `to the Congrets `in a few da~ys. I would hope that this program is given careful consideratiOn by the Congress. The price ceiling on old oiL is causing substantial problems for both the industry aild' the Nation and should be phased out as `quickly as possible. / In August, 1973, the Cost of Living Coundil created the so-called ,"two-tlei" price system for crude oil. Old oil, is subject `to a price ceilii~g while new and released crude oil can be sold at the free market price. The free market `price is, in turn, roughly equivalent to the li~nded cost of imported oil. In No4veiflber, 1973, Congress also deregulated stripper crude. This i~ defined as prodtiétion from wells yielding ten barrels or less per day. Because of these exemptions, a eomplex system of price controls has been created under which roughly 40 per- cent of the crude oil consumed in the United States Is subject to a ceiling of $5.25 per barrel, while the* remaining 60 percent seas for between $11 and $18 per barrel. The two-tier system has created an impossible competttive~sittiation'for ,reitners and marketers unfortunate enough to consume relatively large axñciuntslof high priced oil. It has also encourage~ various interest groups, to try to two thc~r influence in Washington to obtain, for themselves, the economic benefits result- ing from possession of old Qil. Partly for this reason, the Administration an- nounced in December, 1974, an old oil "entitlements" program that, in theory, will redistribute `the possession of' old oil~ to refiners and certain importerS of refined produCts. `Tinder this program, refiners that `have explored for and. `de- veloped domestic sources of crude oil may not be able to refine this oil unless they first obtain permission from another refiner. One entitlement allows `the purchase of one barrel of old oil. During the most recent month, an entitlement `s~ras worth $7.29.' ` The groups benefitting the most from the entitlements program are importers `of crude oil and certain importers of refined products. There is a strong' ineeti- tive under the entitlements program for companies to shut-in production of dimiestlc old oil and to run imported oil instead. The entitlements program, in effect,' subsidizes imports and, for this reason, contradicts the basic `objective PAGENO="0227" 25 of the Administration's exiergy program-to reduce U.S. reliance on foreign Sources of oil. If for no other reason, the removal of the ceiling on old oil, or,, at least, the difference between old and other oil prices would be a major benefit to the nation. It would do away with the justification and need for an entitle- meats program and the disincentives to seif-sufilciency that this program has created, I estimate that the deregulation of old oil would result in about half of the Administration's goal of a one million bpd reduction in demand for oil by the end of 1975.' Deregulation would also encourage some increase in production, al- though by how much is uncertain. Even though the two-tier system has provided ample incentives for new drilling, it has, at the same time, discouraged produc- tion from existing wells, This has occurred in at least two ways. First, it frequently does not pay to employ secondary and, especially, tertiary methods of recovery of oil sold at $5.25 per barrel. However, many of these enhanced recovery methods would be remunetative at $12 per barrel. Enhanced recovery is most likely to be applied to declining wells, that is wel1~ whose production is defined as old oil under the government's price regulations. Second, and perhaps worse, there is an incentive under tl~e two-tier price sys- tem to shut in and plug old wells prematurely. This is particularly true if the casing steel, pipe, pumps and other manpower and materials at these wells can be used more profitably at newly drilled wells producing unregulated new oil. The two-tier system has also encouraged some unnecessary drilling of new wells in order to create new and relea sed crude oil. No one really knows the ex- tent to which domestic production has been lost or unnecessary drilling en- couraged because of the two tier price system and the entitlements program. One extremely rough estimate, based on work by Paul MacAvoy at M.I.T., is that crude oil production was about 580,000 bpg less than it would otherwise have been in 1974 because of the price ceiling on old oil.2 In other words, deregulation of old oil might, by itself, realize or at least come close to realizing the Ad- ministration's goal of a one militon bpd reduction in imports this year. Half of this goal would be achieved by reducing demand; the other half, by increasing domestic supply. The deregulation of crude oil has been opposed, with some justification, on' the ground that it would allow domestic producers to become de facto meinbers~ of OPEC. They would be permitted to earn very Substantial monopoly profits~ from the sale of 1IJ.S. oil at world prices. The President has proposed a windfall profitcm t~x on oil to transfer ~most of these profits from oil companies to the' ,Federal Treasury. This would preserve most of the demand-reducing effects of cleregula lion. However, the windfall profits tax proposal, if adopted, would lose many of the supply increasing effects of deregulation unless it also contains a plçiw-bae~ prov1~ion, There i~ also Coflcerh that higher prices resulting from the deregulation of oil would have a substajitial impact on consumers, especially low-income con- sumers. This criticism, incidentally, applies to the higher prices resulting from the import license auction and the industrial use tax a~ well. But if the goal is to protect the cowmmer, it Is much better to do so be means of tax credits, lower tax rates, direct cash payments or other fiscal means, and to allow the price mechanism to serve its primary function-to allocate oil and gas efil- ciently among various users and to provide maximum incentives for production. We should, in other words, use fiscal measures to redistribute income and the price system to encourage energy conservation and productiOn, Instead, ex- isting prjCe controLs are retained because of Concern that dei~egulation would shift income from consumers to the oil industry. This same confusion of func- tiops occurs in HR. f860. HR. 6860 mixes incentives for energy development with efforts to alleviate the effects of these incentives on the con~urner. There is a general rule that applies: tax and price policies that are designed to serve two purposes simultanebusly usually serve neither well. Nor do they serve the Nation well. Thank you. .1 This estimaf~ assumes a price elasticity of demand of -0.1 and an increase in the aver- age pri~ of crude oil from $9 to $12 after deregulation, 2 Paul W. MacAvoy, Bruce F. Stancle, and Jonathan B, Tepper, "The Federal Energy Office as a Regulator of the Energy crisis," unpublished paper, Sloan School Of Manage- ~nent and Energy Laboratory, MassachusettsInstitute of Technology, p. 5. PAGENO="0228" T3~e it~u~, N~x~ ~re wi~1 c~ N~r~ Ro3~wt N~t)~au~ sps?~a1~ix~g fo~ t~e Small Pr1~~ ~ ~ I~ mc1~ce, Mr. ~ i pIe~ased toh~ave ~roub~for~ th oi~nmittee~ it ~was n~y privilegeto i~ca~ ~a ~twt~enaen~t t!h~at ~ou pi~es~nt~ b~1!om ~the !interior Oo~tthtt~e, an~ I was very xw~ich iwpre~sed by your doeument~tiQri, by botli~ your ~tatcwent and tJ~e ~a~ts you gave to s~pp~ri it. I would 1Al~e to m~v~ ~ogate you more about that after you have presented your statement and others have had a chance to go into it, because I want to know exactly how you arrive at some of these ~gurcs that you have presented. STATE'MERT OF ~ A. NATRA1~, O~T ~ERALF G~ SMALL O~Et~Z~$ ~ Z~Y Mr. NATn~T. Thari~k you very i~iiiuc~h, Mr. ChafrmM~, me~IIberS o~ the committee. Let me btrieily sumw~arrize this statement of mine. I believe that in addition to this testimony today that ha~ been d~s- tributed with ~ few charts and. tables, you also have, I believe, the fidi document on which these eomcli~isions are based, ~uci it is c~il1e4~, Oaiculation o~f New Oil Costs ia the United ~takes, years 1~59 through 1974, dated May I of 1975; and that was produced by a firm of petro- leum engineers to whow we made this assignment of maldug some of these oale~J~ations o~f new oil c~sts.~ N~o~ very ~brie~y, ~he ~rposeof this exercise in which we is a fairly sim~le and a direct purpose namely, to try to determine what I thinh economists could characteri~e as the economic cost of e~pJorwg and. pr~di~cin~g new oil. We did not get involved with the ai~d the cost of o~goiug activities in all areas. This is ~rn~m~iri'&y related to the cost of new oil. Let me ust make ~ne general economic ob~ervatiou, and. that is we ~foig~4, as we went tbro~gb this ~nalysis over the last .1~-l~ fI~'om L9~ thi~ou~gh i~74~that incr~as4ngly, ~or a good many years, the cost of new oil production rose vry ~ubets~- *ia14y~ wh~rea~ 4he price at which oil wa~ s~1d in the United States lagged. v~y c~nshlerably~ 1i~ tb*t te~t~icmy which is ~ you~ if I way refer M *e~d'iibit ~. which is ~t the seoen4 ~a~ge after t~e en~I of the t~t~-~th~ end of the test is an page 7~ pwge S is a table of thEta, and page 9 is a c1~ai~t. And in that ~h~rt, we cM~ see, ~oifl~ back to ~959, the top line is what is called the ~o~t of new oiL ai~d. I ~ifi ~expla~n ~n a minute precisely what we have in mmd there. 13ut this ~s a y ~hy-year estimate of the economic cost of exploring and pro~ ducing new oil, The lower line goIng back to 19~58; on the other h~nd, is the price receiyed for new oil ~u4ng each year, and reviews the east Texas t~td as typic~~ and representative. And if you will notiçie, the t of new cal, year by year~. has been risinie~. although there are s~me slight de~riati~ne, as i~ tM4 arid P9~2~ slight declines. But by and large1 the price was rising c~uite substantially during most of that period, whereas the price of oil sold during the year, new oil, was practically flat from 19M through the neat 15 years and the gap be- tween the eqet of the new oil ~ncl thø price rose very substantially. 1 This document Is reprinted ~t page 250 of this volume. The tables and append1~es were made a part of the official files. PAGENO="0229" ~j~d ~at is i~ith4ed Qfl my a~i~t th~rt, ~a~iø1~ a~übit ~, ~thich Is oi~ ~th~e ne~t pt~ge. AM e~w~e s~e ~ soJA~ 1Iii~, 1~Ith~d ~*~j Price ~i~e~a~; ~d th~ i~ t1~e d ~Eerew~e ~ ~be bw~o ~n~s ~ ~exI~iMt 2- na~et~y, I $á t~e dj~e~iaee bet~en tI~e ee~qni~nLc c~st of ~il eacl3 year and the price received each year-and of cow up mitil 19~2, that gap gre~v ~e~y bstantiaUy. And w~ see,thcn, a very sharp rise in the price of the economic cost less the price mceived, ~uid that was th~ gap. Now, the main point that this rha~t ~ci~ea.is is the fact that as that gap betweMn the economic cost of oil apsi the price reaeived for oil grew-namely, as that lag, as that deficit in the price in relation to cost grew-there was a very marked decline in drilling, ançl from an eco- iiomic point of vicw that is what one would have e~peeted. And we see on that exhibit 3 that, whereas in l~6O~ the explor~$ory wells drilled were ~ery nearly ~2,4OQ~O; at the low point in ~1, there w~ere Less thag so that you have a drop of almost half in the ~un~er of nê* exp;lomtory wells dr~lied üring that period. And this, df eourse, as I say bgain, ~terh~d from the fact that the~priee ele~u~y was not adequate to cover the costs, awl this ~erved as a disincentive and a disadvantage in terms of newexlo~atio~. Now, there are two obseiwations I ~vouiW ~nake ab~mt this. First is that of describing this exercise very briefly. What we discttssed with the~e ~pettoiei~m engineers in `Iie~qis was the tprableru of bow t~ arrive at what; meaningful costs were &f ~new oil e~q~doiratio~a in each year. And as the result of ~iwr ~ooavcrsatiens, a motel or an approach was undertaken in which we took each year as a 4listinetive :~ntxt~y. T~a~e ~ What we did was ~t~i ~ol~ at what die 4rIU~g ~ør ~ue~w ~oil ~was iii i9~S~. We ~took the ~nwber cf we~Il~ drIUMI, ~nd we ted1~ the tc~ta1 amount invested. Wo~took~eeoats,'t;bag, ~ o~pcratiug costs; all of the ~adve~$ages, ~epk~tioa coats, the `iutaiigible allowances-an ve~teoik~$o aceou~t ~ver~~tb4u1g that ~ izi~yestedan4 wthat the costs were. Then we ~odk---~and bydie way, those coats iw~iud~çlry~h~les as well as the producing wel1~-~-~anU then ~we ~p~Q)eQted thtse ne~v ~1iaco~ noes over a bfe ~patser~i which was ty'p'es~l, 4~ased ~on aetnal ewrp~ric~aJ experience. And'diat rougidy i~ ptojeetedoyer M~ut a2 ~~year tal~e~ oñt tor e~tUactioii of that ~oil. And we then ~rc~ecfe~ c~ia `the ~ba$iS Q~ t~)5~) ~prices~ taxaes,depiation owanees~-~4ar1Lthe ~l~nts ijn ~989~-~ ~iaid applied fhose cos~ ~to this ~pwtter~i of prgclue~iqn t~x~ding oxer the nê~t ~ yêa~s. And then, we~Lisoownted that ~e~ve~n~ $cl~to 9, on the basis of pro~idir~g a ~I5-peroent rate of r~turn on we could have ~sêd~any rate of r~t~u~n. Youeoilddotjns1~xer~ise using a 1O~ rcent~rate~of return, a 2O-~pere~nt rate io~re~u~n,~a ~ a 15 ora8or whatever you will. We decided to use a -~pero~it i~a~te ~of return, fheQans~ in 0w memt,exploratoryclrillhxig is a fairly~niaky business; and ~Iwould say this ~bef ore thiscommittee, that this is not a ~uroJytlieoretical~b~erva- tion. 1 thave had qilitea bit of e~pëzie~ice, or ~X did~o*é y~arsago, in actuallyengaging in pnttingsyn~ t~s~together ~m oil1 dri~lhag. Mtera of ~years, ~ de~i~e4 that was ~ot for we. ~Et ~wasçt~ mistake, and I got out of it, and never would go back again, because you uiny~$ome~ PAGENO="0230" 228 times b~ lucky and hit two out of two or three out: of four, but you often could hit five out of five dry holes; and the record is that ~pproximatel~ four out of five wellsdrilled ~re ~lry: Soyou have a nrap game going all of the time, so you work with the averages. But ther~ are home people that do better than the averages, but a lot of people ~do much worse than the averages~ So, what we did then was to conclude that, given the nature and character of the risks in this business, a 15-percent rate of return wa~ not unreasonable. But as I say, one can compute this any way ~ne wants. And on the basis of that, we arrived at what price oil had to be in 1959 to cover all ~costs, and to cover a 15-percent rate of return on investment. We did that agaán for 1960,~for' 1961, for i969~ and we did it fonevery single year. And all of these computations are shown in. this book, which is submitted herewith. Now, we haye gone over this.. I have done a lot of testifying before public utility commissions on cost of capital rate of return, and T think this concept of economic cost is a very sound and commonly used one. We discussed this with many economists, and on the whole, I think we have found a considerable amouut of support for the results. I will not sit here before this committee and say that the results are absolute, precise, exact, because one can exercise judgments. It may be possible, on some of these issue, you ought to give them a 10-percent sate of return, not 15, in computing this. That could be done. But when I stopped to realize that electric utilities in the United States, despite their hardships as the result of inflation, have been earning on the average between 11 and 13 or 14 percent on their return, I do feel that 15 percent is reasonable. One can say, let us cut depletion in half, and see what that would look like. You can make all kinds of adjustments. The technique is here, the data are here, the procedures are here. So we have these results, Now, let me just wind up by saying, what is the meaning and the sig-~ nificance of this information? Very briefly, basic~ai1y, in a free enter- prise systems capital tends to flow in relation to incentives and rewards. It is fundamentally that way, and .1 think new oil drilling will be siz- able if the incentives are sub~t'antial. And if the incentives are not substantial, it will decline. And over the period, most of the time, from 1959 to relatively recent periods, I believe the drop from 90,000 to 10,000 independent oil producers, the drop~-nearly half-of wells drilled, the drop in the yields per well that would accrue to these pro- ducers, all reflect a disincentive. Because foreign oil was available at substantially below the economic cost of now drilling in the United States, the country is now faced with' a policy issue. So, in' my judgment, if the price of new oil is controlled at levels with any degree of ~igniflcance below' that economic cost which we arrived at, or which anybody else can compute-and maybe it would vary somewhat from ours-in my judgment, we' are going to have less and ~less drilling. And the issue p~sed to the Congress and to. the ,COUflr try is, do we want to explore and to exploit our new resources? Do We want new drilling? Tf so, then I think the answer lies in a price that is adequate to provide these incentives; and' if the price set is going to be substantially below the cost, we are just goiiig to have considerably less drilling. ` ` PAGENO="0231" 229 The Washington Post this past week said that the House committee has just voted to extend controls and roll back prices of previously uncontrolled new production. They said it is a disastrously bad idea. As an economist, I myself do believe that setting, rolling back the price of new oil below the cost, will inevitably result in less pro~ duction, less exploration of new oil, arid I do not think that is in the best interest of the country. rrhe CHAIRMAN. It seems to me, Mr. Nathan, that you have rendered a real service in seeking to provide us one of the answers, without which I do not think we can arrive at any intelligent conclusion. We have to know a number of things if we are going to serve the Nation's interests well. We need to know what it costs to attract capital to produce more energy; and in this area we just do not have any figures. We have heard all of this screaming, that the price was too high, because the price went up compared to a previous price. But people simply did not ex- plain that at that previous price the industry domestically was in the process of going out of business. Is not that about the size of it ~ Mr. NATHAN. That is correct. It was in the process of slowing down very substantially, the exploration for new oil sources. The CHAIRMAN. Each year they were drilling less wells than they were before and producing less energy. Now, here is the thing that impressed me, and this was in your previous statement, too. Before the other committee you said that based on your calculations, the eco- nomic cost of finding and producing new oil would be between $12.50 and $13 in 1974. Mr. NATHAN. That is also in my new testimony, at the bottom of page 6. The CHAIRMAN. Now you have done one other thing that I think is a great help to all of us; and, that is, you have presented us a book of figures here which are the figures that you relied upon ix~ arriving at these conclusions. Ai~e these all from published sources'? Mr. NATHAN, Practically all from published sources. They have the survey, they have the Government materials, the ma~ten~a1s~ ar~ ~ll there. rrhe assumptions are spelled out. As I said, Mr. Chairman, if anybody disagrees with our procedure and they say you should have 12 percent, they can recompute it easily; o~, if somebody says take out this or take out that, it is all recom- putable. I think the system, the approach that we have here is a very reliable one. The CHAIRMAN. We have been told about the tremendous problems of oil, but almost without exception, people speaking of that have been talking about the fantastic profits that someone has been making in oil in the Near East or oil in Venezuela. Now, that is an entirely differ- ent problem, is it not ~ Mr. NATHAN. Yes. That has nothing to do with the exploration for new oil in the Tjnited States. The CHAIRMAN. There is one other point here. You say that for producing oil, and you are speaking for small producers,. these people do not own filling stations, do they? Mr. NATHAN. No, no. These do not own distribution facilities. These are the independent producers who account for Some 85 percent of the exploratory drilling. PAGENO="0232" The (~AIR~i ~ ~ ~ are m~t sa~ri1~, a~ I~ u~r~d" it, that that is. the r?~te of retwln a~ persoui~ entit~hdto exp~ct for operating a~ filling station ?~ Mr. N~TI~~ Nq~, no~ ;~JThi~1tas~ to ~jk with th~ rate. of~,iiet~tir~ia entirely a~seçiatea ~ The~C~JáwA~ You~a~ iiot~ saying that is what the rate of retimz ought to be for transportation, for moving the oil~ avotmd~? Mr. N~aar~I. Nn, sir. The C~nó~w, But, f~ir this~ type of opemEi it1ooksto~u that thatis about what it wouht be~ I wa~ uioticin~ Jien~a i~gure f,i~ouin*a d~cumei~t that We~puWished here~ which ind~eat~d~thLt in i97~, and these are the major cdn~anies, on a~ basis where th~y tool~ th~eir porce~tage depletion, if~yiouiobkat: it: in terms of~ what they a~ttialiy made, ou~ a~ cost basis they maiite ~bout 14~ percent domestioa~l~ Thit: that: intiud~d: the ~hoie operation, as' I~undt~rstirnd it:. Mr. NATHAN. That is correct. It includes~ the distribatrnn~ reflning,i and everything~. Tha Ai~%1A~.' So, if ~ôti were' inclnd~ing eve~ything~ w~uld you think that 14.7 ~ore~t wonld~ be n-~or'e thaij yon wotild need to pay the major companies.? ~r, N~I~N'. I won~ldlffive to look at th~ oon~positFon as~ to what~ prOpot~ionis~ ~what ILoaih you hao*; the i~isl~ area. But, I~teil y:ou~-14 percent ;~a~tu~l~ 14 per~oent is~n~t:a~ al5uo~inaHy high rate of return.. T~' oth 1~ek~ a~ tk ~dti~d T~ad~ Coatmissiwi and tk ~ data,~ the rate of return for most manufacturing is somewhere i* the 1~ to' lt$ ntr~ige~ S~this~d~es~O't sound e~toei~tien~l4y high. The CHAIR~1AN. As I understand, it, yqur feeling is that you n~ed~' riot~nteess'arll~ I1a%~ that rate' oP~t~tif~t~ ii~i i*a~rlteting~ distf4bhtiOn or ev~efl th'iifi~, Mr. ~A~AN. W~1l~, oertain1ip the risk' in marketing of gasoline or other oil products and refining, in my judgrn~ent~ is' ~ ,suib5taptiàily lower risk than in wildcat drillitig or è~IbratorV ope~aMon~. A~nd, if one WerO tO eoneh~d~ that 14 petcent' is apiiropriate~ or 12 pØreent is. appro~riate for thos~' pnrpese5 c~rtaiiiiy 15 percent is not exeesslire for new drilling. It is quite re~sonable, Iwotild way. 7he~4AIthA~. Pno%i~èfo~'iaat y&t~r, no~w, her~is a d~ument that- ~eil, it is, tIM sa~n~ dç*~nm~nt from oin~èornthittèe'to ~hioh:I ref~rred last year-~li, `th aet~irj~rtg corpth~atk~tis, lpoking at upndu~tble mamif~cburing c~fr*atiotis, thMr ra~th' of' i'etttrn wa~ 1't.~ pei~cent~ Mr. NATHAN. All mapufacturing-that is, after taxesi' That i~ sururising,, b~au~~ last ~eari~a~'a re~~ion yeai~. The CTtAII~MA~ Phatis 1974: anititaV r~t'és of profit on stockhOlders equit$by in~ stry-a~1~nte~ifactñring' c~r~oratiOns~ ~ percent;: npn- dm~ahl~ thf~eturing~ It all f~lls in that arèa~-17~ r1ercept~ That was taken from the Qparterly Financial Reports~of the 1~'ed~ral `trade Cbmmissibti. Mr. NATHAN. Yes. That is a samJ?le they do reguTarly. Tn the nou-~ d~ahi~, la~sD ye~r wo dld~'nbt: h~v~ i~arl'v the d~ecTiri~ in ec~minic activity iti t~i& noñdiir~b1ek that we haji~ ~ ~ d~n~aI1es, ~ auto- mobiles an~Ibnilding niaterials. They Were the, ones that were Mt worst in the reee~sthti. PAGENO="0233" 231 The UEAIRMAN. It seems to me, if we are going to do a responsible sob, oue~ we have ~ot to look at what it would take to attract capital, ~to do what you waiit capital to do. Two, we need to look at how much capital is needed to do this job, and then three, we need to think in~. terms of where are we going to get it from. Are we going to get it~ out of eaDnin~s, or are we going to get it out of investments, or a combination o~ the mix? And, if so, how much? What would be your thought along that line as to how you would. genoi~ate eiiough capital to produce this Nation's requirements of energy? Mr. NATIIAN~ Well, I think that most important of all, Mr. Chair~ man, is to try to get this economy moving up again. If we can get some degree of recovery, we will be surprised to see how rapidly savings will ris~ and profits will rise too; because, when the economy is depressed, there is a reduction in income, and there is a reduction in aggregate savings. I think we can attract the savings. I think what we have to do, following what you stated, and I agree with it, is to provide incentive to get the investment so that people actually do invest4 Now, my whole concern about the general economy, Mr. Chairman, is that too large a proportion of our investment in the last 2 or & or 4 years has been in debt iiwestment, and not enough has been in equity investment. I think that this is attributable to the fact that we have had a rather bad inflation, that the inflation has resulted in a very substantial rise in interest rates. The very high level in interest rates has resulted in lots of people investing through the debt instrument rather than through stocks or other equities. The result is that many, many companies have emerged out of these recent periods with a very high debt equity ratio that has made th~ir stock rather pre'. c~1rious. So~ you go into a vicious cirole~ The more they invest in debt~ the more precarious their financial structure, and the less people are inchined to invest in equity. It is a self-defeating proeess~ The more you borrow, the less coverage you have of your interest rates4 So, a lot of companies, especially utilities, are in very ~eiiqus trouble as a result of this. But, I think that the answer does lie in an adequate rate of return on equity to permit eqpity investments at attractive terms. The CHAIRMAN. Senator Nelson? Senator NELSON. Did you say, or are you saying, that for example, the lid should be lifted off the price of old oil? Mr. NATHAN. ~o, sir,. I am not saying that. I am talking ønly about new oil. Senator NELSON. Would you do anything, about old oil ?~ Mr. NATHAN. Well, I would try to find out what the costs are on old oil. I think that to the extent that the cost of extracting old oil does not involve these vei~r rapid rises in costs and exploration, if you lifted the lid off of old oil, you would undoubtedly have a very sub- stantial windfall. In other words, I think that old oil would tend to move to the lev~el of the price of the new oil, and that is not too much different from the imported price. I think that if you took oft th~ controls o.r elim- inated all controls on new oil, then I think something would have to be done in the nature of some kind of recapturing th~ w~ndf~his for a period of time, PAGENO="0234" 232 ~Senator NELsoN. If you removed the lid on oil? Mr. NATHAN. On old, not new, because I think new is a different matter, I think, from a very straight, tough, hard-hitting, realistic point of view, the price of new oil must be high enough to cover the costs. And the analysis we have made here. Senator Nelson, indicates that in 1974 that cost of new oil is somewhere in the $12.50 to $13 area. And, as I say, I have talked to economists who have looked at the figures and they say, well, I would eliminate that, or I would give a 12,'/2-percent rate of return, or 13, So they may come out with $12 or $12.25. I have seen no one come out with less than-using this kind of ana1ysis--then the $11 or $19 range at the lowest. Senator NELSON. This is cost? Mr. NATHAN. Yes. The economic cost of exploring and producing new oil, yes, sir. Senator NELSON. So then if the economic cost of producing new oil in 1974 was $12.73 a barrel, what then is your estimate of what the retail price should ~o at-will go at? What would the retail price be? Mr. NATHAN.' Well, the retail price will be affected somewhat, ~ei~ator Nelson, but not substantially, because it depends on what proportion of the total oil produced is now oil, as distinguished from imr~ortod ~il, and as distinguished from old oil. In other words, your price is a combination of all of the sources of supply. It depends on how much old oil you have, let us say, at $6 Or $7 a barrel; how much imported oil at $13 or whatever' it may be after October; and what the new Oil is, say at $12.80. I think that if you leave the new oil uncontrolled, as it `is now, I do not think it is going to have `any really meaningful impact on the price of the finished products of petroleum at this time. It is already reflected. Senator NELSON. Well, it all goes at the' world prices, `does it not, ultimately? I mean all new oil? Mr. NATHAN. Well, it will tend to move toward the world price, but not necessarily at that price. One can vary it. You see, you do have the problem-I was listening to Dr. Johnson-you do have the problems of geographic `differential's and how these things level out. You know prices never quite equalize. Under theoretical economic terms, everything tends to reach an equilibrium. The only trouble is, -that equilibrium is elusive and it keeps `sort of moving away from me. This is One of the problems he was talking' about geographically, `that presumably if you did have some kind of ~Iifferentiai in alloca-~ tion and New England began to pay for substantially higher prices and Tennessee or somewhere else had somewhat lower, presumably industry would move quite rapidly, `and production would increase here rather than there. But-and these `adjustments take time-but "basically I do think that uncontrolled oil prices will tend to move `-towards the marginal price, and now the marginal price is imported ..oil. Senator NELSON. What is the world price now? Mr. `NATHAN. Oh, landed, at about $12 or $13 a barrel. Senator NELSON. Just one more question, then. The common asser- -tion that `has been made by almost everybody I read, whether it is ~editorial-including Mr. Kissinger in Europe and so forth-is thai~ PAGENO="0235" 233 the OPEC price is a very high artificial, nonmarket price, and yet the pressure, talking about the cost of production for 1974, is ~t the OPEC retail price. What is your observation about that? Mr. NA~mAN. Well, there. is no question but that the OPEC prices are politically determined prices. This is not a competitive, free market, free enterprise price. This was set by the OPEC countries getting together and deciding what they were going to charge, end they decided to charge something in the nature of a multiple of 4 or ~ of what the price was before. Now, if the OPEC prices were to fall, and we were to have do- mestic, new oil, competing, then we are going to have .a drop in new oil production. It is just that simple. One price is art arbitrary, po1iti~ cally determined price, by a cartel. If that price, set by the cartel, is substantially below the cost of new production in the United States, there is no way, Senator Nelson, that you are going to be able to get full production and full exploration of domestic rtew oil. It is just that simple.. Now if one were to say, "yes, but as a matter of American national policy, we want to encourage new oil exploration" and it comes to this $12.80 that I have come up with, and OPEC, let us assume-I do not believe for a minute it would-were to cut its oil down to~ say, $6 a barrel, then you are not going to have .any new drilling of any significance. It will decline rapidly here, or you may have to put some kind of a subsidy on on~ side and a duty on the other side. But, this internationally set price is not an economic one, but it has economic consequences. Senator NELSON. 11 assume what you are saying is that in fact the cost of production is so much lower abroad that they could make a profit at various levels below what we could in this country? Mr. NATHAN. Oh, tremendous. You know once you hit a field like they hit there in. Kuwait or Abu Phabi or Saudi Arabia, the lifting cost is not a tremendous amount. Basically what makes the new oil cost in the United States so expensive is that it is really exploratory and risky. if somebody tomorrow were to strike a big, major, huge, all-out oil field like Prudhoe Bay, tremendous quantities,. theY price of that would not have to be $12.83. The price of that would be largely development, drilling around, you know what you have got and the drilling costs and the development costs and the lifting cost is going to be way below the exploratory costs. Senator NELSON. But, nevertheless, the price is still going to tend to be what the world price is. Mr. NATHAN. Yes, in economic terms prices tend to move toward the margin. Senator NELSON. Thank you. The CHAIRMAN. Senator Packwood? Senator PACKWOOD. In your estimation, if Congress would p~s~ ~ windfall profits tax, should we decontrol old oil? Mr. NATHAN. If a windfall tax is passed, it would have the same economic effect. I have one real concern about this, however, Senator Packwood, and that is I am very, very distressed about the inflation problem.. . PAGENO="0236" 234 I think we now have had 10 years of in4tation in the United Stafes We have seen what that infla~ti~n has done to the piib1it.~ ntilities. W~ have seen what that inflation b~ clone tç the interest rate meehanjsm on thousi~ug. We have seen how that inflation `h~ts had a differential impact on intermediary financial iii~titui~on~ ~and I would, at ~this s'ta~e in onr eoonomy when we are hawing a serious recessiqn an~ we seem to be making some progress on intlatioti, but we iire not ~ttre whether `it is going 1o last aria we are not sure, whether when the economy tnrnsnp we are not going to be faee~ with wors~nmg n~a- tion, I would hesitate to iritroduce into the price stream a~y higher `costs th'ani `had to, And so I am not sure that now is the iest time, 1~'ow there are w~y~ to `do it. Art Okun, `for itistance,, came up with `a very interesting'i~ea, ancl that is he .sai4, well let the price rise, recapture it with a till tax, then ~take that windfall tax ~nd give,it to the States and localities and say we ~`ill give ~ron t~bi's money if you will cut your exeise taxes, so that `the Consumer Price `index that* catches the `higher oil price will' be reduced by the reduction in excise taxes. Because, otherwise, if you are goingto get higher oil prices into theConsumer Price Index, you are going to get ~t ,jritO the escalator ciaus~s; you are going to get right on the~iuflation,ary sph~l. Senator PAq~wooD. That is very similar to the President's prograM. He oives re~atesi~ot only to Statè~, but to individ~uais, in,addition, ~&. ~ Well, but you ~ee the trouble, Senator, is that the re- bate to the individu~l does not reduce the Consumer Price Index. ~enathr PACEW000. That is true. Mr. NATr1~. The Consumer Priee [ndex will sffeot a ~ot of wage settlemerits arid wage adjustnWits You see, when you have that escala- tor clause, the indexing proeedure, when `you iucre~se the Consumer Price Index y~u are almoet riss~thng a further rotmdpf price'ir~crease~, arid the spiral is too cont,~gious. A~d i'just do not think we ~reqnt' of the irifiation mess yet. Senator PAqI~wooE. I. have np other queStions, Mr. Chairman. The'OEAIrnscA~ Ser~tor Ha~kelV? `Senator H4s~1~LL. Thar~k you,'Mr. Cjiairn~an. Mr. N'a~ban, ~bur, analy~is is e~treuue1y interesting and I eerta~n1y would think y'our,method~logy sounds reasonable. Nqbody,can quarrel' with the i5.percent,returri~~.Lat least I do not think you can.' I suppose what `We are' really saying is to luthice the avemg'e pu~'o- ducer to stay in business in 1fl4, ~rt intelligent, average producer should expectto~et $12;Th. That is basically w~t you ~eé sa$tig~ Mr. NATHAN. That is correct, sir. That is, in es~&icç, correet. `Senator'IIis~Lt. ~This"is minor, but"~tist as a matter of curios~ty,the economic price from 1973 to 1974 was about 5p p~rçent increase. Mr. NATHAN. Yes. ` `` , Senator HAsKErr~. What were the~aeto~rs wo~king there ~` `Mr. NA~rr~AN. `Well, ~,h'ave it in here in the bi~'report. We shop the price series, and this shO~ws ~*hat happen~d to ~ri1ling cOsts, w1~t'h~p-' pened to pipe;~what b,~ppened to all of the expense~. For i~sta~iee, on table 8, ~f `yoti loQk `thr6ugh, right'~in' the mid~ile of ;the re~~rt, there is~a whole ~ries'o~tabies~-~ ` " Senator FEASKELL. 1 will not take `your time now,' but-' The CHAIR~&AN. What page is that on? PAGENO="0237" Mr~ ~AT1~IAN~ Tt ~s tab}~ 8. ~It ~s, dh, ab~it a quwri~r ~f a~n ~h ii~ito the rop6rt. Yo~t haw~ a Wh~le r~i~s ~f ta~b1~. ~J~st ~l~k at taMe N~. 8. This is an index of well costs. And, without goilig i~ato detail, yè~uwkll ~eet~ie total th~iilth~g' c~ts d~u~ to i~isi~ig p~ees ~entfi~om ath index Of- i~n .t969 it wa~ 100. It j~m~ed f~i~ 13~.2 M 19ST3 t~ iTh ~n ~1~T~3 and 19~4. And you ca~ se~ how ~tthe t~, just the pa~m~ntsto edritllii~g CI~h%CtOD5, ~ u~f~ from 133.2 tO 1~)9.6. ~Ph~t is a ~O percent rise in drilling áost. SenMior 1 ~ Mr. Nathan, 1 am lost. What lin~e am I theant to look ~at? Mr. NATJIAN. The top line. SeMto~ I~~T~ee, I~have it. Mr. NAT~A~. Tite top litte says ~`l~ayments to drilling ao~ntraetors;" That is the man ~ho ~s eng~glng iu the dthilin~ iprocess, He does iiot ustially buy his thilling eq~tpmunt.l±Ie ~ontraets it uut. And that index of drilling- Senator HASKELL. That is about a 30-percent increase iight there. Mr. NATHAN. Then if you look downbel~w~ ~Onrr~ad:and Site ~tep- aration only went up about 10 pe1~c~nt. Traiispottation went up ~bbut 20 perue~~t. ~Fu~I weht u~ ;~0 pe~c~nt. So that y~i see what you have hero, Seitator Haskell, w~s an ii~flation problem~ cb~pled with a mendous demand in drilling eqiüpnient rOlativO th ~upply of drillit~g equipment. The CHAtnMAN, If I might just interject, £t thiS point-~the pride of mud went np by 84 percent~ I had aiwa~s thought thatthat wa~ some- thing yot could always get at ~ ~rCasonabIe price; uiüd. Mr. NATHAN. It is a rather rnod~~t items but it is ~sn lrnportaht use the~e, You see this iS what yon Pay ~or the itim~ pOr se. But behind this are other ~osts, such as mat~powe~, t~anspurtqtidn, ~wid the like. Senator HAaK~LL~ I have flo further quest~ons. .1 thii~k it ~is a very i~ationa1, i~ry complete, very intere~tlng pi~eseh*atioh. 1 presuñie-~let me aSk yon anothet~ questioit~ This is not dealing with oil. We hS~re this natural gas pr~Mem ana ~I have not seen an~ ~oluti~n yet that floes n~t have bugs in it. A&rd I Say the present situatibnis ~ppailirig. Mr. NAP1IAI~. yes. Senator HASKELL. But hate ~OU given aiay thonght to that? Now I reall~e tMs i~s an irrel~vanc~; from your testinthny. Mr. NA~iAN. Well, Iháve done sOme woi~k for pipeliThes, gaS ~ipe- lines, arid also some work on the natural gas demand a~d ~upply arid the èurtailment measures. I think that *hat we~ have to do i~ Qn ne* gas we will have to all~w ~tl~e cost to go up ~erysi~bstanti~Uy ~gain ~becau~e the drilling costs dare so high aitd the ~narnber ~f1~allur4s iS higher than it used ;t~ be, and the prothmtion.pet w~ll is Io~rtha~ ~t used to be because there is no use kidde~ig ou~e1wes~ a~ we ba~è gone along nnd ex~ioited on~ natural resOe~tces hi o~i j~~d ~ghs, we have elCarly had a p~oeess ofgol~gafterthe~most ac~essible. I saw a chart once whioh~sh~wèd on theleft~arid side the thousands e~6ii~ic ~f~sst ~3f g~s tdlscnverc*d, ptr thou~sand ~o~t if w~ils tii~lIed, In ath~r words, this gl've~ y~n ~n i~4e~ of yonr yield in ~ri~5 o~f gas~d~~ co~e'i~sd ~eci~ thensand fè~et d~rilled. Mid so this yielê!, st~iet~ng-and, by the way~ acr~ss the bottQni Of the eI*~t~iS ~ ~ID~G~1~O; ~ I~t(~, t~ad~~e~3 ~rears~ i$~g~$ b~cJ~, t6 ~ 0-.4hatcs1~trt ~j~$t sMrts i~gl1a1zeit g~i~o~u at an ~ ~at~ ~4hMcon~Io down PAGENO="0238" 236 near the lowest level and has leveled off there and the result is that your responsein terms of production per thousand feet drilled is way down, and that is very costly. Now I think that what we ought to do is to try to explore our gas resources as fully as possible, and I. am afraid we just are going to have to go to liquefied natural gas and gasification of coal, which is very expensive, but I do not think you are going to get gas at any- where near the present prices. That is, substantial new exploration. Old, they are making out very well on old gas because the price is substantially higher and the lifting cost is not much, But the new gas costs are going to be very `high. We did not try to do that. We did that here with related gas. This is `oil and the gas that comes with the oil is included here. But we did not do gas~ But I have not much doubt, Senator Haskell, if you did the same analysis we have done for gas, you would find the new gas cost has gone up substantially. Senator HASKELL. Thank you. Thank you, Mr. Chairman. The CHAIRMAN. Senator Brock? Senator BROCIL Mr. `Chairman, I forgot to ask earlier. If I might, I would like to insert some remarks at the opening of the session, this morning, related to the subject. The CHAIRMAN. Without objection, it is agreed to. Senator BEocK. Mr. Nathan, you have dQne an enormous amount of works `and `obviously a `superb piece of work. I have just a little bit `of a problem with your response to Senator Packwood, relating to the decontrol of old oil and gas. There is not anybody in the room that do~s not share your concern over inflation. But the problem with a controlled prh~e, whatever the reason for inflationary purposes or for some other reason, the problem with the controlled price is that it forces unrealistic market decisions. `And I would use `as an example the testimony of the president of General Motors who was in this morning, and he said they were using natural gas to produce the energy for their automobile plants because it was the cheapest possible commodity available. That is an immi- `nently logical economic decision to make. But, the fact `is that natural gas prices have been held below the market by the action of this Government, and not by the market- place, as long as I can remember-and have been around certainly longer than I have been in `Congress-.--and, as a result, we have forced an `increase in the utilization at the very time where, by the increase in level of cost in the development of new resources we have forced a reduction in the investment needed to enhance our reserves, our identified reserves and supplies. Now is that not going to be the case on any controlled price situa- ation? Are you not forcing the wrong decisions to be made by the market on the basis of a political judgment? Mr. NATHAN. Well let me say that I share with you,' Senator Broek, that over the lor~g li'un, or oyèr a period of time, sustained contro's `will have'very~serIotis implications lit terms of allocation of resources. And I think that undoubtedly as we look ba~k i~ow, our natural gas `prices have been much toO low. It has been `a clean fuel. It `has ebeen an attractive fuel.' It 4:S low ~ost ~n~terms of extracting, once you b1~t PAGENO="0239" 237 it. The lifting costs are insignificant. You have pipeline costs. You have your byproduct costs-but on the whole, it is a very low cost to derive. So, we set these prices. In retrospect, I think we would have been a lot better off if we had let those prices go up. However, I have three questions in my mind, sir. One is that we do not know about how much response you will get on the supply side, any more than we do on oil. If Senator Nelson or Senator Long had said to me, Mr. Nathan, if you let new oil prices go to $12.83 are you confident you are going to get a tremendous amount? And I would say no. I do not know. All I am saying is that if you do not let it go near the cost, you are never going to know because you will not get the drilling. And I think the same thing is true of gas, but I do not know what the response is. The second thing, I think, has to do with the fact that one of the reasons I guess that we felt that gas prices should be kept low was that our access to oil was very, very low abroad. Now that is not true any more, but I also believe that this inflation that I was talking to Senator Packwood about is a very serious matter because there is no doubt, Senator Brock, that inflation is a terrible allocator of resources, too. Inflation has a miserable impact. I have seen public utilities in this country, as a result of inflation~ and as a result of the regulatory lag having their stocks sell at 50 percent of book, and having, as I said before, a financial structure that is terrible. I have seen public utility bonds go from AAA ratings down to a B rating. So inflation is a bad allocator of resources, and recession is a bad allocator of resources, because you see what happens to certain sections of the economy like housing, but I certainly would not want to see us maintain controls over the long run. I think transition, yes. Senator BROOK. I do not argue that at all. The problem is that every time you put a control on, you have got to put another control on to make it work, and then you have got to put another control on top of that, and it builds on itself and there is no way to get out without the house falling in on your head because you have built a house of cards. Mr. NATHAN. That, I think happens, when you have them on a long time. Senator BROOK. We have kept them on a long time. Mr. NATHAN. Yes; we certainly have. Senator BRoOK. How long have we had them on natural gas; 30 years or so? The Senator from Louisiana knows better than I. And I tell you something, maybe I am sensitive to the subject, but I have got some good friends in my State that are not working today. Some of them in Nashville, at a Ford glass plant, because they cannot use any~ thing but natural gas. That is the only way they can make that glasa You cannot use coal in that facility. You cannot use electricity. You cannot use oil. It is natural gas. And here we sit, not aUow~d to pay any price in ~rderto keep people working, and~ I am bone wea~ry of this pblitical judgment thaV says, well, we are going to hold down the price because we cannot ~oM to raise it. And, in the process, a lot of Tennesseans right now-my State ~5-583-75--pt. 1-16 PAGENO="0240" is more effected than most, I grant you that, bat the fact ~remains that they are out of work ~becaase the~cannot get gas at any. price Sand the market is making a ratipnal decision that is gonig to hurt us ~n the long ~run bec~anise ~ftha~tpthe. We ~re dthig ~ with oil and 1 ~oidd personally be -willing to see a deregulation now, but at leaet I ~duld like to ~ee as th it, over a ~couple ~f gears. ~ w~iuld like ~o ha~re some en?d point ia mind ~and 1 think it ought to be #set ii~ito la~r ~so that those ~ho make the decisions-~when you builfda plant, you db net~bailditfor n~t year. You build it for 5 and 10 years down the road. The deei~sions we are snaking .`to~ build plMats~ if there are kay being built with this idietic policy totlay, dare based~ upon the wro~g economic proipise. Now if we said, in law, that we were going~toder~gulatePHc~s in stages, yen ~eotikl be naki~g~ these ~eo~uiiomic ~ecisio~s on the right premise. You would know where to 1oc~te jour pi~s. Yk~u wou~Id ~kaow ~that~fuel to~use. ~X!iou wouM ~know i~her~ y~u were gQing.~ut, you ~do~ not~toi~áy. ~Mr. N~iv~. Well there is no e~uestieYL that it is g~ng t~ ha~re some ~strange `economic risequ~aces we car~not antioipate n~W. I think We are ~ ust, cwer ~tke years,~e~ator'~BroOk, we wiiFha~ to come around to using3 more li~uifled gas~nd more gasificaEhm ~ toa~. Senator BROOK. We e~deing ~a l~t ~f r~s~arc~h down at 1~VA and Oak Thdge National ~Labo~atories' on gasifluation, liq~fuetion. it is superb. Mr.~NA~N. ~I't is g~ingterype1i~i~. ~enator~Thw~~ it: ia~a xpená~e ia~the ~iekens. Mr. NATHAN. It may shift our industry quite sirb~taa~ially, but ~I ~agree ;wi&you:i'I h~e~ V~g~ uali3r*O~n~ it~i do not. itauw if I -wouM:agree -on~years,:bi1t :I~woald ~i1o~e gradu~iiI~3~ tow~d it. ~onator BEooK.~Would you ~bee~ncie~an ~iateide fi~üre Mr. NATHAN. ~~rVe. senator ~RoçK. Oh, come on. ?I~hat is ridi~nlOus~ Mr,~NAT1~N. Y~u want to eompri~e~hal~tway between~foitr and five? SenatorB~ocit. ~et us ~ompromiee at two `sad a half. ~ I `do~ ~tt~Seri~ter I' am~reaiiy worried about in- ~flation used tkink bhièeoüntry~is~uoW iho"wer~eessiotiei~nce `the 1930's and I wish I could sit here before this committee ~and teTi ~ :tbattwoi li ebr~k~u~th~e baflk ~of inflation or the recession, but I just cannot. Senator BnOOK. e~ oteither,~b11ttdo~!G~~lt honestly~think'the wage and price controlswe had on 2yatrs ~o~dhFn~ coritributeto ~he reees- kion~.that~wo~aro ~nowm? `Kr. NATaAN.1 amnot su~e'theycontri~buted to~the:rece~ion, but I thi~k the recession was~refty maeh~ r i1t~Øian ~ throug~h ~+er~. ~al1iuonitoth~g ~ td ftiroak~ the in on by~ mrt~ta&iing ~ggrsgatedo~naini.i~miraof ~ ire-~i*thsrot f~r~wa~ and~prtcet~çth- ac~rossrthe ~boai~d, ~ btt~t do~Iish ~he ~ro~itient ~ `to~4-sand, byvthe -way, I say this ~about labor as well as~ ~ ~tb ~at a'niod4fl~m~ -tn ag~dri~etitrnseS~$ tw~A~e. ~at~Lli1~edhe ~oci~i~ntrt4ts i~hab a~ i~g~o PAGENO="0241" 239' Mr. ~ Social contract is nqt working well in Eng'and, be~ cause I do not think they have any.'I think ourlabor h~s bern f~r more responsible. Senator BROOK. No question about ~t. If they were not, we would really have a i~ie~s. Mr. NATHAN. Yes, we would really be in troubie. Senator BROOK. Thank you very much. The CHAIRMAN. Mr. Nathan, I am going to ask those who might i~ot agrç~e with your `conclusions to do their own ~stndy and look at your published data and your information and I woi~ild like to have a few extra copies of it-the b~acl~up information he're-~-~so we~can make it available to them. Ff they ~lo not agree ~ith this they should tell us what is wrong about i~ and see whait conclusion they reach after they put the pencil and challenge some çf these figures th~t they might wai~t. But it seems to me that what~y~u have said here illustrates some- thing that Congress has not been aware of; that those Arabs ini~'ht haye had some logic in what they were ~ing when they `put prices where they put them. Because ii~ you loak at what is iik~ly th~iappen, if you are an exporting country or a~1 ex~porting cartel there'is oi~iy one of those n~tious that ~you `are e~p~ting to thait has the potentia~1 of not only becomii~g independent in short order but a~Lso o~f exporting instead of importmg. Ançl that `is the thiited States of Amerioa. `Now, where cud they put those prices? They put them right about where you are putting them on the basis of saying, ~eil, now you do i~ot need to import this from us if you do not want to. You' ~ean g~ ahead and achieve energy independence. But you cannot produce this any cheaper than `~e are selling it to you. Mr. NATHAN. That is right. Ye's,they may have thad `a sen~e of sorne~ thing around this magnitude, I do ~ot kuow an~d `I am not sa~yin~ `that the $12.83 is 100 percent perfect. But I think It is a very, very near correct ~gu1re. The' CHAIRMAN. It `would i~ot be very ~mazt for them, all thing% considered, to put their,priceto where within ~ or 4,years, their car~e1 would be completely shattered by the eepnomic ~actor~ fa~vGn1ng pro- kiuetion `in the United `States `said e~Ise~here. A good place t~ put `it would be to put it right aboi~it, çr sl~ightly bel,qw the poii~t w~re the United States conid'aichieve indep~mden~e. ~Mr. `NATHAN. Yes, `I think'that is logical. The CHAIRMAN. Now, if y~u~lpo'k ~t ~hat~ t~hey `were saying,~t t~b~ir meeting. They were ~saying that they were se~ng this sti~ it ~ll together to lower price, thtrt (he rest' of the ,~o*1~cl could ~ot produce it any `eheaper'than `that. And t~h~ir argi~m'en~ has that much `i$rjnsie value. I am~iot saying they are right'about that. All I am paying is that tbe,y were just ilJustr~ting something that I was aiway~ led, to belie~re ~was'the `first `lesson `that a `young `wan is supposed to 1~arn i~bout bu~ine~s. ?t was `to}&the, story ~bout the b~ts- iiiessman `who went `home and'~ said, `now ~n, `let us s~e if you have now~ mastered your'~r~t lesson in ~h~i~ie~s. `sow mud~ ~ `two ~nd tw&? ~And the `so~i ,~aid, `Pop,~but `that ~di dep'entis. ~&iid;~'ie said, `it depends ~on `what? And'he said, are'w~ btiyi~j or are'w~ ~eTh~ng? And now from the paint ~f"~ew *dfihÔs~ Am~s, `yes, ~th~ ~u ,duce that stuff at 50 cents a barrel or less. But when they are selling PAGENO="0242" 240 it to yon, a good~ businessman is not going to sell his cost o~ produc- tion, he is going to sell it at what it is going to cost the other man to produce it. Mr. NATHAN. That is correct. The CHAIRMAN. It is somewhere in that area, between your cost of production and the other guy's cost of prod~uction that their price is going to fall. And what they were going to do is to move their price up to some- thing that would appear, based on your calculations, to be pretty close to what it would take us to produce new oil in the United States? Mr. NATHAN. That is correct. The CHAIRMAN. Now, I hope we can find ways to achieve this. There. is one other, thing I think I should ask you about. Now, you are testifying for a very fine group I, have all the sympathy in the world for and I have expressed it many times. You are testifying for the Independent Domestic Producers, I take it, small independent producers? Mr~ NATHAN. That is correct. The CHAIRMAN. Most of those people are still getting their depletion allowance? Mr. NATHAN. Yes, sir, a little bit, but they are still getting some. The CHAIRMAN. I'know that there are quite a few complaints about the fact that ~v~e drafted something that was too tight for some of them to live with on, that they cannot sell something. they cannot comply with their c~ntracts~-wherè a man drills and then after he' gets the well drilled if he finds oil he assigns an interest to all of the partners. And we have `got it `drafted so when he goes to sign it they do nOt get their depletion allowance and all of that~ But maybe' that can be worked out by regulations. .However~ those people, theoretically at least, are still getting the depletion allowance. Now, what would this figure have to be for a medium, or a large independent, or a major company that is not getting a depletion allowance ~? Mr. NATHAN. I thii~k to eliminate `depletion' allowances entirely would probably add something in the vicinity of $1.90 a barrel to this figure. The CHAIRMAN. Because I think, ~sinee you are testifying for the other people, you can be regarded as being sort of an impartial or unbmsed~ witness talking about the competition. Mr. NATHAN. I would be glad to do that, sir. The CHAIRMAN. Thank you very much. Senator NRLSON. Did I understand `the chairman to say he was go~ ing to have some critical evaluation? Do you have any critics of this methodology? ` ` ` Mr. NATHAN. `Orally, Senator, nobody in all of the discussion we `have had with people, nobody `has criti~ized' the technique. The criti- csrn~ has been, somebody says, well, 15~percent rate of return is too high, you ought to use 10 or yoiv ought to use 12, somebody else said, well, you have ~got ~in there the bonuses you pay~ for the right to `drill and since that. derives from the price of oil and if the price is higher they are willing to pay a higher bonus, PAGENO="0243" 241 But one of the things you will find in out' methodology here is that we lag our bonus payments by 2 years. In other words, our 1974 bonus in here is what was paid in 1972, because what you acquired in land leases in 1972 you do not start usually drilling that. So, we have had a 2-year ]ag. So, we have not got the really very, very big most recent bonuses in there. But even if you take that out and even if you reduce it to 12.~- percent rate of return you might get this $12.83 down to. $11.50, ~11.75, $12. Senator NELSON. The reason I asked the chairman is that when I find a good New Dealer like you hand-in-hand with a conservative Tenne~sean~ I tend to be concerned about it. I am a little unsure. Senator BRoCK. We found some areas of disagreement. Senator NELSON. .Not very much. The CHAIRMAN. I appreciate your statement here and I publicly invite anybody to obtain a copy of the backup information which has ~been developed and to offer a critique of it if they want to. Because when I read your statement that you delivered before the Interior ~Committee, my reaction was that that is an approach which I think ~is essential to solve this problem. We need to know the answer to a number of questions. One, what will it cost to produce energy? What is it going to cost us to produce oil? What is it going to cost us to produce gas? What will it cOst to produce coal? The next thing you want to know is how much money is it going. ~to take and how much on an annual basis. Then we need to know how we go about getting all of that and we ought to try to make some ~plan to bring those things about. Now to proceed on any other basis, to just run around here shout- ing we are paying too much for something-if you cannot back it up ~one way or another you are just talking about passion and l~ard feel- ings that someb~d~ raised the price or that those Arabs you think really give you the worst of it. That is not going to solve the problem. It seems to me as though the price will come down as far as the world market is concerned when the United States can produce its own requirements. Then we will have some leverage. Mr. NATHAN. Yes, I agree with that, The CHAIRMAN. Thank you very much. Mr. NATHAN. Thank you, sir. [The prepared statement of Mr. Nathan and a document entitled ~`Calcu1ation of New Oil Costs in the United States, Years 1959 through 1974", dated May 1, 1975, follows. Hearing continues on page 255.] TESTIMONY OF ROBERT R. NATHAN, ON PETROLEUM PRICING ON BEHALF OF ~MAI.L PRODUCERS FOR ENERGY INDEPENDENCE The development of policies and programs designed to maximize the inde- pendence of the United States in the energy area is both highly important and complex. One element of this issue which has been discussed by many Con- gres~iona1 committees relates to prices of crude oil produced in the United States. The deep concern of the United States with the problem of inflation makes it especially important to understand the relationship between oil prices, oil slip. plies and oil demand on the one hand and thç dangers of continuing inflation on the other. Particularly relevant is the impact of oil prices on the supply of oil, and, most importantly, new oiL PAGENO="0244" 242 M~ n~v 1e~ttmoi~T Will indt~;~ate~ JU2T ~ and I 1ia~e studted the econornie~ ~QSt O1~ 4~UiW fo~ ~ ana prodi~tcin~ new ~ri. it ~s clear Uittt 1f~ r~rh~es ~et for n~w ~ o41 ~c~e i~n~t1equat*~ to ~o*~r the costs ol! ~x~iffi~at(o~i and ~$!odtttng new o~I, ~r~or~atkia ~ prc*th~etLox~ w~ifl be ~tged. 1NTt~ ~ a ~ap~ aatI ~ ecb~aii~ fact tha~t ~io~ rbetor4e ~r gea~era&tz&~ ~j~iis~n era~e, ~U'e reeent J1i$tQ~ST o~ p$ces 14w1 exploratiou strci~ng1y em~b&sizes the fact that adequate prh~es are an important determinant of drilling for new oiL I urge this eotum1tto~ to take into aeco~fl1t the dlff~irentia( costs between new Qtl in r~st ~eai~s aml t3* ~res~* l~eis o~sbeb ~s4~s. Aisai~ is ~ssent}al to take into consideration the cost of new oil as distinct from old oil. It Is' in the in~ t~re~t of the Tiii~e~ ~t~t~es ~tp di411 exleuslwely in order to know all that can be known about total s\tflpltes. In this respect we n4tSt protlile ine~Atlvct to m~d~- ]flize the e ioratio~t and e~plc*tat1on of new oil, and this principally calls f~or~ prices ~f iteW oil that will cover costs. Any level of `priee~ below that levei will curtail new e~ratien and ll~ona t~o s~p~jly~. As you may know, on April 28, l97~. L snbwittod~ to~ the Senate Committee Q~ ti~e Interiqr a statement entitle4 "The COSt ef Findihg, De~eloplng, A~id ?ro- ducjng Crude Oil in th~ United States." This statement was based on a detailed thialynisr of thd 1mb' ecoisonlic coats in%~olved hi' all aapects of new prcsltietibm of cmu~je oil in' tltis ceuntr~. ~be res~Its ~`e bot1~ e~ruiftea1et ~nd pro~crocative. It' I~ ~it~ cle~r that foi' some tlpi~ o~l pri~e~ in the Uutted States' have been at ievel~ well ~l~y ~ctwi~ costs an~l this b~s ~~ad ~ discoi~raging impact on fInth ing ~nd devebipi~g new sources of oil nftppiies, These t(ndlnfs ulay not be good newn fbI~ u~, bi~Tt it Ia esseritiat that the 1!1t~±ts IJ~ tieveloped and~ aired in ordet~ to arrive at policies `which wjll be compatible with moving towardi the ftithll~ r~e~t of r~natinna1 ob~ect4v~a of reducing ei~r depe~deneO øh insecure sources for o~rgy t~n4 ~edueipg the ptLfavorabte balance of pt~ymerits resalting from heavy imports of crude oil and petroleum pr~alucts. Sñpultaneously, we must take into account the `onger-run needs of Consumers am! the problems of geuu- dral' 1nPatiO~. The fo~io~uFng ob~ervntions i~elafe speciPeally to the cost and p~iee problems~ Q~ new oil UevelQpment ip ~ Tjnit~ed~ States and should help to shed light on a complex and sensitive subject. It should lie noted that' these problems are quite di~tinct from two other issues that must be addressed by ot~rall energy policy : the problem of conservatibia by constraining demand and tIlt problem of pre- vei~ti~g' or o~setting unIntended' enrichment of producers of old oil or liii- ~ of conshm~rs. T~e~e we are dealing only with incentives and meane tp ad~l tp domestic supr~lies. Unless Oil cail be sold by producers at prices sufficient to ç~over costs plus 1( r~turw ow tile operator~s capital investment sufficient to sustain ti~p1oration, then swrtly wildcat drltltiig in the United States' will decline. it is the rate of return cjn capital investment that provides the driving force to sustain the level of exploratory activity, rJ~his, in turn, determines the level of our oil discoveries~ and production volume. It is in thls context that we must take note of the huge' cost increases that have been experienced in findllig, d~v~loping, and producing crude petroleum. The attached table, Exhibit I, provides data on the econOmic cost of finding, 4evclo~ing and producing crude oil in the United States fot each year dkiring' the period 19~Q ~rough i974~ The oil' (and regulated gas) reserves found eacis year tepr~seuIt' the total quantity of usalil'e reserves that are available fo~ pro- ductiha' a4trthuinblc to all new wells drilled within that year. The total levOl of capital investment in drillings each year in the United States (excluding Prud~ h'ob Eny) i~ ais~ skt~vm ~ vbnu v~fW~nl the sal~ of each yeat"s discovered re serves of oil and `thele attendanil eo'sba were projeCtedt year by year over the ca~cnlated life of the reser~e, The price at which each year's discovered oil was as$uni~e~ tQ `lit soi~ over tile l~fé of the fe~e~vO was thPn determined' to be at that level ~b1cb *o~hl~ yield a di~cobntCc1 cash flow tatO of return to the pro- ddcer ~f f5~ ~iercept after ~a~yment of all costs, i~cl~ing income taxes. This is r~ti~teU to as the "econOmic price," ta that it represents the price necessary to lpdnce wildcat. p~od~acCrs to take the riska and iAcnr the costs attelidaxut on fi~e1~pg and ~e~elopiu1g ~ sonrCe~ o~ ei~de oiL In thO Ieni'atIbi~5, all costs' incurred in tile dtilllng of dry wells as well as new discoveries ha~ve l~eefi taken into account, All tax ixweutites~ sUch as in- tangible drilling costs and `percentage depletIon, as they actually existed In PAGENO="0245" ea~eh ye~r~ h~e ~ ~ ~ iØ~rr~yj~ at th~ p~i~e dn~ã&1~'tb y4ei~ t1~ i5 ~ ~ Qfre1~n~ I~j~74~ e1a~1~ p$c~ ~es~ r~oit~ tite 1Ore~ .re~ f1~tth~ ~nqre ebco~j~ arid reoo~pi4~ a~cu ~ i~om ti~ q~ng~s i~ pe~ep~a~ge U ~et~ce~ ra~teC~ aflcb tlie~ 65~psi~eent~ tn~a~iiheoa~ ci~g~ ~i~pteU ii~ fi975, Itt' c1~es~ na1~ take Into~acootw~t the 10 perc~t zainiinnnr preference tax on percentage depletion or~ tife bigis thain 50 peseent Income ta~ bracket of mrtn~r tndtvdiduai entrepeeneurs. An e p~-iseeugs,ge~ in oil ~exploratio~~ is th~ttnct1y u 1que~'from most other kincl~'of~bc~ness. It utlli~eadnpletlng' capital. as iaeonje andY then expends the larg1er'pau~ of t'h~s income Ia ventur~s, many' of which result in a negative re~ turn~ Four~ out of five exp'k~rathry wells drilled are di'y. A 15 percCnt' return on inveSted capital must be regarddd as an extremely conservative base for calculating the economic price ih an industry that iS sd spCcula~tii~ and r}dk~ laden. The year-by-year economic price and the actual pried received fbr oil d1scov~ ered over the 1959-74 period are shown graphically in Exhibit II. As is evident, only in 1959 did the price actually received equal or exceed the economic price' for new crude oil. The consequences of this price situation should have been anticipated. During this 1959-74 period the number of barrels per exploratory well drilled dropped by almost 50 percent. The level of drilling activity fell by* 56 percent. The number of independent oil producers declined from an estimated 20,000 to 10,000. The price chart largely explains these declines. Reasonable' returns from exploratory drilling involved real costs that far exceeded the prices at which oil was being bought abroad. Despite the recent price increases in crude oil, the economic cost of new oil remained above the price actually received through 1974. If new oil prices were rolled back or if ceilings on new oil where set at levels below the economic' cost, taking Into account the cost effects of the changes already made in per- centage depletion, we could well again experience the situation that resulted in the precipitous decline in the discovery of oil reserves over the past 20 years. Oil is more difficult to find than in the earlier years of the industry, but scien- tific techniques are increasingly sophisticated and costly. If the decline in do- mestic discoveries is to be reversed for any extended period of time, the existence' of appropriate economic incentives-absent for so many years-is a necessary prerequisite for more exploration. Several observations can be made tha~t are pertinent to your hearing and will serve to update the basic study findings to which I previously referred. First of all, exploratory activity declined somewhat during the past 3 months, after' reaching a 10-year peak in mid-March. One would have expected such activity to increase in face of the rising reliance on imports. Explaining the decline in active rigs, from 1,672 in March to 1,625 for the week ending July 7, must, to~ some extent, be speculative. However, it seems clear that the chances made in the percentage depletion allowance, with the consequent reduction in internal' capital sources and lowered borrowing capability, plus the specter of price con- trol~ on new crude oil production, all contributed to the change from increasing to decreasing exploration. A second development of significance has been the continued firmness in the' prices of imported oil despite the worldwide drop in demand, production cut- backs, and increased U.S. tariffs. Indeed, despite repeated predictions of sharp~ drops in the price of imported oil by government officials and others, the outlook seems to be for higher rather than lower prices. It is well known that imports of crude oil are holding at high levels and threat- ening to go higher. What is not ~s well known is that during the four weeks end~ ing June 27, 1975, imports from Canada into the United States east of the Rockies dropped to 412 thousand barrels a day from 682 thourand barrels a day in the' comparable period last year. As a nation, we are not only becoming more import- dependent, but more dependent on imports from less secure sources. If and as recovery takes place in the economy, there will be more imports. As an alternative to larger imports or increased domestic production, the nation could undertake a massive conservation program. Nothing has happened since my April testimony that would lead me to believe this is in the cards-short of another oil embargo. What the foregoing adds up to Is a trade-off between increased imports of Mideast oil-the only place from which they are availnble-~and increased domes- tic production, which depends heavily on new oil. We calculated the economie PAGENO="0246" 244 eost of finding and producing new U.S. oil at between $12.50 and $13.00 in 1974. That is au average cost.' Some new oil may be produced at a lowi~r cost and some ut higher levels. liowever, it is clear that as the price of new oil is controlled at levels below the economic cost of finding and producing it, less new oil will be sought, less produced. As a price ceiling is reduced, It is inevitable that the level o1~ new oilproductlon will also bereduced. Assuming that a serious conservation program is not undertaken, then the quantity of new oil not discovered and produced because of price ceilings set below the economic cost of producing new oil will be imported from the OPh~O nations. This contributes to our balance of trade problems and increases the threat to our national, security resulting from imports froni Insecure sources. Indeed, to pay a higher price for domestic new oil than the cost of Imports could he regarded us a national security insurance p~emiiim. At the present time, bow~ ever, the reverse is true and it could be said we are enjoying a national security bonus rather than payment. PAGENO="0247" 0 z U- 0 0 C-) 00 (44 `00 ~ ~ 245 `JC'400((j ~ C"4C~J<~4~ ~ 0 ~%A(~JC\4((4 (0) ~o 004004 ~ 0) ~ (`~-o ~ 00 0OQ~~ 00 00 ~ -~ 44) ~ C)C)C) ~ 00 0044)000 ~a 00.0) L(~ (0) ~. ~ 0)00 (0)C~~ r.. ~(` r- ~ 00 ~) 000)00-0000 ~0) ~ 00004 ~ (0)00) C) ~` C'4 (0 C) ~ ("400(0400)0000) ~ 00. ~ 00('004 `-~-o.-o (`4 10('- ~ 1 44) (000000000000000(000 00~(04 ~~C'J00 C)) 00 ~ 000)0040000400 (`4 0000 00(000 od0000 00) ~(` PAGENO="0248" ::i;~:1.:j~:i £CAICUL.ATED COST OF NEW OIL FOR 15% ~IS~UNTEDR~&TE OF ~ETIJRN (AFTER F Y) (Based on Annual Total Unted States Actual Re~è~Add~d ~thd ~Co~sit~4 Investment SpentY UN IT~ED STATES(°) ~i~1 LA Rus. MoORE ___ I 12 I - 4 1 2 0 :1 Price Receiv~ For New Oil During Ye~ir jyp~~ (East Texas F~4) 1 .-~ .5 :`:rI. :"`~::~ç ~ 1964 1965 1966 ~ 4 0 ~a)ExcIus ye of P udhoe Bay * 1956 1957 1958 1959 1960 1961 1962 196~ PAGENO="0249" 247 PAGENO="0250" IDellar per barrell ~ Year ....~..... ~ ~ Economic Price Inca received for for new oil 1 oil 2 Difference 1959 2. 86 ~ 25 -- 1960...... 3.40 325 .15 1961 . - 3.34 3.20 .14 1962 3.77 310 .67 ~ 4.27 310 1.17 1964__...~ 3. 32 3. 10 .22 1965 3./9 3.10 .69 1966 ..._. 4.73 3.11 1.62 1967 3.11 188 1968 . 5.13 316 1.97 1969 7.01 3.32 3.69 197th 7.25 3.40 3.85 1971 8.22 3.60 4.62 1972_... 7,36 3.60 3.76 1973 8.63 8 4. 20 4. 43 1974 12. 73 110. 50 2 23 I Cal. 18, exhibit I . 2 Price received f~'~ oil during year (east Texas field). JNew oil. 248 EXHIBIT III A.-ECONOM1C PRICE OF NEW OIL AND PRICE RECE1VED FOR OIL PAGENO="0251" PAGENO="0252" EXHIBIT V.A-DOMESTIC PRODyCTION OF 9RUDE O1L~ ANP NATU~L~ GAS U~JJIPS AND IMPORTS OF CRUDE I~E~ ~ UNI1!~ S1~fl~ 1959G44 t~thot~*~ d~ US, ~re* cMcthtt tmp~c~s H~4~O ~nIt~tat~s W.S. c~tJtnptior~ - - - - - - --~--------~--- - 19~ - --~_---- ----------- - 10* - ~- - - - - - - `- - - ~- - ~~:::~~: - ~- - - -~ - - - - ;- - - - - - - --- - - 1;2~ 1~7I~. - - 1~ZL - - -,, - - -, - - 1~_ - - - - - - - + - - - - - - 1~N - - - - LA fltE, 1~Ioo~ ~ ScnA~ DaUa8, ~ May 1, ~7L N~tW OZL Ct~S, Th~r1~ED S~rAu~s, ~EA~S 1D5I~ Pm1oi~rn 1~4~ MAft 1, 19~5 &~OØ3 &f 1n~/1tt~. A ~tiidyba~ be~~n i~1e t) eMtft~thte the e~oiibm1e cost of ~hi~U*g, de~e1op(ng, and. ~~rod.ttdlig ei~Ue ~etrolettrn ih the UnIted States, exciush~e of the Prunhoe l*~r held in ~18ska4 ftn~ each ~at dnrfn~ the perled from 1950 thrOugh 1W4. YOnriy lilaterhml' dttto*s to Ose TIMltced S{ates all re~er~e ineentor~ were ana~yzed Its ~*~Id the eA iad4ture~ aseo~tafed With pettOleuin e~cp1nration and delbDthent atMed -~,roredred lny an economic model desigIted specifiea1l~ fey the dir- its aoed gas~ the te lIqees esed ü~ aihe geuera1i~ appflcØle to ttht~ira1 gnt pr~en~ ~1toe nan~. e onomic f ttnm are common to bath. ~ ~sae-a~thorl~eIt b~ ~ ~oheet It~ ~atha~ t~res14ant at 11~ohert R. ~a.AM~mte~ h~'o, ~o~ce ~nfonmettoe ~sIt4in thIs rtmt~ wns ~ihtalh~8 from p~bflsb~d rorircer which ~we odes! to hO the i~dst rdlIItble and oth~IetO, Oar own fi1es~ ~nd wo&k ~mjOrs Oosn~I1eft `dhettrrg f*eeions wofit oh ohat da* for t~nl!ect I iepmidence. The deThu- Itatiohr of he*~ ~41 don ahe ~-~tsn~ ~tl& there de~kOlobOd b~ tii~ Itrte~agedcy 1~ask f~Orde oh Wi~ ~heiMh~ 1~L V~ 2~. i~t~eie~ at the U.~ (lealogleal ~ar~'sey, Sakne Of thO mO~rr tF htmtiatllltohed r ihn3~ be forhrd t~h ~ thM4~r A ~i detlee ItdM~een -e~Dn ~jh~n an*OtAiilea dii eaHdeninhIe~ enti iL~hees in this rehert. SUMMARY AND CONOLUSTO1~S A series of computations have been made far each of the years train 1959 through 1974 to estimate the econoipic cost of crude petroleum in the United States. These studies show that the economic cost of crude petroleum in the United States, exclusive of Prudhoe Bay, itiereased from $2.86 per barrel in 19~9 to $S,7() per barrel ji~ 1973. During the same period, the typical selling price of new oil thcrei~ ~rO~i ~t3.25 to $400 p~r barrel. As a consequence of the ever increasing disparity between the actual e~onomie cost and selling price'~ petroleum exploration during the period declined sharply. PAGENO="0253" 251 Bflw~h i~5~*Mxiifl&Wtfl th?111Thr~ áeth~ty dr~rppe4 8ft~pth~ee~ WIMn d Ia ~r~vIdt~ tPétIItt~t1t $ E~Ø ~r~èmt~ and over 1CtUprothloerM, many of substantia1~Ize, foltiie It ffidr1~ kttráctlxre It C~1I tIt~It ~pre~èattles ffi Iargtt InterMtloaal firms t1~an t~~eOiK4%thue et~ItiflPtIS aeUvltlet ~ ~ N~tIDftw1ae eUsts h~vi not been compiled fSr i974~. but we have estimated capital exptdlttteb ba~ed ofl~ We ilumbut of w&Js drilled ansi have calculated tha aMhbthla cost of till fobn8 In 1974 tie be $t2~84 per barrel. As a result of the kfttb otnbarge; tlm1974~ seliThg price for crude olliacreased; to approximately `fl(;~to~*~~l btrSlç ~~tiditig gteat stliflhts t4~ e~plothtoCy dtilt$ng and x marked. r4flfsffI irS the 1tt~y&ar ttekiid of d~cl4tiin% aetiWty, ~ ? Eetmomtd set ir delifted ai the cost of finding, devclkpiug~ and ~ pro&tciu~ crude petroleum plus the minimum returt on the op~r~tOr's~ capital necessary to sustain exploration. The economic costs of new oil supplies are calculated by the discounted cash flow rate of return method whereby reWhflS from the sate oft aM ThbI± httefltut eoSt~ tü~ prujeeted i~Sr1t Over the Ov~eeted life of `the $sdrVt~. Ott jitlt~en am adjti~idfl Withiti thu Oeoh4ifWie nWdel iffitil thu die' ~tnfttf~ `SUb M,* ta~th Of ~ctUUh to life' Øtitht?@F `(atth fflthtl itWonit taxes) is ift petceut, the mlnithffin M~tifred hi `our opfMeh~ to maintain exploratien levetr. lietdfieti teStis `at the econOMic cahutittiSs and the methods used in tliei~ dFivatiou are contained within the text of the report. Øñè $MpdmSiit ?aniior aft Oeth~ eOOMJMW Oil ~dsM in tue `defdatlun `allowance' *thuh `hd~ hO% bOnn repeti1d tot the tthtion'e M&jot pr4ddSr5~ Calculations Wsqe pr*fthlsly O~lfig thu SIMM tiathbmie taodel Mit `not Included itt this watt Wk've stkr*n tMtt etIMiitiMi M thu delitetioh atliSnOc win hieroase economic coith 6tnew oil t~y'a~tffit4matel~~ ~O to'2flretn'nt. SW3?tthftfed~ JOn 11 L4tnn, P.K. PnYolexth &spldratio* The bas4c elemctit'C `Ut ~ptifrotebth `~urptOStioh kt1e rUSh 11W sahiC `atoilS the world. CjYufto Oil `pro'ditel±On is thu Sfninkt'ioh of a matfs ides-kite sucCesSful te'sfirlg 0± a ckirtei~t Ii ~iØthe~tS of Where oil nsi~1it lie fonmi, Itibas come froth I44h~~ eOtWc'eS, s(idh at 4. stu~17 of `Srial phSO((tajShs, reednhtiidstSce' seislnl'c sdr\~efl, `ekahuiithlfon Of lOgs frOnt nnSeSSsThl WellS, &tid anulegies With condi- tions elsewhere Pus suit of exploration itleto, mk\ result in C piOtC ot tatt$flolt itifOithafibui, w~t1eli `Oftefibtlteus the thea. TM~ piece of infhrhvatl'ofl, Which is fi0q~ehtl37 ttittirped to as a "lead~4, thny lie u~thihg more than the subtle change lb tiontour. SpdOltig on a flAb or the wicy a rivOr `cha'flges iS dhntsc CS it flown th~o'uflh the ~jaM. ` LcacFt vihich otter tite mOSt ~rotht5d ate lrfl estigated S asiflihe additional `~cdtb*fUS, g'e8j4h'~V'Stcilifs, lingifteets, aS ae~1pnrflftg `staff fe1n~atte `ImitnetCtidkss of all available geologic data and postulate petroleum neenititilatloas. Tf the thea slill `flôtiWrt in tlOA~e' `nietit (hi. the ottliS of the fit `oWe htSitiS Will), the tOad nth~~ `lie bp~ra'tl~d into a ~reshcct~s. kt this jihhltt, leas~eS ate~ft1rehMsOd, &fllhySaj etet `Oi~e eriflged. to Waite Sfld3W,'Ufld `Ueolobhiial `Sfe holes tntaw L ttçtiled. Eqlornnoti bSiogtsts and geo~tys'4ClWts Wilt tlteb tht4tflet the itew jnforihatton to' Self the otigisthi eOltSpt `Was tt(ttd. If the `flew ditta al SWpØWM the grosfiect cia than~ `cases it *iIt hot) `and it a~eofs to bWfØ stffleiunt' Coin- th'&citii botefitiCl In tetattdh to OrbOth being cfralfiCSd, tile ff'Speot is slated for oi~e or mpye ex~floratory wells, floof of Detnol4Uth resciM en conies only from cfrtllItIg eaplofatat? *uits-~there is no othet way. the hogt of ntodetn `geophfllcOl teetthltp4~ give `bitt `a ehdaoWt iuteicuie of j~laccs to look tot Vet~olenm ~ectfllitII'atiOhs thu eaplaratoft well inst lie prottuctite ot dtv, bt~t the odds ~rO i011 f'sn or its bettig tfr~ In 1914 far exthn1ite.~ s:OOO Of thu s,~oo `Utptorattity ~ve'll& dt~ned tailed `S dftd"ttilet' Oil (Yr fran "aith Were `abahddhtid alt dry IbIS. if the expmtati3rt `well ±s `sneeessflil iii finding oil, new oil resends are `added ta the lJntted' States `in'tient*~ Ikiehufles ndded by drilling are classified into three general categories: new. peld~~ new reservoirfi in o14 fields, and extensions tc~ old fields, Rescyves addc4 `by drilling have ~istoripally been revised upward, most coMmonlY through huiitiemetit&tlon of enhanced oil recovery techniques. fldue'thØhOtrt `011W edpMrdtiOfl the fore'aoine, tibtOh is genes alit retOh1&l to is thb etplor*toit pintse in the `iite Of an oil field, is folloWed by the detefOptutint Ut tli'e hehu Wiled ad4ftiSCl Wells are dt4lIe~d and equipMent is itittOiled to aeat'Moddth oil ~rod*cttbb~ PAGENO="0254" 252 1)eveloprnent investment is usually divided by accounting conventions into two ~ : ~v~1 uiiIling and eqidppiiig costs, alit lease equipuient co;ts. Tl1he \v(~1 ~ -..`~ ( )(~~ia t(~4 I eo~4t ~ illChl([e a I I C4111(1UItS through which oil is J)rOUuCed to the ~~iirJ~t ;lfl(L the ~ve11Jieac1 a~senbiy. Lease e~itipiiidnt includes surfaces and sub- `~l1iIth(~ ~~uinpiiig equi~iiieiiL 1)i1elilles to storage, an(1 lease storage tanks i'e- (juire(i br huWiiig flfl(1 niea~niiing crude petroleuiii l)eIore it i~i sold. i~:pkiu~tiiu of ilie held begitis wlieii tbe first well is piaeed oi~ P1O(IUCtiofl and (()I~11fl1(-~ Ufltil operatiilg (osts equal rhe operating revenues at which tune the field is abandoned. I)uring the exploitation period which typically lasts 25 to 30 yeaj*s, wei Is require contiiiuiiig attention to keel) oil p1'4)(l1~ction at economic levels the COsts of labor ;~mid materials to maintain equipmeiit and oil production ore retcrrei to as produiiiig or operatimig costs. J~conoiinc con.sulcraIion ~ A. glaa-e at dry l~oie statistics omi Table 4 shows that nmmmy failures accompany tIi~ si e e~sfuI wells v~ hich d~iiue new oil fields. En `~h failure represent~ a con- shorn he expenditure of time amid monies in terms of geophysical and geological cu.~i, e~ae acijuis~tiou, geleral and adm~uistraLive cost, and all other oullays at1rij~able to getWig tao pu-ospects to the point where they are abandoned oi' seit Ct(d l'ai fling. Ant- viable entity engaged in prospecting for and producing crude petroleum must generate enough economically successful ventuies to pay for both its fail- ures and successes. Moreover, to justify continuing exploration activity, the pro- ducer must earn a return on investment commensurate with his risks. Should the producer do otherwise, petroleum exploratory activity would cleclhie and firms having revenues from oil production would seek more secure investment oppor- tunities. One tremendousl.y corn jdicatimig factor is that oil is discovered in a some- what random fashion and a firm exploring for oil may continue in a umet-loss husitioR tom -\ era ~ea is i fore it con lii hteu mined that it is unable to continue or uiitil a discovery is made which covers the previons losses, in this study we hive endeavored to set out in the most straightforward man- ncr possible the relationship between oil found and cost attributable to the find- tug of that oil. The frame of reference is the entire United States during the past Th rears, exclusive of the Prrdhoe Bay field in Alaska which is iii a geological province for which we have very little history. The 15 yeais prior to 1914 have becim a period of declining petroleum explo- ratory activity. During this period, an increa sing number of producers found that in the face of rising costs they could not find enough new oil to justify a Ltempts to replace their reserves and, therefore, began de facto liquidation. Because of the randomum nature of petroleum finding, a few (!XJ)lorers prospered during this period, but most, and indeed the nationwide exploratory industry as WE ~biiil show hi Icr, did not. We have quantified the e~ects of increasing costs and decreasing finding ra tes on the cost of new petroleum reserves in time United States. it serves no useful purpose to state that finding costs are so much a barrel and lifting costs have increased to a specific level unless one is so familiar with the magnitude of these numbers that they can intuitively be cons erted into piofitability. Since few people even those withia the petroleum industry, can readily make this transi- tion, the historical economics of oil finding have been expressed in terms of time economic cost of new oiL The economic cost of new oil is calculated by taking into account time amount of oil discovered in any one year and the cost of finding, developing, and pu'odiw- irig that oil, PiuS time minimum rate of return on time operator's investment necessary to sustain activity. When the economic cost is compared to the actual selling price of crude oil, great insight is provided into the forces that di-ive petroleum exploration levels. The next section, "Methodology", gives a detailed account of how econom1c costs of new oil are calculated. Methodology Activity in petroleum exploration, like most endeavors, is driven by time pro- ducer's anticipation that ime might impiove his position. The najor considerations in exploration decismonmaking are cm'rent petrolei In irwes extra polo lion of pa st economic experience, and the current laws and regulationS concerning petroleum finding and extractive processes. If prim- experience seems to justify continua- tion of exploration, the limiting eonsti'aint then becomes the avails hilitv o~ risk capital which is normally generated internally shmc e petroleum exploration vemi- tures cannot be financed through commercial lending institutions. PAGENO="0255" T~ tI~ii~ stw~ty we h~* `Iso}ated h4~c~ ~ear~ ~pentlithre~ ~foi' p~Vu1~i~~ ~1~rat&on aii~t de~ioj~eiit ~rnd ~t1Ié ~i1tIthá~te ~etr~!êtth~ r~s~r~ ~cT~e~ ~U1±~o~x~i dri1~tk~ thi~thg 1~1ft~ ~ rear. ~L'1i~e re~ves i~Ver~ p~o~j~ted ov~ t~eI~r e*pe~t~d 1i~e~ so that i~h~ fU1~re ~thrrnaI gross r~veni~ ~ro~n th~ ~ ~ ei~ud~e o14 ~tt~1 4t~ ~is~oc~Iated ga~ eiuld i~ ~1~u~atM. ~ All ~&sts ~ts~so~iate~t With t~iie bil production were deducted to calculate net c~s1~ flow to the producer after ai4~o~h~ t~4tes. ~ ~ . Laws eon~r~i1ng dep1etf~n a~1owa~e a~d 1nve~tment %a~ credit in ~ft~e~t tl~i~ itig the sear of d{s~o~ery *ere u~d th t~1cu~ting 1th~net cash fto~v ~.thce the~ factors were the ones inth~tench~ e~p1&ra~tor~r aet1~4~ ~n ~t~ia~t ~ear~ ~tna~Li~n~ adv~uitage of intangible drilling deductions and depletion wa~ t~nw~i~i i~ ~cUF ~UU~S 1~t the ~rQdu~r h~c~ other i~neoi~ ,~ga~nst which to dedtiç~t a large pQr~i~u i~~ib1e dri~i~g costs, ~ ~ ~ ~ ~ ~ ~ ~ ` ~cot~94~ic cds~t~ of ~W ,Qfl wei~ ca1~iit~tted W th~ ~fl~onntèd t~~t~h ~qw~te of return xnetbod wherein Oil pñce~ wOre adjusted i~uttll t~iO `od~c~i~ ~ r~tte of return after ted~rai li1coi~e tax~ was 15 ~r~ent, thO rr~inhithth rO~nire~, in our ojurnon 1~o n~o~uta~~n exphQra~1o1~ lev~1s 1Ii~ ~l~othitet cash th~t meth~od ~tâ~ i~s~d i~i thIs ~tüth~ beeause it i~ a i~i~ni*~ersally `a~cej~tOd. ~ ~n- vestment Ctiterio~o th fet~olettm ex~1orat1on ~u~d ~)rOdttebou re~1*fr~s Th~luIdtt'ti economiC pro3E~Ot1ons for the ~v~ars ~959 through 19~t4 tna~r be fó~rih~ tJ~ Tab~I~ ~1J, through 26 1I~he b~ttom line Of the~e pro~eetiOn~ 1~ summ~ri~z~t ~n ~±~thië ~ ~ `Uso inchii~hO~ ~ts f~Otnotes the derivatiQti Of the eolhiiins ~p ç~Lrl~Iig o4 ~tim ~o hoflue pr~ject&ons The exact ca]culatlthi ptoc~dui~e ai~d ~e~l~at1th~ oi~ edii~i~ paramOtets ina~ be followed by &am1hlfig1~I~able~ 2 thron~h ~tO~ ~co clal~Yis niade that the eaicttlaticnI i~ ~precis~ ~ue nil t~pe~i~* ar~he, `~o~ e±~vthple, that the g logical ~e~pOndttth~es pro&t~O ~b~t1rjia~ t~ se~4 ~y~a~ts.~r that ro~alty ççp~tise~ are. ~bstañtlaIl~r greater thun The ~n~-e1~h1~h ns~ln~he Oalculation or that bil W~11s~ cost more VO o~arate then ~ ~O~[1s. he~e~ih~Meht~ were not made because basi~e data are ~Ot av4ilable to ~ei*niit m'OrO ~detdil~d ~hif~ ferOntlation of ~the~ Costs. `~`urther, 1~ Is bOtiOr, in oifr ~t~m~iit, tO hati&Ieth~ ~ tistical dat~i on a consistent basis~ratJaer than to hutroduce arbttrarr aasiililpttqhs w~M~h would adtl little to the aOr~ ot ~be ca~Oi~iation~ and WOuld n~t nla~e- ~ial1y chahgu the resu'ts; A consciou~ ~4ffOi~t ha~beOfi m~de tO Pe1?Qrm the irnicuIa~ thops . ip such a p~pn~per 1~ha± ~he ~e~ul~ing e~onornic ~oal~s ~f i~e~ ofl are ~nit p~terstdte~ In ~gCnerai, 1n~±dducilon o~. AI~i/O cIathihe~ data'apd rO~hienieflts in the thohnldne wOtflçi ro~nlt ~t1 ~1tghrly .b~iet~ ~1i prices; ho~e~Ter, `the th~th~th~i~ u~O~t provlde.a `pn~!stent bá~1s f~r rn~kjii~ uiCanlng±tLl ~ flistorieái z~serve ,a~rlltion~ in the tTihit~d ~atOs are ~h~cii Ofi ~table t ThtkI reserves ~Ldtt&l ~ drilling include extOu~Ion~ of oRl Oil fie~ds discb4rOr~ of lae* ilelds and new re5~rvoirs dIsco~re~ed ~n old fields A sOcorid ca'te~oty of ~e5et~ ~u~ditiOns in~htnies revisiOns to e*istlr1gres&ve~ whiCh ~re the a1geiH~ple ~unnfl~ tion o~C the posttttte anti n~gtttFve adjustments *0 re~Or~T ~s In ~tll of.thOi1~1cis in tI~~ United States T~ie qil reserve rev~Islot~.t shpw a lOn~g po~l~i~ h1stOrl~ tre~nl, priL manly bOeao~se recovery fâctor~ ba*é been lncreaseçi as a n~sult Ol$condary recovery projects Revisions ii~tech In i~(4 ~for m~a~m~le may come ab~n%~in pgrt because a WeatTh~ta~I1eId foti~titi In thO, 1~O's ~waspl~iced q~iwaterfibbd lb 1P13. Ei~tor1eii1y ench barrel Of ~pew reserre added thrOu~h tiriilthg Il~i~cr~ie ail additional three-f~unths barrel of uflthrOugh fire rCr5ioh~j~roce~ lid The u~itl~ te~rss~rve4~15ç1pipst ~ oitiiey~air's e ~ Table 3 is a compilation Of historical expenç1iture~'ip the United ~States as~Oci~- ated with exploring, developing, and producing cru~O petrOTetun for the irears 1059 through 1973. Drilling statistics for the same period plus 1974 are on Table 4, and Table S depicts the calculation of operating expenses allocated to oil wells, compiled from data presented on Tables 3 and 4. Implicit ih the calculation of operating expenses is the assumption that operating costs for oil well~ are the same as gas wells. This assumption, which is required because oil and gas well operating costs for' oil wells generally exceed those for gas wells. Table 6 shows the combined capital cost for oil and gas wells, as compiled from data on Table 3. Capital Investments allocated to oil operations based on data appearing in previous tables are on Table 7. Also shown on Table 7 is the adjust- ment in capital expenditures in the Prudhoe Bay field so that the calcul~ted capital costs apply to the United States, excluding Prudhoe Bay. Cost components related to well drilling and completion costs are on Table 8, together with the cost index for the years 1968 through 1974, The basic cost data used for the years 19S9 through 1973 have not yet been compiled for 1974; thus, it was necessary to use the supplemental material from Table 8 to estimate capital 55-583-75-pt. 1-17 PAGENO="0256" ~54 expenditures for 1974~ Table 9 ~bows a comparison between drilling costs appear lug o~i Table 4 and thQse computed from a completely different source listed on TaIl~ & The. correlation between -the two sources was judged.s~tisfactory for use i~ estimating the drilling cost cQmponeut of 1974 capLtal expenditures. Caiculatlon prQcedures for estimating the total j~974 capital expenditures related to oil are shown on Table 10. The detailed calculation of discounted cash flow rate of return and economic oil price for individual years fi~om 1959 through 1974 ~s shown on Tables 11 through 26. The results of these calculations are summarized on Table 1 and footnotes appearing o~ Table ~ apply to Tables 11 through 26 as well. Analysis of. rcsult~s' The results of the calculations summarized on Table 1 are shown graphically on Figure 1, which ~lepicts the economic cost of new oil and the price actually re- ceived for new oil during the same year. The East rrexas field was chosen as a reference for new oil selling price because of its large size and long history of consistently tabulated oil prices. Figure 2 shows the cost of the average well drilled during the period from 1P59 through 174, and Figure 3 shows the average monthly operating cost per weli during t1~e same interval, with 1974 being estimated by eztrapolatlOn of the curve. The tyend in the amount of oil discovered per eiploratoty ~vell is shown on Figure 4, Data presented on this figure are excl~~ive of allocated reserve revisions. i~igure 5 shows the number of drilling rigs sold at auction in the United States~ The significance of these data. is that auctions of drilling rigs are usually distress sales and most of the rigs sold in this manner are junked or dismantled and used for spare parts, The first drilling rigauction took place in 19~0 and by the end of 1973 over 00 percent of the nation's drilling equipment bad been permanently removed from drilling service. The reason for loss of the driIli~lg rigs m~y be ~een in Figure 6, whIch depicts the total drilling activity, an. increasing number of drilling contractors were forced to sell tl~eit equipment and cease or reduce their operations. Figure 7 is another activity indicator which shows total oil wells drjlled. Figure 8 indicates the total exploratory wells drilled i~ the United Statès~ and Figure 9 shows the total footage drilled. . All of the activity indicators shown on rigures 6 t1~ropgh 9 have one thing In common: in the 15 years prior to 1974, the level of petroleuip ezploration bed shown a continual, decline. The reason for the re~etion in activity is apparei~t from Figure 1, which shows that during the early 1960'~ the economic coat çfuie~ oil began to exceed the price for which it could be sold in the United States. By 1971, the economic cost of new oil was about $8.00 a barrel, or more than twice the selling price. A predictable consequence of the decline of petroleum activity was the sale of many substantial producers to larger or international firms and the beginning of the liquidation of the couptry's oil reserves~ By 1914, economic cost of new oil had increased to over $12.00, based on esti- mated 1974 capital expenditures and operating costs. The first major reversal in the 1~-year trend of declining exploration activity occurred as a result of increased worldwide petroleum prices In late 1973, when the United States selling price of new oil reached $10.00 per barrel. [Whereupon, at 3:45 p.m., the committee adjourned, to reconvene at 10 a.m., Fri-day, July 11, 1975.] PAGENO="0257" ENERGY CONSERVATION AND CONVERSION ACT OF 1975 FRIDAY, J~t~LY ii, 1975 U.S. SENATE, CoMMIP~E ON FINANCE, Washington, D.C. The committee met, pursuant to notice, at 10 a.m., in room 2221, Pirksen Senate Office Building, Senator Russell B. Long (chairman) presiding. Present: Senators Long, Harry F. Byrd Jr., of Virginia, Nelson, Gravel, Bentsen, Haskell, Curtis, Fannin, Hansen, and PackwoocL, The CHAIRMAN. The meeting will come to order. I wish to make a statement regarding procedure, An objection has beenmade to the committee meeting after 12 o'clock while the Senate ~s in session. However it is the judgment of the chairman of this com- mittee that this legislation is so vital to the Nation's future that it would be unwise to postpone or delay this hearing or in any way delay the progress of this bill toward enactment. Under the rules of the Senate, so long as there is a quorum present, it is not within the power of the Senate to require any individual Senator or any group of Senators to be present on the floor, although objection can be made to a committee meeting. If we are precluded from meeting officially, we will meet unofficially. We will meet as a group of Senators, if we. are given no alternative, and obtain the information, and find some way of making it available to the Senate, even if the chairman has to pay the stenographer himself. Because some of the statements may occur after 12 o'clock, I will order that the secretary obtain and make a part of the rec9rd, all, of the prepared statements of all witnesses, just as though they Were read. And I will also order that the secretary obtain and make availablc for the record all statements, all questions and all answers th~t were made yesterday while the Senate was in session. Any statement that was made after objection was made in the Senate of the cornniitteeme~ang is ordered to be printed as a part of the record. I now call the first witness, Mr. Herbert S. Richey, vice chairman of the chamber of commerce, and such advisers and associates a~ he may care to have join him. We4. are very pleased to have you here today, Mr. Richey, and I ani sure I speak for the overwhelming majority of this committee who share. a profound admiration for your fine organization and its record of service to this country. (255) PAGENO="0258" ~56 STATEMENT or ~t1~1tT S. IUCHEY, VICE CHAIRMAN, C~AM]3~1t OP COMMERCE OP THE UNITED STATES OP AMERICA; ACCOM~ PANIED BY: WALKER WINTER, CHAIRMAN, TAXATION COM MITTEE, CHAMBER OP COMMERCE OP THE UNITED STATES OP AMERICA, AND P*~TN~~, ~IO$~ I~A~D~S~ G'~EEfl, BA~OO~~ & PARSONS,, CHICAGO ILL; DAVID I~UKEN, ACTING DIRECTOR, NAT~ URAL RESOURCES SECTION, CHAMBER OP COMMERCE OP THE UNITED STATES OP AMERICA; JAMES GRAHAM, ASSOCIATE DI~ RECTOR FOR ENERGY, CHAMBER OP COiYLMERCE OP THE UNITEfl STATES OP AMERICA; AND ROBERT R. STATHAM, DIRECTOR, TAX AND PINANC~SECTTO1~, CHAMBER OP COMMERCE OP THE UNITBD ~TAT~S O~ AMt~&ICA Mr. Bimzr. Thank you, Sen~ttor. We are delighted to be here. ~3fy name is Herbert S. Eiehey, and I am vi~e cfilairman o~1~ the hoard -of d~reotors ~f the Chamber o~ Commei~ce of the Unitea States, wd I j~residtht thd thief exec~t1~e offic~r `of ~he V~iiey C~z~np ~óa1 c~, lo- \eated in Cleveland, Ohio. ` I. am ac~omp~nied by my fellow board member Walk~r Winter, ~hairmari Of th~ national chaniber's taxation c i~thttee and a partner, in the Chicago law firm of ~oss~1ardJes, O'Keefe, Eabc~ck & Parsons; David LukOn, actth~ dfrector ~f the chamber~s Mturai resources sec~ tion and James Gra~iat~i, associate lirector for energy; and Robert It. St~atharn, director of the chamber's tax and finance section. We are appearing before this committee on behalf of the Chamber of Commerce of the TJnitOd States, the largest associatimi of bnthnèss. and profes~ional organizatiolis hi the United States, an~ the principal spokesman for the American,, business coi~'imunity. The nat1~ñ~l chamber repre~sents over 3,500 tr~de associations arid chambers of comiñercè. It~ ha~ a direct membership of over 4S,00~ bu~ixieM fitrii~ arid an `underlythg rn~embershlp of approximately `5' milliori individnai~ and firms. flased upon the eriergy utth~éd by the conimer~ial and iri- ~iustrial seoter of our economy, the national chamber federation prob-. ably represents the largest energy-users blot i~n the United States. On behalf of the uational chamber, Z wish to tharik the committee for this opportunity to present its opinions ori nati~haI energy pohc~ au~ the house Enargy Tax bi~l, IT]t. ~0. Th,e Natioifs energy prob~Iem,, serious as it is,, conid be treated ~mpIy. We n~e~t to reduce our reltance on forthgn `energy supplien~ To do that, our prime ob~ctives ~m~t be to: One, `increase domestic ~roduotion of. energy su~plies~ and two; recb~ce consrinnptkni by cui~b- rng wasteful pMctices~ In oi~r c6nipetitw~ enterprise system, there is only one sure way to accomplish both ob5ectiv~es: Remove price c'on~ trols from oil and natural gas. This market~pproach would ~1lpw prices to ~ise~ The higher prices would p~o~ide ~n incentive for `p~du~ers to explore and develop greater domestic supplies of oil and ii~furat gas. The hi~hGr' prices would also spur consumers to con~erve fuel, to look for way~ of reduc- ing their consumption. In addition `to removing price coptrols on oil and natural gas, the Congress, in coordination with the administration, PAGENO="0259" 267 ~sh~iu1d r~ino~e co~tmints axid em~our~g~ ~`eñnein~nts i~ four addi~ tioirnl major ~ Ones facilitate tb~ avM1&~ility of oi~r na~u'aI re~our~S~ W~ must a~ceIerate ie~sh~g and d~v~1opni~mt of th~ Outhr Contineutal Sh~1f, 008, Revise ~edera1 1a~hds poii~y to r~stirne cø~l leasing on public- lands and s~pand leasim~g ~f ptibli~ lands f~ir~il ihale aud g~oth~rmal dsvslopm~nt. Expeditiously develop the capthility to utilize Alaskai~ natural gas~ Support increased research aud dwelopment of und~r~ developed doxnesti~ energy resources such a~ oil shale aud geotherm~i ~n~rgy. Two, revise e~isting constraints on energ~y production and consump~ tion. Establish realistic standai~ds and procedures for surface cc~J mining and land reclama~ti~n, Assure a balance between ie~sures for envirc)nmemital proted~tioU and the economic utilization of domestic energy resotirceS, Artieitd the Clean Air Act to permit greater use of coal. Develop procedures to expedite the siting of energy facilities, including nuclear power plants, refineries and deep water ports. Sub- stitute coakfired or nucle~tr powerplants for oil or natural gee fired plants wherever feasible. Three, assist in revision of energy demand. Establish natloual mah~ clatory heating and cooling efficiency standards for new buildings. Stimulate dcvek~pment of new technologies for industrial energy cofi- servation. Maximize resource recovery and energy ~eco~ery tech- nology. Develop an ethic of energy conservation on the part of the American public. Support active public and private campaigns to conserve energy. Four, free the marketph~ce to allow the capital formation essential to meet future energy requirements, There is no better example of the misguided use of price controls than the history of natural gas pi~oduction. The Natural Gas Act of 198g was enacted to protect consumers frOm the inherently monopo~ listic operation of natni~al gas pipelines which basically ar~ regionally noncompetitive. liowever, producers of nefural ~as~ which are hu~hly competitive and `regionally mobile, were ~pecificaliy exempt from the act. These pricing policies ha4~ ~atised the prese~tt natum~a1 gas ehottage and have contributed to our overall d~i~ièstic energy shortage in three :lvays. One, artificially low natural gas nrices rednc~d the economic incentive to locate and develop new supplies of natural gas. A redlic- tion in the rate of discovery of new gas accompanied the 1~PC's price policies of 1~58~4Q. Two, demand for natural gas accelerated sharply in response to the ~leclining real price of natural g~s. Mahy inefficient and Inappropriate uses of gas were emiiloyed. The clean~burning quality of natural gas aiso Increases its i~alueT though not its price, in these environment-con- sciOus times. Predictably, the rapid rise in demand for natural gas and me drastic reduction in new findings `has brought about the present shortage, catising severe curtailmente of natural gas deliveries to businesses, hindering productionand ethplo~ment. Three, bey~ud just the present natui'ai gas shortage, artificially low natural gas' prices ha* contributed significantly to cur domestic shortages of other fuels. These low prices had a depressing effect on PAGENO="0260" ~258 fuel oil pric~s since fuel oil competes with natural gas for many uses. As a consequence of the artificially low fuel oil andnatural gas prices, the dorne~tic fuel supply situatid~i det~riorâted in two ~ays~ A shift developed away from coal as a fuel and was hastened by rising coal prices, due primarily to increased labor `costs~ and stringeht envii~ou- mental controls. New exploration and development, was forced away from domesticresourdes to foreign resources~ Most of the easy domestic oil and gas deposits had already been discoi~cred, Present costs of ;exploring and developing offsho~ areas. and Alaska; are about 10 times the cost of typical onshore drilling. The result was expanded develop- ment of relatively inexpensive foreign reserves, such a~ Venezuela, ~Indonesia, the Middle East, to raeet domestic demands. Thus, the combined effect of artificially depressed natural gas prices, ~reduced development and use of domestic supplies of all fossil fuels, and accelerated demand has brought the United States to its present precarious situation. To reverse this trend, new. natural~gas shOuld be deregulated immediately. . A receiit Business Week article pn the intrastate natural gas market illustrates perfectly what happens when a market is allowed to func- ~tion freely. In recent years, some Texas intrasta;te gas pipelines have curtailed deliveries just as severely as the interstate lines. Following an almost textbook example, the shortages caused prices to rise, in the unregulated Texas gas market, which in turn encouraged new drilling and production, The result has been the production of more gas than Texas can consume, forcing the price down from' around $1.90 to in some cases $1.20 Mef, a price which interestingly is below some cur- rently propbsed statutory ceilings fOr gas. The article points out that the higher prices haive made gas users far more frugal. An expert estimated that most plants have cut consump~ tio~ by about 15 percent simply by using better insulation, recovering ~waste heat, and taking other gas saving steps. Additional evidence ~indicates that the higher prices resulted in a 20 percent net increase in producing gas wells over the previous year. A study by the Texas Wild- eatters Association shows that gas production from new discoveries amounted to almost 1 trillion cubic feet in 1974. That was 15 percent above the 1973 figure and 21/2 times the 1970 level. Decontrol of crude oil will also significantly increase production and decrease consumption. The Interstate Oil Compact Commission ~has estimated the decontrol will increase produbtion from old `oil wells .by 850,000 barrels a day, resulting in a net addition to reserves of 10 billion barrels a day by 1980. The Federal Energy Admini~tratiOn and ~`the Chamber of Commerce have estimated that decontrol would result :in increased cOnservatioft of `400,000 barrels ~per day. A large percent- ~age of these savings will displace' foreign Crude oiL Utilization `of coal. The U.S. Bureau of Mines has. estimated that ~there are 434 billion tons of cOal `in' the demort~tFatecI coal reserve base of the United States. It is e~timatCd that 50. percent of this coal is recoverable. The demonstrated reserve `base is coal in relatively thick beds which lie close enough to the surf a.ce to b~ mined b~ conventional surfaee oi~ñnderground methods. Thns, a minimum of 217 billion tons of coal is available for recovery by present technology and within pres~ ent economies. At current consumption levels, this' is enough coal for PAGENO="0261" 259 ~3OO years. Even at the doubled production rate projected før 19~5, this is enough coal for a century and a*htrlf. However, the demonstrated coal reserve base is only a minor fraction of the coal knowh to exist in the United States~ The U.S. Geological Survey has identified 1.6 trillion tons of coal deposits at depths of less than 5,000' feet; and it is estimated that about as much udditional coal lies in deeper seams or in unexplored areas. Coal at these depths i~ mined ui `other parts of the world, but in the United States it has not yet become necessary to go to such depths and expense. In short, the United States has a nearly boundless abundance of coal, enough to last for centuries. What is required is a policy which will k~ncourage the fullest development and use of the* available reserves, in~luding'the development of technology to mine and transport the coal in the amounts needed in the future, and a commitment to assure lull use of this most abundant domestic resource. Such a policy should ~tlso consider that synthetic fuels from coal can make a timely contri~ but,ion to dwindling supplies of natural gas. An important Government action would be to resume coal leasing `on Federal lands, which has been frozen for more than 3 y~ars. The ~requirement for an environmental impact statement on most Federal notions has evolved into a paper bludgeon to thwart most expansion plans of the mining industry involving Federal lands or Federal ac- tions. Additionally, SNG, ,shale oil, geothermal, nuclear, solar, and other potential forms, of energy can make a significant contribution to The high degree of dothestic energy self-sufficiency. We believe quotas, `if implemented, would legislate shortages which will require allocations `and will mean restricted energy for all, seg- ments of the econoMy, especially if we do nothing to increase domestic supply equal to the shortfall. The proposal to tax the business use of oil and n'atural gas is ill- conceived and misplaced on several counts. When fully effective, the excise tax on the' business fuse of pil and natural g~s ~ill fbe, $1 `per, barrel for oil and 18 cents, ~er thousand cubic feet `fOr gas. this is a negative approach to the stated purpose of the provision, encouraging business conversion f~r greater savings~ The answer to encouraging greater energy saving is not to put a penalty tax on business but to let the market system'prodi~ice more efficient energy supplies and new :sonrces of energy. If the tax is designed to encourage industrial conservation of oil,an,d gas, thi's has been, andwill continue to be, accomplished more efficiently in the marketplace by interaction with higher energy prices. A recent Department `of Commerce survey of industrial consumers shows that .industry in 1974 ñt energy consumption on a per unit of output basis by a median 7.6 percent which then-Secretary of Commerce ~`rederick Dent called very substantial. The majority of the energy reductions were in the 6~oercent to 8-per~'ent range. }`Iowever~ 10 reporting in- dustries recorded savings of over 30 percent~ As technology responds to higher costs, efficiency will continue to improve. ` ` If the tax is designed. to encourage industrial conversion to' coal, this~can also he better accomplished through the marketplace where "industry can deterthine what enei~gy source is most desirable"based on cost and availability. industries which are unable to convert to coal, PAGENO="0262" c'i~~ ~ f ~ ~ a~iir q~a~ty constraints, would be unjustly p1~~ TJ~~ in~du~tti~ wh~th 4~ t~o ~oriire~t ~ e'~a1 sh~i~4 bsi~t~ th~ougb~ a p mp~t capital örecJOWei~y s~yStc~ Wh~iC~ ~ en~i~e~ecI i~ ~ l~et ~e1cti~, r~Ltlio1~ t1~a~i by wocid~n~ i~ig*i~ pe~Jby ta*~i~, P~alty i~a~e~ ~r~in n~d~l capital ft~' eom~a~ni~ 1~o invest in e~rgy efiici~ncy eqnip~ient. Addi~ t~of~all~r,, be~u~ n~rn~rl .gas~ ~ w~d~erpiri~ed, a t~1~ otir iti*oukl h~*v~ littJ~ effect on cc ervairion or c~onverslou~ Since its price would con- tio~nnidn 1oeiI~W thop tfeoal o~crndn oil, An excise tax on oil and gas will raii~e revenue, but do tiothing to ines~prodi~on of ~as'or oiL*hñreh ~houM be the thii~rst of national gy polã~y. ~F~ae L*~dSt e~1ci~nt er~atioi~ ~s i~e ht~e seen, will result froni hi~hereñeag~r cost~'wh~eh ~ and i~'roditctiro~ ovisbm~eeror~ s~rgy~ a~itul is am im~irtent f~t~r i~ ~erg~r' ex$oratioi~ ~ devek~p~- ~ncai~ E~tin~tes ~f the~c~pital ~ee~s o~ theen~rgy in~ustry over the next decade have reached $1~ trillion. E~itti~g and anticipated tat ~ohcies greatly iuthi~i~ie~ i~avestme~rtt ciceiá~ns b~ th~ energy corn.- ptWies~ Ath~itional ta~;bui~d~t~s o~ tltre~t~ od~ additio~i t~es ~afl dls cowP~ iuvestment and im~ecie th~ velop~nent of es~ei~tial eitergy ~u~plies. Thus~ there ~xist~ a e4 tMn~ $etween t~e~ ~id the en~rgy cris~s~ ~acin~ a e~ita~l s1~oirtage9 the energy ~i~d~nstry ~ s~dea~1t a severe ~ by ~ 1~w~tio~n ~tQ~ ~97~ The act I reamed taxes ~ 19~5 on the petroleum i~h~s4r~ by ~tl~nost $~ biUion~ The severe liuiita~ on the. p~tcentage dep1~tiou s~Tiowance a1~e could reduce avail,able t~apit&l Lu ~ by ~L7 bilIiou~ Tlese~a~dvei~'se changes in the tax law~ with regard to natural reso~wces pouid sei~iously impair th~ search for new energy. There. have b~emuume~ous proposa~s to izx~pose an ex~es.s profith ~ax on euergy produe~r~ cá1pau~e~,We o~pcs~ e~cess profits taxes, They i~uu counter to th~ ~ompeUtive e1*er~rise system are economically im~ arc difl~c~lt t~ inist~r and are not a solution to the current èner~ ~ ~tÜ on ~ce~s p~thfits sug~è~ts that the Govcriiment ~ decide h~v i~u~ch p~ofith should be ~id which pro~ts are excessive ~ which ar~ not. I~ ~hi~ i~ possible with the energ~ producing segme~it of the oconçm~t, tlk~n why is it not possible with other segments o~ the ~c~iht~tnji~ `~i~e M w~ stop ~ What ~*riii he the ~hortape~ next year and the next, and which businesses will be subjecte4 to G~ver~n~ie~it ~tdatjdñ and cotitrol of their ~ ~ ~ pt'o~t~ t~±es d~scou~a~ ca~ iini~e~tixzeiit they deve1~p- trient o~ new energy resoiiroe~. Ther~ is a de1~nite psy~hologicaI e~ect on investor~ *bo krto* that atxy s~uOees~ will be stibj~t to a tax that ~bui~' ~ tho~it of' all the ~ofIt. Eft ~4kliti~th, an e~c~a~ profits ta~ ~otM hate the 1!eet o~ ~attshig ~othi~a e~to' deity capitai ijwestmeAt a~tioi~ itlitfi ~ time' i~s ~the %~rx ~1res~re~thi~ iii k cM~nfth pos1~- ~onémeflt in t~he i~ment Of pr~du~i~e faci1itië~. at~ iid~M ~ any fo~i'ii Of e~e~ ~t'oflth tax. ~f on~ i~ imposed, however, it must contal?ii ~ ~lb*b~~~vhion. W~thOiit a pio~back ~d~1o~ri, the eapitul ~itai tO ~the ~olt~tlon of America'~ ~flE~r~y nee4s ma~ nOt be availabiE~. I w~ld i~k~ to th~ik the ~ornrnittee fOr allowing' the ~hamber #f 4~othii~ree to k~Or1i~ t~ iii~it o!n4thiS moat criti~ai i~*th~thal issue. PAGENO="0263" The. CII~1~N. ThanI~ ~ verymuth, sir. We are proeeeci~ng und~ the early b~rd rule, and imless ob~jeetion is heard, we will co i~u~ in tha~s fashion. And sinCe the c~bairiMn was the first Senator present, I will avail myself of the opportunity to ~k the first question. You have suggested th~mt we should amend th~ Clean AlT Act in to use more coal. How mncb. additiooal pollutie~ can ire expeot in the atmosphere in the metropolitan areas if we sw~toh to natural gas a~id fuel oil to th~ extent that it is being nsed~, and us~ coal instead ~ Mr. RIOnEY. Senator Loi~g, thwt is a dithci~lt question to ai~swer specifically. There are ~pany areas that are not in metropolitan dis~ tricts that can convert to coal, which we do not feel would lead. the air with impurities. I might also add here that there have been greaf strides in recent years in the collection of particulate inatt~rs. I think when people speak of air poalution from coal, they speak particularly of sulfur emissions, and there is a great argument ~s to the lack of-well, there is readly a lack of knowledge on the effect of sulfur emissions. What we, as coal people-and I am speaking here as a coal man--have recommended is that th~ high sulfur coal be allowed to be burned, that the standards for health should be set ~t ambi~mt levels-that is, the level that we breathe-axid ~iot at the mouth of tim smokestack. And that in times when there are weather ~nersions~ cloudy days, heavy days, drizzly days-that the powerpiants withi~ or near urban areas, metropolitan areas, l~e re.quire4 thei~, on a tern~ porary basis, to convert back to lower sulfur fuels. I think I am right in saying tl~at approYxmate~y ~O to 60 percent of coal reserves in the Easteru part of the United states are what a~re now called high sulfur. reserves~ And of the low sulfur reserves, ~ grea1~ number are committed to the pro4Eucti~n of meta&irgioal coal for steelmaking. The CHAIRMAN. Well, it has occuTred tq me that along tb~e eastern seaboard, so long a~ the wind is blowing from the west-and that seems to be the preyailing direction- Mr. RI~IIEY. Yes; thatis the prevailing wind. The CIIAIR~rAN [eontinui~g],. If you put yQ~u~r: ~e~iaeratmg plant somewhere near the, coast, and so long as the prev~iling wind i~sh1ow~ ing westward, it simpl~ ~mrries the smoke out to sea.. And wbii~ it is nice to se~ the horizon, it would not make ~ lot ~f di~erence ~cept in the summertime when bathers are ~ut ther~ wanting fi~o see it, ~Q that during the winter months, when we have to do a ~$of heatmg, i~ would not make~mueh di~erence, anyhow.. Now, when it is blowing the other way, you might witch over ~ use gas or fuel~oil or something that has a much lower degree of pollu~ tion t~ it. We are going to have t~ fi~d~ome ways of ma~ng some comprounses if we are gok~g tç become energy su~ic~ent. I think that is clear. Mr. RICHEr. This is correct. The CEMua~rAw. Now, it has also qccurred to me that we must i.mme~ diately take steps to rednee consumption ~curbiug wastdulpra~cbces~ We now have ~tility rate structures all ~o~v~r Amer~ca wlnch were designed to encourage waste. You drive clown the roal a~nd you ~e a sign with three little birds on it, saying, ~`~lectricity is cheap, cheap, PAGENO="0264" 262 cheap," urging you to use more electricity. And el~ctricity is priced so that, `the first ~, m~mber. of unite you ~iIl b'u~ `would be `at about 14 ceifls a kiiowatt-bour~ and ther~ it would drop dowh to about 7 cents a kiiowatt~-h'~ur. , " `,. It seems to me that it should be just the other way aro~,md that the early it~'ou~ght;to be the cheap units and the late tmits'ou~ht to be the expensive units. `So if. you conld persuade `a fellow ,to' insulate his home,, the savings would be' twice as `great; as it `would be if the rates remained unchanged. That is, if a person Us~d the same amount' of energy, `his bill would have' `to b~ inc'rea~ed but if he~ reduced his energy consumption, his bill would' be'about the same as it was before. Cam you offer us any'~uggestions along that line?" Mr. RIonEY, Senator, I think that there are sorrie studies on that matter going onat'the present time. Our feelirig is that *ith the price of natural gas and oil domestically increasing, that people will turri more and more to elë~triCit~ for domestic heating and other domestic functions. * The price of èlectrioit'~ is going up, as you know; arid I think ~e have covered in our repOrt, `and certainly back it up with further sta-' tistics, that thi~ `already ha~ caused savings. `I know that in my own industry, `the coal industry, we have always be~n pretty poor, and we saved every nickel of electricity we `co'uld, that ~as a big part of our costs. I think more~industries that"were profitable perhaps used elec- tricity a little more freely. ` ` I was amazed to recei~e from one of our largest corporations, Gen- eral Motors, a rather thick report, SOme ~½ inches thick, that showed the *a~s that they saved e1ectricr~y. ~or erahiple, if I recall the fig- rires right, they produced' as many cars, let us pay, in I9~3 as they did in `19G8 or 1969, with a tremendou~ reduction in electricity. Now, this èan be done. In the household, I think it is a little `more djffieult for a person to save electricity. There are some talks now going on- `The Ou~InMAN. May I interrupt for a moment~ You are making a point that has appealed to me for some time. I look at television and hear the fellow adv~r~ising that if you insulate your horne,you will save `$150. That is, if you put his 6 inches of insu- lating material in the attic, you will save `$150 in the winter. Now, if you "structured utility rates be it for natural gas or be it for electricity, in such a fashion that the laSt units came very high; then he could advertise nOt that this is goinjtO save `$150, but that it may save $300. * ` , Now, the, Hop~e, bill would give a person `a tax break to help a person, to insñlate hi~ house. If we requir~ them to reverse the rates, that adds t6 the incentive so he saves $300 in a year. If it cost some- body $1,000 to insulate his,home and if you give him about a $200 tax break and rev~rse utility, rates, in ~1~4 years that would pay itself out. Then if we can find a way to help finance it over a longer period than 3 yeai~s and have the utility company collect for the `monthly payments `as part of ,the~ bill, he would wirid up paying no more than he was pay- Ing befoi~e. In faèt, he would pay less. `And after a few years, he would actually h~ve a smaller bill rather than a larger bill, by a very ~ub~ stanti'al amOunt, because he had insulated his home. PAGENO="0265" 263 flow, fundamental to all of that, it seenis to me, should be simply the restructuring of the intes. That does not cost the taxpayer any thir~g. Why should we not do that? Mr. RicuEY. Well, as I said, I' believe study is going on on that., I believe it should he made. Now, your specific example, I do `not think anybody can disagree with that. The C1iAnu~rAN. Now frankly,' the' man who pointed this out to me w~s the man who wa~ the chairman of the board of a big pipeline company. This company is delivering to all of these utilities, and to him it is absolutely silly to be still pursuing a rate structure which was built to encourage waste at a~ time when you ought to be encouraging' economy. Mr. RTGHEY. I think perbap~ there is another side of the coin, speak~, ing f~r business and as a businessman, if I have a mine or we have a factory and the more. electricity we use the higher rate we pay, this is discouraging expansion. I think this is what I fear. And I see a flop over, as I have been reading in the papers, in the rate gtucture of ele~: tricity. `it seems to me that to encourage expansion and thus produce. more jobs, large users should have a quantity discount of some sort~ And I tl4nk this is the pre~ent rate structure now. The C1~AnmrAN. If you are doing what I am talking about doing, it will put people to work manufacturing insulating material and in- stalling it in the attics of the houses. Down in my part of the country, they are building homes with the air-conditioning running 24 hours a day in the summertime and the heating running 24 hours a day `in the wintertime, with no in~ulation whatever. The air-conditioning machine goes constantly; it never cuts off at all-either heating or cooling, as the case niay be. And it seems to me we ought to make it so~ expensiv& tb waste energy that `people cann'ot afford to waste it and you would provide more employment, not less, to do what I am talking' about,' because you would put people to work insulating those homes. Mr. RICUEY. Well, I was~ speaking generally of the whole business, economy, not just the insulation industry. It sounds to me like your problem down `there is' that `there should be building standards that would require insulation o'f'homes. The CHAIRMAN. That is not a problem down there alone. I bought John Mitchell's apartment after he moved out of the Watergate, and it has glass walls. The outside walls are practically all glass, with no insulation whatsoever. And nobody has done a blessed thing in the~ whole Watergate complex, one of the most expensive apartment coin- plexes in Washington, to do anything about `insulation. In fact, I do not think anybody has even turned off the pilot lights on the gas ranges inside that building. , ` Why not proceed to make it so expensive to waste energy that the people who are supposed to be running that apartment building will say, we cannot afford this; we have got to start insulating. Mr. RIcHRY. Senator, if I might come back to our written testimony here, the chamber's position is that by freeing up the marketing prices' of domestic fuels, gas and oil, that they are going to rise according to the laws of supply and demand, which will fund more money for more discoveries. But this alone is going to raise the cost of pOwe;' PAGENO="0266" 26~ hea~b a&l ~o onin this ~eo~i 7. Ijirthe ~1~ctric iitility industries~, they are goi~g to ba~e to ~ paying inøre and more ~or f~e1, ti~an they have been, and their rates thereby are go~ii~g to go i~p~ w1tLe1~ I Viulik will a~cc~mpizsh wl~t you ar~ gg~s~g we 40. The CHAIRMAN. Well, I have exceeded my tiwe.~ M~ Etc~wr. But heifot~e it ca~ ~ arid re~1ly coi~rn~e~ut on ypur pro- posal-which I do not totally disagree with-as 1 s~id, it is my wuier~ standing ~that ~he~e are. ~o,iie ve~y ~as ~tndies ~na4e. ~± th~ proj~db, tu~d I think we aught to wa~ u~ti~l those are out b~ore we i~y to make ~d~clsious. The ~ Well, itsee~s to me we l~u~e te~ 2 years t1c~s way it ~s now. ~ before thie c i~tt~e meeting got &taz~te~ yo~ told me that insofar as mining coal is concerned we ought to quit waiting and go on and ~fbo eoniethüitg. Now, what I am saying is., iuso~ar ~s iflsulating bom~ee is ~oi~eerned~ we ougb$ to q~i~iL waitiug~ insof*~r ~s turning ont the pilot l~ghts on those gas ii~e~, we ought to q~uit waiting. We ongbt to get hesy and st~aitdoing soni~thiag. Wows I am willing to have somehocly prod me aii~d use & stick o~i me to make me do what thoidd be d*ne~ but I 4o not feel like being the only guy in the whole Watergate oo~nple~ ~t>hwt is ti~n1g to conserve on energy. it ~rant to u~ahe my neighbor do the ~sa~ne thing. ~Aiid then. lam willing to do my~pa~tt Mr. Eio~i~. I think it will hawe to lie done as you say, through the pricing meehnthsui. TheC~&m~AN. Senator HaskelL Senatoi' H~~iELL. Ths~ik you, Mr,\ChM~man. Mr. Riáey, L woutel like to pursue Qhairma~a Lom~g's general line of qnestioiti~ng. For example, taken into~ the induatñal ~res~ with the quantity die.. count way of ~ructuring rates there ~ no d~si*moentive to nse, of courae~ Furthermore, ~what it does S ezaceithate the peak bads~ .~&ud we all know that high peak loads require eubstaiitial capital juvestment. Mr. cIeET. Thatis eorrect. nutor HA~i~LL. For e~ampie, by using a rate syst~ with ~ for off peak usage for example, w~. would save ~t~e~ndons ~apitai investmeiits~ ~tnatber iwpe~ct of domestic pricing of utility ratos Ms been rnen~ tioned. I have a friend who has a country house lind another mutnal. friend was out there and he saicL iet~s turn out the lights. And this fellow said, oh, the hell with it; I never use up the mninimmirn~ Well, you know, something is wrong. Mr. Rioin~t, I do not live in an area where we have a minimmn~ This is something new to me. Senator I siu~i~t4. I see. Well, 1 am just pointing out the whole area of utility rate struc~ ture is a marveloos way, if we do it wisely, to save tremendous cepithi inweatmeut. And we are going to need to conserve power, in my ~er~ sonal opinion. Mr. Bicmr~ No question at all. Senator HASEELL. And also at the same time it SaVES energ~7. I would comirient that in Senator Nelson's State the utilities commission PAGENO="0267" ha~s done some ex~rim~TIting. Tile ~ub1i~ Se~e C~miissiOi~ in ~e~w York,, as you ~re uudoubtedl~ aware, is 1e~king into the matter subsi~antiafly. ~ut I cOfl~UD be~rtily with the chairmai~ that this po~ sibly could~ be one of the n~ost fruitful areas foi~ e~p1o1?atiO1l in oa~rgy sing, And I ~onId appreciate it i~ perhaps your orga~uzatioi1 would ~i~e a little th~u~ht to tile subject matter and advise us what yoll thitik abo~it ~t, I thm1~ that might be vety helpfuL Mr. I~ioiu~. I think that would be very possible. And~ I wou1~i like to comment on your first statement on Oft~ peak loading. This is very important. I do not know if it is still do~ie. I remember when the electric utility industry back in the 19~~s ~r~t bega~ to promote the ~a1e of electric hot water heaters. They were ~o programed or timed that they only heated during the of~p~ak hours, and yen gpt a~ reduced rate trom the hot water heater, ~ow~ *hether that still g~es on or nOt,~ t do not know. But the only probiem with it waa if you ran out of hot water duiing the peak timer theii you h~d to~ pay the p~omima price~ ~ortunately~ in our industry we are beth~l- ~ 2- and 3~shift industry, so we are using pôwe~ ~4 hourS a day, and this heips~ a great dea1.~ flut we do have a great capacity tl~~t i'~ ti~t used, from about midnight at night until 6 or 7 in the morning. Seflator Is~t~i~. Weli, if your organization would give ~ lititle thought to the general subject matter and advise' use of your tbltik- ing- Mr. Ricm~y. Y~es, I think w~ can do that. Senator H*sK1~L. Ihave np further question~. The CHAiRMAN. Senator Packwood. Senator PACKWOOD. Let me pursue coal burnii~g with you a little bit more. I am uot4 that familiar. w~tb. it,, in the generat~ou of elec- tricity, because I come from the West and we use mostly' hydroelectric power. , In your statement you sa~y if the c1e~n air ~rd~vision~ gointo effect in mid-1975, it would e~ct~veIy putiaw 200 million tonS of coal, which isajtlaird of all the pro~du~tiou iu thisco~mtry. Mr. RIcHEr. That is right. Senator PAOKWOOD. Then you say, with emerging ~uifnr~ d1q~ide removal teehn~iogy, aboi~t~1QO million tons ç~f thi~ 2~00 nillhlon, T as- su~ne,* could continue to ~e burned,, but the èquipmen~ pro~ably will n~t be ready for installation uptil around 1979. The other 1OQ million has so much sulfur in it that even these techniques we are now talking about will not work? Mr. RICHEr. It will work~ but it will produce sulfur emissionS higher than the secondary standards permit. The due date is now past, and to my knowledge there has beèti no r~strieti~ yet i~ the b~irthng of the' higher sulfur c~ahs. Senator PAcwWOc~D. Excuse me, how is that accompli~hied? Tf~ the deadline is past, the restrictious~ axe in aff cOt? Mr. RICHEr. I believe EPA has taken the positiun, that utilities who are working toward the development, .pu~obase and installai~ion of'snl- fur removal sq~uipiuent~ and, wh~ are making ~ttem,pts ana aceomplish- ing in fact the blending of higher suth~ir càals with lower ~uthn~ coals th~mducø the totid level of suij&ur gping, iuta boilers, that they are con- tinuing to operate. PAGENO="0268" 26 There is just no way that 1 can see that if 200-my figure is 240 million tons. I happen to produce high sulfur coal, s~ I am pretty close to it. That this has shut down some 28 percent of the electric generation * in this country, and you just cannot do that, But we are working toward a goal, Senator. To me it is not a goal that can be accomplished by pulling a shade down and saying today *everything is black, everything is white~ It is going to take time to do it. For example, I do not be1~eve that the electric utility industry could equip itself with the so-éalIed sulfur scrubbers in order to develop the limestone to work in the scri~bbers, nor to produce the extra coal that is needed to dry the limestone to put in the scrubbers, nor to dig the holes to put the effluent in, nor to develop the transportation sys- tern to haul the limestone from the limestone mine to the plants. And from the date of the Clean Air Act until thTh July, there is lust no way. So, this is going to have to be stretched out. I might like to add a point. When I spoke to Senator Long about the ambient air levels, I mentioned my own company produces high sulfur coal. We sell to two major utility companies in the country whO, for the last 2 years, have had sulfur measuring devh~es stationed away fromplants where this coal is burned, as far as 25 miles at the ambient level. Now, they have put them in river valleys they havO put th'~ni ~up on hills; they have put them in forests; they have put them on farms; they have put them in cifies, and they have yet W pick up a sulfur reading in the air. Senator PACEWOOD. A sulfur reading~ Nçne at all? Mr. EICHEv. No, sir. And this data is available. Senator PAcI~WOoD~ Would you send that to me? I would appreciate it. Mr. RICHET. Sir? Senator PACKWOOTY. Could you get that data for me ~ I would like to have it. Mr. Ricm~w. I would like to have the two utility companies who are doithis;hecause they are~outspokcn~ about it-~in fact, on~ gentleman has some very straightforward ads in the paper. Senator PAcKwoon. They are burning your coal, which is. very high sulfur coal-, Mr. RICREY. Well; it is relative. Senator PAOKWOOD. Two or three weeks ago~ I read a story-not more than 3- or 4-column inches; I have not followed up on it-that the Batelle Institute had patented a device for economically taking sulfur out of coal. Do you know anything about that? Mr. Ricrn~y. No; just what I have read in the paper. Senator PACi~wOOD. Does it, sound hopeful? Batelle is a good institute. Mr. Ricrn~r. Oh, sure, `high sulfur coal producers~'wouid~reet some- thing like that as reasonable. Senator PACKWOOD. I have no other questions.' Thank you, Mr. Chairman. The CHAIRMAN. Senator Byrd. Senator HA~iRY F. BYRD, 3r. Thank you, Mr. Chairman. ]~Ir. Richey, your statement, 1 think, isa `fine one. Mr. Ricrnx. I would like to credit the'staf~ `of the chamber for it. They are quite knowledgeable. " ` ` PAGENO="0269" 267 Senator HARRY F. BYRD, Jr. The staff developed a good pres~htation. I agree with your statement, too-I think ~t is a good statement~-on page 25, in regard to the capital formation, the capital needs of the energy industry. It seems to me also that you are on sound ground in your statement with regard to the e~cess profits tax, which was tried in World War II and prov~d very unsound. I dc not i~member the entire history of it, but I think it Was taken off after a relatively short peiiod. It did not voi± well, But the other side of it is that if you ~ompleteiy decontrol all petroleums, tremendous profits will be ob- tained, I suppose, bythe oil companies. And without an excess p:rofits tax, which I do not favor, how do you achieve equity for the consumer? Mr. RICHEY. Senator, your point is well taken. The chamber histor- ically has been for the immediate removal of such things, but we are in ~ different circuni~tance right now. Our feeling-my feeling is that if things were cut loose immediately, there would be such a rush for drilling pipe, drilling, rigs, steel, labor, geologists, transportation equipment, that it would be a mass sc~amble, and there could be a pe- rwd of difficulty. It might be that a planned, scheduled deregulation, iover a reasonable period of time, would permit operators and drillers and so on to plan a sched~u1e knowing where they would be 6 months, ~ year,~ 18. months, 2 years down the road. And perhaps would slow that down some. Walker, ,would you have somethi~ig to add to that? Mr. WIw~En. No~ Our experience has been very bad with the excess profits tax. Whether you call it windfall profits, it is still an excess profit tax. We have opposed,jt. But I would certainly agree that per- Mps a form of `decontrol of the old oil, over a period of time, might accomplish this. And as Mr. Richey said iii his statement, if there must be some sort of a tax in the interim to achieve equity~ that is not other~vise considered proper, we would hope that there .would be a plowbáck j5rovi~jon so that the additional revenues that were gen- erated would go tothe companies and would increase exploration. I ~would like tO pick~ up one other point, too, on capital formation. We have testified repeatedly in the hope that provisions can be added in the code to assist in capital formation. As you know, Secretary simon testified befQre the Ways and Means Committee-I guess it was ~ionday or Tuesday of this week-urging that this be done. lie has agreed with the Ways and Means Committee to come back with specific athninistratiou proposals on this area of capital formation by the end of July. And if possible, I would hope that this committee, with. the primary jurisdiction over the taxes, could pick up on that and give us some of our capital recovery changes, such as the invest- ment credit, increased depreciation, and so `forth, so that we could assist in this conversion from gas an~ petroleum to the use of coal and so fort~h. Senator HARRY F. B~iin, Jr. Well, do I understand you accurately, that while you oppose an excess profits tax in principle, that you think that such a tax is needed, or would be needed, for a period of time if all petroleum were decontrolled? ` ` ,~r. WI~NTER. I think if you have decontrol over a period of time, "~qid, not instantaneously, you will not need any formof excess profits tax. " , ` ,`. ,~ ` . , ` ~` ` ` Senator HARRY ~ BYRD; Jr. What do you mean by over a period of ~time? PAGENO="0270" Mr. W~in~. 1 ~I~n~i kn~*r. ~Wha~ it ~èu~M be, ~h~e~hpi~ it ~vou1d he a ~-y~a~ i~d4-~bUt ü~ *h~ `e~e~t, ~f th~i~e is ~oiaie ~idgthent in Oôngr~ss o~1~ t1i~ id ~f~r ~ t~i~ ~t~c~h ~s ~ut e~ee~s pr~t~ t~, then we ~n&d ~thinIy ~ tht~t there b~ a ~1~wbaek ~i~ision, W~ are ~ ~f ~iy~ e~ee~s profits t~. We think it ~eád~b ii~~y. I ~o n~* k~v Whe~er it w~d ;he ~xt~ded front th~ ~etr~I~iWm i~nthi~tr$~ tbth~ ~ 1 ui~ei~ t~ th~ ~ingiii~try. Seri~at~r H~uF. B~ui, ~r. I agree w~ith you. I ~ui tr~ng to und~i~ ~stanrd j~ti~r, i~h~ ~y~ottr view ~ o~ ~t. I thMgbt~hat'y~u in sour ~tattiuth'~at~4'th~t t~hiere ~w~iu~M d~te be u wjn~Ifafl profits tax. M!. W~r~i~u. ~ 1~ Gs~d1~*~ wa~it~t ~1oWb~c~p~rovisimr. ~Wd~fl~'k~ w~ffl ~ ~vi~M~It pr~fl~s %a~t, ~o; ~fr. S~toH~~ i~. &~ ii~i~t~mé see IU ~,a4i-~ Mr. ~ Senut~, i!f I could ~ ai~e ~p~osed to a so ~ ~x~e~s ~prdfits tax or a win~a1~aTl tar. We t~ned~ ~n the ene~y d~ti~ ~ ca~piWI t~ ~put haflk 4~t~o that inauth~y~to e~Va1ad, *e *gree ~on'that. i~, i~thwe~v~r, Ciongres~, oveT and ~bov~ the peopTe ~i~is ~ tht~ tbe~ ~v~nt to put ~n ~eXóess fits~a~ o~ it, ~we `say ~ ~a~e ~iow t~t, ~i~&se ?gi~ us ~a b~bad~ pro~ision so we ~M~~apitaT `that e'I~1PI~iTh~ taxe~t ~away to un éx- ~ ~ifi4M~k* ~i~i~'M1 tax, a~tid ~1~"u~ ~tti~t it'~b~ck !u ~ wells a~d mines and so oii. . A specific e~~4e. ~th f~~M~11 ~rfl ult erxcTldeilt c~a1 corn- ~ T~wm~Ct ~b~n* t~ `com~an'~ or ~ copper ~om~ ~au~ or~a~body. I am ~ii~e `VaI,~e~' Ckmp ~Oo~rl Ob. we ~a~e `not a big `~Ontpa~, bht our uct ~vd~tli `it ~ ~ ~ifli~*~. JOur ~peudiug ~O~raM for `the. next ~ or ,~ into coal ~ffiiPe~ ~to produco co&E. SC w~y from `ti~, ~rhiCh we de~etM~ ~; re~tt~ict %he otitp'tit' o't ~bâi ~f'to~nCnt~ to ~1l ~ ~the others. SeuatO~'~Lo*g ~ rrieetiugbe~a!ri, th* 1 ~as ~for9E~ on." The st~eClfi~ OTh~ffik~I ~MS `can ~em~r~4chete `*~tS ~i, ~great being ~nt~do. T think i*i~p~èt ` thi~ `TheV ~h'oi~ld c'~ver ~eeintomir ~situat~ons, e~vid f~hev ~q1~V, &~rnPa~y is `4~CtLt ~I~W~1U ~ ice ~tn~fl~M t sá ~r,k)ur ~n'i~n ., fee mM, `11~n~t withlh sOiiiè ~ co l~e~ves a~çe ~f that, it is no*~ ~omiki~g 4~&rCnt--ft!it' `fii1!1'~r ~lv ~ai~part-~t'Mth ~e w!iitha Qtôha'vYai~ ii~T1jthc~t 4~iU ~ ~yeaii~s. ` `~ . " `~ ~ Now, I cannot sit arQlmd with 1~a~in~my. T 4o~ot ~ai~t,d ~e hi ~eoa1 ihi iWe~ I abii*e~tht~' o~f"o~her ~1~'s c~p5~t~ ~f, I ~caune~t `riit it ~hcte Ir ~nt ~ ~I lia* to put it someplace C1~e, al3d this ~s the ibig', ~Ci~iOu~ ~ay. ~ur ~ r~r~1~5 ~dse'to, ~dbu1~e4 co~1 pi~d~cticn in 1,0 years,, and here is 8 years taken ~a~to ~i*rt. .` ~Lthun~ F ~ ~Pr `1 &niW you ~i±e qu~te ~i,g1~t As ,~L 9f ~ ~th i~V~ttI~, ~Orthát ~~t- ter-was putting u~ a new façili~y ~pd ~ry to~d~t~ne ~b~ièr PAGENO="0271" 26~9 to beat it by ~x?ai ~r by ~eti~eleu~n,. ~r ~ne or tl~ ~th~r ~$, would ~`ih~e cost of coal com~are? Mr. ~ Today., .1 believe, in most situations, th~ cost of coal is cheaper than imp~rtcd oil, unregulated oil; and is cheaper than intra- state gas, whi~tli operates in a free market. Now, for example, my BQ~pa~y ships coal to the east coast, to an east coast utility. Our coal delivers to them-i am not counting burning c~sts, because I do p~o~ know those~-~but our coal delivers to the~n about $12 to $14 a ton eqi~iivaleut less than the imported oil. Now, if I could ~ay one thing about th~ impact studies, to my k~owl~ edge, from the impact studies that have been made, they have 1~ever, after the impact studies have been com.p1et~d, stopped a proj&,t. They h~ve del~yed a project; and my fethn~i is that the development of a project and the impact study can go together simultaneously, because I do want to know what effeet our development will have on a com~ mm4ty. How many homes should we prø~vide? How about schools? What taxation do we need to provide for sewage plants, growth, and so. on ~ This is valuable information, and it helps the producer. But let us ~iot delay the digging of the coal. Senator }I~nnr ~I?. B~nD, Jr. Yes, I thinit so, and T think the Con- gre~s has not given adeqnate consideratl4n to the pofi~ts you develop there~ and has not given adequate consideration t~ the need for capital formation. Thankyon. Thankyou, Mr. Oh~irman. Phe~QnA~MAN. Senatot Beutsen? SenatQr Bentsen. I v~y m~ueh mpathi~e ~with Mr. Riôhey'a com~ ments concerning the impact statement. But let mesay~ Congre~ss has gi1~en consideration to that apeciflo point. We held. hearings earlier this year and~ witn~s~es as~ur~d ut they were go1n~ tO cut Out about one~third of the time. We will wait and see if they dq it. They also said that they~would ti~y to cooperate a~id ~work with the State agencies in dovelop1h~i this instead of ié~ttie~g the State agen~y do it~ jOb, à~nd then the I?ederai Oovernmeut agency do~ its ~: and thei~ say the State did not do it satisfactorily, a~d yo&hairo ~ô sk~árt ~rrnigb ~he cycle ~again. S~ hopefnlly, we ~re i~iak1ng so~ne he~d~ay in the ~er~ thh!ig you are talking ab~iit. You cannot hold up $4~ million wqrth of caN- ~ai~ for o~arnplo~whi1e this kind of study is being mkde~ , New~ t1~~ other ~oirit is~ you are talkiiig'ahont th~ léa~g of Federal lands. Is it not also~ true that muck of this F~d~xkal lai~d~ isa dhecker- board situ&tion so thnt Ofle has a difficult tin~; becnqse~ if you aP~ talking about your private lands you get a lease o*~ ~ runJ~nto the problem that the Federal lands, in o~ffeet, n~gate *hat yøu can do a lot of times~ I was in a mine 9 weeks a~6. I went l~a~k 7 ~iles froth the entrance underground and that mine covered a g~ogFapbical ar~a ~larger than Manhattan Tsiand, Mr. Rienn~. What mine was that? S Senator Bn~s~N. That ~as Consolidated (~oai, ot~tside ~f ~itk~ bur~h. S , S Mir~ li~tcm~i~. We h~r~ sdme mines that go b~Y1~ 1~mile~: S Senator ~ I certaii~ly ag~eee wi~h the e}~ai~rthan on th5s question of stopping quantity diseount~ ~or big eMctH~y ~ers~ ~ small businessman ha& enough trouble co~npetlr~g with lbrg~r ~ panies~ Major quantity disàotmts put smaller $~i4s ip~ ~ p~ett~ t~u~h 55-583--75---pt, L~-...-i8 PAGENO="0272" 270 ~pot trying to compete. So we have that competitive pro'bieth, plus the objectives of the Nation in trying to get better utilization of energy. I have seen a Bureau of Standards Study that estimates that indus- * try today can save about 30 percent of the energy it uses; and you cited some examples of some of the energy savings that had occurred. We' have also had some major engineering firms testify about poten- tIal energy'savings before the Pi~blic Works Committee. Mr. RIcH~Y. Senator, energy has been so~ cheap we threw it away. Senator BENTSEN, Why can we not put in something like a 5-year write~off on ne~y machinery,~ that would save energy ~ We do that for pollution control machinery today. `Mr. RICHEY. That is correct. Senator ~ENTaEN. We give them a 5-year write~off if they will put machinery in that will control pollution. Mr. RIcirF~r. Anything that provides commerce, business, entrepre- neurs, with more capital to invest, the better off the country is going to be. S~n~ator BENTSEN. I would like `to see us use the carrot and the stick approach. We should get away from quantity discounts for bi~ indus- ,try~s use, of electricity and provide them perhaps with a `five-year ,write~off for energy saving machinery. And' ~t the same time, we would improve .te~hnology in this. country, whièh we are in need of to remain competitive in world maTkets. We invest the' smallest per- centage of our disposable income back in manufacturing capacity of any, `major natioir in the world. England is the, one next to us, and they are in real trouble. Let me ask you another question. We talk about moving on energy and trying to develop a' Manhattan project approach. We did this when natural rubber was cut off in World Wa~r II and we developed synthetic rubber in,this coitntry. Yet I look at thè'cost of `a coal g~sifi- cation plapt,, ~for ex~~nple~ and I ai~i' talking aboiit ~ major one. Coal gasification is not a new process. They were doing it in Germany during World War II. That' is' the way they stayed `in the war as lone as they did.' We' arø talking about trying some new technoiogica~ * processes, and we are also talking about doing ~it on a magnitude that has never `been done before. That can lead to pr~blexns and there is `some risk involved. First industry was talking about building a coal gasification plant `for $500 million, and then I heard $700 million, and then I heard `$1 billion. And then, the other day, somebody said, well, yes, but maybe $2 `billion. Now, I would be concerned if I were on the board of directors of one of those companies, and was told it was going to cost $1 billion, and might get as high as $2 billion and that synthetic'gas would equate to $13 or $15 in the price per barrel of oil. If I were to build that plant, and I had a capital surplus of $500, million, and then suppose~ the Middle East countries, in a capricious way, decided to drop the price of oil for a couple of years, and put these alternative energy sources out of busii~ess, the capital surplus Of that compkny gets wiped out. ~,So'it do~s npt~ get built. `And yet, ~t i$ hi the nattonal jnt~rest~ to build these plants to determine their economic and envir*nmental feasibility. J ~1q npt want the Go\rermpent to hnve~to build them and operate them. ~How' do we get~ it d~ne,~ than ~ 1~l~w about this kind cf an approach? Suppose we had an energy banik. And suppose we would say to PAGENO="0273" 271 private industry that has a plant they think is feasihle~ for a major ~aIternative source of energy like coal gasification or one of the others. if private capital put in the top 25 percent or 20 percent of the risk ~capitai, the first dollars lost, and then they have to run ~t, and yoti th,ave the discipline of the bottom line, then Government through this energy bank, if they also think it is feasible and in the national pur- pose., would guarantee the bottom 75 percent of that loan for investors, or 80 percent, and look tO th~ property itself as the only liability. Do you think that would be an incentive that would brIng some of these things on, and get them built? Mr. RIcHEr. That is one I would like to study, because, Senator, I feel it is our national interest. We would be derelict in our duties as citizens if we did not build some of those plants. I do not expect to `see the country covered with them, but if We do not, get some of those plants built and operated, and get the experience in running them and producing a profit for feed stock, I think we should be ashamed of ourselves. Senator `BE~TSE~. 1?Ve ar~ not short of energy in this, country if we will develop it. , , ` Mr. RIchEr. This is correct. Now, as to your plan, as I said, 1 think ~we ougj~it to study it. I think we ought: to study it very carefully. Senator BENTSEN. We can sit around and talk about these things. Mr. RICHEr. We have got to build some of these plants, Senator. If such a plant were in effect today, and a contract was signed to build that plant, I firmly believe .that-~-well, this is 1975; it would be 1985 before you saw any synthetic fuel come out of it. That is `what' our Jeadtime is. S~nator BENTSEN. I agree. Mr. RICHEr, And 10 years from now, we could be in pietty bad shape for energy in this country. Senator BENTSEN. We h~a~J better start now to take care of it.,. The 1rouble is that sometimes we have the attention span `of a 5-year-old ~in this country. We wait ur~til th~ next crisis before we move, and then itistoolate, ` , Mr. RICHEr. To give you an example, I was ii~ Mexico 2 years, ago, and I met a salesman for, atomic energy plants. And I asked him how long it would take to build a plant in Mexico. And h~ said 5 years. I think we all know in this country, it takes 12 to 15 years, and the difference is- Senator BENTSEN. Do not believe all of that from Mexico, either. Mr. RICHEr. Well, I was just making a point. We seem to have a lot of delays in this country on large projects. Senator ~BENTSEN. If you think we have redtape here, try Mexico. Mr. RICHI~Y. No, thank you. I am used to this redtape. I do not want to learn redtapein Spanish. Senator BENTSEN. Thank you. I have no further questions. The CHAIRMAN. Senator Nelson? Senator NELSON. Well, on the matt~r of this general assault that is made,, day `in and day out, on environmental im~iact statements-- there is a recent FEA report, I wish I had it here. This is a report on `the delays in nuclear ~owerplant construction. Th~ amount of' delay :cau~e~l by environmental irnpac~' statements and environmental litiga~ t~ion was the sh~allest single, cause of delay they had That's what they PAGENO="0274" 272 ~ftrnm1 i~T flis PBi ~u~1~-thc ~ia~res w~7s 1.~ pcrcenit d. the total e~nstrU*~ta)fl deiay~izuiiiciear ~ eka~ p~1ant~ being bii~ilt 1~,st y~ar~-~-were oi~ c~o~un~b ~f eni~ironnaenta1~ dela7s of one kind ~r a~tlaer~ it a~era~ed oiit~ just 4 months~ for ewironmei~tal. del~ys~ Strikes; b~ la~i~ ua~eus ~eonutad for aho~t 1~ mon1~ha' bo~1d~uip on constructü~ in ~l1i those~p ~nts,~Ithor th~vtag~eaabo~u1~ i~S montha, ~om~ otI~e~ pr l~nia~ in labon ~I~ld~a a ia~mber. of montha~Oon of the largest uo~dolay waa equipment avaii~b±lity, 6 m~ths. Mr. Ch~man~ I w~ii~M ~p~eo~te th~~ EEA abud~ resu4ts being made part oif the record for this morning's meeting-that nuelearp~e~ is~be~ng d~elaAyed by the~ e onn~e~itaI ia~ites ia ju~ n~t true ac~ord~g to the flA It only arnei~vntodi to lf.73 ?erc~nt of tho~ tMal d~la~y found b~ thek PEA. [S~enator Nelsen seq~ti~entl~y s irdtted the Mlowin~g letter for the reeoM:3 U~ SN~v~ COMMITTEE ON Px~ANcE, WasMn~jton, D.C., JuZ# 11, 1973. ITOn. Ri~i~t1~ Lntt~ Cha4rnutn, ~Je4vate Fii~ance Com'in4Ueo, D~R M~ ~rn P~u~suant ~ our convej,satlon thi$ rooming doming the ~re~et~g o~ t~xe J,*4~CQ~ riltt~e~ l~isteU ~olow are the results of the Federal Energy A.dwinistmnttOn~s. (~`EA)~ power plant construction delay report. I *ould~ aj~1precfat~ the st~id~ results beiirg m~td~ part of the record fur this ~ ~neetIu~ Tn ad~litiOn~ 1~ am in tni~d~ the F~A i~ currently under- ~a~tin~ a s~ik~ to upaa1~e this~ 1~1T4 report. 1 ~cvilt keep you th±orined of they re- sulls o~the F~4~.ljpdatO, The results of the PEA. stud7 are as follows: Of the 28 atomic power plants that were scheduled to go into operation last~ year, env~roumental action was one ~f the lea~b s1girifi~ant causes of dTeX~. C°NSTRuC~ (1)4 nipnth:s w~A~ lost d~±e~t~Y àvhor~méntal ljti~tton (~.7g% of total loss), (2) i~ ~o]~t~S~ltSI d~I~L~ fè11ahO~ ehkirtäg~ 4&~ X8 nt1rs~los~ due twtabo trU~e~ (4) 12 mouths lost due to rescheduling of associated facilities, (n), 2J3 n~o~ti s;le$1~lue4tQ chaages~iu regulatory requirements, ~ ~oriths 1~tdi~e tO ~ dulivery delays; (4) 84 mo~the lbst clue te poo~ iat~ui'~duct1mft~. ~LoBD~Et5ON, U.s, senator. Seu~tou ~ In other words,~ the whole assault that has been gQi~g~a~Z0~$ this cou~ry.. Now, here, we get the ~rne: thing, abotit coal, Now the FEA says- yaii~ are ii~ th~coal~ bu~&ness,so~mfl~ybe you can correct them if they are ~vvong~-~tha~ tq stai~t ~ andY put a stripy mine in business takes 3 years, to get the equipment, to get everything started and going. Now, you are saying. the4 en~i~rcnmen~tal in~pa~t sfateineht takes 3 years. Well, you could not go any faster than that ~n?way~ A deep mi~ie, they say, t:akoaabout4tq 5.year&Aa~etliey corre~ct inthat? ~r. Rie~e~4 I ~an~ot ~a~e an, investment and j~lace orders for eque~tpex~ing t ~est~itso~ ~ rep~rt~abunt which Ikno,w netbi,ng~ ~ l'*e~ve~ ~ ~av,e~ati ~a~ei~ state~re~t ma~de, ~vthen that i~ finished nnd4he~a*L g~Lth~ ~a ea~Ltb~en4 I ean~ 4Qeveryth2n,g~ else,, ~ a~ $. t*~e ,s .~~ies.'t~ ni~ght~ &~ Qomment,~ ~y company is. ifiore than 98 percent p mining so we are not strip mine people~ PAGENO="0275" ~73 But a strip mine, under c~taán circuntsth~rxce~, `can p~obab1y go 4t ~xi 3 years and followiirg the study co'~dd ~o in a inatt~r of months. We figure it would take us to build this deep.mine~ I mention if ~e could start now, it would ~be t~8; so that is 3,4 years before we would get our production up. I was not picking on the envitonm'entaiists at all on impact state- ments or on delays in nuclear plants. I just make a `statement that in this country it seems to take 12 to 15 years from the conception until the operation of a nuclear plant. Now, there are some 6~ agencies, I believe, in Washington alone, not counting the States, that you have ;got to go through for clearances on it. Senator NELSON. Well, if there are unnecessary delays in any `ol these we would all be interested in it. What troubles me is that there is the fiat assertion, time after time, and the general aeceDtance all over the country that the environmental movement somehow br an- other is keeping us from getting automobiles going because of pollu- tion controls, or coal mines going, or nuclear powerplants, but nobody really gives us any evidence. And when the FEA, which is under a Republican administration, comes out and says that only 11T3 percent of the delay in all 28 nuclear plants being built last year was en'viron~ mental delays it seems to me that that ought to finish it for the nuclear powerplant argument. Now, let us go to coal. Now, what we need if we are going to deal with this intelligently is for the coal people to submit, in detail, the documentation of what the delay is and let us have a look at it. I suspect, given what has been said in the past, that there is not much. more validity to the coal argument than ther~ is to the nuclear, and the automobile one turns out to be a total fraud anyway. They engaged in a conspiracy for 15 years~ arid a consent decree was entered against the automobile industry in the Federal Court in Los Angeles, for a conspiracy not to develop pollution control devices. So, they engaged in a conspiracy for which they could have gone to jail. Then they attack the Congress for passing some laws saying you have got to set some standards. So, there is just a whole lot of phony baloney in all of these attacks. Now, what I would like to see is the coal industry submit~ in detail, documentation, point by point, morith by month, what happened. Then we would have soniething to deal with. Mr. RIcI~IEY. May I speak to that as a coal man? Senator N~sow. Certainly. Mr. RIOnEL I believe it waS last week or the week before our industry put together a detailed study, company by compaily, sum- marized it and delivered it to FEA as to what the growth rate in the industry will be; the number of tons-this is over 10 years~-the number of tons of deep mined coal, the number of tons of strip mined coal, the number of tons of coal west of the Mississippi, east of the Mississippi, metallurgical coal, high sulfur, low sulfur, and that information is available from the Natural Coal Association and cer- tainly FEA ha~ it now. In my own case, it is very simple. We have the personneito develOp, so much at a time. We cannot develop any faster than our personnel will let us~ including the hiring and training of coal miners which is a very serious thing and difficult thing to do. I do not disagree with the way it has to be done now but it has to be done a certain way. PAGENO="0276" 274 So I think, speaking for ~coal, you can have that information and I believe the figtire in the next 10 years is am increase in production of sthne 956 million tons scheduled now~, provided certain things will thke place. And those are itemized, one, two, three, four, five, and, six. Senator Ni~LSO~. Now, ybu have testified that you agreed that it is necessary to have environmental impact statements. I think any ra- tional person would agrec~ to that. Mr. Ricnrr. Not necessarily, I said I think they serve a purpose. Senator NELsoN. Well, q good ora bad purpose? Mr. Eicir~r. I think they can serve a good purpose used in the proper~ way. As I said; T think in answer to Senator Long or Senator Byrd, that I think that the development of a cOal mine can go on at the same time that the impact statetheiitis going on, that the findings of the im- pact statement will be beneficial to the community and to the mine operating company.. Becan~e we have to know how to provide good: plac~s and the proper places with adequate facilities for our employees~ If you move into a desolate area in the mountains with 500 or 600~ people over 5~ 6; or 7 years, you have got social proMems. And I think an impact study would bé~ most helpful to us, But I do not want to hold: up a whole project on ~a yes or no basis of whether such a study is made~ Senator NELSON. Well, I would like to let you explain it. Now, I would assume that it is the consensus in this country, at least a ma- jority consensus, that we are not going to move into the west and strip the whole west and. pollute every water course in the west and destroy. vast areas of the west. And that in order to avoid that you have got to make a study of the water courses, the pollution problems, the availa-~ bility of water~ the drainage problems, the restoration of the surfaceof the land, all of these things. So, a study has to be done. Now, of course, that is going to cause some delay butT do not think the country is prepared to say, we are just going to forget all about that and create a disaster area out in the west on account of strip~ mining. So, if it is agreed to, it has to be done. Sure, it takes some time. What I would like to see is what is your evaluation of the unnecessary delay, of course there is some necessary delay if we are going to plan the proper utilization of our resources. Then tell us what is the unnecessary delay? Does the study that you are talking about address itself to that precise question? Mr. RIcHEr. Senator Nelson, I think we are both painting with very broad brushes here. I do not think that the coal industry or the U.S. Chamber of Commerce expects to go out and tear up the west or tear up any other place. Senator NELSON. I said I have assumed that is the case. I said I as- sum~d it is the consensus that we have to do some planning of resonrce utilization, and in order to do some planning it takes some time. `\*That I am saying to you is, why does not the coal industry tell us what is the unnecessary delay precisely delineated? You are in the business. Now, the assertions are made by the coal industry,they come. here and fight the strip mining bill, we spent 4 years on it, it has been before the Congress 10 years, we pass it, it gets vetoed, we pass it again, PAGENO="0277" 275 it gets vetoed. The President makes assertions i~t will cost 30,000 jobs. And wh~ they get to hearings bcfore the House side, they cannot prove it at all. Actu~l1y it probably will create jobs. And the coal in- dustry was on the ~ide of the President on it. Now, all I am saying is it is about time the coal industry came up and said, all right, we agree that we are not going to destroy the west, that is the consensus of the country. We agree t~here has to be impact statemeii1~s and studies on what the environmental impact is. But we do not want unnecessary delay and gentlemen, here is one,~two, three; four, or five, the unneces- sary delays, specific, exact, not general assertions. Now where is that? Mr. RTCHEY. As I said a 1~ew rni,nutes ago, we have prepared a report, which I believe will answer'the question, which was given to the FEA last week or the week before. Senator NELsoN, Does it delineate precisely where? Mr. Ricimr. I think there are'specilic points on there that this can be done if that is clone. I cannot itemize in my mind what they all are but the report has been idade and we certainly can get one from the Coal Association over to you. Senator NELSON. I would like to see it because with all of the talk that has been going on over this issue since 1964-I think I introduced the first legislation on this, in recent years anyway, in 1964-in a]i these years of talk and hearings these assertions are made. But, to this day I have never seen any doculirlentation. So, I think it is time the coal iudustry came up with some documen- tation, If it is there, we want to see it. Mr. RTOHE1~. I think we can provide it for you, Senator. [Mr. Richey subsequently submitted the following information:] This report summarizes expansion plans of the bituminous coal industry through 1985. Mines already under development in 1974 will, when comphueu, have a productive capacity of 43.79 million tons. The additional capacity under construction, announced or planned `by 1985 amounts to 534.01 million tons, niaking a total of 577.8 million tons of added capacity available by the end of 1985. (The cumulative figures for eastern mines should be discounted to allow for about 3 per cent annual depletion of existing mines or 15 million tons per year; no such factor need be applied in the West, where nearly all Operations- will be new.) The figures are subject to the following assumptions which would remove obstacles to industry expansion: 1. The Clean Air Act amendments proposed by the Administration will be enacted. 2. Capital will be available for the projected expansion. 3. No unreasonable surface mining legislation will be enacted. 4. A viable federal coal leasing program will allow development of Western coal. 5. Realistic means of complying with the National Environmental Policy' Act (NEPA) will allow energy development without undue delay or restraint. ~. Adequate transportation will b~ available. If the expansion indicateç.l in this report Is actually to take place, these assumptions must b~ transformed into accomplishments as soon as possible. Each asstunption concerns a present major obstacle to coal production. Each week that they persistmeans a week's slippage-even complete loss-in attain- ing future production goals. With stretched-out timetables in deve1op~ng new production, inflation in- creases the cost of materials, capital beeomes inadequate, and the whole in- tricate timetable is thrown askew, PAGENO="0278" NEW ~~A3. M1NE&AN~D MA~Ofi EXPANSIONS OF EXISTING ~INfS-PLANNE0~ ANNOUNCED OR UNDER CONSTRUCTION 111 THE UNITED STATES, 3V5~85 ..~,. ......~.. ~ ..... ~ ,,~.. 197~ .. ... ~ ~ ...... 1980 198.1 1982 1993 1984 1935 ..~., , Region .aiid State ., .., .....,....,~.... ....... ~ Ul4Im~ts capoolty of addItions I ,,.,..,... ,. ..,...,..., .,.......,.. * ....,,.......~ . 1976 ~977 ~ ......,.-,...,~.- .. 1978 1979 ~ ...... .. .., Western Unit~ 5t.ates: Wa~tdngton: ,lncr~pentaL ...... 1. 3(1 0.30 0.~ 65 0.40 1~. 30 0.10 -~ Cuonnlatwe . 3.0(1 1.30 3.60 2.20 2.60 2.90 3.00 3.00 3.00 .3.00 3.0(1 3.00 Wyoming; Incremental - 5 45 17.70 2)~ 20 22.20 21.80 15.50 5.50 9.50 3.00 9.0(1 2.00 CumulatWe 193. 4(1 5.4(1 23.70 44.30. 56.50 89.3(1 103.80 108.30 119.80. 115.80 311.30 119.80 ...........,..~ .. ,..., ....., .~ Sulitotal, Western Ini~remen~al 21.65 33.45 34.1(1 43.60 57.80 41.20 2(1.2(1 17.1)0 8. 1$ 4.00 2.00 rnuIati~te..~..... 302.40. 23.55 55.00 89.10 132.70 190.10 231.70 251.90 269.80 277.80 83.30. 283. N) Eastern Umte~tSt4te4: Alabama: Iñ~reiuentat 3.55 3.45 2.95 4.60 1.50 0.50 ~ 3.55 7.0(1 9~55 14.55 16.05 16.55 is.ss 16.5(1 ~ ~&.~55 16.55 IIIinoi: lcrej3ept4j L75 7.75 7.70 7.70 5.10 2.90 2.20 1,90 9.80 - CiImutative~ 40.60 1.71 9.10 13.2(1 24.90 30.0(1 32.90 35.10 37.00 38.80 38.80 38.80 Indiana: ln~reonentat: 2.80 2.70 - 1.00 1.00 3.00 1.00 Cunulathi(1~ 11.00 2.80 5.10 8.50 5.50 6.50 7.50 8.50 9.51) 9.50 950 9.50 Kentugjty, Eastein: lncrement4.. ~. - 3.90 6.90 8.10 3.40 3.20 1.(10 Cumubtiv~. .94.60 3.80 10.60 15~70 19.1(1 22.30 23.30 23.30 23.31) 23.30 .23.30 23.30 Ken1u~y1 Weste.mn: l~crementaI 3.1(1 2.90 3.06 4.30 8.00 5.40 6.00 2.61) 3.6(1 4.20 1.00 Cisynulative 44.40 3.11) 5.90 8.90 13.20 39.20 24.50 30.60 33.20 36.80 43.00 42.0(1 PAGENO="0279" Kenttick~, total: lncremental,._. - 6.90 9.60 2. 10 7.70 9.20 6. 40 6.00 2.60 3.60 4.20 100 Cumulative 69~00 6.90 l&50 24.60 32.31) 41.51) 47. 90 53~90 56. 50 60. 10 64.30 6530 01)io~ Inc~ienta1 2.011 2.60 3.00 2.60 1.20 Cuniuja3Iye 14.20 2.00 4.60 7.60 10.20 11.40 12.50 12.50 12.50 12.50 12.50 12.50 Peno1ylva~iia: Incremental 4,41) 7.70 7.80 6.00 2.90 2.20 j~ 31.50 4.49 12.10 19.96 25.90 28.80 31,00 31. 10 31. 10 31. 10 31. 10 31. 10 Tennessea: 1ncremeqtal.. 1.00 1. 10 1.25 1 00 .50 ~_ Cun~ulativ&.. 4. ~5 1.00 2. 10 3.35 4.35 4.85 4.85 4.85 4.85 4. 85 4.85 Virgj~ia: -~ ~ .30 1.70 1.96 3.00 1.30 1.10 1.60 1.20 .60 - flu live- 13.70 .31) 2.00 3.90 6.91) 8.20 9.30 10.90 12. 10 12.70 12.70 12.70 West Virgittie, NOrThere: innwntal. - ~ 2.60 2. 10 1.40 1.40 3.90 160 - Cutoul~ive~ 1320 2.88 4.70 6.10 7. ~0 10.50 12.10 12.10 12.10 12. 10 12.10 1Z10 Wes~i/iygjn3a~ Sout~wra: JncrientaL,.. 5.45 7.80 8.26 8.60 6.70 4A0 1.30 160 -- 1.50 1.50 Cumula~jye.~ 57.80 5.45 13. 25 21.51 30. 11 36.81 40. 91 42.21 43.81 43.81 45.31 46S1 Weep VI~gJn~, total: IncrementaL. - 5.05 ~. 90 9.66 111.00 9~70 5. 70 1.30 1.60 1. ~ 1,50 CunlubeIive 71.00 8.05 17.95 2761 37.61 47.31 53.01 54.31 55.91 55.91 57.41 55.91 ~ Subtofal,~astern: "-1 Incremental 29.75 46.40 42.21 42.85 32.90 21.40 12.20 8.30 6.00 5.711 2.50 flumelatI4/e 275.40 29.75 75.15 118.36 161.21 215.51 194. 11 227.71 236.01 242.01 247.71 296.21 Total, UnitetfStates: fl~cremej4al SI. 40 79,75 76.31 86.45 90.70 62.60 32.40 26.20 14.00 9.7f~ 4.50 Cuthuafiye_~~~. 577.80 51.40 13115 207.46 293.91 384.61 447.21 479.61 505.81 519.81 529.51 534.01 ~ ...~,.-..,,-.-.. ~ . .,.~ .~...... .. ~ ~ .~ .... ~,. ~ I Ult~ma$ a~ac~ty of now mines and expansiors, includingcapacity tisat was adde~l before 1975. PAGENO="0280" 278 The CHAIRMAN. If the Senator ~vould yield; I just hope if w~ can come to terms with Senator Neason, whom I admire, on. this environ- mental problem then the environmentalists and the Congress will go ~dong with his judgment; because he is a reasonable man. And I think there is great trust of hith as an environmentalist. Mr. RICIIEY. Well, Senator Long, I have a business philosophy, when you have a problem, go to 1~he guy who can either do the most agamst you or for you and sell him. Senator NELSON. If there is truly unnecessary delay, I do not care what any environmentalist says, I will oppose the unnecessary delays. Mr. RICHEY. I appreciate that. The CHAIRMAN. I wish the Senator from Wisconsin would give his reaction to the situation off the A,tlantic coast and when thus so far they Thave riot even drilled a ~ingle hole. In fact they have riot even let lease. I would be curious to know how much of that you would attribute to environmental considerations? Senator NELSON. I do not know but I will look into it and give you my opinion. The CHAIRMAN. Well, the Atlantic has been out there a long time and there has not even been a dry hole out there. Mr. RICHEr. I just hope that if a hole is drilled out here that there is some oil because this thing in Florida was just shot. The CHAIRMAN. I think there would be progres~ if they just drilled the dry hole. They have not even done that. Senator Hansen? Senator hANSEN. Thank you very much, Mr. Chairnian. Mr. Richey, I would like to compliment you on the perception and excellence of your testimony. I was interested in many of the facets of the energy picture that you discu~sèd arid I think that' yoll very properly and accurately note that there is a relationship between the price of one form of energy and the rate and development of other forms. I have heard th~ coal industry maligned, as I am certain that you ~have for a long j~eriod of time. They have been criticized for not plow- ing money back into research, for not getting on with coal gasification, and one thing or another. And yet it is perfectly' ob~rious to me with `the Federal Power' Commission controlling the price Of natural gas for a long period of time and keeping that price at about 18 cents per `1,000 cubic feet when, in the last 2 or 3 years, the figures are that it `would cost at least one-third more to go out and firid new gas than you could sell it for previously, the previous 3 years. Something has to be radically wrong arid yet this concept was sold to the American public on the `idea that, their interests were being protected and I suspect a lot of peonle went along with that concept until the energy crunch took plaCe here less tha'n 2 years ago. Then for the first time, I think, America had a' `look ~t its hole card and said, maybe .we are building up a dependency on unstable, foreign `supplies `to the degree that was not in the public interest. So, I compliment you on the wa~ you have laid it on the line, as I like to characterize it, and sa~r what you have. Now, there has been talk and I am pleased that my very dear friend, and one of the persons I admire most in the Senate, `Senator Byrd is here because I think he expresses a concern that is widely held. And that is that PAGENO="0281" 279 ~jf w~ decontrol oil now, j~ it not true that we are going to have e~- orbitant profits reaped by the oil companies and that there must either be some way to plow back part of those obsèeno profits as one Thember of our club of 99 describes them, we are not yet up to a 100 you know; we are about that. Senator HASKELL. We are trying. Senator HANSEN. We are still rankling you mean? Anyway, there are some who characterize these profits as obscene. I have read a lot of statistics on the financial needs of the oil industry and I note that a few things impressed me. Most people, most of the witnesses, not all, but most of the witnesses we have had, have said that we must go in the direction of decontr6l. But there is not agreement on how quickly decontrol ought to come -about, nor is there agreement on what should be an interim course of action by the Government either to guarantee a plow back of the ~escalating profits that are anticipated if we decontrol automatically on the one hand, or what sort of a windfall pi~ofits tax en the other -ought to be put into place. Let me point out that the testimony we have heard, and I think it has been pretty well corroborated by a group of experts, talking about discovered oil supplies now. I am talking about oil that we know is in place. There is no doubt about the amount of it. We have historically recovered around 30 percent or less maybe of the oil that is in place. Now, if we were to take off the cap on oil, if we let the price rise -as high as it would go, and of course everybody says, well, it will go clear up to where the OPEC nations put it and if they raise it higher, it will go higher. That does not quite conform with my under- standing of economics which says that there is a little elasticity to demand that reflects on the price of oil. And if it gets high enough there may be a few people buying a little bit less oil than they may otherwise -have bought. So, let us talk about the 40 billion barrels of reserves we now have. This is the amount of oil that I understand is in place now. We know -all about it. The USGS has confirmed it. The industry knows it is there and it is the amount of oil that will be pumped with costs where they are now and prices where they are now. If you want to pump more of it, if you want toinduce secondary and tertiary recovery efforts to get more of it above ground, let the price rise so that you can afford to spend more money to get more -out of the ground and you will get more out. The stripper well is ~ good example, I think, of the point I am trying to make; 13 percent-and your testimony, 1 believe, includes these figures-13 percent of all the oil ~e have today comes from stripper wells. We would not be getting very much of that if it had not been for I)ewey Bartlett and some other Members of the Senate who recognized that as quickly as it costs as much to pump oil as that oil sells for, that is the day you shut the well down, simple economics. And I am delighted you are here because somehew the basic common- Sense logic that, Senator Long ha~ oftentimes stressed about the gro- cery man who was selling tomatçes, and the gal comes into the store and says, how much are your tomatoes? Well, they are 40 cents a dozen. PAGENO="0282" 280 So, she ~mes b~ek ma little b~t~a~d she says I can buy them for 20 cents a dozen down bh~ street. Be s&1d~ `why ~1id not you buy them? Well, they are out of tQ~atQes~ ~ITs says, i~ I were out of tomatoes here I would sell m~ne fOr 10 cents a dozeu~ But, somehow, we do not seem to understand tliaI~ ~nessage. Mr. RICHEY. Senator Hansen, Leanziot give. you absolute f~gures~ only relative figul?es. But, my und&standing, and let us take the old oil pric~e.c~f $5~, t~t~we c~re~over iu~t of a well, on an average, some 30percent of the~Q~l:dowMb4t h~e. If we go up to $~, $t.50 ~barreI, we might get ~ percent. If we ~ to $i0~a barrel, we may get a higher figure, and so on. And I think the real tact and people' have overlooked this, but, by increasing the price we may be doubling or tripling, tbi~ Nation's oil reserves. SeuatQr HAN$EN~ Weti, a~ awatter of fact, I am not particularly- Mr. Ric~r~r. And putting us in `a better economic position in the ~world for ~ii-people forget'the first embargo was in W67 but it fell ~apai~t because we had surplus oil to sell. Senator HANSEN. E~rery bit of competent testimony we have had here~ Mr. Rio~ey inclines me .t~ believe these are accurate figures. We ~ha~vu 40 .hillion barrels in reserves n~w, oil that is in place on Amen- camp sthi that~ we:kno'w about and if we are willing to decontrol pniees~ to le~ the pTico rise by using secondary and tertiary recovery tech- niq~uos, we will get in addition to those 40 billion barrels another 6~ bil'ion barrels-ohe and a half times as much. Now, it sure wakes great campaign oratory an.d talking about exclu- sive clubs around here~ the 99 is not an exclusive club. I belong to the exclusive. club-~there are seven of us, including Senator Byrd, who are not yet candidates for the. Presidency. [General laughter.] Senator hANSEN. Anyway, it janet going to go over very well this whtter, if t~oubie breaks out.i~ the Mi&lle East and we have another oil boycQtt ovei~ there' to be able to go around and tell the people, well., ~e are sure sorry you are out of oil and we are sorry your home is colds we are sorry that you have lost your job because there is not any natural gas or oil either to run the plant. We are sorry about that hut we hope.you will remember that we kept the price good and low. We hope~you will remember that. I am glad I am not running next year because if I had to go around and tell that ~tory I am not so sure that people would attribute the intelligence to me that Ibope that they might. Mr.~ ~ Your voters are~like i~y ~t~ckholdors--it is not what you did Thr them yesterday, it is what you are going to do for them ton~rrow. Senator HA~s~N. Wdll~ you lcnow now, this industry, according to di~erent sur~veys that have bee~madeand studies that have been made, is going to require between two and a half and three times as much capital, both within the United States and int~rnationally just to try ~to keep even, without any `inflation. And the figures are that we will aee&, wonldwiâe, $1. trilliçm~ $200 billion of new capital to put in3 That is without any inflation. If inflation continues at the rate of 15 percent ~worldwide, itis going t~.take$8 trillion. Sq, I think thatinaybe, instead.of being overly concerned about how much we. lia~ve t~o take out ef the industry in excess profits taxes or plowback or whatever, we had better start thinking about where we PAGENO="0283" 281 are going to get ~he oil. Becau~e h~re ~ ~some facts that peoirle may not know. In my State of Wyoming, and we iiap~nto be the fifth la1rg~t oil and gas producer ~mon.g the States, w~ had 186 rise drilling in Wyo~. ming, last Easter. People do trot know that. Thetthink we prodnc~ coW chips and mountain scenery, bnt we dQha~e w~me oil. Now, we have got this, we had 1~3~ rigs drilling en Easter. The 20th of June there were ~6 rigs drilling. And w~ky did that eôme about? We passed a tax rebate, tax reform bill and among other things, it reduced the depletion aliowan~e. And Whet~ somèbod~t goes around trying to get soMe money frOm a banker or a docto.r or somebody else and that potential investor i~ôks at the opportunities and sees first what the chances of hitting a dry hole are, and they are prett~y good, you know, they are not bad at all. If $u want to take a sure bet, bet that you are going to hit a dry hole and that is a winning bet anytime~ But, if you look at that and add to that the tak~ that the Govern~ ment is going to extract, i~ you are one of the fortunate ones, about 1 well out of 70 happena to~ discover a major new fleid, 1 out of 4~ is a commercial producer and I have forgotten precisely what the figures are on dry holes, but that is a d~ma good bet,; So, I think that if we are gOing to encoumge the people and the eapi~ tal to take the risk to £nd the oil, we had bet~er~be looking at that and my feeling i~ that we are watching the wr~ang ~ahhit if we bare con-s cerued, as sqme a~re, with Making certain thM ~the oil industry does not have too profitable a business. Now, how does this relate to coal? I think it relates in this way. So long as we continue price controls on petrolenw, so long as we keep the prices down, the opportunity you hai~e'tojdo the job you i~ust do, and coal has the bigg~st~ppOrtui~itq of any eneigy~sou~oe in tMsa~n- try today in the short term to r~plaee w~1aat we get from oil ad ~gas, if coal is going to do the job, would not your ability to do t~hM job be enhanced with quick deregulation of both natural gas and oil? Mr. RIcHLy. Yes, I think it `wduld. Thehig goal in eoai is going te be to produce coal for the electric utility industry. And the second big market is going to be to replace iwlustriai heat for plants that have formerly operated on naturai~as. We are fiuding, in our ca~e, and I thii4~ this ~is applicable to most coal mining companies, that we are making~contracts with tbe~e peo~ plc for 25 and 30 yearS, So, Fthirtk coal is mot~e than ~hart term. I think it will help coal. It will m~ak~ goal become more attractive. It ~ill~rpb- ably give us a better price which will ~et ~s~accumnlate ixiore eap~tai to put right back into coal mines. Senator HA~4snm~. Well, tiow wh~i yon think about coal gasification plants, they.coSt a lot of moiie~ `from what I~i~ve b~e~i told. Mr. EXCITuY. 1nbeli~vableatp~ui~s I hay~becntol~. Senator ILu~srw~ And if you ~M going t~ get the J~i~içl~oJ~ ~nvest~aent that you need in order to build those ~plaMs, you certainly rwU4 ~find your task easier, will you not, ~f natural gas i~ ~omplètely deregulated so that ~t as~gomg to l~ave to became ~rul~y eor~p~'titive in the mar1~et placeas contrasted: with~thesituation I~thi~~not true? Mr. Ricni~. Yes,sir. Senator F[ANSEN. One final point, and I would just make thi~s~'t~ my good friend from Wisconsin, for whom I have the highest regard, PAGENO="0284" 282 there was a recent circuit court decision here in the District holding* that before any further leasing co~ild take place, as I understaid, on Federal lands, before any railroad lines can be built, before any m~jor mines can be opened, or major plants developed in the West, a regional environmental impact statement is ~equired. Now, some of the people with whom I visited down at the Depart- ment of the Interior te]l me that if they have to go through all of those steps this may take at least 2 or maybe 3 years. I would ask my good friend from Wisconsin if he could tell me if that estimate is right or would he have any thought about that? Senator NELSON. No; I saw a note about the decision to which yoir refer and it may be absolntely sound and necessary. But, I have not lookedat the decision. Senator HANSJ3~N. I just wanted to make that one observation. You~ probably are not concerned with what goes on in the West except academically, but I know-~- Mr. RIcin~~. We how have a mine in Utah. Senator HANSEN. Thank you~ Mr. Chairman. I apologize for run-~ ning over the time. The CnAnn~1AN. Thank you very much. I would like the witness to know that if we listen to one another long enough we do have a `i~ay of agreeing on something eventually in this committee. We did it with regard to runaway fathers. After 5 years of debate we finally reported out a unanimous recommendation. It did not receive plaudits in all areas but we were unanimous by the time we had debated for 5 y~ars. Are there any further questions, gentlemen? Thank :you very much3 sir. Mr. I~ioiruy. Thank you very much, it is delightful to be here. [The pr$pared statement of Mr. Richey follows. Oral testimony continues on p. 299.] ~TATEMENP ON NATIONAL Exmsw POLICY AND ENERGY CONSERVATION AND CONVER-~ SION ACT, ILR. 6860, FOR THE CHAMBER OF COMMERCE OF THE UNITED STATES (Ey}lerbert S. Richey) My name is Herbert S. Richey. 1 am the Vice Chairman Of the Board of Direc- tors of the, Chamber of Commerce of the United States, and President and Chief Executive Officer of the Valley Camp Coal Company, Cleveland, Ohio. I am accompanied by Walker Winter, Chairman of the National Chamber's' T~uqt$ot1 Co~nmittee and a partner in the Chicago law firm of Ross, ilardies, O~Keefe, Babcock and Parsons; David Luken, Acting Director of the Chamber's Natural Resources Section and James Graham, Associate Director for Energy; an~l Robert R. Statham, Director of the Chamber's, Tax and' Finance Section, We are appearing before this Committee on behalf of the Chamber of Com- merce of the United State's, the largest association of business and professional organizations in the United States~ and the principal spokesman for the Amen. can business community,' The National Chamber represents over 8,500 trade~ associations and chambers of commerce. It has a direct `membership of over 48,000 business firms and an' underlying membership of approxImately 5 milliOn indi- viduals and firm's. Based upon the energy utilized by the commercial and indus- trial sector of our economy, the `National Chamber federation probably verve- sents the largest energy-users bloc in the United `States. On `behalf of the NaflonaP Chamber, I wish to thank the Committee for this opportunity to ore- sent its opinions on National energy policy and the House Energy `Tax `Bitl~ TF~.R... 6860; `~ PAGENO="0285" 283 Development of a National Energy Program Today the United States and the rest of the. world face major energy problems that are both short and long term. Unlike many others, our natjon has the energy resource technology and capital to develop a high degree of energy self-sufficiency. But if we are to have any hope whatsoever of achieving this goal, a united national effort will be required that Will far surpass any peacetime j~rogram in the history of' the United States. The U.S. must implement a positive and comprehensive program f~r the orderly development of the nation's energy resources, one which will involve the cooperation and participation of all elements of our society. Two motivating forces are absolutely necessary if such an effort is to succeed: (1) a widespread public understanding of the program and its aims, and (2) a national dedication to the program. It is iin~erative that the imbUe finderstand that the U.S. must develop all viable sources of domestic energy. There will be no single best solution to achieve energy self-reliance in a relatively short time. All technologically feasible en- ergy resOurces will be needed to satisfy the continually growing energy require- nients, even given modified growth rates~ and provision should be mackp for their simultaneous de'v'elopment. Energy will cost more in the future. New resources are becoming more diffi- cult to find and construction costs have increased due to more complex tech- nology, safety, environmental concerns, and inflation. To have a chance of attaining energy independence, a national energy program must recogize the role of profits; the energy industry must maintain a level of earnings adequate for underwriting the massive expenditures that will be required. The U.S. will have to import significant volumes of oil for the next ten to fifteen years, e~ien while working to gain it~ self sufficiency. Elnergy~ conServation must be practiced intensively and on a continuing i~asis. Conservation is of basic importance because of the need to use our finite eu~ergy resources more wisely. The focus, however, must be on eliminating wasteful and inefficient energy use. Even these measures may indirectly reduce or shift employment to some extent. But we should avoid imposing reductions in energy use which would lead to próductioii cutbacks, substantially increased unemploy- ment, and deterioration in the economy. To be effective, the U.S. et~ergy program must have a national dediCation and a unified direction. The government must provide leadership In establishing a comprehensive national energy program covering a period of at least two decades. The program must be structi~red to encourage the effective participation of the public, government, business, industry, labor; education, and the media. It shc~uld.be based on a philosophy of constructive participation rather than puni- tive regulation. And It should recognize that the attainment of energy self- sufficiency will be an evolutionary process. The program should recognize that the energy problems of this nation can- not be-solved in isolation from the energy problems of other nations. Our eCdn- omy is to a considerable degree dependent on the economic welfare of other industrialized countries which generally are oil importing nations. And we and the other importing nations for many years will require oil imports as well as the recycling of capital from the oil exporting nations. National Chamber Recommendations The nation's energy problem, serious as It Is, can be stated simply: We need to reduce Our reliance on foreign energy suppliers, To do that, our prime objectives must be to (I) Increa~e domestic production of energy supplies, and (2) Reduce consumption by curbing wasteful practices. In our competitive enterprise system there is only one sure way to accomplish both objectives: Remove price controls from oil and natural gas. This market approach would allow prices to rise, The higher prices would Support increased research and development of underdeveloped domestic supplies of oil and natfiral gas. The higher prices would also spur consumers to ~onserve fuel, to look for ways of reducing their ~onsumptlon. In addition PAGENO="0286" 2S~ to removing price controls on oil and naturat gas, the congress, In coordination with the ministration, sheuld remO~e conStraintS and ~ .retIne1n~21ts In four additional major areas. (1) Facilitate the availabilitY of our nar~l~5SOUtOea Accelerate leasing and develo3~meot of the Outer Gonttnental ~lLelf (OCS) Revise federal 1an~ts ~oI4c3r 1o resume coat leasing on ~publle lands ai~id ex~pand leasing of publle lands for oil shaje and geethennal (tevolODmCnt~ ~)xp~cittiousl~ dwelop the c~pabiit~ to. utilize Maskttn na~turai gasi £up~~ort ln~rea~ed ~eseasch `and de~eioi~tmebt of iilnierdereiOP~d dom~st1~ energy resou oi~sneh oil~ha~l~t~s ~eott~er~nitl ~iergy. (2) i~eris~ I~Sti~n~ ~eonstraiii~bs en ~ener~ ~psMEuetiOn and consumption ~s~bl1h~rea~ll5t1c standzrd~ nitd ~d~e4Ures for s~rta~O coal mining and land reclamation, Ansure a balan~e het*eeñ meesures for eavLronme~th~l protection and the econonh1~ eft itaath~a of doiaastht etterg~ resources. Amendl~he (Diesu AIrAotto per~ntt greater use of coal. De~oiot~ dure~ h~ e~pedite the iIbing of anerg~ facilities including iu~lear~o~ praitta, ~ Substit~ite coal fired or unclear power plants for ~ti ~or natural gas fired piant~ Wn8re~er f~it~ibl~ (~) Asttst it ~rts1on ofener'daüd?~ l!~talilis~i 4nktional m *Ititdi~ b~atthig and cooling e~ffieiancy standn~rds forn'bi4lld1ti~ St1n~ato' devE4I*plnOliV of new t ologlés for industrial energy conservatl9n. Matini1a~ r~5 eTeco~1~ ~ I)evelç~p an "ethic of eterg~~ ooi~serVatIOrI" e~ the part of the American pubije. S~epport active public and private campaigflsto conserve energy. (4) FreO the n ket ~place 1~ealioW ~tbe~capttal foritatloii essentIal to meet future ener~ re~iiremaflts. r~~gbL~7t,1~ ~l.S,, ~ ~ ~ s~1~ ~o prQduce 40. mestic energy supplies adequate ~or its ~teeds. 1~mports were jTe~td t~ levels ~heough t~e~il]i~*iM~tS ~ç~u$~ ~5~Ui, ~a~4 4~tl0R~QYed spare oil production ~*~aqi1~y.. I $PC D~.TA YEAR PAGENO="0287" I~ the eari~y 19'flY~ ~ ~t~~i~t1 ~OflS~UmPt1~M1 aec~1eMted ral)ldIy du~ ~ i~rea~denei~gy requi~d t~ n~eet ~ newly estab1i~hed ~ I~a972, ~ d~rné~ti~! prodtlctioh of oil reached capacity levels and oil imports were used to satisfy further demand ,.mrmc~eases, thus making the~Unlt~d St~t~siner~ltsingly reliant on ~foreign energy so.urcen. This faç~ was recognized by the~ ~rab oil ex~orting nations, resulting in their use of the oil embargo as a tool of political and military policy in late * 1973. The pre~edipg cthart, using National Petm~oieuth Council data, plots historical and prc~j~eted domestic ~energy supply to 1985. Th~ 15 mihiou barrel. per day (M~PD) projected import.levelof foreign crude is a significant warning of our impendipg domestic energy shortfall. The U.S. economy* can neither support the resulting financial deficits nor abide the ever present threat of an embargo. Means t,o In~ease Pvo4~o~iQn S~' COTiiOL$ .NA~TJJ~L ~ *.; There is no better ~xathpje ~f the misguided u~e of price ~oiiirol~i ii the history of natural ga~ producf~~n The ~i~tural Gas Act ~f 1~h~8 was enacted to protect consumers from the ~he~entiy mo~1Q~q1iStie o~peration of nat~ial gas pipelines which basic~XIy are reglo~ially non co~pet1tive However~ producers of natttr3l ~ which a~e highly c~mpctitlv~ and ~egionall~ mObile, ~*eré specif- * ically exempt from the Act ,* S In 1954, tIme Supreme Court,, In the now fa~nou~ Philhi~~ decision, interpreted the law to include extensiOn of Federal Pdwer Commission (FF0) authority to producers who sold their gas to interstate pipelines. The FF0, bçlievlpg the Congress *ould cla~fy the producer exethption of the 1938 ~aturàl G~s Act, did not commence regulation of ipterstate g~ms until the late 1950 s They were immediately buried under an avalanche of mnthv~dual r~ite cases which the FF0 eventually tranMatédintb reg~ona~ area rates and thmally into on~ national area rate. * S * S * * . Many technical experts and academicians are cor~vinced tba~ our current natural gas shortage, estimated for this winter to be more than three trillion eubiefeet (.Tcf) short of approximately 23 Tef of total demand, is the result of FPC.,cost .regulatiçm, S * . * S * S In e±a~nining the history of FPC co~itrol~ on n.atur~1 gas sold interstate, one finds that a decade-long declipe in real energy prices corresponds .to a significant decline in supply for that pe.rjod. Prices foz new gas (expressed in 1958 constant * dollars). interstate declined stea~Illy frou~. a high in 1958 of 18.6 ~cnts per thousand cubic feet (Mcf) to a low in 1969 Of 16.4 cents per l\lcf. This corresponds to an overall decline in new non-associated discoveries from 13.8 Tcf in 1957 to a low of 1.7 Tcf in 1969. . S The cost-based methodology employed by the FPC to determine regional and * national, area rates has been consistently discredited both within apd without the FF0. The laborious computations cquld, af. best, ~et ouly average costs for producing gas which by definition will p~efent half of tli~ av4ilabje reseivoirs tal en into computation from being produced When drilling a gas producer w~l1 contiflue Only as lçiç~g as l~e feels be can mal~e money ui~id~er tbe price ço4trols rither tIm in according to market conditions The mandatory ceilings have re duced the incentive to explore areas known to present the potential for high risk an4 above average cost. ~ * * * S * 5 5 These pricing policies have cause~l tli~ present, natnral gas sbOrtag~ dn~ have contributed to oumY overall l~nme~tjc ~i~erg~ s~jçrtage In three ~ays: (1) Artificially loyv natural gas pric~s re~uced the economic incentive to lo.~~te. awl dev~1op. new ~pppU~. of m~tural ~ As seen ah~ve, a reduction in the rate of discovery oC new gas accompanIed the P?0 s price policies o~ 1958- 1970 (2) Demand for natural gas acce~ez~a~te~I sharply ~n response to the declining price of natural gas. M~any iñe~1Cieut and fuappropriate uses of ~as 5wOre ~mploye~1. The cleiua-i~~~ing qwgity Q~l~ ~atip~a1 g~s also increases `i~s value (though not it~ price) in tbes~ enviroi~mer~t conscious times Predictably the * rapid i~ise in demand for natural gas and the dr.ahtic reductionin new `findings has brought about the present shortage, causing severe curtailments of natural gas deliveries to businesses, hindering production and employment. (3) Beyond just the present natural gas shortage, artificially low natural gas prices have contributed significantly to our domestic shortages of other fuels. 55-583----75--pt. 1-19 PAGENO="0288" 2S6 These low prices had a depi~essingeffecl~ on ~ueI oil pi4eessince 1!uel oil competes wilh natural ga~ fo~ many uses 4s a consequence of tile art~ftc1a1Iy low ftiel oil and natural gas prices, the domestic fuel supply situation deteriorated in two ways; ,` ~ ~ .~ ~ ~ ,~ ~ ~ ~ ~ 4~ shift developed away from coal as a fuel aM was hastened by nsii~g coal prices, due pnmar~ly to inc~reased labor costs and stringent e~ivlronmental controls. ~ ~ ~ ~ ~ ~ ~ New exploration and develoj~in~nt was forced away ~rorn domestic resources to foreign resources Most oi~ the ` easy domestic oil and gas deposits had al ready been d~seoverecI ~resent costs of explorl~g and deve1opln~ oftshoie areas aud Alaska are about teu times the cO$t o~f typical onshore drilling The result was expanded develop~nent of relatively Inexpensive fQrejgn reseives .~ (Venezuela, indonesia, the Midd1~ ~ast) to meet domestic demands. Thus, the combined effect of artificially deprt~ssed natural gas prices, reduced development and use of domestic supplies t~ all fossil fuels, arid accelerated denmud has brought the United States to its present precarwus situation To re verse this trend, new natural gas should be deregulated~ immediately. A recent Business Week article on the intra~tate natural gas market i1l~strates perfectly what happens when a mkrket Is allowed to function freely In recent years some Texas Intrastate gas pipelines have curtailed deliveries just as severely as the interstate lines Following an almost tevtbook example, the shortages caused pi ices to rise in the nnregulated Texas gas market which In turn encour aged new drilling and production The result has been the production of more g'is than Texas can consume forcing the price down from arouhd $190 to in sOme cases $120 Mcf a price which inteiestlngly is belOw some currently proposed sta tutory ceilings for gas. The article points Out that the higher prices have made gas utérs far more frugal An expert estimated that most plants have cut consumption by about 15 percent simply by using bettei insulation recoveriflg waste beat, and taking other gas saving steps Additional evidence Indicates that the higher prices resulted in a 20% net Increase in pi'oducing gas wells over the prevteus yeai'. A study by the Texas Wildcatters Association shows that gas production from new discoveries amounted to almost one Tef in 1974. That was 15% above the 1973 figure and 21/2 times the 1970 level. Assertions that production is more a function of potential supply rather than price are simply unfounded And the developteents in Texas need no1~ be limited to that state. The Energy ~esearcb and Development Agency (ERDA) has estimated that there Is at least 500 Tcf of natural gas locked in the Devonian shhle forma tion in Ohio Michigan Illinois Indiana Kentucky, Alabama Tennessee West Virginia Pennsylvania and New York Howevei to produce that natural gas the free market must be permitted to operate. * PRIOR CONTROLS AND ORTJDR OIL I. Ba,ekgronnd The present system of pricing domestic crude oil Is both wasteful and ~ounter prOdnctive In addition to the complicated and bureaucratically expensive alloca tion mechanisms needed to enforce the two tiered pricing system contu~ued regu lation delays investment In seconçlary and tertiary recovery methods which can be expected to Increase oil supply on both a short and long term basis Decontrol would permit domestic crude oil prices to rise to the prevailing world price levels so that the demand dampening effects which have been felt worldwide would be felt to the full extent in the Umted States Under the two tiered price system the price of a high percentage of domestic oil is held at less than halt the wor~d price The impact the escalation of world market prices has had on demand overseas has been considerably cushloped in the United States B~ Way of reference current domestic oil production is 66% `old," 13% `new 8% released' and 18% stripper Imports acoount i~or almost 40% of domestic consumption The removal of price controls on domestic crude oil Is an essential and integral part of the program to reduce energy cqnsumptio~ and curtail de pendence on imports It is generally agreed that production In~eutives afforded since the fall of 1973 by the rules permitting new' and released" domestic crude çil to be sold at free PAGENO="0289" 287 market pric~s a~e of dec~ea~ing'efeeètiveneS~' ~ce~ pSr don~est~à cru4e oil (Other tl~aIi crude oil produce~d ftom a strippe~ well lea~e~ are deterthined ~1nder Federal Energy Admintstratio~ (PEA) r~gulat1ous accord1~g to tb~ number of barrels produced and sold each mo~ith fropi each ~roperty. If the current month's pro- duction. from the. property concerned Is less, than in the corresponding month of 1972, all the production must be sold at or below the ceiling price established for "old crude petroleum." The ceiling ptice nOw is the Ma~~ 15, 19711, posted: price for the particular crude oil coneerüed ph~s $L35 `per barEeL The national average of such ceiling prices is `currently approximately $5.25 per barrel. However, to encourage increased production, the PEA regulationS permit all production In ex~ cess of the 1972 base level (less adjustments for production at less than the 19 ~2 base level in prior m~ntbs) to be sold as "new crude petroleum" at the higher market level prices (currently $11~50 per barrel and higher). Another `Incentive for increased production is the alloWance ~f an amount of the month's produet~on which equals the amount of "new oil" produced to be sold at the higher market level prices, provided that such, amounts of crude oil, called "released crude petroleum", do not exceed th~ Production le~iel of the 1972 base month. This means that if production from a property in the 1972 base month wus 10,000 barrels and is 13,000 barrels in the current month, 7,000 barrels of the current month's production would be subject. to the "old oil" price ceiling while 3,000 barrels could be' sold at market level prices as "released crude oil" (assuming no adjustments were needed for past production deficiencies)., . As previously indicated, two.thlrds Of total. domestic crude is classified as "old oil" and is therefore subject to the price ceiling. The remaining one-third Is either specifically exempt from price Controls under the stripper well lease exemption or is permitted to be sold at free market levels under the .productioii- incentive rules governing the sale of "new" and "released" crude oil. Many producers, especially those whose current production levels are substan- tially below the 1972 base levels and are jurther declining under primary recov- ery techniques, remnin unaffected by the incentives which are too remote to outweight the high cost of the snbstantial secondary and tertiary recovery programs necessary to bring production up to and above 1972 base levels. The existing incentives are effective only for limited periods of time in any event. The inevitable slackening of output will bring `production below base levels to the poffit where existing incentives will no longer encourage investment in sec- ondary and tertiary recovery and other costly programs designed to increase total output, An additional benefit of domestic crude decontrol will be the elimination of economic distortions caused by the present two-tiered pricing system. This sys- tem inevitably causes cost disparities among refiners and marketers of petro- leum products. Moreover, the ezisting complicated structure of price controls nt all levels of distribution, necessitated by the cost disparities resulting `from ,the two-tiered system,, tends to be self-defeating over the long run. It reduces normal incentives for lncrea~ed production and cost control and eliminates in- dustry's ability to engage in long range planning. As effectiveness of price con- trols wanes, regulations of greate~ complexity and reach become necessary to maintain the eoutrolled-priee structure, Tightening of controls tends to further stifle initiative and contributes to greater economic di~tort1on. II. Analysia,of Oil Decontro' ` ` The two-tiered structure `systemn~ `with 6~3 `percent of ,the domestic ~i1 at an arbilrary low prIce of approximately $5.25 per barrel and l~4 ~perce~it at the market price of approxiwately'$11,50 per barrel, re~ults in an averag~ domestic price of about $8.29 per barrel. The average price of all crude oi~ consumed in the~ United ~States mu~t then inelud~e about 40 percent of the ~uppl~ at the foreign prlce'df approxii~teIy $13.00 pe~ barrel. ThIs results'in ,an'average crude oil cost to the United States consumer of approximately $i0.15. Companies are' allô~Od to use this average ~oSt figure in setting the. pnièe of refined products. For instau~e, if we can determine that~ demand r~spo'nds to price ehan'ges~ we can `estimate that the pricing pOlicy ~ias cansed' they pi~rcbase of about 0.4 millIon extra barrels Of Imported oIl per day over a short perIod and about 1.2 million extra barrels per day over a 1on~er period `(this assumes a PAGENO="0290" ~S8 demand e1astk~ii~y coeft1ciei~ of O~2 on the short run and O4~ on the long rim ; cle- ii~anU e1a~t~city ~ini3 been e~tft~ateU as high ~ts 0 8) ~ Xwt~&~t o~ an additional 04 m~fliou b~xieIsper clay ~t a cost of ~ 00 ~i barrel equals $i 8~ bi1li~n per year that we wou~ç1 not otbei~wiSe jeman~L from O~J~i sources Pile h~n~er term pro jectioli is ~5 6T 3iltion per ye~u~ ~ri ~Lrofly ~ that t~e e1n~ticity co~fl!eiehts which bave been used were detern~anM d~trhig per1od~ oft. low ~ itiU~catiflg tIia~; the coe±Ucient~ cou'd be big~ier during ~eii~d~ ~f )aj~her n~ar~et pi~1ces ~he Interstate O~i Compact Oommission (~OCA~) jyu~thshed a r~po~t in March :1975 ~cs bi~1i stated lbat 1ifjfli~g o~ pnc~ coi~r~1s 01i 011 prckluced through see ondary ai$ tertiaiy prpcedu~e~ wofl1~% ui~rea~ daily prodi~ction b~ &50 000 barrels 4nd ~ S reserves by 10 billion I~árre1s between 19t5 kind 1~0 The study, prepared at the ~equOst of th~e *EA, i~ based on ddta repre~eiItihg over 4,300 enhanced recovery p~oj~çts pnd i25,U00~yOUbcing w~iis. The 900 o~erators represented in ~he stu~y are from ~ ~tk~s ~d t~re&1lCe ove~'~ ~Or~ent Qf all U.S. enhanced recovers. 011. The f~e~ort ~ttitè~ That the sizable daily,ptbduction increases would be due to a~ ~ktended ecotiolnie life fd~ enhanced prPieets `ahd increased capital thvestmettt$. The ~~port cnit4udes that this .incte~sect"produc- tion wou1~ reduce oil imports by nearly ~.5 bhflon, theteby lniprgvl~ig the b~latice of trade. A stroi~ger~conomy `and n~ore jobs will re's~lt, Decontrol of crude oil will also make the'deteio~mdflt ~of the 008' a more realistic enter~rise, liow~ver~ `the legal impediments that deta~yed ,çOnstrüction of the Alaskan pipeline, which will e\rentpall~ delith~ ~ thiuion b~rrels of oil per day to thO lower 48 states, must not be allOwed to recur hi the QOSsitnation. Preliminary geophysical evidence suggests that we could evéntpally find billions of barrels of oil and triltious of cubic ~feét of xiatur~Pga~ o~ our Atlantic Seaboard. Gulf of Meylco welhs ,áI~éad~ pt'e4de a ,signlfican~ `pO~ti~n o~ domestic production. When foreign oil coulid be'bouight~for less thaü $4.00' pdr bam~é.l-and was politically `~afe to depend on-Atlantic `ofts1ior~ oil, w~5 hot ,ecohOrnically attractive, With oil at a world price of mole tban'$1300, offshore Oil has become an attractive `investment. Venture capital is ~o~ing towdrd~ 005 detOlopment as the Federal Government motes toward 1easii~g. Yet, enormous Op~ositio~ to OCS ieas~ng is developIng in some surprising places, such as thoae fegions, Ihost severely affectOd by cutoff~ and pric~ hictekse~ b~ foreigp su~p1iers, The' Atherican outer Continonta~l `~elves present a peat ~ the greatest opporturnt~-to lessen significantly our depelidence upoit foreign oil. These offsho*e areas can be developed economically and wIth mm1~nal en- tironmental risks. The legal framework to he~ `coa~tat ~5tates cope ~%vitb the problems presented by' offshore drilling and onthore'siipport faëiiltiCs is embodied in the Coastal Zone Management program~ tli~ough which, Federal thnd~ are provided ,to help states plan for eQastal and offshore ~ev'eioprneii~. AdcOlerated leasing o1~' the 005 is `crucial to increasing domestic energy ~u~plie~. Continued Federal price cO'atrols `on uatutal gas' and "am" 4qaIt~stjc .Crpde oil will sOrve to discourage ~apital ihVe~tnient abd',' lisk `,taIti'n~ the~eby discouraging explOration and development of `these two ~ittt~ fuels. ,, na'TLIzATION o'a Q0~iL The U~5. Bureau'of Mines `has estimated that~ `there are 4~4 ,`bllIibn tót~s of coal `in the demonstrated co'al reserve `base of the U.S. It"f~'estimate~1 that' ~0% of this coal is recoverable~ "I~he' demonstrated reserve base~'i~'~Oal in relatively thick beds which lie close enough to the surface to he mined by: conventional surface or undergroufld methods. Thus, a minimum of 217 billion tens. of coal is available for' `recovery b'~ preshnt ted~inOlogy and within pre~ent neopomics. `At current consumption levels,' this `is enOugh codl for ~0'~ea~s." ~và at `time doubled pioduction rate projected for ~ this is enough coi1 for a century and a half:' ` ` ` , , ` ` However the demonstrated coal reserte b~$e i~ oi~jy a minor fraetaon of the coal known to e'amst iii time V 1 The U 8 Geological surve~v hl~s identified 16 tril hon tons of coal deposuts at depths of less thltn 5 000 feet and ~t m estimated We a~su5i4 the prhle Of refined prpdu~ts Is about $~ 20 per )~gr~re~ or abgult $C 05 per .ga1~ou 1e~s-t~an-w,ouId be~ t ~a~a~'mvit~h lie Coetrol.~ `If `petrol~aon prodoCts tr~ le)i~hg on average for ~ 40 per gallon instead ot *45 per m~auloIu ~f the Short lea elastleitr Is 0 2 and 0 be without price controls; at 0.6 the eXceSs consumption is 1.2 million barrels per PAGENO="0291" PAGENO="0292" PAGENO="0293" 291 Costs of Synthetic Fuels from Coal, 1973 ITEM 20 LIQUID BOILER FUEL ~ 80 ~J2$ DISTI~LATE MIX - PIPELINE GAS Curren $ogy AdTectsnol~gy J2.98 rNIN. MAX. LOW*81U UflLITV GAS I ~i_iii EASTERN COAl. L~ J WESTERN CO~L ~~0~ -~ COMBINED OIL/GAS .1 I,.~ ~ ~ .50 tOO 1.50 ZOO 2.50 ~oo 1973 Dollars Per Million Btu !~!~ `~.por; on ayntIs.Sc Fu.ls fro.iç~~ Federal Energy Adminigaretson, Siptember 1974. Another difficulty is that a variety of legal and economic constraints i~ow mili- tate against the full development of coal as an energy source, Implem~tatlon of the Clean Air Act Amendments of 1970, for example, forbid burning~ofcq~J under many cQnd~tiQl1s. This affects coal production by decreasing the market for coal and discour*~g1ng capital investment in coal production. Despite recent action by Congress amending the Clea;n Air Act to facilitate the conversion of some large fossil fuel-burning stationary sources to coal fj~om oil, much more needs to be done, This legislation allows a. number of plants (100 plants at 32 locations) to convert to the use of coal, but tbe major problem (pl~nts now burning coal) has ~een ignored. It is estimated that full implementation of the air quality standards, scheduled to go Into effect in ~nid-1975, oou}d effec- tively "outlaw" 200 teillion tons of coal annually (1/8 of all coal production) which is now utilized by electrig, utilities, With emerging sulfur dioxide (SO2) removal technology, about 100 millIon tons of this coal could continue to be burned-but the necessary .rem9val equipment cannot be manufactured and in- stalled before the scheduled dealines and probably not until 1979 or later. The other 100 million tons cannot be utilized under present air quality standards using known 502 control methods such as intermittent control techniques. Serious electric power shortages could occur and many localities could be thrown Into chaos if large quantities of coal are burned after the applicable deadlines have passed. 1~'or these reasons, It is imperative that further amendments to the Clean Air Act to facilitate the conversion of more power plants to coal be passed by Congress a~ quicklyas possible. Continued delay In amending the Clean Air Act also has indirect energy Im- pacts. Coal produces's and Investors are reluctant t& invest ea~ita4 in eoal-ps'odue- tion so long as the possibility exists that the coal cannot be sold. PAGENO="0294" PAGENO="0295" 293 ~Ar~ A Locatj~n of F~deial Lease Tracts PAGENO="0296" 2~4 Source: U.S. GeoIOgics~ Survey, 1974. OTHER SOVECES OF DOMESTIC ENERGY Coal, oil and natural gas are proven resources that can help us to reestablish energy independence in the next five to ten years. While th~se are the most reliable sources of energy a~ allable at this time they will not be the major sources which we must utilize in the years ahead. Another set of technologies exist that are not yet fully developed, but which are our greatest long term hope and are deserving of more study and development. The most developed of these emerging energy technologies Is nuclear power The fission reactor is already a proven, relIable energy source The breeder reactor, while showing enormOus potential, probably needs several more years of research before reaching pilot plant stage Nuclear fusion Is still a highly theoretIcal energy source that will need several decades of study before full realization. The federal government should encourage the installation of ~ssion plants wherever fea~1ble. We must, however, perfect all phases of nuClear development, such as improving reactor safety and efficiency and provide for equitable siting procedures for nuclear power plaats. The costs of alternate sources of fueLwill, play .an Important role in nuclear development Continued pilv~tte controls on oil will have a detrimental effect on nuclear capacity as Illustrated in the chart below. We further recommend that adequate financing be provided ERDA for the continued derelopment of nuclear breeder and fusion reactors. U.S. Geothermat Risources, Areas of Promise lo HOT ~PRINGS~ LESS THAN 100°F O YOUNG VOLCANIC ROCK \\\ GEOPRESSURED BRINES PAGENO="0297" 93 1980 -U-..-. ~l ~ 79 0 Accelerated Development $11 0.1 Busineec As.$7O~~~j 1973 -J20 I I I J 100 200 300 400 500 Thousand Megawatts Source; Project Independence Report. 1974. page 113; Nuclear Powgt Growth. 1974-2001) Atomic Energy Commission. 1974 page 49; Th~HcIear Industry 1914.,Asamjc Energy Commission 1975. page 7; 1985-90 extrapolated. The creation of ERIJA was a giant step in our national effort to promote new and better energy sources We hope that ERDA will catalyze and concentrate advanced research in such diverse areas as solar, wind and tidal power, advanced engine cycles, magnetohycirodynamics and the like. MAXIMIZE iiESOUiiCu nEcovEny Another means of producing energy from readily accessible resources is avail- able through the emerging technology of resource recovery. Resource recovery and its attendant technology of energy conversion can u~ the long run not only reduce the cost of municipal waste disposal but also can lower energy costs through energy conversion techniques. Refuse.cierived fuel burns at approxi- mately one half the Btu value of an equivalent amount of coal The largest ~)ower producer in the cot~ntry Tennessee Valley Authority ~s seriously stnclyipg the possibility of converting a number of its electric power facilities from fossil fuel to refuse-derived fuel. Resource recQvery refers to the extrdction and ptilization of :materials from mixed solid waste energy recovery refers to the utilization of the calorie value of refuse in egergy systems In application they offer the most positive approach to present and future munk~ipal refuse management Resource recovery Is not new It has been a standard tool of ittdustry for many sears However it has not been applied to the problem of municipal scdit waste until recently because of its inability to compete economically with conventional 2~5 Projected U.S. Nuclear Power Plant Capacity~ 1973-90. PAGENO="0298" 296 4iisposal techniques and with the development and increased effectiveness of resource recovery systems. In fact, total resource recovers systems have increased uix-fold in the past three years and more and more major corporations are entering this growing new field. Technology is now being developed, and in some cases is already available, to mechanically process refuse to recover resources, The significance of such systems is that materials can be reclaimed for reuse in predictable quality and quantity to meet manufacturer's specifications. A recent study by Franklin Assoeiates, Ltd., sponsored by the AlumlDUm Company of Americh, indicates that if resource recovers were "fully developed," i.e., put in 150 metropolitan areas in this country, 62% of the poj~iilatlon would be served 57.6% of our solid waste problem would be solved and 25,700 more people would be employed in this industry. Furthermore, if only 25% development takes place, a more realistic figure, 5.3 million tons of combustible waste could be recovered. T$ latter would be the equivalent of saving 32.4 million barrels of oil per year. This works out to almost a hundred thousand barrelo~ of oil a day, which is onc4enth the energy conservation goal expressed by the President, Conservation As has already been indicated, considerable conservation would be achieved under decontrol of crude oil. Although projections are dft1~eult, si~nilar, ~f not greater, results would be achieved with deregulation of new natural gas~ Because the price `for gas has "been held at such an artificially low level for so long, any rise is likely to have a significant conservation impact. The market place, through the interaction of demand and higher prices, will promote the highest degree of energy conservation. At the same time the govern- ment should continue to develop, through ERDA, technology which will iflhprove the efficieney of energy related operations and facilities in the transporl4ttlofl, residential-commercial, industrial and electric utility segments. The chart below, using National Petroleum Council data, plots the historical and projected demand in the energy consumi~ig sector. UK~TED STATES ~N~RGY `DEMAND HO 120 ~0o - S~R~ `35 40 5 g IA -~ o I ` SHARE,~~ ` ~ 20 10 .NPC DATA'. ` YE?R **` ` ` While conservation is critical to our national energy program, we must firmly keep in mind that conservation alone cannot provide the solution to our energy needs. Even at a minimal growth rate of two percent a year, domestic energy production will have to increase 26 percent through 1985. At a 3 percent growth 23 PAGENO="0299" 297 rate, dome~t1~ energy production will ht!re to Increase 42 percent. At the current rate of oil consumption, all of the presently proven U.S. reserves would be con- sumed by 1985. Thus, an amount of Oil will have to be found during this period equivalent to 114 percent (or 12~ percent for the higher growth ease) of our present reserves if we are to i~taaJntajn this res've position. This will, indeed, be at! enormous task ~nd can be aCbi~ed primarily by the efficient functioning of t1~e market place~ :SpeOiflo Ob)eotian,~~ to iij~. cs~o Quotas, RdAiouiug an4 Othei' AflodatiOn Devices For yCars the NatIonal Chamber has advocated allowing the market mechanism rather than the government to make the adjustments necessary to the efficient functioning of our econotnic syrtem. Current energy problems clearly demonstrate the market mechanism's superiority. Quotas, for example, have been proposed to rapidly reduce U. S. dependence on foreign oil, No one questions the need to reduce our vulnerability to foreign suppliers, but let ps examine the impact quotas will have. Those levels currently being discusseU-~.O MBPD in 1975 and 1976, 6.5 MBPD in 1977, 6.0 MBPD in 1978 and 1979, and 6.5 MPBD in 1980 and thereafter-wouhi constitute a sub- stantial cutback in projected !mport levels. Both the National Petroleum Council and the Federal Energy Administration's Project Independence projections indi- cate that we can expect a level ~f imports over 11 MBPD in 1980. This would face the U.S. economy with a minimum shortfall of &5 MBPD. Yet, the U.S. has no prospect of developing any surplus* producing capacity. Even when Alaskan pro- duction is oh stream this will increase domestic production by only 2-2.5 MBPD. Thus the proposed quota system could potentially cripple the U.S. economy. Even at less restrictive levels, quotas would put pressure on the o\~erall price level, rekindling inflation, While dashing hopes of a full-fledged economic recovery by denying industry the raw materials for production. Quotas do not address our more basic need, to encourage domestic energy development. In fact, both quotas and import fees may have the opposite effect. Energy shortages lead to shortages of energy-intensive products soire of which, notably steel, are in turn necessary in energy development. And, even if materials are available, large amounts of capital are also essential. The implementation of quota~ will further hike the scarcity value of oil, but the resu~ting economic rent will not go to domestic producers who need the capital. Quotas have an additional, overwhelming liability. They will recluire the imposition of allocation and rationing systems. There is no indication that Americans recognize the seriousness of our energy situation and, without their cooperation, there is no way in which any such system would work. Even if this credibility problem could be overcome, however, it is virtually impossible to devise t! fair system? How does the government allocate: by climate, by geog- raphy, by population, by occupation, by product? The problems are endless. And neither rationing nor allocation has any direct effect on reducing wasteful uses of energy, encouraging the development of more energy efficient production processes, or developing alternative energy resources. It is on these areas which we must concentrate If We are to reduce our energy import dependence, and it is on thesethat the market system will force us to focus if it is allowed to do so. What of an lmporV license system? If competitive bidding were instituted as part of such a system, it wot!ld increase the ease with which the producing coun- tries could gang up against us. In addition, it would bid the price of petroleum up, not because of costs of production, but because companies would be bidding for a commodity in artificially short supply. Even if an import licensing system were imposed without import limitations, the problems created and exceptions granted-of which there are a sampling in currently proposed legislation-would create vast bureaucratic bottlenecks. yost damaging of all, the uncertainty gen- erated by such a system would greatly hamper the long-term planning essential to the viability of our economy. And there is no assurance that the producers woul~1 bid at all. A related proposal; that for an import purchasing agency, is subject to many `of the criticisms cited above. In addition it would damage an important seginent' of the U.S. economy, the oil industry, by Interfering with its integrated operations. It would, at consicierableexpense to taxpayers, attempt to achieve a~ ~eeure suppQ~' of oil at a reasonable price, an approach tried by a v~triety of other countries PAGENO="0300" 298 without significant sources. In fact, It wo4~ proyi4e the producing countrieswitb ~an easy means of cutttjig ofC our imports entirely, ~ . BUSINESS tJ$E TAX ON OIL ~AND NATVRAI~ GAS ~The proposal to tax the business use of oil ~nd natural ga~ ts 111 c~niceived and misplaced on several counts When fully effective, the excise ta~ on the business use of oil and natural gas will be $1 per barrel for oil and 18 cents per Mcf for gas. This is a negative approach to the stated purpose of the provision Encouraging Business Conversion for Greater Energy Saving," The answer to encouraging greater energy saving is not to put a penalty tax on business but to let the n~iarket system produce more efficient energy supplies and new sources of energy. If the tax is designed to encourage Industrial conservation of oil and gas, this has been and will continue to be accomplished more efficiently in the market place by interaction with higher energy prices. A recent Department of Coimneree survey of industrial consumers shows that industry In 1974 cut energy consump- tion on a per unit of output basis by a median 7.6% whIch then Secretary of Commerce, Frederick Dent called very substantial' The majority of the energy reductions were in the 6% to 8% range however ten reporting industries recorded savings of over 30% As technology responds to higher costs efficiency will continue to improve. If the tax is designed tO encourage Industrial conversion to coal, this can also be better accomplished through the market place where industry catL determine what energy source is most desirable based on cost and availability Industries unable to convert to coal, either because of poor transportation facilities or because of air quality constraints would be unjustl~ penalized Those Industries desiring to convert to coal should be assisted through a prompt capital cost recovery system which is considered in a later section rather than by prodding through penalty taxation Penalty taxes drain needed capital for companies to invest in energy efficiency equipment. Additionally because natural gas is so underpriced a tax on it would have little effect on conservation or conversion, since its price would continue to remain below the price of coal or crude oil. An excise tax on oil and gas will raise revenue, but do nothing to increase production of gas or oil which should be the thrust of national energy policy, The' most efficient conservation, as we have seen, will result from higher energy costs which will also encourage exploration and production of nOw sources of energy. CapitaZ Formation and Ener9y DeveZopinent Capital is an ipiportant factor in energy exploration and development. Esti- mates of the capital needs of the energy Industry over the next decade have reached $1 trillion. Existing and anticipated tax policies greatly influence invest- ment decisions by the energy companies. Additional tax burdens or threats of additional taxes can discourage Investment and Impede the development of essential energy supplies, Thus, there exists a correlation between taxes and the energy crisis. Facing `a capital shortage, the energy industry was dealt a severe bjow by the tax laws should provide that all non-renewable natural resource industries industry by almost $2 billion. The severe limitation placed on the percentage depletion allowance alone could reduce available capital in 1975 by $1.7 billion. These adverse changes in the tax laws with regard to natural resources could seriously impair the search for new energy. To meet national needs and to assure replacement of exhausted mineral assets, the tax laws should provide `that all noi~-renewable natural resource industries have adequate depletion allowances The need for the percentage depletion allow ance is as great today as it has been In the past if America is ever to return to an afforable level of self-sufficiencY in Its oil and gas supplies. There have been numerous proposals to impose an excess profits tax on'energl producing companies. We oppose excess profits taxes. They run counter to the competitive enterprise system are economically unsound and difficult to admin Ister and are not a solution to the current energy crisis ~ tax on excess profits suggests that the government can decide bow much profits should be and which profits are excessive and which are not If this Is possible with the energy pro ducing segment of the economy, then why is it not `possiblO with other segments PAGENO="0301" 299 of the economy? Where do we stop? What will be the shortages netx year and the next, and which businesses will be subjected to government regulation and control of their profits? Excess profits taxes discourage capital investment for the development of new energy resources. There is a definite psychological effect on investors who know that any success will be subject to a tax that could consume most or all theprotit. In addition, an excess profits tax could have the effect of causing companies to delay capital investment actions until such time as the tax expires-resulting In a definite postponement of the development of productive facilities. We are opposed to any form of excess profits tax. If one is imposed, however, it must contain a "plowback" provision. Without a "plowback" provision, the capital vital to the solution of America's energy needs may not be available. Conservation and efficiency can be as important in dealing with the energy crisis as the discovery of sources of new energy supplies. According to a M~Graw. Hill survey released in November of 1~74, 17 percent of the plant and equip- ment of American business is at least 20 years old. United States tax policy should encourage the replacement of obsolete plant and equipment. To provide energy-efficient plant and equipment, the concept of prompt capital recovery allowances should take the place of outmoded concepts of useful lives which have been used unsuccessfully as a measure of depreciation and obsolescence. Replacing obsolete, energy-wasting plant and equipment with modern, energy- efficient plant and equipment would help the United States solve the energy crisis. The President's Labor-Management Committee has recently recommended that the investment tax credit be increased to 12 percent for electric utilities. The Congress should take action on this report. We favor a full 12 percent credit, not only for electric utilities-but for all business. Tax policy toward energy companies could determine the outcome of the energy crisis. If taxes are increased, the sources of capital can certainly be expected to diminish. We urge that tax measures be adopted to encourage energy exploration, energy production, and capital investnient in energy-efficient equipment. UOnCZU~SiOfl In conclusion, I thank the committee for allowing the Chamber of Commerce of the United States to comment on this most critical national issue. The CHAIRMAN. Next we will call Mr. Frederic B. Ingram, chairman of the Energy Corporation of Louisiana. AJ1 right, Mr. Ingram, we would be very pleased to hear your statement, sir. STATEMENT OP MR. FREDERIC B. INGRAM, CHAIRMAN OP THE BOARD, ENERGY CORPORATION OP LOUISIANA, LTD. ACCOM- PANI]~D BY: MR. JOHN U. BUCKLEY, VICE PRESIDENT AND DI.. RECTOR OP NORTHEAST PETROLEUit~t INDUSTRIES, INC. OP BOSTON AND VICE PRESIflENT AND DIRECTOR OP ECOL Mr. INGRAM. Mr. Chairman, thank you very much for the opportu- nity of appearing before this committee today. My name is Frederic B. Ingram, I am chairman of the board of Ingram Corp., of New Orleans, La. Our company is an independent firm principally engaged in ocean transportation, shipbuilding, in-. land waterway transportation of petroleum, chemicals, rock, sand and gravel, international petroleum and chemical trading, and con- struction of oil and gas pipelines. I am also chairman of the board of Energy Corp. of Louisiana, Ltd. ECOL is a petroleum refining company, 50 percent owned by In- gram and 50 percent by Northeast Petroleum Industries, Inc. of Boston, Mass. PAGENO="0302" 300 With me today is Mr. Johii Buckley, vice president of Northeast and a director of ECOL. ECOL is currently constructing a 200,000-barrekper day refinery in St. John the Baptist Parish about 35 miles up the Mississippi River from N~w Orleans. This new facility ~wil1 be the largest refinery ever built in a single construction phase in the continental United States, and upon its completion in the latter months of 1976, will be the largest independ- ent refinery in the continental United States. The ECOL refinery will also be the first refinery ever built in the United States designed to maximize the production of heavy industrial fuel oils-a product this Nation now imports in substantial volumes. I will limit my comments today to title I of }II.R. 6860 and to the impact of the import quota, auction and duty systems established by that title on new independent refineries. The CHAIRMAN. Would you mind suspending just a moment because I want Senator Haskell to hear what you are about to say ~ Mr. INGRAM. If sections 111, 112, and 121 are enacted in their present form, it will be nearly impossible for an independent com- pany such as ours to build a new refinery in the future. In fact, if these provisions become law, it is unlikely that very much capacity will be built by any company, anywhere in the United States, and we will continue to be dependent on foreign refineries for a substantial volume of our products, particularly in the case of residual fuel oil. A review of recent history will underscore my concern. As the com- mittee knows, in April 1973, the President announced abandonment of the import quota system that had been in existence since 1959. In place of the quantitative limitations of a quota, he established an import license system under which any person who wished to import could do so upon payment of a license fee. The licensee fee on crude oil was set at 21 cents per barrel and the fee on products, at 63 cents per barrel. This is very similar, I might note, to the ad valorem duty schedule of 2 percent on crude and 5 percent on products established by section 121 of I-T.R. 6860. However, in order to stimulate and encourage the construction of new refining capacity, particularly by independent companies, the President created a special incentive-for the first 5 years of opera- tion, a new refinery would be forgiven the, obligation to pay the license fee on 75 percent of the crude oil it used. In effect, for the first 5 years a new refinery would pay an import fet~ of 5.25 cents per barrel, in- stead of 21 cents per barrel. In April 1973, upon announcement of the new program, the Federal Government made two commitments: first, the new program would be a stable, long-term one, upon which the industry could rely; and sec- ond, it was particularly designed to encourage the construction of new, independent refineries. I note that Secretary Simon will be testifying on Monday and I would just quote from a statement he made on April 18: Our objective was to design a program that would assure the oil industry flexibility to import oil to satisfy the ibort-term needs of IT.S. refiners and con- sumers while, at the same time, provide longer term stability and additional in- centive for increased domestic `exploration and produetion arid new refinery construction and expansion. PAGENO="0303" 3O1 I realize that this may seem like a small amount of mon~y-the waiver of about 16 cents per barrel, but several facts may underscore its significance. First, as the committee is aware, an independent project must be financed by borrowing from outside sources, usually large banks in~ contrast, when a major oil company builds a refinery it need only rely on its internal cash sources or the borrowing strength of its entire operation. Since an independent project must borrow heavily, its interest and principal payments are heavy, particularly during the early years of operation. That is why the 5 year waiver provides an incentive. Another ,f act: With the declining level of U.S. domestic production, a new refinery must rely on imported crude oil more heavily than existing refineries. Although this factor has been mitigated somewhat by the mandatory allocation program, that ~!rogram is temporary and in the long run a new refinery must count on processing a large proportion of foreign crude, In fact, as you will note from the background material submitted to the committee, our refinery was specifically designed to run on foreign crudes; it was specifically designed to move residual fuel capacity into the United States while being able to run ciudes from anywhere in the world, thus minimizing the risk of supply interrup- tion from foreign refineries upon which we now rely so heavily. Thus, with the prospect of running a high proportion of high-cost foreign crude, the waiver of import fees becomes a critical factor. In summary, we simply could not and would not have embarked upon our refinery project without the 5-year waiver granted by the Federal Government. It is essential to our operation; it is essential to the operation of any independent refinery project. Unfortunately, H.R. 6860 changes all this. In one stroke, it wipes out the existing fee-free system and the 5-year waiver for new re- fineries. It breaks a firm commitment of the Federal Government, on which a number of significant investment decisions were made. A.s persons who relied on that commitment we are deep]y disturbed. If ILR. 6860 becomes law in its present form, we believe it will raise serious legal and equitable questions regarding that commitment, Per- haps worse, by removing the waiver the Congress will be saying two things to independent companies, who, like ourselves, wish to build new refineries: You cannot rely on our firm promises and we do not care about new capacity in any case. As a private citizen with substantial experience in the building of refineries, I can assure this committee that without any incentives~ no~ new independent capacity will be built in the United States. And that would be bad for our Nation and contrary to the goal of energy independence. In addition to abolishing the 5-year waiver, the quota and auction systems established by H.R. 6860 have three other features which are certain to discourage new independent refineries: First, the establish- ment of a strict quantitative limit on imports is a disincentive in and of itself. Since a quota means that someone will have to go without oil, this usually means new refineries; thus potential investors will be scared away from a project by the prospect of being without oil, even when there is no embargo or foreign supply interruption. 55-583----75----pt. i-20 PAGENO="0304" 302 Second, H.R. 6860 raises serious uncertainty about the cost of im- ports. Under section 112, companies n~ust bid at auction for the right to imports Thus an importer-and, more important, a prospective borrower or lender-has no jdea what it will cost to bring crude oil into the United States. Further, for one company the cost could be different than for another, depending on the date of the auction and the volume of crude oil licenses he must bid for. This uncertainty will be death to new projects. No one will he able to make firm financial projections; no one will be able to determine his crude costs vis-a-vis his competitors. Third, while the auction system provides a limited set-aside for independent importers and small refiners, it does nothi~ig for inde- pendent refiners such as ourselves. As a result, we will be forced to enter the auction and ~bid for crude oil import licenses against the major oil companies, whose financial resources far exceed our own. In addition, such majors own substantial quantities of foreign crude oil and thus would be able to set the price of the crude to be bid upon by themselves and by us. Obviously, this is totally unfair and anticompetitive. In summary, H.R. 6860, if enacted in its presnet form, will end any hopes for expansion of independent refining capacity in the United States. It will end any chance of increasing the share of the refining industry owned by independents. It will mean that major oil company dominance and control of refining is assured for decades to come. - Fortunately, this committee can prevent this from happening. And I should like to conclude my testimony with five specific recommen- dations relating to title I of F[.R. 6860: First, the quota and auction systems in sections 111 and 112 should be deleted. As I have indicated, they will create a massive new set of bureaucratic controls, result in uncertainty and confusion, and will effectively discourage the construction of new, independent refineries. Second, if the committee decides to retain some sort of import quota system, the auction must be completely eliminated and replaced by an allocation system for quota rights. And such an allocation system must provide a specific set-aside, a guaranteed allocation for new, independent refineries. I would urge that this allocation be of at least 5 years' duration. Third, the ad valorem duty system in section 121 should be re- tained. This, as I have indicated, is essentially the same as the current license fee system and, by~ establishing a higher duty on imports of products than crude, provides encouragement to the construction of domestic refining capacity. Fourth, if this ad valorem system is retained, it must carry forward the 5-year waiver commitment made to new refineries by the Federal Government in April 1973. This could be done simply by providing that new refineries were required to pay only 25 percent of the ad valorem duty, that is, a duty of one-half of 1 percent, on crude oU imports for the firstS years of operation. Ii ifth, section 121(f), which eliminates the current supplemental fee program, should be maintained. An important and positive fee.- PAGENO="0305" 303 ture of H.R. 6860 is the ending of the complicated supplementral sees imposed by the President on February 1 and June 1 of this year. Those fees, which place more of a burden on crude oil than products, are a clear disincentive to new domestic capacity and should be eliminated as soon as possible. I commend the Blouse for its action in this regard. Mr. Chairman, in conclusion, I wish to thank the committee for the opportunity of appearing today. The bill before you is of the greatest importance to our refinery project and to the future of inde- pendent projects throughout the country. The action taken by the committee and the Congress on ER. 6860 will establish energy poli- cies for years to come and will determine whether new, independent refineries can be built and survive. Your action will also determine whether our Nation will continue to depend on uncertain overseas sources for the major volume of its residual fuel oil imports. I am confident that you will act wisely. rfhank you very much. The CHAIRMAN. I want to suggest that there may be some better way to solve your problem and I think we ought to explore that with the Secretary of the Treasury and with others to see just how we could do this. But, I am fully in sympathy with you and I think this committee will be in sympathy. We agree that we should not do anything to prevent the building of new, independent refineries. I wish to ask this question: Does it not tend to work out that when we find oil and products in scarce supply, such as was the case of a year ago, that the major companies tend to use every device available to them to favor their own company, own station, and to extend their control of marketing over other independent outlets when they can in these times of short supply? Mr. INGRAM. I think that is certainly fair to say. I would say it perhaps might not he intentional on their part due to the size of their operations and the way they have trained all of their people. The CHAIRMAN. I was here at that time. The independent filling station operators were screaming to high heaven that the major com- panies were taking advantage of that shortage to expand theii~ control and extend their control over the retail outlets both in terms of con- verting stations to company owned stations where previously they had been individually owned and terminating leases, tightening their control over their retail outlets. And in addition to that, the completely independent retail outlets were finding it difficult to obtain gas. up until they eventually found some ways to impress them to treat these independent retailers more fairly. An independent refinery such as yours has every interest and finds it very much to its advantage to try to keep these independent re- tailers alive, does he not? Mr. INGRAM. Yes, sir. The CHAIRMAN. Because those are the people that you hope to sell your product to ? Mr. INGRAM. That is right. PAGENO="0306" 304 The CHAinMAN. And I know that sometime ago the retail independ- ents stressed to me th~ fact that everything that could be dne should be doi~ie to try to j~romote one or more independent refineries that would try to keep theni alive because they would have an interest in doing SO; contrary to those other major companies who had no such interest. I guess you are aware of that? Mr. INGRAM. Yes, sir. The CHAIRMAN. Thank you very much. Senator Haskell ~ Senator HASIcI~LL. Thank you very much, Mr. Chairman. Mr. Ingram, it is nice to see you again. I met Mr. Ingram with the' chairman's colleague from Louisiana. I must say I am not impressed with either a quota or a tariff, I may have some other ideas, vis-a-vis the industry that you and I might not see eye to eye on; but I certailily See the dislocating effects of both the tariff and the quota. I really have no questions. I would like to say this, Mr. Chairman/, Mr. Buckley is here. There has been talk of the United States being the sole purchasing agent for overseas oil. I do not know if that; is going to come up in connection with H.R. 6860. But I heard Mr. Buckley on another occasion dis- cuss that proposition which has considerable surface appeal. He seems to put a lot of holes in it, it makes it' look like a swiss cheese. So, if that proposition is going to come up before our Committee, I would I1ke to recommend at that time, that we might want to hear from Mr. Buckley. I do not think I should ask any questions about the proposal now because I do not think it is a matter before the committee. But, if it does come up before the committee, Mr. Chairman, I would like to recommend that Mr. Buckley be called as a witness. Thank you very much, Mr. Ingram, I appreciate your statement, it is nice to see you again. The CHAIRMAN. Senator Packwood? Senator PACKWOOD. I think you have been dealt unfairly with and I sympathize with what the chairman said. I think we can find a way out of the predicament. I am curious generally, do you think we should be trying to re- strict our imports? Should we have an energy policy pointing in that direction or not? Mr. INGRAM. I do not think we should have a policy that tends to restrict imports just as I do not think we ought to have a policy that tends to control the price of domestic crude oil or natural gas. I think we are going to have to come to a situation where free market prac- tices dominate the energy business or we are going to end up in worse trouble than we are today. Mr. BtJoKr~nY. Could I add to that answer, Senator? Senator PACKw00D. Yes. Mr. BucKu~Y. I think the problem here, as you know on the side of the House; and they had a difficult struggle there, is they came up with a bill that addresses really one side of the problem, and that is the supply side. If we are going to deal effectively with energy we have to deal with demand. If we are going to cut imports automatically, and PAGENO="0307" 305 if we put no restraints on demand and simply try to deal with it by cutting supply, then obviously we end up with shortages; we end up with higher costs because of these shortages. We end up with an anti- competitive impact on independent marketers and refiners and enor- mous new bureaucracy. And, overriding all of that, a system that simply will not work. You only can have a quota system that is effective and works if you have spare capacity in your own country; if you have reserves you can draw on when the shortages hit. We no longer have that kind of spare. We did back when the quota system worked earlier. We no longer have that kind of spare capacity so what we are doing is imposing upon ourselves a self-imposed em- bargo. I do not think there is anybody in this industry that has looked at supply and demand that does see, looking at the numbers that have been suggested, pretty massive shortages over the next 5 years. And who is going to be cut out? Which industries are going to be shut down? Which homeowners are going to go without oil? And when you get to those questions, the whole thing will fall apart. Senator PAc1~wooD. I do not think you and I seriously disagree and when I posed my question to Mr. Ingram it was in the context of an entire energy policy. I realize if you cut your imports back 3 million barrels a day without decreasing demand, you are going to have to ration, or the price will go up because of the shortage. But fundamentally, I am curious, with your answer, Mr. Ingram, because even in the context of an entire energy policy, you say, no, dG not make any restrictions on imports and let the market take care of it. But, in purchasing our supply, we are not dealing with market economies. I would be with you 1,000 percent if I could be guaranteed that the market would be allowed to operate and we would have access to purchase, Mr. INGRAM. Well, I think that it will in the final analysis. There is a price at Which we will not be buying Middle East crude oil or other crude oils that are priced too high. Senator PACKWOOD. I suppose at some stage it will be priced where we will not buy but we will have no alternative if we have no reserves. If we have no energy policy, what will we do? Mr. INGRAM, I think the only way we are going tO have reserves in this country is to spell out a positive energy policy so the people can start making the kind of inves~mènth that* it would take to get us to the next energy plateau. `WO have got to stop all of this worry about whether there are going to be windfall profits if they deregulate oil. That is not the problem. The problem is that there is no program for phasing to that. It would be just as bkd not to deregulate oil, to deregulate the price of old oil. As of this morning, the windfall profit is the least of the reasons. There are many practical reasons in the business. There could be a tremendous amount of waste, confusion, black market-everything you can think of would go on. SenatorPACKw00D.1 agree with you. I hope we do deregulate but you have no hesitancy bein~4Q, 50 percent dependent on ithports, the risk that entails? PAGENO="0308" 306 Mr. INGEAM. No, I do not. We are going to be that way n~ matter what so there is no sense in worrying about it. You might just as well deal with it as a reality. Senator PACKWOOD. 1 have no other question~, Mf~. Chairman. The CIIAIRMAN. Are there any further questions? Senator Hansen? Senator HANSEN. Let me yield. I took more time than I deserve. I would be happy to yield to Senator Fannin or Senator Curtis. Senator CURTIS. I have no questions. Senator FANWN. Thank you, Mr. Chairman. Mr. Ingram, I just hope your projection that 50 percent of any oil requirements will be imported is wrong because I think that would be disastrous, not only from the standpoint of what it would do to our economy, but also from the standpoint of that dependency. Being cut off from that foreign supply would be a catastrophe. Do you feel that there is valid reasoning behind that? Mr. BUCKLEY. The 50-percent ~uggestion? That is really Senator Packwood's figure. I do nt believe we suggested that. Senator FANNIN. Oh, I see. I thought you agreed upon it. Mr. BUCKLEY. No. I think there are a lot ~f projectiotis that do show import dependency in the petroleum sector running up to 50 percent by 1985 and 19~0. * Senator FANNIN. If we do not take certain actions? Mr. BUCKLEY. That is true. Senator FANNIN. Well, that is the point I wanted to make. That pro- jection was being made. I apologize; I was not here to hear the testi- mony I just heard that one statement. But the 50 percent, as you now agree, is based upon the assumption that we do not take proper actions in the near future to alleviate that happening. So on that basis, of course, I agree with you. And I understand in your statement here, you talk about quotas; and certainly, I oppose quotas. If we institute quotas, would we not have to institute price controls? Mr. BTJC1~LEY. If you institute quotas, you may not institute- Senator FANNIN. No, no. If we institute quotas, would it necessitate ~price controls? Mr. BUCKLEY. Well, you have price controls now, as you know, on old crude.; and so long as there is some kind of domestic price cotitrol on domestic crude production, and foreign crude is priced much higher, then I agree you lmve some inequities and some difficulties. And it almost compels continuation of a price control system. Senator FANNIN. I agree that we should decontrol. I just read part of your statement, with which I am in agreement. The problems that we have with the shortages and all-the first thing they say, is let us have some price controls. And then they talk about rationing, and, of course,then you have more serious mah~djustments. I think that would be disastrous. .1 assume from your statement that you agree with that. Mr. BUCKLEY. That is correct, Senator FANNIN. Then, of course, we talk about the ~bureaucracy. It was estimated it would~cost as. much as $2 ñiilhion a ~year to have a bureaucracy that. would hatidle xationing and all. I think, yOu are in agreement with that from your statement, Mr. INGRAM. Yes, sir. Senator FANNIN. Now, the' one item that I think perhaps has not been covered-is that if we establish a Federal purchasing agency, how PAGENO="0309" 307 could we insure that we would get the optimum mix of oil for this country, the proper gravity crude from the appropriate refineries, and so forth that is brought about by our present competition? Mr. ~ Well, a natiOnal purchasing agency is possibly the least workable of any idea that has been put forward in my memory in the oil business. Every refinery is an entirely different piece of machinery. A barrel of crude is worth $10 a barrel running in one refinery. I do not think it would be worth $9.25 in another refinery. And in order to have a national purchasing agency, every barrel of refining capacity in tln~ country, and every crude oil available in the world, would have to be put into some mammoth computer. And, in effect, the Govern- ment would be trying to equitably program the economics of every oil company in the country. It just cotild not be done. Senator FANNIN. It is unworkable, you feel; completely illogical? Mr. INGRAM. It is an awfully hard thing to do on a company-by- company basis, and probably the thing that the oil companies do the poorest job of. And if you threw them all together, and tried to take care of everybody, it would be categorically impossible. Senator FANNIN. Would it not remove any possibility of a competi- * tive factor operating, too? * Mr. INGRAM. It would, in effect, be nationalization of the business, because the Government would have to run the whole business. They could not just run that part of it. Senator FANNIN. Thank you. The CHAIRMAN. Senator liansen? * Senator HANSEN. Possibly you may have answered the question. I apologize for not having caught every word you said. What percentage of our petroleum supply do you think we could import without undue risk to our national security? Mr. iNGRAM. I think after you import any sizable percentage, you run pretty much the same risk; and I ~m not convinced in my own mind that we will not be importing 50 percent of our requirements by 1985~ even if we go ahead and do everything ~s expeditiously in the energy business as possible. I do not see much difference in the risk between importing 50 percent and importing 35 percent. if it gets cut off, you a~e going to have exactly the same problems. Senator HANSEN. Would you see much difference in importing 50 perc~~t and importing 15 percent? Mr. INGRAM. Yes. I think that is a significant difference. Senator HANSEN. Would yo~i agree that as our dependency upon petroleum i5 lessened, assuming that we bring other forms of energy into the stream of energy supply in this country, such as nuclear power and coal, to mention two that are on the immediate horizon. and solar energy possibly, that then we could safely run the risk of increasing the Percentage of our petroleum supply that would have to come from abroad? I am saying, if we can have more of our total amount of energy produced by domestically owned resourOes, then t would aesurne you wopid. agree with .me that ~he risk that we would run in importing more of our `petroleum would not pose as serious a ~threat to the country as is now proposed. Does that make sense.? Mr. ~N~RAM. Yes, I think it does make sense, .1 think one other thing~ ought to. be pointed out, and it goes more to what we were saying in our statement. The type of refining capacity in the United PAGENO="0310" ~O8 States today is to a very large percentage the type of refining ca- pacity that can run U.S. domestic oil, and cannot r~in foreign oil, because of the quality `of it. And I feel, notwithstanding our project here or anythin,g else, that one of the Serious' ~hortcomi~gs in our dependence on foreign energy sour~es is ~he fact that we do not have the refining capacity to run crude oils that are in large: supply in the ~o~ld today. When we let refining capacity be built outside of this country, in the Caribbean, ~n Canada, and South Aixierica, and Ceptral A~nerica, we are just adding additional people' who can twjst' our tail. And the Middle East countries might be yery willing i~o ~eli us, the oil, hut you cannot burn A~rabian heavy in a pow~rplant or anything else. It has got to be ri~m through a ~pecific type, of refinery which we do not have. Senator HANSEN. Several o~ the committeesof Congress have gotten into the energy business, ~r into a study ~f the energy situatipn, and on recalling testimony that IL have listened to, addressed to the spe- cific point of new refineries coming on, being built and cqming on- stream, I have gathered the i~npression that the biggest single drawback to capital formation and the building .f new refineries seeths to be ~he lack of adequate assurance of crude oil supply, Ts that an opinion you share t ` . ` Mr. INGRAM. No, sir, that is not. I do notthink. anybody who is considering building a refinery is terribly worried about the physical supply of crude oil. What they are worried about are the rules and regulations c~vering the econbmics of the business, and on our project, for instance, we are spending $400 million. And we borrowed close to $300 million of that from banks; We did not have a barrel of crude oil committed, and we are halfway to being onstream, And if . ~ou `had to a~k me, we still. do not have very much crude oil tied up, by our own choice. The only risks ~that w~ are' concerned abqut, really, are the `risk's'right here in Washington'. Senator' HANSEN. WelI~ I must assure you that your fears are not unfounded. ` Mr. BUOKLE~. Senator, II think the point is that we can see rules change, such as the ones that would be' changed by this bill, wh~re `we have been told, in' a statem~nt by `Secretary Simon which was made on the same day that President Nixon put, ~ut `his Executive order of April 18, `1973; and I ~vOuld like to submit th'is for the record. If you read Secretary Simon's statement on that day, April 18, 1973, at least a dozen times in there, `he. said the reason we are going to this new system is to provide long-term, , assu~ed policies that yOu can count on, and go out and `build those refineries. Well, we made the investment, and we are half~'built, and all of a sudden comes along a new H.R' 6860, which in 1 day eliminates all of those incen- tive~ that were built into that program. It eliminates the `tariff dif- ferential between ci'ude and products, th~ forgiveness, the waivers that new refineries' get, and establishes a `quota system. So suddenly,. if we are able to do the best deal' in the world with three or `four different producing countries, we ~anndt bring that oil in ourselves. We have got' to go th'rough an, auction system,' and bid against' the majors, `and you knqw, `it i~ just a'dis~ster for' us. And that means that, since PAGENO="0311" 3O9~ we are the only new rethierybehig built hi this ceuntry today, if our experience goes badly, WIIQ. else i~~li~ world ~s ever going ~q. build one? And we ne'e&20 or 30. ofthesethings. .:," ` ~ Our big vulnerability right now is mit an Arab embargo It is the thieat that any embargo pdses On r~sidual fuel, because We impoit over two thirds ot our total needs tor that, ~id that 1 uns ~acto~ics, it runs utilities. We have got to. build some of that capacity 1aerc~ and nnder this bill it will not be bitilt One wait to limit our risk here is to get the kind of refining capacity that we need in the counti y, and that means the kind that replt~ces product impoits That is what ours is designed to do. We are going to make 68 percent residual fuej. In the, United States, the average refinery produces 7 or 8 per~ cent Every b~rrel we produce will back out ~i barrel of imported product, and yet this bill simply ignores &i o~ that, and creates d~- incentives. Aiid~ `we tire hopin~ that this committee will recognize those faCt~, ~iid will take' the stepsneeded to rectify that situation~ senator HANsEN. 1 have no ,~urther~ quCstiohs, Mr., Chair~ñan.' [The April 18,1973, statementof `Secretary Simon, ~eferi~ecl to pre viously, follows:] ` ` " . STATE~NT ifr WILLIAM E. `SIMoN; Drnr~' SReRETARY or rire TREASURY o~e TUE OIL IMPORI PR0GRA~ A~1im 18 1973 President Nixon today signed a Proclamation which t~rmingtes volumetric quotas on oil `imports beginning May 1, 1973. The' Proclamation substitutes ~1 system of license fees on imports of petroleum and petroleum products into the United States. . ` ` ` Today's action follows an intensive stiid.y ot the nation's oil import policies relative to current domestic supplies of'.erude `oil and petroleum refinery, capacity and the national security interest of ~the nation. The study was conducted by au inter-agency `task force' under my direction as Chairman of the Oil Policy Committee. LICENSn FEE PROGRAM An expian&tion of the new license fee program is attached. In essence, how- ever, as of May `1~ 1973, there no longer are. any volumetric contro's on oil `im- ports, ~nnd the'existing duties on crude oil and refinery product imports are sus- pemled. Any ,pe~'.son or company wanting to import crude oil and/or refinery., products may40 .so~ after obtaining an import licen~e from the Office. of Oil and Gas at the Department of ~the Interior' and after paying the license fees in force at the time. . . ` ` ` ` In order to provide an' equitable transition from the current program to the new license i~ee `system, certain crude oil and product imports will be exempt from li'cen~e fees for a limited period after May 1, 1973. These exemptions, how- ever, will be pbas~d out over a seven year, period. DEMAND AND SUPPLY Iii recent yearS, the United States haS ~eeti its Surpln~ Supply' of crude'oil and refinery cap~eity rapifily, dwindle ~nto a deepening de~1cit, 4s dei~a'nd for petrolepm products has splr~led upward and dis~over!e,s of new tèserves and construction ot new reilne~es in this coluntry have failed to J~eep race Increasing ueluAnee on imports of foreign supplies Juts raised ~erjous questions with regard to the nation s balance of paymentS pbsltion and national Security require~uents In addition the difficulty in Satjsfy1ii~ the nation s home heating oil iequir~ment5 thus past winter and the threat of a ~asol1ne shortage this summer underscored the'iiimthl~nt need to recousic1e~ hfltiOnal ofi policy, nud an investigation of cur- rent policies was begun in J3~e~rtiary by the oil import task force under my direction.' ` , ` ` ` ` , ` ,` ` `,` ` ` PAGENO="0312" 31O M1~ATO~ OIL r~4PORT PRGR~ rJ~1ie task force found that the Mandq~oi~' 011 In~ort ,o~ram no loe~pro~ vided the proper cllnn~tC to sp~rt~ ~t vigorottS domestic petroleum 1ndtistr$~, which' is' essential to the national securit)~ ~tnd the eèo~ofl~1c welfare of the nation. It found that the program w~as'neithei~ a~qi*te to alievlat~ the thfeat of near-term crude oil and produdt' shortages, nor adequate `tO provide longer- term incentives for liicréásed investment in demesth~ exploration and prOdm~ttOn and new refinery construction and expansloil. The task force fOund that the program was not so much a ~ai1nre as It was obsolete. It was established at a time when domestic production was in exceSS of demand and it was fouPd on the premiae that it was necessai~ to i~estrict imports of cheap foreign oil to encourage `the dOmestic petrolettht' Indt~stry in the interest of national security. rrbe conditions which gave rise to this policy no longer exist. Further, the original purpose of quotas was to provide reasonable self- sufficiency by encouragthg the development, of domestic produ~ction and refining. capadty.'ThiSclearlY has not bappe~ied,~ Companies were induced to explore `a~id'procl'ace abroad in order to beneAtlyoth from' lower `foreign prod~iclng costs and the, assurance, of `a large higher-priced market at home. Imports' now account for 30 percent of production an4 nre expected to climb to the,50 percent level in a fe~ years. The task fofce found that `these `unintended developments are inherent in the quotS system, and have not been coi~rected' by thO stop-gap' measures used to shore up tITLe program over the Past years. Lately refinery capacity has also begun to n~ove abroad. Althebgh ether factors have contributed tO this development, 1~cluding `envtronmeflta~ restrictions which have blocked refinery plant siting~, the uncertainties o~ the, quota system have had an adverse effect' on long-~range investmelit5 ~or new refinery cotustl~uctiOfl as wOll as investments fOr additional exploration and prodi~ictlon'in this country. This uncertainty `desreioped because: 1. Import `alloCatiQiTh are subject' to annual realignment; 2. In recent ~jears', the program has been altered frequently, making it a patchwork of special prOvisions and exceptio~i5 and 3. ~knera1 dissatisfaction with the program bOth In' industry and the' government hü fo~tered the e~pectatiofl `that it would be alandoned shortly. flASTS yon roLloY RgOMEIfl~ATION 1~a~ed ~n'thls' ássO~snieiit (if the Malidatory Oil Import `PrOgram, we launched a `full scale effort; to develop recomniendatlons to restructure import policies. We recognized the need to get the federal government out of the business of' regulat- ing oil imports, since the government does' not `have the forecasting capability to predict exactly what import' levels `wlll~ be each year. Oflr objective was to design a program that would aSsure the oil industry fl~1bjlit~ to import oil to satisfy the short-term needs of U.S. refiners and consumers while, at t~e same time, provide' longei'-tei~rn, Stability à~U additiOnal lnCenti~Os for increaued' domes- tic expioration"ánd" pi~Od'uction `and n~w' refinery construction `and e~pans1oni. `We knew that in designing this ne~~ program' the Spéei4I prQ~isi'ohs, `exceptions and subsidies in the MOW would have'~o b~ Onded. WC realized that this could not be done abruptly, but would have tO be done gradually to avoid putting an unfair economic hardship on the numerous peraOns and companies that together have invested, many millions of dollays in the ~1omeslic Oil Industry based on the poliCies i~ider t~ ~XOIP. . ` ` ` ` ` ` We also `realized that our'flew policy recoifinTLem~tatiouis'.would `haute to satisfy eonsui~er lutelests in reasonable prices and sufficient supplies without stramn1~lg or ~isr~pting the ~omplex' mechanism knqwfl'as the Qil'lndustry, Welcnew that each `segment of "flue. Lndustr.y mnst, eoutinn,e to l~e viable In ord~r to meet. the supply nced~ of. ~natlen )pt~ in' ~he ~r. ~ud lengO~ term. ~be,,formidabllttL of this task is ob~vious When. yo~, reah~e. that Uie ,ofl industt~y. is .composc~ p~ ~ ~tze It rgio~al'~o local and from integi~a~e~ majQr~' to' indepeiden$~prothte~rs refiners ~uarke~r~ anç~ jobbers We~.~rtber. recognized that our policy. ommelidath~ps woul4. have~ t~ ~e compatible. with, other gQvernment policies and prograi~s, in particuia~ the" Economic Stabilization ~rQgr~m~ . ` ` ` PAGENO="0313" 311 We knew ,tI~at In order to be more attractive ~or oil eompanles-or for that mattei an~vone-to build new i,ef1ner~es and ezj$io~e for more oil in tins country prices ~n tins country for fore~u petroleum products would have ti~ be hig1~er than the pnces ~or domestic products Only in this situation would it b*~ more piofitable to maiiutacture those products I~ere than to ma1~e them somewhere eh~e and impart them into this counti~y There had to be clear advantages to producing ci ude oil in this country rather than producing it somewhere else and in turn sel~iflg It in this ~ounti y Therefore we have set a license fee on imports of crude oil and even higher license fees on imports of residual fuel oil thstiliates gaso irne unfinished oils and other products Various changes in these Incentives are spelled out in advance so that the oil industry will have a reasonable degise of certainty nndei which to make major new investments in U S exploration and development and refinery construction. INDkPENDENT REFINERS Implementation of the new license fees on M~ty 1, 1973 will give value to unused 1973 import licenses, providing landlocked independent refiners with some additional leverage to bargain for domestic `sweet -low sulfur-crude oil Import licenses, in general, now have no exchange value because the landed prices of foreign crudes-especially `sweet crudes-aie roughly equivalent to or above domestic crude prices An mci ease in the vslue of independents licenses by the differential of 1O1/~ cents per barrel initially should help independent ieftners bargain for addition'il sweet crude supplies 1~4oreover the ability of the independent refiner to obtain license fee-exempt tickets from the Oil ImpQrts Appeals Board will, hopefully, enable them to obtain a ~ufficient nppiber of tickets to allow them to bargain for adequate crude oIl supplies under. present- day price. relatjonships~ Under the new license fee progrim the exemption of 1973 allocations for all refiners will be phased out over 7 years The intent is to provide refiners both the time and the incentive to adapt their refineries to run available sour' eludes or to develop or contract, for adequate "sweet" crude supjifles for the long-term. XNDEPENDEN~ MARKETERS AND JOERERS Today s action also gives value to the 1973 import allocations issued by the Oil Import Appeals Board to independent niarketers a~td jobbers, enhancing their ability to bargain for products. The OIAB will continue to hear appeals from this sector of the industiv to make certain that no undue hardships occur as a result of t\i.ght product supplies. In the long-run, the license fee program will further benefit independent jobbers and market~rs by encouraging, additional refinery capacity, which will make products more readily accessib1e~ PRICES The impact of today's action on oil prices is expected to be gradual over the bug-term and minimal in 1973. Imports subject to the new licOnse fees duribg :i 973 ilre expected to be such a small percentage of the nation s total oil require- ments as to have little if any impact on consumer prices The Cast of Living Council has advised us that there is adequate flexibility under the current oil price eohtrol~ to alloss ouch price movements sh~u~d they be necessary to meet the supply neecTh of the nation Today a action also gives all importers the opportunity to negotiate long term contracts and thereby lower prices for their crude oil an4 product supplies This should be especially beneficial to deepwater terminal operators in PAD District i. . . . . CONCLUSION The program announced today by the PresIdent dials equItably with the niai and varied a~pects of oil imtort policy While satisfying the national secur1t~' interest by assuring the oil industry the fi~1b1htv eertatnt~ atid IncOntives to meet the gross I~ng petroleum nOeds of the nation through domestic expansion lit all levels of the production and thatribtition system Today a action suspencit oil import quota restrictions Without abanthmtng the Mandatory Oil Iniport Program It opens the sVas~ for foreign Impotts to al'eviate uotential shoitages of ciude oil and finished prodnets without ~ore~tostng the PAGENO="0314" 3~2* optiôñ 6~ ~Y~ip~irig Mandatory ~ohti~Ols ~t iin~ t1he~in~ t~f~iturE~, sithuM that ev~r ága~n BecoMe necessary or de~i~ah~O The Intent is to mtuntain tinport can trol ru~d ~iccbuhtabi11t~ withth~it ~re~ti!icthig the ~tlow of essetiti~t1 oil' ihto the Urt~t~d states ~ give~ the 1~resIt1~tit thef1~xibilit~ t~ ~ shoft~ term needs ~f &ins~tner~ ~ith~nit de~tro~tig long t~rm incentive namely do meStic exp~lotatiOfl and ~toduction of citide oil and con~trttction and expansion of dthñe~ti~E~ffiieJ~1eS. `th~ ~iJ~W1A.N~: I~eti~'see; if I urnierstand th~s situation now~ If I under~ta~&it~ you ar~ not here th, athr~nte that we rely upon fo~eig~r dit kYOu a~e hët~hi1~iy Th~ s~ th~f thi~ t~Gi~ is ~oii~g~ tc~ be importing a lot of foreign oil for `~ long time to come, reg~rd1ess of how you look at it. That is a fact of We. We are importing about 6 million barrels,a day, an&you wot~ld h~pe, ~y the time you ge~ your refinery ~omple~ed, t]~t you woi~ld be refining about 1 baird out of 30, and ~tIt~t 4,.,barrel out of 3O~~oiild~ be the kind of oil that. most of the other refineries are not built to han&le.~Is that correct? Mr T~mltA~ Coi~rect~ sir The Oiiti~t~ All right So t~at,,'assuxnir~g that ~ are ~oing. to import some fox'eign oil, it is better to bring it in as crude than it is to bring it. in as a; product. And that *`h~ `b~tin national policy for a iong& tin~e~ I take it? M~."I~diiA~i. Cthect. `11~he O~iAInMA~ If you..bring it in. as a product, and.yóu have to go to a thirdparty country in' order to~ get it refined, you increase your injllr~ in the ev~nt of an embargo So that it is more to `this Nation's advantage tO maintain your~iITdepéndeflt refining capacity. I see you nodding~yes. And then, that being the case, the Nation made it to your advantage to bvjil~ a refinery, and then having done so, you now are confronted with a bill ~ here it would no longer be an econon~ic proposition. . , Mr. I~mm~i~t. FRight. It would be even less so for somebody else to build Oi~e. ` ` ` . The CfiATRMAN I did not hear you Mr. INGRAM. It would be even less reasonable for somebody to start today on a new refinery, because thei'rcost would be considerably more than ours. ,.. .. The CHAIRMAN. If I were you, I would worry about myself. I would not. werry about the neat guy. Mr. Bno~t4n~. We are w~'rried The CnAInMA~ What you are saying is that this Nation adopted policies which make it feasible to refine that oil. here, and now you are confronted with a bill that would remove that incentive. Mr. .iNm~M."That `is e~actly' ~ight. `The Ci~Ain~iA*. And' if that is to be done, you are saying that. that threatens your investment, and you have borrowed $300 million. How much did you say you borrowed?, Mr INGL~I ,,Tust under $300 MilliOn The CiiAinM4N. So you have raj~d'$1O9 million, .and you have borrowed $300 million, to. build this refinery. And"you do not think it would be a very good investment if they do what they are' talking' about dbin~ to ~rOU ~ Mr IN41~AI'~ It wouM be ~. terrible investi~ient Mr~ BucI~LEY. It would be a disaster. .. PAGENO="0315" 313 rj~ij~0 ~ I thin1~ J~ widw~stand the occasion~, .a.,I think we should rem~~ the confusion., You. are not here~sayiug w~s~i~14.rely on foreign ~mp~rts. All you, are saying is, so long as wcbri~gt~em in, they should not change the r~1esip.fhe middle of the game. Mr. INGRAM. They ~b~u1d.not change the ruies.o~ us ~n' the middle of the game, ~nd this committee, ~id,a lot o~ people up here, should realize where our~real vulnerability is, au.d iLls in the fuel ~i1 imports where we depend on third partães; where we. depend oi~.4 prod~icing country to send it to a refinery., and for that count~y to be reasonable about how it marks it. up, and theu. send it to us. AncLthen they do not have to if they ~o not want.to. The CUAIRMAN. The point is., your argument. then is,. it is, bad enough to be vulnerable for the crude, but it is doubly bad to be vul- nerable both for the crude and the `refining. Mr. INCRAM. Correct. Mr. BucKr~r. We would hope we, as a Natioii, could limit our vul- nerability by promoting the kindof refipery that we are..buil~ing, and lessening our imports of products by promoting an intelligent and comprehensive storage program for crude oil, which would be a na- tional program, and actions along those lines. And quit~ apart from those steps, that when we come to grips with how we are going to lessen overall dependence on petroleum imports, let us look at how you can restrict demand, increase co~iservation, use energy more effi- ciently-all those things that reduce demand automatically, back out the highest cost oil, and that is the imported barrel. Whereas, if you just say, well, we do not care about demand, we are not going to put any taxes on demand, we are not going to have conservation, `we are not going to use energy efficiently; the, only thing we ~re going to do is slap on a quota and limit supply, then you just create Chortages, and that is going to creat~ great confusion-ci~ipple the economy, quite apart from what it does to us. And we jiist think that'thatis the problem of this bill. It deals with some lopg-term cdns~rvàtion and some long-term measures to promote conservation, but `short, term and immediately it puts the clamps pn, supply. 4pd we just thb~k' the~t is going to be extremely bad for the Natjon and the `Natiop's ecoporey, a time when it is trying to struggie ,to ~et out of the re~e~sion. The CHAIRMAN. Senator H'askeil? ` `, . Senator'HASKELi~. Mr. ~bairmaq, I ji~ist'have one question. Mr. In- gram, did I hear you correctly ~ You borrowed roughly 75 percent of a new facility without any assured source of supply ~ Mi INcwu~r That ~is coirect, without one barrel of ciude oil com- mitted under' contract. , ` ` , , ` `Senator' ITASKELL. I had always i~inderst~od that, `to build a refinery, you had to .hav~, assured sources of, supply to borrow the fu~ids. I gues~ Taip wrong, in, your ~a$e anyway. , ` Mr. INGRAM. Well, I think that that WaS ,p~obably ~preva1ent rumor, and a lot of people thought'that ~f they got and hisured their crude, oil under oontr~ct, ~~acy çoul~ gp tQ',a bani'and'lorrow money. But as it turned put- `,Senator H~si~ j4r.,I~ is noj~ s~' .`. ~ `, ` ` ,, ` ` ` Mr INGRAM Not necessarily Mr BUCKLEY I think, Senator, there are 12 milliop b&ri~tls~'day of crude oil shut in around the world. `Almost ~irèry jo~prodth~ing PAGENO="0316" ~14 country who has gained ownership rights from the majors of p~irt of their production wants to deal with independent refineis The reason we do not have. crude is, it is really our Own choice. We wanted to wait, because we f~It that the market f~r crude and the price foi crude and the credit terms we could get would be better now than they were a year ago or a year and a half ago So we were pursuing a conscious policy of not trynig to tie up long term at a time when supplies were tight ai~d prices were high, and there was no credit available, and wait for what we saw developing, which has now de- veloped-bemg a major surplus of crude in every producing country, on much better terms to us when we now consummate our crude con tracts And we were able to convince our banks that was the iight Strategy. Senator HASIcELL. Thank you very much. Thank you, Mr. Chairman. The CHAIRMAN. Now that you bring that subject up, it is relevant to an experience I have had. I have run across a number of people, promoters, who have contended that they could assure oil from Nigeria or someplaèe, various and sundry places. And my impression from the information that came my way was that anybody who could ob- tain the assurance of a supply of oil would have no difficulty building a refinery. But every time someone wanted to take him up on the other end, the answer was they found out, no; there was no way they could guarantee that oil. I take it that that is why you are smiling, because those guarantees were not there, anyway. Some fellow found some politician over there in `Nigeria or Algeria or somewhere who wants to talk about it, but when you really get down to facts, there is no way they can guarantee it. In the last analysis, about all you have got when you think you have got a guarantee from some of these countries is just a promise from some politician in governments that are not as stable as this one Mr. INGRAM. That is correct. Mr. BUCKL~Y. Even if you have a ~ontract, all of the contracts you sign today, whether with a major international company or a country, they all have quarterly outs. They tell ,you~ each quarter, what the price is, and if you do not like it, you can walk away from it, and if they, do not like you, they can walk .a~ay from you. So there is no such thing as ,a long-term, secure, crude oil. supply contracttoday with anyone, and that is whether you deal with the major international- because they are dealing with the same governments, and they have no assurance either. So, you kno~y, you bascially have to rely on the fact that you build that new plant, you are going to get crude some where, wilh surpluses all around the world and crude oil prøduction~.- we will get it from somewhere.. The ~MAIRMAL Even those major companies have been "persuaded" ~to sell, what they have to the Government of Saudi Arabia on ,~ery "reasonable~' terms, have they not? Mr. JNGRAM. `That is correct. ` ` The CHAIRMAN So that, in the last analysis, you are not really in as bad a situation-do not have any "firm" commitments-as it might sound, when you look at how the other fellow ha~ made out when, theoretically, he<~wned. thecil. ` Mr. INGRAM. That is correct. PAGENO="0317" 315 The CHAIRMAN. He thought he may have set it on the other fellow's terms. So, in the last a~al~sis, it' is nOt' all that bad again to have a refinery, and go out in the world market, looking for oil Mr BuOKI~Er We are willing to take those risks We ate willing to take the marketing risks We think we can make this project move But the one thing we do not have now that we thought we did have is U S Government policy which is going to be stable-which was announced as going to be stable, and suddenly it is going to be changed And that, we feel, is some kind of a risk that we simply cannot' absorb, because the money is too big. The CHAIRMAN. I think that most of us here probably feel that, since you started out on this endeavor under policies encouraged by this Government, and since we need the refining capacity, you should not have the rules changed on you to keep you from, going into it. Now, it may be that what you are suggesting here is nOt the best way to do it. Mr. Simon was the former Energy Administrator himself. I suspect he set some of these policies upon which, your Investment was predicated He may be able to suggest a more feasible way, con- sistent with the other objectives of this bill, to meet your problem. But I would be the first to say-particularly because you are trying to build an investment in Louisiana-that we should not change the law in any way that would put you out of business. I hope that we can discuss it with Secretary Simon and Mr. Zarb and others, and we can find an answer to your problem. Thank you. Mr. BUCKLEY. We certainly would appreciate yOur discussing it' with him, Mr. Chairman. Senator HASKELL. I would merely like to observe-I think in view of the fact that Mr. Buckley is here, I think it is of importance to New `England as well as Louisiana. Mr. BUCKLEY. Well, New England imports all' that residual fuel, 100 percent of its requirements, so any refinery that makes residual fuel has to be helpful to New England. The CHAIRMAN. Would it not have been more desirable if you could have'gained permission to build that refinery in New England ~ Mr. BUCKLEY. It would have been better for New England, but not as good for Louisiana. ` ` ` ` ` ` The CHAIRMAN. I understand that. But it should also be said that the people in New England, for various environmental reasons, `have not been `willing to encourage the building Of refineries in their' area. Mr. BucKt~Y. That is absolutely correct, Senator. And `we, in fact- our company did try, made several efforts to get ieflning capacity in New England, and were frustrated for a number of years And I think it was a very short-sighted policy by those in New England' responsible for delaying, postponing, or killing the' projects. An'd'we, however, have been most gratified `by the' nOt only gracious but very' warm wel- `come we have had from politica'l'leadership in Louisiana,' and I am very pleased to be there. ,` , ,, The CHAIRMAN Well, if there is anyfhmg wrong with refineries, we have so many of them in Louisiana that one more will not do any- thing but piovide a few more jobs, and we can use the einploythent opportunities. , ` `~ ~" ` ~ " ~` Thank you very much, gentlemen. ` ` ` `~ , " ` PAGENO="0318" Mr~ hGRAM~ Thank you, sir. . [~The prepared statemeilt of Mr~ iugr~~ fQ1lQW~ :} ST~TRME~T O~ FREDR1~IC B I~G1~A~IAM OI~M~N OF TI~ BQ~RD? EN~RG~ Conr OF LOpISTANA, Lr~. Mr. Cha~rman Tb~Lnk'yOu very much for the oppor~uni~ty çd appe ig before this ~ommittee today. My name is ~Fm*~eric B., In~ram. I ~ çliairmaU of the Board. of Ingram ~orporatiOn of New Orleans. Louisiana. Our company is an independent firm principally eitgaged in ocean transpOri~atiOfl, ship building, in- land `watei way tr~hs~ortatiofl of petroleum, chemicals, rocil, sand an4 ~r~ve1, international petroleum and chemical tradiug, ami eonstruc~ion o~ oil a~ gas pipelines. I am also Cbairmt~n o~ the ~oarçl of Exi~~gy Corporation of Louisiana, Ltd. (ECOL). UCOL is a petrol~uifl i~efln~ng cOmpany, 50% ownédby Ing±~am and 50% by Northeast Petroleum Industries, Inc. of Eo~ton,' Matsachusetts, ECOL is currently constructing `~ 200,000'barreis per day refin inSt~ ~obn.the Baptist Parish about 35 miles uptlie Mis~is~ipPi River from New Orleans.. This new facility will be the largest refinery ever bpilt in a sjng~.e, ç~onstructiOn phase in the continental United States,, and upon its completiOn In the latter months of `1970, will be the largest independent refinety in the continental United States. S , , The'ECOL refinery will also be the first refinery ever bu~Lt jzit~etJ~ii~ed states designed to maximize the production ç~ heavy inUu~td~al fuel oils-~a product this nation flow importS in substantial volume~. S S TITLE I OP flE 43560 ` `I will limit my comments today to Title I of II.~. 0860 and to The Impact ôtthe import' `quota, auction and `duty systems established by that title on new inde- pendent refineries. . In brief, the impact will be disastrous. If Seetioiis 111, 112 ~nd 121 are eftacted in their present form, it will be' nearly irnpossible for an independent eo~pany such as ours to build a new refinery in the future. In faêt, if theSe provisions be- come ia'W it is unlikely that ver~ much capacity Will be buiThby any cothp~ny, anywhere in the United States, ~1nd we `will cofitinue to be dependent :on foreign refineries for a substantial volume of our pro'~ucts, particularly in the ca~ of residual fuel oil. ` ` S A review of recent history will underscore my concern. As the Committee knows, in April 1973 the President arinoiniced abandonment of the import quota system that bad been in existence since 195P. In place of the' quantitative limitations of `a quota, lie estab'lislldd an import license system under which any persop~ who wished' to~lmpor~ copld~'do ~o upon payment o~ a license fee. ~,,,, The Uncense fee on ~ruUe oil was, set at 21 cents per barrel and the fee on prodtiets, at 03 cents per barreL5 ThiS is very similth~, I might note, to the `ad valorem duty schedule of 2% on crude and 5% on pthduets established by `S~ction 121 of H.R. 6800. .. ` S INCENTIVES FOB NEW REFINING CAPACiTY ` , However, in order to stimulate and encourage the construction' of new r~flning capacity~~particu1arly;bY independent companies, the President created a special incenth~e-for the first five years of operation, a new ~ef~n~ry would be fQrgiven the obli~atio'n to pay the license fee on 75% of the ertide oil it used.3 in C~ect, for the first lIve years a new refinery would pay `an' import fee of' 5.25 cebts per "batr'el'instdad of21 cents' per barreL ` S In `A~il,'1973, upon, announcement of the new pi~ogram, the Peder~l Govern- *rneut m~de,twocOmmitmentS `first,the new program would be a s~abl~, long- `18 Presidential Proclamation 4210, April 18, 1973 and President's nne~gy Mes5'~g~, A~rii 2Tlie fees were phased l~ on a ~raduai, basis over two years, moving from lOi/~ cents per bbi on `May `1, 197E tO 21 cents `on `May 1, 1975 on `crude oil; `fi,~om 52 Cents to 63 ,c~flt's :Ot~ gasoline and from 15 to 63 cents on other products. ," ,. ` S SectiOn 4(b) (1) of Proclamation 4210. ` ` ` S ` S PAGENO="0319" 317 ~: it1~th~ tht4st o~ pj from t1~e~ } specifically ~; It - ~_d tq move residual fuel capacity Into t~i~ Unitec~ States while being áb~e to ruir~tIcle~ from anywhere in the world, thus i~inhhizfng the risk o~ supply iaterruptiou 1i'oth ~ upon WIitëh We now rely so heayjly. Thfis, with t~ prospect of ilinning a Iilg~i propoytjon of high~cd~~~ foreign £rude, the waiver of import fees becomes a critical factor. In nth~r~, We simply cOuld not and wonld UQI ha~ve em~a ke~ u~on ~ur refih~r~ prOject Wlth~lt the five-'year waiver granted by tl~e, ~4eral Gpver~. ril~ht. ~t Is es~e11tjai tO our oper~tion; it is essential to the operation of anj independent refinery project. 7, ofthhil]~el~, 113k. 6~llO dhan~es Oil this. Il One strokes it Wi~Os< out the fe~-free sysfem ~iYid the five-year Woi~er fOr hew refijieries. It ~ a flini d~siiffi!tniOñt tf tile ~dera1 Gavel~nhmnt, on which a nmnber of sig~nificant inv~tthM4jb ciO1OilisWdl~e firade As persons who relieti oil thkt Oehistdtinent We are deeply disturif, II! U~. ~IO bOboth~i lh~ h~ ith p~Oseht fOi~i~n~ we believe it will raise serious legal and ~MFabtO 4h~Otions tO~atdifig that ~on1thltment, Perhilpa wOr~e, by re~aoy~ng the Wai1vOF thO Congr~ss Will be s~iylng tWO thin~ to independent cOthptn~ies~ who libe ourselyes~ Wish to buIld ilO* ~OfiheHe~: you can't rely On our "firm" ptO itet thutl1~e ~lorPt ~afe ~l4o~ut We*capaeit~ in ~yease. a~ ~Yrivn±e ~iti~eh with subttauitiOi enperieilce in the building of refineries, I thfi assute thi~ Oo~iikthtae ihilt i~vithont any 1hCOnti~5, no neiv ii1dh~5endm~t ~a~tut~ Will be bfflitfn!thê TJhfted Stt!tOk A~k1! thOt Wohldbe bad for otit Nation and contrary ~o the goal of eiiht~ 1hdO~Oill1eficO, ~TJO~ A~n &hroii ~trOtts In addition to kbolisbiilg the ftvOyear Waiver, the quota and auction sl~tems esl*bllshCd by Hit. ~lS6O have three other fOatures Which are certain to dis- ebu#age~idw inde~Olitlent rtflnerlcs: First, the establishment of a strict quantitative limit on imports Is a disin- dOntivO in afirl of Itself. Sln~e a quota mehils that someOne will have to go with- out Oil, this usbhll~ in~hhs ileW refineries; thus ~ldtentibj ipvestors will ~g scarea á*O~ frthn a project b~ the )~to5pect of being without oil, eveil wbnn ~there is nO ethbargo or ~o~eigndtlp~lyjnterriiptioh. On April i:s, Seci~etary Simon stattd: `Our obj4ctlve *es to 5esign a p~rograin that would aesthe the oil 4sldtlstry uevibility to import oil to satIsfy the sbqrt-te-m needs pf U,S, roflrmrn tSd cnn~ipwers while, at the same times provide 1on~er-terrn stabilit3' and edditional incentives for increa~ed domestic exploratiob and hrodueti~n dad pew rcfinery construction and expansion" S~5 ~ectiQn 2~165 of the Mandatory ~etro~euin 4hloeation Regulations, the "buy/sell" ~program tnd Section 2i1.07, the old oil allOcation (or "entitlements") program. wnftcet of its ~ muat be fthnnhcéd h~ in êbntii*st~ Whè~i a fluajor only rely on its internal cash seh'i~ces or ht~e1~tfica~. Th~de `itri lntl~pende~t ~t*~ct 1 brindWai p~~mOl~ts `are `hOav~~, ~atrtien~. Thht is Why th~ fr~e-ye~ wkivOt ~rOi of t.~ 55-583---75--pt. 1-21 PAGENO="0320" 318 Second H R~ (3800 ~u~es ~rious uncertaiflty about the~ cast of Imports Under Section 1~2, companies must bid at auction for tIi4~ r~gbt 1~ import. ~hns an importer-and, more irnport~int, a prospective borrower or lender-has no idea what it will cost to bring crude oil into the United St~ites, Further, for one corn- Mny the cQst could be different than for another, depending on the date of the auction and the volume of crude oil licenses he must bid for. This uneertainty will be death to new projects. No one will be able to make firm financial projections; no one will be able to determine his crude eosts vis-a-vis, lii~ eompeti'tors~ Third, while the auction system provides a limited set-aside for independent importers and small refiners, it does nothing for j~dependent refiners spch an ourselves.~ As a result, we will he forced to enter the auction and bid for crude oil import licenses against the major oil companies, whose financial resourCes far exceed our own, In addition, such majors own substantial Quantities of ~Oreign crude oil and thus would be able to set the price of th~ crude t~ be bid upon by themselves and by us. Obviously, this is totally unfair apd anti-competitive. In summary, U.K 0860, if enacted in its present form, will end any hopes for expansion of independent refiningcapacity in the UnitOd Staten It will end an~ chance of increasing the share of the refining industry owned by indepehdents, It will mean that major oil company dominafice and control of refining is assured for decades to come. EECOM1~EENDATIONS Fortunately, this Cbmmittee can prevent this from happening. And I should like to conclude m~ testimony with five specific recommendations relating to Title I of HR. 6860: First, qTLe Quota and auction systems In Sections 111 and 112 should b~ de]etecL ~, X have indicated, they will create a massive new set of bureaucratic controls, siesult in uncertaintly and confusion, and will effectively discourage the con- struction of new, independent refineries, Second, if the Committee decides to retain some sort of import quota system~ the auction must be completely eliminated and replaced by an allocation system for quota rights. And such an allocation system must provide a specific set~ aside-a guaranteed allocation-for new, independent refineries, I would urge that this alloCation he of at least five years' duration. Third, the ad valoreni duty system in Section 121 should be r~taJned. This, as I have indicated, is essentially the same as the current license f~e system and, by establishing a higher duty on imports of products than crude, provides eu~ courageinent to the construction of domestic refining capacity, Fourth, if the ad valorem system is retained, it must carry forward the five~ year waiver commitment made to new refineries by the Federal Govern~x~ent in April, 1973: This could be done simply by providing that new refinértés were required to pay only 25% of the ad valorem duty (i.e., a duty of ~ of 1%) on crude oil imports for the first five years of operation. Fifth, Section 121(f), which eliminates the current supplemental fee progratn, should be maintained. An important and positive feature of H.R.~ 6860 is the ending of the complicated supplemental fees imposed by the Pl~esident on February 1 and June 1 of this year. Those fees, which place more Q~ a burden on crude oil than products, are a clear disincentive to new domestic c~acity and should be eliminated as soon as possible. I commend the House for its action in this regard. Mr. Chairman, in conclusion, I wish to thank the Committee for the opportun- ity of appearing today. The bill before you is of the greatest importance to our refinery project and to the future of independent projects throughout the country. The action taken by the Committee and the Congress on HR. 6860 will establish energy policies for years to come and will determine whether new, independent refineries can be built and survive. Your action will also determine whether our nation will continue to depend on uncertain overseas sources for the major volume of its residual fuel oil imports. I am confident that you will act wisely. Thank you very much. The CHAIRMAN. I am going to recess the hearing now, if there is no objection. until 2 this afternoon. 6 Section 112(b) (2) (A) defines a "small refiner" as one who operates less than 50 0O0~ bid of capacity. PAGENO="0321" ~t 12:20 prn,,the'committ~ recesse4to eo~~ ~t 2 p~m. the same day.] A~FET~NOON SE~Si0N The CIt~IRMAN. The committee will come to order. I say the com- mittee will come to order; this group will come to order, because I be- lieve we are meeting without consent of t1~e Senate at this point. As I poi~ited out in the morning session~ there, is no power of anybody to require the pi~e~ence of Senators in the Senate Chambers as Io~g as a quoi'iirn is ther& and if they cannot get a quorum, they can send for us. Now, until such time as consent can be gained, we will just have to meet as a group of Senators, at the invitation of the chairman of the committee, interested in talking about energy policies. S And so on that basis, I am. going to call the next witness-and your stat~ment has already been printed in the record-Mr. Gerard M. Brannon, economist, representing Taxation With Repre~entatjon, ~}Tow ar~ you, Mr. Brannon? S S / `STATE~ENT~ OP 5GERARD M. BRANNON, CI~LUUAN, ~EPTM~NT OF ECONOMICS, GEORGETOWN UNIVERSITY, REPR~SENTII~G TAXATION WITH REPRESENTATION S Mr. BRANNON. Thank you. Mr. Chairman. S The CHAIRMAN, It is goo'd to have von. Mr. `BRANNON. I have submitted a statement, and I would. like to summarize it briefly. The statement makes three points. One, that we should have sub- stantially higher petroleum product prices. Second, it explains how we can have higher petroleum product prices without the bad side effects of high prices. And finally, I arguo that the overall situation is such that if you do not find a way to get these higher piices sys- tematically, you will get them chaotically, and we will have a general mess and probably more recession. S This morning you talked a great deal about higher prices, and SJ doubt that it is really necessary for me to say much about that. My statement makes the point that these higher prices are not so import- ant with respect to oil companies themselves. Very clearly, the price of oil has gone up a very great deal. There are already ample incen- tives for oil production. The higher prices are necessary to discourage consr~mption. Basically, at this time, an extra barrel of oil in the United States costs the United States about $12 real resources. We, in effect, tell the public to buy oil if it is worth $8 to them; that is about the average price of oil to the public, so we are subsidizing oil consumption. As long as we are paying $12 for the marginal oil supply, it helps the United States to produce a substitute energy product that has a cost anywhere up to $12. But we throw all of those substitutes into competition with $8 oil, so we discourage the production of substitute energy sources. Now, these are not just technical economic arguments. A way of looking at this is that we are being patsies for the cartel. The reason that a cartel does not raise its price indefintely is that at some high PAGENO="0322" ii ~}osea~n piütipie,. OPEC ought to be 1osin~ srnne ~aIes when it raises its price as high as $1~, but the tT~~it~d St~t~s cOtz+e~- ientlv arranges things so tba4~ ILS. c~ns~tmers to~ity ~ to p~ $8 for ~ and the OPEC does not have to face the consequences of the I~ss of s thát*Ould ~ ~ W~ wonclerthey talk about rai~il1~ t~ ~pt'i~e ag~ai~it in September. A ca~tel coul~I hard4y have a better ~u~bOi~r thin bile that~ protebts the cartel market a~rd mak~s i~ ~a~Mt~ f~r them to raie~ pthes. Now, the ob~*ib~i~ d~as~b~k to highe~priices are that these wfli crè~ate ~ry süb~tantia1 ~*indft~Pls ftir oil produder~, ~nd :they ~wfll im~poso i~eavy bur~t~~s oil ~o~is~rn~ets. Th~ fiI~ p~iut T `~a~t to th~ake is~ ~sentA~lfra log~ical tone; that we could structure a Willd~1l1 ~rOfits th~ ~h~ieh, from the producer's ~etandtnt~ exa~ctly~ the ~Ln~é ~ the pr~s~nt j~rice control. I ~will argue lat~ ~at ~W c~n *lakë a bêtt~r w4iidf~1l M~x thin this ~ b~t presently I ~ant to ~ th~t ~ iiai~ ~g~t a tern `wMth~ i~ just like a windfall profits tax. We have a law that ~ay~ for so~calkd ~ld nil, which a pro4ucer could sell on the market for something like $12, he i~ requi~d to sell it for~,25. Now, the ~produ~er's sitttati&n w~tid be) mi diffei~tilt if we told him he could sell it for $12, but *bet~J h~ did that~ he wo~ild have ~to ~give Uncle $5.Th or $&~T5. Just as a matter of pure logic from théproducer's standpoint, price control is ltke~a ~Wi~4~all pr~fi~s~ tax, rather a wind- fall excise tax. Now,~f, instead~ of price cont~l, *e impose ~o~e ~kind of a fall tax such as the Treasury proposed to the Ways afld. Means Committee; we could g& s~ne~what fui~her and refund the windfall taxes to C~nsurners in a ~sta~rin whi~h their refund Cliii itot ie the more oil they ~sed The th~ischisf, so to speak, Of oil price control is that we think we at~glviitg ~onsmilers a~ benefit b~lettihgthe~ buy oil cheaply. This bèñefit is a direct ftrnetinn of how ~ffich oil the~r bust. The felio~w who d~idves a C~dilh~c obvi~nsly gets mOto benefit than the fellow whp rides on the bus. I happeil to 0*11 a houséin~the conatry, so you are subsidizing my excess trips down to the cot~iltt~y through this teclmiqiie of lettin~~ ~me buy gasoline cheap. This is absurd, If I ~wa~t to~pay for m~r luxuries, you should not be subsidizing them. The ôbvioii~ way to d5~J~With~ the prine problem is to let the ~ariee go up, impose a tat on oil companies for some of these windfalls, and refund this ta~ to custOmers in some way in which no customer gets more ref nnd the more oil he uses. I had eatlier proposed a simi~le way of doing this: that ~ou give every luau, woman and child $75, which he could take as a credit against income tax, or as a refund. In the Treasury proposal, there was a considerably more complicated refwid arrangcment. I do not argue strongly b~tw~le~ these two~ hut it is Important to get the n1on~jr heck, This is why we h~v~ th5pOlit~eai pressure fbr pric controL And also, it is important to avoid the very great recessionary impact that would occur from a large increase in the oil price, whi~h would take purchasing powCr away from ConSumers. I am saying, in effect, you can give the purchasing power back to consumers, but we do not have to do thi~ in this present form which PAGENO="0323" 321 aa~çJ~e~ the ~fun4 to hiqi~i~ oil. Ph~t ~ ~ ~t 1~cier t~ ~afloi~ st~b~titttte~ and `e~onrag~s people to ~ n~r~ OiL 4~nd the; wl~oje, t1ieu,~ pl4ce control i~ sooi~lly undesirah1e~1~oaise you, a~e ingtheJne1~eient uses o~ oil. the j~per I talk about some of th~ speeifie~s ~f th~s alterwitive structure, ~vindfafl tax~ higher p~e~ ~ndi~f~uid. I l'~ave air~a ~y s~id I thought the Treasury windfall tax reasonable, I do thm~c the Treas- ury ~movecl t~p far from the structure of the pr~ese~t price cqi~tro1, Our present price control has a very great ir~centive for new od-~-e~entially uncontro'led prices-and a very great burden oii ol~ o~1, Tue Treas- ury's wiu~faU profits tax would have applied equ~ily to both iduds of oi~ ~[ would rather see sorneth4ng in bet~reen th~~e two, iu, whlc~h there was a wiiid~ll profits tax on new oil and a w~n~i~iJ1 ta~ which was le~s ~èvete than the prese~t price controi~ on the o14 qij, ~ ~iu,lç the~ heavy burden on old oil is connected with som~ of the present di~- couragcment. of prpduçtion. If you do have a windf all ~tax, one thing I weuidupge very stroiigiy is ~o not haye a piowback. Basically, a piewback is a subsidy for iiivestment in the energy industry which is limited to people wh~ have windfall incomes from the energy industry. If you want t~ snb~sithze energy investment, subsidize it for e~ery1~dy; dp not say that this subsi4y is an exclusive club which is limited to people who already have big investments in oil and are getting wiudwall mcomnes in oiL The plowhkck is absolutely absurd. I do not favor import taxes, ae such, because import ta~e~ raise the priee of new oil in the United States, and that part of the price ni- crease does not go to the Government. and you have no opportunity to make this kind of adjustment to the higher price that we are talk~ ing about. The whole structure of higher prices would cause some increase iiX the price of coal, I do not see a iwdessitp fox' windfall tax there, but I would urge that you repeal percentage depletion of coal. I notice that percentage depletion is a very poor. kind,of subsid7 for increasing out- put. With the 50 percent of net income iiniitatioi~;percentage depletion is structured so that it provides the largest benefit for the most profita~ ble producer. the fellow who would have produced even at a low prices At the margin of production where you r~aliy want to increase pro- duction, thu 50 percent of n~t income lindtation cuts depletion down toward zero, Consequently, percentage depletion is structured in such a way that it does not provide an increa~ed incentive for prQduc~ing, coaL You would get that increased incentive by simply letting the oil price go up. The third part of my argument was that you do ~ot haye time to wait. It seems very clear that the President is determined to prevent an extension of price control in August, arid this Congress lies not shown the ability to pass legisiation over time President's veto; so that we could very well come out of this year with higher prices for petro~ leiim products and no adiustment for the windfall profits that they wøuld create~ no adjustment for the hard burden that they woul~1 impose on consumers, and no adjustment for thereduetio~ in consumer, purchasing power that they woul4 IUVO1VG. PAGENO="0324" 322 r~~1j~ isthë `kbid of thing that wd~ild iiot only 1~e burdensome oncon- "si~mer~~ but would `push us back into. r~c~s1on~. And thi~ ,~s th~kmd'of' thing that I foresee if the Congress ~~sists on going along with kind tof a stalemate, with no effort to systematically deal, with the price~ pi~obIem but'simpl'V lets prices go up a~a consequence of being unable to agree on an~ kh~d `of legislation about the extension of ~on~trpls. Thank yoiL The CIjAinMAN. Senator Gravel. Senator U~i~L. "It Is iiice t6 see you again `Mr. Brannon. You testified be~oi~e, andi I was just going over with,Mr, Best some o~ yout testimony ~at that' tiitie; ` ` ` . ,. * I am encôi~ra~ed that you tak~ a' very strong and ~ggressiye view toward~higher j,ricCs. I tl~dnk that if we can begin talking that rheto- ric, it will make a lotmore sense to the American people, because prices `are going to i~ise regatdless of what we do. So I think we can begin to condition them to that. I do want to focus on, though, what you call windfall profits, be- cause I think that is another part of our rhetoric that we pay atten- tion to. I have not been able. to find a `windwall profit. I know a lot of people talk about them. Maybe y'ou can. help this committee and tell us how much profits, who is getting them and what they are. Mr. BRANNQN. You hate got ~o separate this problem of windfall profits on crude oil from this total picture of an oil company. An oil company, as such, does a lot of things. It `refines oil, it sells oil in gas stations; it may operate in the Mideast and may really be losing over there because the local countries are taking away their profit. Very specifically, what I talk about as excess profits is the receipts from the continued operation of an oil well. Now, an oil well has ordinarily a life of something like 20 years. In 1973, there were a lot of oil wells producing in the United States, and a lot under construc- tion. At that time. the market situation was that this oil would probably be sold for $3.50 a barrel. Then the well was drilled, and from then on,, for, say, something like 10 years the well would probably be free flowing. For the other years, there `may be some secondary recovery, which was more or less anticipated, when the well was drilled. You ~knew von would get So much free flow and so much yield from other methods to increase operation. Now, what is happening here is that already that oil that is coming ~oiit of wells that were drilled when the expected price was around ~.50 is producing $5.25. That is the old oil price. And it `will be pro- ducing $13 a barrel-almost' four times the expected price-if we have decontrol, and higher if the OPEC raises the price as seems to be the universal `expectation. Now, this `particular , company then goes ahead to sell the oil' in gas stations and so fOrth, and the fjnal profit will be confused with a lot of other things. Bu~ on this production of old oil, there is substan- tial windfall gains. Senator GRAVEL. Fine. S~ we can begin to isolate. Now, do you knOw of any other windfalls in any other part of the industry that are taking place right now? Mr. BRANNON. No. A great~1eal `of the oil that is coning onstream now, which is involved i.n the Treasury proposal to extend the wind- fall tax to new oil, ought to be recognized as oil that people planned PAGENO="0325" S3~ to produce back in 1973. We recognize it takes a long time to get an oil well into produc~tion,. T~e Alaskan fields are a pretty good case. We were arguing about~ 1~uilding that Alaskan pipelitle long before the price went up: A lot of companies thought that an Alaskan pipeline was a good investment `when they would pump the oil down here to sell it on the market at ~3~50. N~w it is goihg to be pumped doWn here and sold on a very different niarket, and under the FEA rules it will be called new oil; but it has been planned fdr a long time. SBnator GRAVEL. T think, then, you are not facing up to some of the facts. The Alaskah pipeline, when it was first talked of, at that time, was supposed to cost $900 million; now it is going to cost $6 billion plus, and they have not even finished building. So obviously, those costs are changing quite rapidly. So how can you just pull out and talk about-well, I do not want to focus on that. If, as an economist when you want to look for excess profits, would you not normally look at their financial statement at the end of the year? Mr. BRANNON. No. Senator GRAVEL. Where would the profit go, then, if they are not reflected in their financial statements? Mr. BRANNON. Well, you see, the word was reflected. There is a re- flection in the mirror, and if I had a chance to look at sOm~thing di- rectly, 1 would rather look at that than the mirror. I would rather look at this oil production- Senator GRAVEL. They have got tanker operations, they have got refinery operations, they have got all these operations. Now, if they are getting excess profits somewhere, will it not show? Mr. BRANNON. If you look at it carefully, and separate out all of the other elements that go into it, yes; it will show, but it is very hard to sort it out. Senator GRAVEL. Fine, so it does show, and we have got a lot of people on Wall Street that make their living at sorting out. Why is it that energy stocks, oil stocks do not enjoy a premium in the market- place, If they are the recipients of excess profits, the investor would perceive this and therefore, react accordingly. Mr. BRANNON. Well, the investors are anticipating that there are to be restrictions on the excess profits. In effect, one reason that you do not have excess profits now is the fact that you have the price controls. Senator GRAVEL. Oh. so there are no excess profits, then-is that what you are telling me? Mr. BRANNON. Price control is one way of dealing with excess prof~ its, and I suggested this logical argument that there was a certain kind of a windfell tax which was exactly the same as price control. Senator GRAVEr~. OK, so we already have something that stops wind~ falls. We have not had any windfalls. Mr. BRANN0N. It stopped sOme windfalls in old oil. Senator GRAVEL. Have we, or have we not had windfall ? Mr. BRANNON. We have had a device for restraining windfall profits on old &l; yes sir. Senator GRAVEL. OK, and since we had that device on, have we had any excess profits? Mr. BRANN0N. Yes. Senator GRAv~iL. Where? PAGENO="0326" 324 if, the ,I~ill waiit to stay ãi~ ku~i~s~ to, u~ n~y rig~ to use my retine~ies, to use all of th~a~, I npw h~y~ tp a~cquire oi~la~ ~12, s~ that rne, to r~pl~çe the inventory r have, I have to expend $1~. So 1~ got no windfall. It was ~ paper windfall. It only becomes a real windfall, if I go ot~t of busine~s. ~bw, do ypu bu,y th~at 19~? Mr. BRANNON. INO. S~nator GRAv~ W~1y? ~r. BRANNQ~. B~cai~se I }~ave, a g~es~t deal of confl~ence ii~, tl~e ~ricar~ busjness systéth,' and if there is a ~nket for oil, süI~1eiently strong to n~áke investment sensible at these high prices that you talk ~bpu~t, ii. am ~oi~Ide~it that one qr another, coPi~y will liivèst ii~ it. I~ e~et, yoi~r proposition w~s tha~t y~iI s1~ouI~ rnak~ speeiaiiy f~v- orable provisions for, you to `mak~. this investment i~i the new oil. Sen~to,r GRAVEL. I did n9t ~~er ai~y prq~o~als. Mr. ~RA~NON. Bec~u~ if ~rou do, `that, you still ~h~ve wi~ndfall profits. Se~a~to~ GRAVE~L. I was not o$erin,g a propos~l. I was asking you a ~very, ~pe~ffic q~ieption. Mr. BR~NNON. `You were kind ~f suggesting that. reiuvestment pprges the fact~ tl~at ~ a windfali~, Senator Gi~AvEL. No; I ~yas not suggesting that. I will say it again. I have got. ~ n4llion ban~els of oil. It `costs' nie ~,l ~p discover that oil. Now, I sell ~t ~t $10. T thak~ $9 pr~ofit Th'at'iS windhll~? Mr. BRA~NON~ Yes. ~en~tor GBAV~L. But the. day after to~norrow, T have got to fill `my 1~auks up again, so I cah sell some more oil'to stay in business. It now Qosts me $10, ~o ther~fore,,the money that I supposedly made for wind- ~aU I have now got to use to stay in business. Mr. BRANNON. ~et me try to explail it in a different way. In that l~st operation, wh~re'you speak about making new investthents that ~eost $10,- Senator GRAVEL. I am not makii~g new investments; I' am just try- ing to fill up my tanks fhat I emptied out, Mr. BRANNON. Making investments that p'r.oduce replacement oil. Senat~r GRAVEL. OK. Mr. BRANNON. That costs $10. In a market sense, those investments should not bp made, `unleSs the investme~ts are worth $10 after you have made them. Senator GRAVEL. WelL the new oil now is pei'm~tting me to sell it. Obviously, if we regula~cd new oil, I would `t~~qe ~y w~ney. w~go PAGENO="0327" 3~5 away, b~ca~use I could noti e~eu repM~e. ~But ~t h~ast the Gove~m~nt is going to let me stay in business~ t~ ~o look ftir some new oiL Now~, *here Shave I ripped it off? Mr. BE~ON~ Wh~n you. n~ake tlxi~ in~stth~nt hi new re~ources to produce replacement oil~ fOr this to be au economic i~i4stment, it Iia~ to produce things *ldch, ~n the â~erage, expee~e'd ,v~lue is worth $10.. So you have not sacrificed anything; you ~ transferred yOur cash assets to new assets. A steel company could hate gone out and done thi~ as well a~ you. Senator Gn~&vi~r~. Have I made any excess profits? Mr. BRANNON. I do trnt see why you should get the kind of a tax break for doing it, u~ess you want to, say any investor gets it. senator Ga~v~. W~jt a, second, The~e ~s ~o ~x hi~ea1ç., t ~th ~n busines~ like. anybody else. if I could just finish this point, 1~1r. Ch~ir~. ñi4n-~-i ~tm hi ~ ti1~ ~iyb~dy ~el~e. I ask uo tax break. All I w~mt to do is ~eli ~ ~i~odttbt that I ¶ia~re~~d th~Lti S~ui ~ta~ hi `~si~i the ~ `day. ~w, `~öfl ~ie inTqSl~ring a t~± I~1'eak. I' h~tI~ n~ot p~it'~ tax break into this, Mr. B ~ I *as hu~lying~ a tax' break hi this sehse~ ~ir~ You said that, if $~Oii ~o~k&'tMs profit' ah~ *th~t OM âiid sp~t it Oh sumption goods, it would have been a windfall. Senator GRAVEL. Now, I did not say it was a windfall. M~. B~A~ON. I tho~gl~it ~ ~Md~ ~ ~t it *i~hout ~u~hig ne* oil, ~t ~*ould have been a wi~fai1. Senator GRAVEL. I could take it hoine and buy a Cadil~a~ if I want, All I am sayih~ I am in the oil bu~iu~t if I were in the cotton bu~i~ ness, and I had in tile sto~ehdus~ 1;000 bales Of ~Ottdfi~ that `~o~t Me~ $1 a .b~le t~ produoé; the nia&et *e~nt ~lp; now, I ~Ould ~ru árO~lid and sell ~ny cotton at that higher value, But if I `want. to go i~ep~ace my warehouse, to keep my wa~tehou~e an effective economic unit, I have now got to buy at the higher rate. So I take the money that people say was a windfall, b'~~t I do nOt get any benefit from it. I am ju~t staying In busine~s, ~r. Eh~~ON. I was u~y1ngto a~ky&u tO look 1at `this k~ stage~. That i~, I think ~o'n a~e ~á~Thg soiiiethbig 4b~ut what th~e situation would be if this fellow took `his prol~t and *efit out of the business, That is some kind of a- Senator GRAVEL. Most oil companies are still in busines~-.~ Mr. BRA~NON, I want you to look at this as two sOpârate sta~ék Y~u seem to be saying something about what if he goes Out of' business, Senator GRAVEL, But can the oil company look at it in two separate stages? `Mr. BeANNON, Yes, Senator GRAveL. HOw ean they? Mr. BRANNO~. rrhey c~u talk about n~ot ~Mkin~ a uth~ in~e~tthaut, Senator GRAVEL. No; they cannot, Well, then, what they have got to do is write off all of the refineries, write off their service stations, Mr~ B'RANNON~ They can get crude oil, They ~an b~iy crude oil frOM other people. Senater GnAvEL, At `$13 a barrel. Mr. BR~NNON. Yes; so it is only worthwhile building their own resources, unless they get oil that is worth everything- PAGENO="0328" Sen~tdi~ GRAvEI~. Doctor; I think we i~ia~e thade our point! I ~am nit going to monopolize your time. The record is probably going to be open foi~ more than a week, and I would be happy, as one Member, if you oould edme forwai~dwIth any excess pi~ofit documentation o~ any American oil company, or tlie indñstry. And I think it stould be very edif~ing to iis~ Mr. BRANNON. All right. Senator GRAYRL. Thank you. [The following material was subsequently supplied by Mr~ Brannon:] WINDFALL PRoFITS ni OIL I have 3 comments in response to Senator Gravel's request. (a) My statement argued that it was more efficient to deal with windfalls by producer taxes and consumer payments than by price controls. This argument stands even if we cannot agree on any preciSe definition of windfalls. I submit that the fact of current price controls on oil and the widespread belief that they should be continued is evider~ce that the Congress believes that uncofitrolled prices would create windfalls. So long as the belief exists it Is relevant to discuss hOW to deal with it. (2) Piirtber I agree with the implicit Congressional judgement on windfalls on the basis of comparing base profits from oil with the potentials for added proilt from further price increase. BASE PROFITS The 1972 preilmlnary Corporate Statistics of Income ~eports the following net income for petroleum and natural gas companies: $3.0 billion for petroleum and gas "mining" companies and $5.8 for petroleum and gas manufacturing companies. I add to this three quarters of the $46 billion depletion deductiOb as an estimate of the excess of percentage over cost depletion. This yield $12.3 billion as approxi- mate book income before tax The allowed foreign tax credit was $3~0 while the income tax before foreign tax credit was about $3.8 billion. r2his suggests that about three quarters of the profit was from foreign operations and thus we could roughly estImate thatill.S. petroleum companies made profit of about~ $3.5 billion from producing about 3.5 billion barrels of oil in the U.S. PRICE INCREASES In 1974 U.S. oil production had dropped to about 3.2 billion barrels but the average price had risen to $7.25. Of this about 2.1 billion barrels were old oil sell- ing at $525. I assume that in 1972 without controls the old oil price would have risen to $11.00, and in 1975 it would be $12.00. Several gdded profit calculations are plausible: Increased profit in billions Inctease from $5.25 to $11.00 on 1974 production of old oil (2.1 billion) $12. 1 Increase from $5.25 to $12.00 on 1974 production of old oil (2.1 billion) 14. 2 Increase from $3.60 to $11.00 on 1974 production of old oil 15, 5 Increasefrom 3.60 to 11.00 on all 1974 production 23. 7 CONCLUSION If price controls were removed the oil companies would be selling oil for $7.40 per barrel more than they received in January 1973 and almost all current oil production is from fields already under development In 1973, i.e., fields that were planned investments when the oil price was $3.60. This would represent an in- crease in the profit of petroleum companies of 200% over their profit from all sources foreign and domestic in j972. It would represent an increase of about 800% over the profit on U.S. operations (and the increase was calculated from U.S. operations only.) Even if we confine attention to old oil, an increase in price from $3.60 to $11.00 would represent a 440% increase in profit on oil that was simply a continuatiob of production from fields producing in 1972. I regard these increases as windfalls. PAGENO="0329" 327 (c) An examination of the unedited transcript may permit a sharpening of our ~respe~t1ve ideas of windfall profits. On p. 311 the stenographer recorded you as referring to a calculation similar to the ones I made above and asserting that "Tt was a paper windfall. It only becomes a real windfall i~ I go out of business.' My assertion is that reinvestment does not change the character of a "paper windfall" into "no windfall" because reinvestment is a rational busiuess activity which should be undertaken only if the firm expects the assets to be acquired by rein- vestment will be worth more than the cash. Reinvestment in a prOfit motivated ~couomy should only occur when it is profitable to reinvest. For this reason, I don't see reinvestment changing a paper windfall Into no windfall. If you think that a paper windfall which is not reinvested deserves a windfall tax I would say that a paper windfall which is reinvested also deserves a wind~fall tax. As I said in my statement, if you want to subsidize new investment in energy, you should do this for all investors not merely those who make such investments out of "paper windfalls," The CHAIRMAN. Senator Haskell. Senator HASKELL. Thank you, Mr. Chairman. Mr. Brannon, I think the scenario you present has considerable logic; that is, that, come August-the Congres~ in the context of whether we keep the lid on old oil-the Executive comes out ahead. And I think your suggestion is very ingenious, as to how to deal with the substantial economic consequences. However, my question to you really is, `given your druthers, and for~- getting the scenario ahead, from an economic viewpoint solely, would you prefer to have the scenario set forth in your paper take place, Or would you prefer to see the oil situation dealt with a~ it is being dealt with today? My question is meant to be looked at strictly from an eco- nomic viewpoint. Mr. BRANNON. I would certainly want to go in the direction of the scenario, that is written out here ui the paper. Senator HASKELL. I grant you a rebate to consumers. You feel that way despite the fact that certain people will be impacted more heav- ily than certain other people by the increased price of fuel products? Mr. BRANNQN. Yes. Setiator HASKELL. Thank you very much. I have no further questions. Mr. BRANNON. If I could say one general thing about that, sir, it does seem to me in our society, that we continuously fall into this prob- lem of confusing prices and incomes. In our farm policy, for example, we have for a long time talked about wanting to help fa~mers by in- creasing the price of their products. Now this is a peculiar way to help farmers. It says, the bigger the farm is, the more massive it is, the more it benefits from price support., There is very little help for low income farmers here, very little encouragement to increase farm production here. Looking back over our experience, this is why we have made agri- cultural labor so unprofitable and caused such mass migrations in the cities. If you really are concerned with the fact that some farmers have inadequate incomes, the Government has the ability to change their incomes, nnd increasingly, our farm programs have gone in the three- `tion of dealing with inccmes. Now, in this oil' situation, a lot of people are concerned that some low-income consumers would be badly off, if oil prices went up and gasoline prices went up; yes, they would. And you ought to deal with their incomes, their being too badly off. And it is silly' to tell them, well, PAGENO="0330" ~sc~e *~H ~t y~i h~a'v~ ~a~1ii~e far: half price~ because thea, tlie mpre gaMlirie yOu u~e, the~ ~iOte ~nk~fi~T~t g~t. Yo* ~?repayin~g ~or~riytrips i1~o my f~ace ~u U~e n~oun~a~~, ~Ad th~Lt is sWy. Set~ator HAs~i i~. 1 s~e y~tr ~oi4t~ I just t~'thk th~t~th~ amp~ct ~i11 ~tli ~M1y~ ~n difl~~re~ peop~ie. I seeyeurp~int~ I `thi~i1~i~ ~s ii~geiiiou~s; i~d I thii~k there i~iay bet ~re~t.de~l of i~i'it~ t~ it ;~a~d. ~appre&ate i~. Mr. BR~QN. `*~ou might ~tru~tur~ it~O make th~ r~ftt~ftts ~ in eyld~ ~liinates. You have ~ 4èt of ~ta~ res~ur~e~ t~ lbok $ di~eii~ent-~-~ Senator k~tt,fldw bb~tt hi~h~r~lt1ti4~? Mr. I3RANN0N. Iligher aW~u&e; that i~ ~1i ~ght. Th. HASKELL. Thank you, Mr. Chairman. The CHAIRMAN. Senator Byrd. Senator HARRY F. B~en, ir. Thankyou, Mr.~Chai~an. I just have oi~e 4u~stion, Th~. 13i~atinon. YO~ ~*y that if i~ ~n&dñess to hold dow~i th~ p~i~e d oil. ~rom the pOint of view nf the eon~niner, why is it ñiadness to holddówi~ the p~i!ce `of oil'? Mr. BRA~TON. ~Oti'ee the approach qf the P1~eside±it's pr~pésai on ~energy last January. It was to find th~t ~hàt is the a~erage inèi~e~ in cost the cOnsumers would pay if you let the price of ~il go up. And he found this averag~ at different Fe~e1s of income. And he ~a1d, Tht~ give each c~f these families that ilnich mon~y, so thM ~rn aver~tge, th~j would be just as Well ô~ as they would be with lowei~ prices. Ot~ce you have~ done that, eaóh consumer ~aees the choit~e that if he drh~s another ~n~ile~ it is going to be more expensive by the real cost df gasoline. If he keelis hi~ house two degrees w~rnier, it is ~oi±ig tO be considerably more expenSive. tie Would be facing the fnll marginal cost for u~iu~ that oil. When ~~elp him~ by keeping the price d~~n to $8 h~te~ad ~t$1~, each con1~ffier ~et5 a bcnefit o~ $4 ~for e~rèry barrel of Ml he ~cs.If he uses 190 barrels, this benefit of lower priceS is $400. If he ~eally sacrifices and goes Without using oil, he gets no bene~t at all. It iS rather conspicuous in the whole business of conservation, ~ fellow really does ~ave the United states-a business ih~m that. figtir~s ~lp some way to reduce oil cons~imption really saves the United StatWs ~ by not nSil~g a barrel of oil. But When the price Is $8, he saves Mm- self only $8 He loses this $4 that you thought you wete gwing~ him In effect, you ate paying him to use oil. That has to be madneSs. S'enator~ Ihnn~ F. BYnD, Jr. Thank you, sir. Thank you, Mr. Chairman. The CHAI~MAN. Thank yon ~éry much. [The prepared statement of Mr. Etannon follows:] STAeE~aaT OF t~ERAED M. EaANNO±4, DaPART~415~P oir EcoNoMtes, OaGETOWx UruVERSiTY Mr. Chairman and Members of the Committee, I appreciate tbi~ opporthni±y to testify on energy legislation. I am appearing both as a representatire ~f Taxation With Representation and as a student of the eubject who has written books and articles on energy prices and taxes. Energy policy has been an uncommonly tough political issue. I will address the central political ptbbleni whiCh is the price of petroleum prOduct~. This ts the hard net that the fluited States has refused ta crack. Speclficaliy~ I will Argue that we need substantially higher prices for petroleum products; Show how the undesirable side effects of higher oil prices can be con- trolled; and PAGENO="0331" 82~9 * Argue that if the CGn~res~ does not deal systematleafly with these price Issues fate ~srlll deal with them chaotically. T1~E M~I% I~O~ RT&1IE15 OfL ~lUOEs* The need br higher oil p~i~qsc~~ ha seen mqst clearly ~y considering sepa- rately the demand and supply aspect of price~ On the demand ~jde, the li~r~ f~tjs that it costs the tJpitad states about $11 to import another barrel of OIL Mo~'e oil u~e nwa~is more huports, Siiice ji~apotts are the variable, i~e., the ~r~jnal su~~p]y. ~n this situation, it is inefficient to use oil in ways that are not worth $U tothquser, * Phisis why we talk sq ~nter~iin~bly abqut cupservation, but talk is a stlipld way to conserye. ~bould we ~4~j more in~u1ation, tQ our hoipes? ~ertainly we should n~ot when an extra. $1OQ worth of insulation savqs ouly $1 of q~l a' year. This, is wasting insi~1ation and the labor and material, that goes into It. But we .shoul4 put in more insulation than Just, p~ys for itself at the present low con- trolled vrice of oil. The efficient answer is that we should Insulate ~s mmli as would pay for itself if oil cost $11 `a barrel. At present, how are we finding out how much that is? We rely on a bunch of bureaucrats in FEA and on stupid proposals to grant tax credits for lnsulatlon~ Our business system is a remarkable means of getting the most out of re- s~urce~ if It knows the true resource prices for commodities such as oil. But when priee~ fire distorted, the syatem is going to operate inefficiently. It will overuse cheap resources and \*Te will in a * futile way rely on bureaucracies like FEA to cope with the resulting problems. The other side of the price prodess is that when the U.S. must pay $11 at the m~rgi~ for imported oil, it is efficient to. use substitute fuels that have an oil equtyalent cost up to $11. When we artithulafly hold the' average oil price to something like $8, then we, make `it uneconomic to utilise ifliulfied coal or solar e~ae~gy with oil equivalent prices of $10. This nonsense is of coUrse, the excuse for more bureacuracy and ta~t benefits. $iuc,e we won't pay. in the marl~et place, thc cost ot margins! `efficient oil substitutes, we concoct alternative incenth~es which are lees efficient. These points that I baye made may sound like a pesky economist caDping at esoteric points of technical efficiency. But they are far mOre than thaL These points show that present energy policy adds up to contihued high demand for imported oil. Imports will stay high because we refuse to rely on price to cut ~1ep~anØ, and, are equally reluctaut~ to rely on price to stimulate develop- menu of substitutes~ This is disastrous public policy, because the high demand for imports is a continuing draip in our balance of paypiei1ts. Eteti nloie i~pqgt~n~1y, it is ~n ii~vita1ion to OPTIC to raise ~the price of oil even further. O~C is a business oper~tjon. ~n busiue~s the only reasop for npt raising pr~pes still more is loss of business, In the pu ease we are protectii~ the American consu~ler from the OPTiC price and we are preventing potential substitute fuels fgoip competing with the OPTIC product. .~atuous customers like this are a * cartel's dregm. Of ** course, OPEC will r~4~e the price ~for oil. A thousand Fords and I~issing~rs will make no di~er- e~e~ The only reason for ~ cartel not t~ raise price is los~ of bu~iness, and we age doing little to causç OPEC to lose business. HOW TO MEET TIlE rn5AwaMJJc5 OT HIQI~ER PIUCES Why does the United States persist in th'i~ madness of holding down th~ oil * price? We think that higher prices provide windfalls to producers who' were ready, to do, business at the old price, nd we think that bighe~ p~ice~ impose burdefls o~ consumqrs, * * M to t~iq win4fahls, this can be dealt with very easil~ ~`otice that from t~ie standpqint ~f the producer a price control law is Just like a tax. A pt~oducer is indifferent between a rule that says be must sell tip $11 barrel of oil for $5.25 and a rule that says he can sell it for $11 but must pay a windfall tax of $5.75 per barrel. , " * * Very cLearly there are a v~rje~y of~ ways that we could txpppse a windfall toy, I will s~y more about specifies later. 4,t this'poirxt I will limit myself to the logi~cq~ argumept, that the present sy~te~ of' price control `could be converted lojlc, stock and b~rreh int~ a tax with no different impact on pro~uce~s of old, oil than the puesput price conI~rol' syatem. * * PAGENO="0332" With this point about the identity, so~ far as producers are concerne~1, between a windfall tax and price control,. let us turn to the other bad side effect of higher prices, the burden on consumers. If we used a windfall tax instead of price crn~trol, government receipts would rise as much as consumer payments for oil at the higher prices. Govern- ment could then u~e the ta~ procends to th~ke~ payments to cOnsumers wbi~h in aggregate would offset the price increases. The crucial wirds are "in aggregate."* Controlled low prices offer a benefit to donsumeiis which is available in proportibn to their purchase of oil products. The more low priee~ gasoline the consumer burns, the more benefit he gets. The Cadillac owner gets more benefit than the bus riden This is madness. Because I ov~in a house in the mountains I drive more than average. It is absurd for the government to subsidize my luxury. If you raised the price of oil products, `taxed the windfall, and used the pro- ceeds to make payments to the public that didn't increase v~~ith their use of oil products, we would have the basic structure of a rational energy policy: Consumers at the margin would be confgon~ed with the real price of oU in deciding whether or not to make marginal purchases, Consumers on the whole would find the cash rebates offset the added cost of oil, Producers of oil substitutes would be encouraged to press forward with production because the competitive product, oil, would not be selling at an artificially low price, thus driving substitutes off the mar~ket. SOME SPECIFICS Tf you adopt this way of looking at the energy price problem, most of the problem will be solved. You must get away from the madness of thinking that the way to help consumers is with lower prices.. You can help co~aumers with money. Prices need to serve their economic functions of indicating the relative cost of the resources we consume. Obviously, within the broad strategy of higher prices, windfall taxes, and consumer rebates unrelated to oil consumption, there are many alternativeS. Your staffs and the Treasury staff can give you much help. I will offer only a few comments bare. WINDFALL TAXF5 The Treasury's windfall tax proposal drew no distinction between receipts from old oil and from new oil. I think price control provides too much differS ence in the treatment of those receipts, but I would keep some distinction be- tween the tax on new and old oil. In my view, the windfall tax should be a little higher on old oil. Furthermore, the definition of old oil could be improved. I `call your attention to Sugge~tions by Charles Schuitse, Arthur Okrtn, md myself in testimony before the Ways and Means Committee. In no case should any consideration be given to "plowback" rebates pf, a windfall tax. With higher market prices for oil, I see no riced' for energy in- vestment subsidieS. If you think they are needed, then it is insane to structure them so that they are only avkiI~ble to co~~panies that already get windfall profits from oil. This only encourages oligopoly in oil. The only reason to suggest plowback Is to solicit campaign contributions from oil companies. If you want energy investment subsidies, give the subsidies to all investors, not just people with windfall profits in oil. import Tawcs Taxes on imports are not sensible. Since imports are the marginal stipply, a higher price for imports due to an import tax raises the price of uncontrolled U.S. oil. This creates more producer windfalls. The total increased price to consumers is more than the government's tax revenue, so an import ta~ can't finance compensation to consumers hit with higher prices. ~fJQqIi Pr~~es and Incentives ~You should recogniZe that higher oil prices will cause some Increase in coal prices. A minimum response to thiS would be to repeal percentage depletion for coal. Percentage depletion is a completely insane producer incentive. With the net income limitation, it provides the biggest incentive for the most profitable coal property, the one that would have been worked even without the incentive. PAGENO="0333" S31 Percentçtg~ depletion is useles~ for. mar~inai productioji, and to inqre~a~e eo~i output we need marginal productibn~ fligbei~ prices will help to increase prothic- tion from marginkl infne~ pex~edntage depletion ~vill not, `~ ,~ Higher Prices We have already wasted almost two yedrs sii~ice tb~ dràmàtic increase In' world oil prices. Nevertheless, a very Sudden further inc~rease in the oil price has a potential for unexpected ramifications that could `upset the very tentative signs of the end of the current recession, One can make a plausible argument for moving with some moderation to decontrol with appropriately modified Windfall taxes and rebates. The Ways and Means Committ~e beliOved that it would be ~1se to structure this moderate move to higher prices by concentrating the increase on gasoline prices. This strategy is not to my taste, but it is plausible. Rebates The administration proposal of last winter, had an Intricate structure of rebates, partly cash payments to non-taxpayers, partly tax reductions for tax- payers. I think that the, strategy wiU be more easily understood by the public if the rebate system is simpler than what the Administration proposed at that rime, I would suggest that the law should require the Bureau of Labor Statistics to publish two cost-of-living indexes: oiie as constructed flow and one without those price increases for which consumers have been directly compensated through rebates. The law should also state that au contracts providing income adjustments for cost-of-living increases should be interpreted as relating to the index that excludes compensated price increases. Ta~x, Benefits in the House Bill I would drop all the nonsense in the House bill that creates new tax benefits, such as the insulation and solar energy credits, to offset defects in the p~iee system. THEItE IS NO TIME TO WAIT You may decide that all toy testimony to this point sounds pretty good, `but th~tt it offers a complicated plan that will be hard. for the public, to understand. You may therefore prefer to bumble along as we are doing now. I Submit you don't have that option, It is widely anticipated that OPEC will raise the oil price in the fall. I predict it will keep on raising the oil price until the higher prices cause them to lOse too much business. As long as we insulate the U.S. market from those prices, we are being patsies for the cartel, because we are refusing. to Lake effective steps to reduce the U.S. business ~Ione by the cartel. There is also a more immediate problem. The oil price control law expires this summer. There is no evidence that this Congress can pass an extension over an expected Presidential veto, We could therefore get the wor~t of all possible worlds: A large oil price increase, With no windfall tax and no effort to corn- pen.sat~e consumers for lost pur~hasing power. That result will plunge us back into recession. I urge this Committee to act in a responsible way. In lieu of the irresponsible House bill, you should Write a bill that provides: 1. Higher oil prices, 2. Windfall taxes, and' 3. Consumer rebates unrelated to oil consumption. The CHAIRMAN. Next, we will call Mr. Richard Scudder, chairman of Garden StatePaper Co. STATEMENT OP RIC~IAR~ B. SCUDDER, CEAIRMAN OP THE BOARD, GARDEN STATE PAPER CO., INC. Mr. SCUJMIER. I `appreciate this opportunity, Mr. Chairman. My name is Richard Scudder, I am chairman of the board of the Garden Sjate Paper Co., Inc., of Garfield, N.J., a firm which I founded in 1961, after participating in the invention of a process by which old PAGENO="0334" a32 ~ ~era~e~'s ç~Miid~ 13c ckin1~c1 ~ 1~eGyc1~çI foi~ the m~n~ft~ti~e o~ newSpriht. We~ pr~sent1~r ~ rn~i~, ~4ç~y~ ~y ~ ~ ~ Los Angeles and are büi1dii~ a mill in ~Texi& hi pa~tnersI~i~ w~i ~ age~1cy 9f t1ie,~L~c~anGovernment. :It ~ `~eew I~e ~ coiç1~r~bJe jwj~ ~on~ o~1 ~td its e~ç~n~ p~Qb~fl~ tc~ ~wsp~i4 ~i~t ~ ~ ~ ~i~4 y~ ~ t~U~ ~a~wspavers ai~ rn~r~ ~p~ndeu1~ m impQAr1~ tlEuWa tiser~ o~ øil~ w~fl ~v~r i~, under the pe~simist4c f~e~t thi~t ~ai have heardb here today. Arid MJ~t~ `A r~i~z~ç t~çIyp~ ~ ~ p~w~n~t. ~ç~r n~w~prii~ is $2 ~ Garden State make~~pi~mt t~~y ~x~w w~t~ ~qr~ ~~id together with its associate FSC Paper Corp., produces some 4~Q~QQQ tcn~ çx!~ ~rews Tht ~ ~~i(~3 i~ ~j~q~t p~ p ~ent~ ~~spr~int ~production in the. United S~ate~, amLwlir~h i~n~s fo~ tii~ o~iitirnp~ tion of abopt half a milli~n tqn~s of ~a~tep&per a year. We would ~i1~e ~ pr~du,pe double thal ahiount a~h~ retrieve from çhe wwii~ip~I s~iid~, wnst~ ~tr~hi ad4i~io~&~ t~on~cls ~ t~xi~ ø~ w~e- paper~ To achhive this objective, three new mills wc~uM be eon~t~ucted~ Eacl~ mill wouI~ be capable of producii~ i~O,OOO tons of newsprint p~i ~yeai Each of these nlifls would C9S~ in the neighborhood of $75 million, for a total capital expenditur~ of $~ r~iiffloq. I will ~xpiain briefly ~yl~y th~ fçre~oin~ objective has national sjgniflc~n~o; how ti~s. qbj~ctiye m~y ~ ~hiey~d; ai~d how oth~ pro~ poèal for accoinplishmg the objective re~ólves juestions thaL were raised against a different raoyoiing tax credit proposal in the house. T~e TJ~p~i~qU S~ci,4~s. pe~t 14~Q~% ~ SQiJJ:Cc~ t~9l~ 1içW~1Y ~ p~ ~ i~i~wsp~,jat supply. This ~ai~ ~ 1~i4s. gi~, sensi~ tive, and vital industry, the newspaper business, is totally ~penc1ieu,t for its ~suryiv~i oi~ ~o~~çign sourcea.. Tli~ ~dver~e iinp~t upon the TJ~S. ~I~p~ççp~ ~t atIP~1 p~y~u~ ~t~2~Q ~ tpn~, lip. fr~ $~ ~ ~s n~ai~ty $~ bi~iQ~. Th~ Ccn~niepee J~ep~rtmeu~ ~ore~s~ a ~cen~t ~er .~ear increase in U.S. newsprint ~equirements, and this ra~ oP ~uoie~se, ~ii~h ~va~ hal~d ~ the ~e~en~ ~c~ssion, will proba)}y have val~t~ wb~u the eç(~uQ~y begi~ 1ts ~pva~4 ~ New c~J~i1~ies ~rç~ nee~Ied ~ n~l ~ c1jLtAye,~ iuet lMt s~r4ng2 in April, with othev foreigir producers~ ta d~cu~stlae n~ld~pii~ie. of ne\~s~rint. They ha~r~ f~r~ast inoreas~ in prhie~s up to $3O~3 a tali in ~ If ~ i~d, ~t~i1~ i~f ~n~çji~ e~p4~ ~`A~W ~o~Jt~rs occurs, as e*pected, we mayi~r~$~QQ,p~p t~n~ p~ew~p l?Y~ t~e. ~d of this year. We should begin to taJ~ s~ç~s ~ p~9t~ç~ A ierio~n news~ pub- lishei~s from sho~t~p~ ~rf~fltd' `p~i~ès, ~Wd the c1onstant threat of strikes by Cnnadinn ~iil and~ ~a~pottation workers. We should also do what we can to lessen our dependence on foreign sources arid to ir~iprqyç~ ~ ha)~ai~c~ of p~Xments.. 1*e must aL ~rdfi~ Ve~nomienl~y vMbie, st~b'1e~ pcrrneirt~mar~ kets for substantiàl~ arn~oimts~ of ~rec~4l&~}e faw mtterials, This could mean that co~ nit~e~ w~dcb supply r~cycl~ng mili~ with used paper cqul4 i~edüc~ t~e ;co~t a~icl b~ii~deri of ~rbag~ thsp~s~l by adop~ng prpfitk~l~ ~p~pe~ ~er~r p~o~rahis'. TitIil tMt~the IJ~nited Statê~ stjnn~Tate the e~)nst ctuch of pro- tfrefadfliH~ En ho othèr~ Way ~c~h thi~ o~tiutr~ p~ for thoci4al services it would like to guarantee to all of its citizens. PAGENO="0335" 333 ~ proposal would pro~ide income tax incen1~v~s, ~ the f9rm of a tax credit of $10 per ton, ~or Increasing reeye1i~i~ of postconsumer solid was~te materials in the manufacture. ~f prod~ict~ ~or which the iJnitedState~ is more than ~0~percent depe~ident on ~oreign ~otirces. To avoid or~e criticism voiced in the T1oua~, t1~e tax credit *ould not apply to recycled materials required in the opemtioi~ of ~xisth~g hicili- t~es. The tax credit would. app~y only to reçyç~ed materials u~ed by a i~e~ mill built after the en~ctmerit of authorizing le~slation, The propo~l places a limitatipn, or ceiling upo~i th~ agg~eoate amdunt of the~ tax ci~edit whi~ch may be claimed. The aggregate o~ the tax credit wonid not exceed 15 per~nt of the total eo~t of the manuhcti~uing facility. The tax credit, however, woii~ld be in addition to the existing investment tax credit of 10 perceht and would apply to buUdirigs as well as m~achine~y and. equip~ient. There were serious and unanswered questidhs in the Hous~ concern- ing the cost and potential benefits of the i~ormer ta~ credit p~'oposal which Was striokei~i from 11.11 6860. Thq cost of Qur propos~E and the beneflt~ which would aecrue may be i'ead4ly computed. For example, in the case o,~ a new newsprint miii costing $75 million and having a capaei~ty of 150,000 tons of newsprint per year, the tax credit would aggregate $11,250,000, which is 15 per- cent of $75 million, the total cost of t1~ mill. The tax credit wàuld b~ earned at the annual rate of approximately $1,$~0,000. This is computed oii the basis of $10 per ton for the 165,000 tons of ~ised newsnapers per year whIch i~ required in th? production ~f i~0~O00 tofls of fres~i newsprint. Thus, the total ai~qount of the ~IIowable tax credjt qCutd b~ claimed in ~ years from th~ date that the mill was ful~y operatiQilal, This loss of ta~ r~vern~e iyould be reeaptti~ed by the Treasury in substantial part through incçea~ed empio~ment, apd the taxes that ~ould be p~id from profits of the iww, taç~llty. Nor should weoverlook annual savings1 o~ $~5 million ~n the bahtn~e of payp~nts account for each miii's output computed on the basis of $~00 ~r ton for Canadian t1e\~sprint. Opponents 9f the recycling tax çr~dit ~li4iinat~ from th~ 1{ouse bill. e~tfrnated that inorèas~d recycling o~ oni~ ~ ~ per~ent would ha~ ç~ resulted from its provision's Our proposal, if c'uru~d ~liroi~gh, would result in au therease of 92 percent iii the recycihig pf ~I4 n~w~ papers pationally. The aqtual recyqied toln4 çOuM be jncren~ed froh~ ~00,000 to~rs ati~nua1iv~fo ~,700,0O~ ~ons'frpm th~ e~orts of only ~r~e compa~r when the three mills it pro~ç~se~ to ht~dicT arC 1n full Operation. Many other mills, mi ~ht b~ built. We hp~ve no Mtimat.es on the~otâ~E eØect upon repy~1ing that wo~ild result frCm t~e a~optipn ~ the r~cvçI~ng tax cred.it p~pps~ ~e have di~OU5SOrd in this sbttemènt. We do ui~, however~ that a real~stic appro~eh must hO taken to rpakO recycling of vahu~b~e wa5te mMerTal resou~eès1a viable entCrprise. W~ believe that Our pr~pos~1~ if adopted, would be a good start. The det~ils of tour p~o~çs~~re contained. in th~ atthehment tO ~m~r statement. U I will be plea~sedtp answer any qu~estions, ari4 fh~nk y~u, The OT~A~ 1~&re th~re~i~r 4lie5~ions, gentieme~ Senator GRAv1~r4. Yes, I just want to go on record that T am very, very strongly in favor of a tax incentive for t'ecycled materials. That 5~-583-75-pt, i-22 PAGENO="0336" ~34 would i~ic1~ide paper. And I. will l?e o~eiring an~ndinei~its within the committee to the bill, to reinstate what the Bo~use Ways~and ~eans Oommjttee,tried to 1o. ,Howe~er it find' myself just having a few questions in the a~ea, I will try not wiiy paper but ferrous metals, igilass, aoyjhing tb~at can be recycled. We are de~hct in our duty not encouraging it to be recycled. The two `exclusions that you have t;hat disturb me ares one, it only qualifies if it were 50 percent dependent upon a foreign source. I would hope you could take a more global view to the problem of energy. If it saves energy to recycle certain products, we ought to do it extraneous to national boundaries. So I would not have that kind of* an exception to it. Would you have any comment on my position~? Mr. SCTJDDER. Well, almost all recycling efforts do, in fact, save energy. It is truie of paper and aluminum, and steel, and rubber, and everything else I know of. The proposal here, at least in part, is to meet objections of the Treasury. Senator GRAVEL. How does the national 50 percent foreign solve an objectioxi of Treasury? Mr. ScuDDEii. Because of the burden of an adverse balance of payments. 5enat~r GRAVEL. What about the burden on the environment, cut- ting anexcsss .p~uaabeç of trees. And I say this as a person who repre- sents' a resource State here. We do not have much paper in Alaska to recycle, but It just think it is immoral to waste what nature has given us on this planet. So, why should w~ put a regional or a national boundary to it? If it is something we shou)d do to be more efficient, why should we not do it on that basis? Why do we have, to tie it to a foreign country? If there is going to ~e benefits of balance of pay- inents, there are also going tq be benefits in energy. Mr. SçnDm~R. I agree with,that, and with other recycling tpo~ It has seemed. that this kind of proposal has been before Congress for some number of years, and there has been no success in getting enact- ment of. such laws. And this is, as we say, a start. This is a' section in which there is this additional, to me~ very significant plus that you also do reducethe balance-of-payments. deficits. Senator GEAV~L. Maybe y~our start is much too humble. We will try it at a little higher level. . . The other point that I wonder about is, you have this incentive only for existing-for mills that will now be constructed. What about a guy who has been laboring in the vineyards? He really. hustled, built this plant, and then has been suffering an economic detriment all of this time, and all of a sudden, now comes the Con- gress with its beneficence, and it just going to give it to the guys that will now go do it. What about the guy that already is already recycling paper? Do you not thin1~ he should have an advantage, if ~sre are going to give an advantage to this industry? Mr. SCTJDDER. Well, I am one of those poor fellows, Senator. We have been doing this for 10 years. Senator G1~&vEL. Do you not think you `should begin to get an eco~ PAGENO="0337" nomie a&vantage to not; only do~ new stuff, but to give wh~t you are doing aJready an economic advautage, so we. will do more recycii~g ? Mr. SOunDER. I think it will be .ver~r pleasant, but the windfall argument has been raised aga~st it-v-that here you are, ~lr~a~y 4oing this-~-- Senator GRAVEL. What would you do, supposing-you say you have a plant; Now what will ~ou do if we turnaround ahd glue an ad~an- tago to a ton of paper to be recycled? It is going to have an eèo~omic advantage. What are you going to do? You are going to expand the production of your plant; are you not? Mr. Scunnru, We might very well; Senator GRAVEL. OK, ~v'ould you do that, or would you go out and buy yourself another Cadillac? What would you do? Mr.~ SCUDDER, No Cadillacs. Senator GRAVEL. Well, yoo would now, for the. first time, be~iii to enjoy standing in. the suil in the marketplace. So are we to assume that everybody now is going to go out and deal conspicuous consump- tion? Or are they going to do what they have been doing for 10 yeals and do it better ? Mr. SOTJDDER. Once again, with the experience that the Treasury Department has objected strenuously to---- Senator GRAVEL. Sir, you are not testifying before the Treasury Depar~rnent; you are testifying before th~ Congress. Maybe they will have hearing~ down there, but---~-- Mr. SOUDDER. What we are trying to do is to combine an incentive to build new productive facilities, because without productive facili- ties, nobody can live. Senator GRAVEL. The other point-this $10 a ton that you have- the House had a figure of 10 percent, which probably amounts to paper for about $2 a ton. And that $2 is not sufficient incentive to do th~ job, at least for tb~ paper that does get mixed up iii the trash. Computer paper and neu~*sp~apers, they are easy to collect. But would the $2 be sufficient to at least handle the easy collection~ of paper, or do we Ii ave to go more than $2 a ton? Mr; Scrrnnm~. I do not think $2 would be sufficient, sir~ We avoided the percentage simpl~r because it i~ an extremely volatile market, and waste paper can be bought for $6 a ton now. It was $70 a year ag9. Senator GRAVEL. Have you figured out what the c~mpetitiveadvan- tage is for capithi gains treatment on virgin timber? Wh~t level, or what does that translate to, in dollars `per ton? Mr. S niut. I do not know, sir. Senator GRAVEL. Could you secure that for the committee? Mr. SOUDDER. I believe it is available, yes, sir. Senator GRA\~Et. All right. Will you get it for the committee, and then communicate with my office personally, since we are drafting legislation rn this regard. I think if we went right to that, we could rationalize a difference from other advantages to other recycling material.' Mr. SOUDDER. Yes, sir. Senator GrL&v~L. Thank you very much. Thank you, Mr. Chairman. PAGENO="0338" ( [~&~?. ~ ~ Cép~1vF~ i~RAC1~ ~oi~ ~ ~L%~&x B~ziwv ~ ~Väc~ Woo~m~t~ ~ WAs~ ~ ~APE1~ ~ ~~VL4~ IV~Ts-~E~L~ ]~, :L~n5 Th4s statemexit is prep~red in rèspon~e to t]~e request o~ -Senatoi~ Gra~e1 f~r Information 011 the competitive advantage oi~ present capital gains tax treatment ef vU~gi~ tij;~b~r. ~ ~ ~ ~ ~Eotex~Q~u ~~içy'~; ~ ~port ~o ~ O~n~ress (Much 21~ 1974), iliclades a th~cuss1on ol t~i~ ~ubjeel~ o~ ta~ benefits ~ tI~ virgin i~ate i~ia1 industries. ~ ~ ~ ~ ~J~he1o1~ow4ng ~at~penti is ~owid~ on pa~ge .8A~ o~ th~ ~pert~ "Ca~ita1 Gains 2~rèatment. 1~oz~ ~ çIc~~ ~rø~~ty~1ie14 ~ then sold in the ordinary course of doing~ ~ i~ su~ept to QM~u~y i~~me taxes at the time of sale ~t the ina~ithuip ra~e ~4 ~8 ~rcen~t~ Bu~ inç~me recèive~ b~ó~ñ~L tb~saie o~ tMIber is suts)ec~ iiist~ad to ca~dttU g~n~ ~ treat~ ipent. This special aflow~~oe ~or the. ~a1e o~ t1mboi~ ~edire~ t~i~ payzuehts from the ordinary 48 perêent rate to the 30 p~tcei~4~ i~p~ta~l ~ins ta~ r~ixe.' T~ie c~$t~l ;~i~ ~ax t~e~tme~4 o~ ~i~i t1~r ~s x~qt ~ ~ssu~ i4 p~rsUJng objec&iv&~ fo1~ increa51n~ paper ree3~cling cap ~ T~e b~siç~ p~ohj~ni~ ~ tQ ~0ise aubstantial Sums of tnonW to buila nec~sary produc~lve ~apacitj in a vital in~u~try that has a a&gnfieant impact on tJ~e national economy. ~uz~d~ in tbe gni~u~ o~ ~T~,Qfi~0~0P0 p~r `i~ill ~ ~2~00Q~Q~Q,for, tiu'ee mills are not available on a long term (15 to 20 years) basis at interest rp~te~ ~at are compatib~e wit~i the relatively low r~tes ç~f return on inve~trn~nt, Prelin~ry data' baaed upOn an ErA repdttby Arthur ID; Little, on the proce~s economies ~ the pulp and paper industry, indicates that for new' lnv~s n~n1~ (~witli only rate exeap~Loi~) `return, on, investmØ~t. fo~' virgin rnjll~ i~ from I t~e ~5 peteent~ge pQi~ls, g~e~ter tl~au th~ ~or ~eço~I~y iibe~ n4lls. UQWeV~, a reeyelj~g1 tax crec~tit of $10.00 per ton for *SSte taper consumed by a mill in the man~If~ctw~ ~f new paper products would make the return on investment fo~ ~econdr~r n3jlls ~m- petitive with ytrgti~ mills auci cap result in move favorahie tinauata.~ temits than now e~i~t ç~n~1 a s sl~lj~l ~e~n~j~n in~ tl~ Qv~alI roj~ of ~m~ciag b~a `rniU. A tsx credit proposal which embodies these features c~W ms~~lt i~ t~w cop~ structiop of 25 t~ 30 ;ew p~p~e~ recycling ~nil1~ over ~1$ ~ 4pcaclç, wiIUi an investment v~lne of aj~prO~1mately $1 billiOn dol~árs~ Ga~e~ Stete gaper Compg~, ~or exampl~, ~OIIId lihve lh era~ic1l ahd/or i~der cqpstrr~ct~~n a~ the ~ of 5 y~r~ a!t ~ 8 pe~v i~Q;Q0~ ton z~ewnprint reeyc1~~~ig ~ `tbi~ WQ~d ~ pr~a~t eapaclt~ pnd~oiil~1 pr~vi~a pUirl~et ~ addiliO~d çl~1o}~sands of tons of used ~ew~papérs~iI'l~re wpX~i~ n1~d~l~r, ~ ca~aOIt~ lm~r~gs~ In ~`heyIi~ng mWs that pt~a1nce pbperboar~ box- bQar~ ~ ugat~4; i~hbi~g~ ~nd~ othei~ ree~icIei~ paper pr6dllcts. A tax incentive measure such as we p~opo~e, d~sigjie~ `te ir~pnea~~ 1n've~tment in paj~er mi~~capa~clty~ ~ tI~ ~ qf~j~c ~ cli t~f~r p~per from `ithe present l~v~1 of ~ to ar 1*1~i% ~u~4 pe$~p~ ~4gl~ieç~ thbis , j~eo'tion is based~ i~Oft ~~ej~o~t f4~ tile ~frier4q~rn i~a~er Ifn~tl~ut~, by Mi~~~t J~e~e~rel~ I~atitntë *n~Lou !pne1ti~umaay d~ta~ behtg ~ by2' tile ~i~*~t1pz~ ~ 4 4J~ `i~ie~d sng~eatst ~th2at wittout an e~On9~n1,~ IR1~ ~ r~q~l%~g r~t~ fç~ ~ ~ d~o~$~ 17 Ver~xlt by i~98& ~ Increased tec~ci1ng rate s~hIch t~r~uald re~u1t oi~o~ qi~iw~ wqlrhl mean roughly 20 million ton~ of l~d4%1tI~thitl ~apei~ ~e~pi~er~d pv~è tl~~ 1~7~ to I~85 period. According to EPA data, if the recyciiia~g rateino lse~ to~h~t, w~ich we believe l~epll~c~ l~f~ ws~ul4~ b~4O tci 4~ t'e~w wa~&xi p~arinsjng mills, or neatly 40 mIllion ~q~i's ~if a tlp~xpA ~ape'~ ~ The $10.00 per ton ~eeyc~1~g t~x credit 1r~pape~ de$pes fr9~ ~tqd~e~ that have beenmad is. tiw~ant fe* ~reSts e~Or~m1nefhe l~otenl$i thal e~t~'t~ for rec~clfng w~Ø~q ~ Th~e s4w~e~ 4iaeuea tbe need ICr ~eonomi~ m~en1~os it p ~nca~ ~ ~~lçr~~l ~ Bab2~d1I1~on tbe~ejtp4ies ~1le1 par~,qr ~n~st~ ~ çpncl 1~i~ a $1~0~p~ ton 4~it~g~tax crCdit ~ouk~ hO u~eUE~d to acbh~ve feasible paper recycling o~.j~etlyep. EPA data support these conclusions. RECOMMENDATION ron ~ Q~1I4tT `~0P05~L To achieve the objectives for increasing recycth~g of p~st-conSum~r wa~te~per a tax credit must be tailored to the unique circumstances of waste paper as clistin- PAGENO="0339" guished from other recyclable materials in the ti~ftS~hhel~ ~lld ~ including residential and commercial solid ~ ~&ccordI~ to EPA, ~tper ~re~se~ta ~ mU~on ~to~is~ of the 6~ U2ii~Ofl tons Of ~tt~iiet ~btId ~à$te; G1a~s~ Is se~hd hui: ~ô1in~4 With ltE5 ñ~iflf cii t~ns fol1b~vM ~ ~ th~M~Mii~tbn~ ~ i r~fflI&n~ ~oifs; WM ~&thth, non-ferrous metals, 0.4 million tons. Waste paper ~1,Ied~ fi~1~t~ *ide1~ ~ti1~I are ~t the very botten~ of the pI1~clng ~ci~le rari~ir~g: from $&0~ pth~ ±e~i 14 as h~hi as $79.~0 pe~r tox~. ~J~h1s~ compares with. ~tc~s pf ~U~.iu~inuzii .~rap~nd qthe~ floit-fei~±otia fn~tath W11i~!h i~aiigi~ ~wàtd~ ~l'o~m $400.00 p~ tdui. That is ~ a fiat $10.00 per ton tax credit for paper meets the iir~i~Ed ~é~ui iii~ifls o~ tite paper recycling li4~hiSt1~y bit~uita3~ ii~tt fit the tI~ds ~` Othe~ ~tfiJ~tè ~mt~êria1 recyclers. To make a $10.00 recycling ta~ eredfl efçectlve hi hi~l$~g 40 ~eb1eve ~bJeetives to increase paper recyclI~, ~he t~* ~ ~ ~ ~plie~1 ~ó the ~x~iö~ of existing facilities dr tb the eo~t1'udtioii of n~w ~1uints. Tb~s li~ftátidñ e~i, the opplft~at$On of the tax ~ted4t ~1tl 1tit~e tli~ o~t ti~f ~1Ie ~a±~ tI*~1tt ~rd*~ion substantially and at the same time will substant1s~iIy Inc~rea~e nec~Ssa~ produet~vE~ capacity. `t'i~e prt~pbithl foiibs4~: PROPO5AL TO PIiOVIDE INCOME TAX INCENTIVES ron IN~MSt~tG ~A~Pn I~i]4~ui RncxcLr~fG Deflnition~s: 1. ProcesseL-~he term "processed" means rept~lpet1, 4be~ed.1 o~ otherwise subjected to a treatment that alters its con Os1t1di~ m~ ~ ~rhe term iioe& ~i~t in~1tide~ en~etuil~n oè~st4~ eOnsThfifiig mci~eb ~ ~rWiik, ~ted- ding, and pa~k1uig for stOrage an~ ahi~ment. 2. Pogt n.sw~or tca8~e ~ap~r,--The te~pi "post-~on~ume~ w~te ~pa14*" ~i14ans paper, papefb&trd, or other fibrous prodttet tb~t has `zone tl~l~ jt~ use~fii1 life, served the purpose for which it vt~c.~ fr?i~e~ts~1e~d, ah~tT bèthi f~cTdd1S~ the user. Such teri~i d&e~ riOt I hite W~sle or sci~áp: (a) Created in a manufacturing or conrerting ep~eratiori~ `or' (b) Recovered outside, the United St&to~ Propo&rl 1. Allow a tax credit in the range of $10.001fOr e0~h Mn Of ~5t~&ni~siiriier waste paper prd~éssed ih the United States by the tax~ayer during thO ~aftb1e year, into new comtiiereia~ly marketable pulp, paper, paperboardf aud other similar products. 2. `the ~ ~ré~dit ~alIo~ed uiiâ~' b~ U~ed h~ the M~prt~rer Onl~ `fOI~ th~e~ p~t~ose of &~ffi~d1n~ e~ist1ug j*per reè~cithg ~iapac1ty Or In th~ ~on~ttiictiOii Of ne~7 paper recycling facilities. 3. If the amount of tire credit for any~ ta~cab1e year e~c~ tire 1iabhhit~ for tax for the taxable yea.)~ (an unused credit ~ea~') the exc~ss siVail 1~e treated as: (a) a re~yc1Od wnsto papor credit t~arr'~back to Oath of the 3 taxable tears preceding the unused credit year, and (b) a recycled waste paper credit carryover to each of the 2 taxable' years following th~e unused credit y~ar. 4. Th~ gggregate of the tax, credit allowed the ti~xpayer ~tnder the provisionS of this paragraph mdy nOt `exc~eed 15% of the total cost of th~ ptopOsed ~apita1 expansiOn, lhclt~iflg m~thiñery, `e~tYipthebt and bu1ldh~; M~t ~1udir~g~ htM arid site preparation &ists. The CHATR~tN. SeluLtO'~ }Thskell. Senator HASKELL. Thank you, Mr. Chairman. Mi". S~rtu~ru, T g~ues~ this `shOws what the hor~er~e~ is~ I thitik your nrorosc~i i" uiidOttbtedly a ~er~ ~co'~'thy thi~ but I ~up~b~e ~ express myself, in view of the~ f wet that I thihk ,t~t p~ce1ithj depie~ tion ought to be eliminated entirely. All members of the ~otnmnittee are not unanimous on that. In view of the fact that T think that ~capital gains dii timber ottght to be eliñiiIt~ted, I do n~c~t belie~e that I could go along with anOther subsidy to another undu~try. T juet thought 1 ought to make myself clear. PAGENO="0340" 338 Thank'you,Mr.. Ohairman~ The QIA~R~iAN. Senator Byrd.,, , Senator }L~nn~ F Enlr/, Jr Mr Sthidd~ two ô~ your ~sociates a~ e very e~ose ai~d. dear frieiid~ of ~ Th~yan and Alan Don~ nahoe, of Richmond, Va. In reading your tëstimon~r, I am not clear as~ to whether this tax credit would be taken u~ 1 year, or taken over a period of sevend years-~-isthat the way ~, , * Mr.~Scuunn~. It wouid~be over, severalyears; yes, sir~ Senator I~I4RRY F. BYRD, Jr. Seven years? I~tr Sctmi~rn Presumabiy, it wçuld be 7 years Senator HAm~yF B~YRD, 3'r. Why 7? Why not 5, th~ 10? Mr. Sct~rn~n. Only that the mathematics work out that way under the formuh~we have proposed. Mr. DRANCE. And based upon the consumption o~ a mill, the $10 credit applies to each ton that the mill would consume, so that a 150,- 00O4on~capacity mill- Senator }hm~r F. Bnw, Jr. `Each tOn of old newsprint that a mill wOuld consume-not the `amount that `the mill would produce? Mr. SCUDpER, Th,at,is corre~t. Senator HARRY P9 Byr~o, Jr.~ What is, the di~erence between the cost of the regular newsprint, you might say, and the recycled newsprint? Mr. SctmnnR. Recycled newsprint is somewhat ~cheaper, $10 a ton, $5 a ton, depending on `~here it is sold. Senator 1{Annv }i~ BYRD, Jr. And with $~65 newspaper? Mr. SOunDER. $260 yes, sir~' Senator hARRY F. BYRD, Jr. $260, that is not a tremendous di~erence in price, then, is it, to the consumer? Mr. SCUDDER. No; it is not. Senator HARRY F. `BYRD, Jr. How `many recycling mills are there for newsprint at the present time? ` Mr.. SCUDDER. There are three. The construction of another is con- templated in Virginia. One is being buiit~in Arizona;' one is contemr plated in Georgia. Senatq~ I1A~RRT F. Bmn, Jr. I guess wl~at I really meant is, how man~r different companies ~re involved? You are the pioneer in it, as `1' recall. Mr. SCUDDER, We are the only company. Senator HARRY F. B~iu~ Jr. Are you the only company? Mr. SOunDER. That is able to make newsprint completely from waste paper. There are others who. choose waste paper as a partial furnish. We believe that these incentives would lead to' other companies who have newsprint mills and other mills to use waste paper, instead of trees. Senator HARRY F. BYRD, Jr. You mentioned that American newspa- pers are dependent on foreign sources for 70 percent of newsprint. I guess most of that comes from Canada, the 70 percent? Mr. SCUDPER. Almost all comes from Canada today. But there was an important instance of what can happen Jast year~ when the Scandi~a- vian countries lust unilaterally withdrew, regardless of contracts or anythiflg else~ from the American market. They do not sell paper in the American market any more. The newspaners who were dependent on those sunulies were in a very difficult situstion. Senator HARRY F. BYRD, Jr. The price escalated almost as much as the price of oil. PAGENO="0341" ~33~ Mr,"Sdty~~~. Ye~; it did, `, , Senator hARRY ~?. BYRD,' Jr. At `least it~ seemed that w~ay t~ a lot of newspaper publishers. HOW do you judge the newsprint production now?, ~s it relatively stable? And what do you look for in the near future? Mr. SO'UIDDRR. We look for shortages again in a year oi~ two. Senator. Senator HARRY F. Byim, Jr. At thO pre~ent time, I take it that there is not a shorthge. In ~fact, there is a very heavy inventory. Mr~ SCt~DDRR. The shortag~ ended in December~ with a violent switch~ and there is a surplus of newsprint at the mo~nent, Senator HARRY F. BYRD, Jr. Is that because the publishers have taken steps to reduce consumption? Mr. ScUDDER. That certainly is part of it, but it also js a reflection of the recession, diminution of advertising. Senator HARRY F. BYRD, Jr. When you speak of a shortage, are you speaking worlthvide, or are you speaking insofar asU.S. publishers? Mr. SCUDDER, I think it i~ a worldwide shortage~ sir. Senator HARRY F. BYRD, Jr. It will be a worldwide shortage? Mr. SCUDDER. Yes, sir. Senator HARRY F. Bmn. Jr. And you think that will come about in 18 months or 2 years? Mr. SCrTDDER. The forecast is for an annual increase of 5 percent in use, but the capital costs of building a mill are such that nobody is very anxious to `build one; So there is no real prospect of increased pro- duction. but there is a very real prospect of increased need. Senator HARRY F. BYRD, Jr. You mean the mills are now producing at capacity? Mr. SCUDDER. They were in November, December, October, and were unable to meet demand. We think that situation will recur in 197~, even without further growth in their business, in the development of new papers and small papers, where most of the growth has been. I do not see who is ~oin~y to furnish the paper for that growth. Senator HARRY F. Byim, Jr. Do you anticipate the ~rowth will come about, largely because of improved economic conditions? Mr. S~UD1OER. Yes, sir. S~nator HARRY F. BYRD, Jr. Thank you, sir. Now Senator Fannin is not able to be here. He has another committee meeting simultaneously with this one, and he cannot be here, but he has six ciuestions which he would like to have answered for the record. I woul~J assume that would he satisfactory to you? Mr. SOUnDER. Yes, sir. I should say so. Senator TTARRY F. BYRD, Jr. Thank you, Mr. Scudder. [Senator Fannin's questions, with responses, follow:] Quusvioxs FOR' RICHARD B. SCUDDaR FROM SIu~AT0R FANNIN Qaestion. If you plan to build new mills, why don't you begin now? Why is a tax credit incentive needed when it is apparent that a market for your product seems to be assured? Answer. The combination of high capital costs and high long term interest rates make the return on investment unattractive. Que.stlon, how does a tax credit that is earned after a mill commences opera- tions affect your ability to obtain capital financing now to begin construction of a rather expensive project? Answer. The guaranteed return affects the pro forma financing statement in a favorable way so that financing would become more readily available and at lower rates. PAGENO="0342" PAGENO="0343" ~S4i T~h~nwA~ S~ it isyoi~rtheory~tMt ~h~i]~c1 lu~ya*a~tneat~ t~off$~Oa ~ it t~J~e i~ base4anyQuroo~~1 w~iiat yoiu 1~lunk i~ costs to4rialke the i~v~stoaeiit fe~sib~ Mr. ScuDrn~n. That is roughly what it is; yes., ~ The Ci An~UN. Now, ~1an~ is ~e~g~i~g p~ a~t~ ~~ew~print nowadays? Mr. Sctn~it. iI~t is $~0 in the ~ $~S~ west~. The CHAInMAN. I see. O~n you give me ~ome iz~tho~tion ah~V wMt you 1hi~ *e profit is on a ton of recycled newsprint? M~r. Scuni~. It ha~ varied widely. It w~s sgmewhei~e in the neigb~~ borhood o~f $Q0,. Itthiii1~, in i9~T4~ The C~i~tin~u~. Well, I. th~il~ you ought to give usthe l~est doou~ mentation you can to show why yon think that this is not adequate to permit the industry to expaM ~*d why you tbII* that the ~additiqual $10 would make it feasiMe. I personally think that yo~i havegpt a good argument insofar as this would help with the balance of payments. And it would help us to clean up the environment, ami help us to ~nake better use of the resources tl~at i~e have. But I thi~k tha~t you ought to try to document that $10 o~ what it would take, the best yo~ ~ow how, Mr. Scu~ni~n: I was dIslilzetiy% wrong on the figure 1 gave you a minute ago. The profit per ton in 197~ was closer ~tO $~, but it will be considerably more in 197~.' The CIIA~RMAN~. That is a lot of di~erenee, $~0 and $~ ~r. Scunn~. Yea, sir, it is. I am not a good in~the-mind mathematician. The CHAIRMAN. So was that your after tax pz'oflt~ Mr~ SQUDDER. Yes, sir. Now, one of the principal problems is, that the interest costs that each ton of paper i~as to carry will be~aroun~ $60. The CHA~rR~AN. Now can you tell us-'-- Senator Gn~&vr~. Mr. Chairman, could I just ask one tlung? The CHAIRMAN. Certainly, in a nioment. How are we goiug to eq~itakly ad~ninister a tax l~w where you get $10 a ton tax credit, but you w~uld nOt get tax credit for what you have now? In other words, whM~ `lund ~f eqinty does that make? It seems to me that assuming someone opened a~new mill to compete with you~ it would he completely. unfair that he would get a tax credit on every ton he recycled and you would be penaJü4d for all that you had been doing. IL do not ace hoM~ we .c~ m~ke much justice or equity or uniformity out of a. s~tna~tiou wherein ~ f~ilo~t who is doing something that we wOuJ4 lihe him ~to d~o gets no adrvnntage for that, bnt sonic newcomer JR the field. would. get the full advantage of it. H~w can you justifythat ? M~r. Secio'onu, ~t is a4dressed only to what we cOnCeive as the na~ tiozial interest, the n~ed for ~mw pro~uetive fuc~ilitics and the need to attack the balance ~f p~ym~nts deficit. I am sure anybody that runs a miii would he delighted to get an extra amount of dollars per ton for what they produce. However, in `our case, we built the mills we have on sound economic p~neijies; we are content with them and are looking imw toward the future and what we can do. in the future. j~ftation and the cpst of money-it h~ been unbelievable; it costs~ PAGENO="0344" 342 fotir or five `times ~as much ti~day to build a mill as it did, only 3 or 4 years ~gO. And under that e~rcumstance~ h~sp is needed; whereas~ we built our first mill for $9 milliou~ To be, sure, it,was sniafler; but today we are talking about $75 rnillion~ .~ The CHA A~:'H~w long ago did you build your firsthull? Mr. SCUDDER. In 1961. The CHAIRMAN~ It has gone up' that much in that `short a period of time? Mr. So~oen. WelJ,~to be sur~ the mills `are bigger,thut it has gone up dramatically, a multiple of times. .. . ` The CHAI'R~AN. And if ~ nnderstaiid sour `arguth~nt,' in view o~f the fact that the argument was made on the House fiobr~ that this was a matter of rewarding' people for doing som~thing they were dbing already, you' want to make it clear that the only respect ~in which you would ask a tax advantage `would be just ipsofar. as you can expand production. " Mr. ScuDoEn. Yes, that is correct. The CHAIRMAN. Thank you very much. Senator Gi~'n~i4. Mr Ohairman, could I just follow on that, because that does rankle me a little bit. You Mve a plant:in existence that cost you a~ amount of dollars. You are going to build a ilew plant under this device that will cost you, sa'~r 2x. Now, if plant No. 2, which `cost 2x, can buy newsprint or can buy recycled paper at a $10 economic advantage, and then plant No. 1, `that you similarly own, cannot have that economic advantage, so it buys at ~j; plant No. 2 buys at y plus a $10 advantage. Now, when you have to repair plant No. 1, if a generator goes out in plant No. 1, it is going to cost you e. If the gen- erator goes out in plant No. 2, it is going to cost you e, also. So how can you, in ~economic terms, testify before us and say that you are prepared to let that inequity exist? Because you have got one plant that will not, even within your own organization,. will not be' able to compete favorably plant No~ 2. Am I making a false assumption here? Mr. SccmDeR. I think so, in part, Senator. These are depreciable expenses. Mills renew continually and' are buying new equipment con- tinually, while the allowance for depreciation never pays in a period of inflation for the new equipment you have to buy from it. `It can come fairly,ciose. You have the depreciation factor working equally in both mills. Senator Gn~vi~r4. Well, but if `in the first mill you depreciate at a cost which is half of what your replacement cost would be, then your depreciation gives you no succor at all. Mr. ScUDDEn. Well, `there is validity in what you are saying, in that nevertheless, when you go to build a new facility it iS the return on your investment that counts. And the return on the investment of the old mills at a cheaper price can be considered adequate. The probable return on the investment of the new mill can in no way be considered adequate. Senator GRAVEL. I grant you that. Now, we' have got one injustice there that we are trying to correct because it is good. But I hate to see you take the public position, just to get it through the Cone~ress, or think that you can get it through the Congress, by writing off an PAGENO="0345" ;343 ~xisting inequity and being pr~par~i to sOri~ of bite th~ bullet on that. Because we can look at a proble~n straightforwardly, and .1 think the chairman rec~gnize~ it. and, IL dth 1 thini~ it is grossly~ui~f~ir, whether it is you or another compan3r, that, they l~bo~r in the viney~rcl in a bad competitive situation and then all pf a sudden there comes benefit, and what you do is you reward Charlie, that has, ~ieyer made ~n effort-in your case, you ha~te-but~ never made an effort to get into the recycling. business. What happeiis to the pioneers in this business? It is discrimination. Now, you h~ppen to own two mills, but supposing an old gentleman who has a recycling mill has now got' to compete with you. He has been in t~e.recycling business and you build a new plant and he has an old plant. And you, can now buy at a $10 advantage. You are going to run him out of business, are you not? Mr. SOUnDER. Well, in practical fact, no, I do not think so. Senator GRAVEL, Why would you not? If you have a $10 advantage per ton on him, thenyou are going to take away all of his customers- unless he is prepared to eat that in profit. Mr. SCUDDER. This is a limited $10. It is going to be eaten up in the interest costs and other costs of constructing this new mill. Tt~ is not going to come out in a competitive advantage in purch.asing wastepaper. Senator GIt&v~L. If that is the case, should the competitive advantage not be what I asked-and that is~ what is the tax advantage for virgin timber-and then tell us what that is and then we will give you the same thing so that you are equal in the marketplace. That, is what we want to do. Mr. SOUnDER. That is an interesting approach. Senator GRAVEL. There is no other reason that we would want to help to give you a tax loophole-at least for me, I do not want to give you a tax loophole. All I want to do is give you the same weight boxing gloves that the other people have in that kind of affair. Because as the chairman pointed out, there is great energy savings in recycling paper, and that is what this bill is all about, So we want to save energy, and the way to do it is to make' you equal in the marketplace. Now, you tc~li us what that equality is. So all you are saying is~ we want $10. We do not know what that $10 means ; `I do not know what it means. Mr. SOUDDER. Well, you see, like my predeeessor~ Tam an economist, and I want to state to you a view that I think this country will have difficulty in surviving unless more of its capital is put into productive facilities. This is strongly oriented in the direction of leading people to build new plants. Senator GRAVEr. Maybe if we made It-since you are talking about an interest of $60 out of $980, maybe we ought to make it $90. Give us ~a rationale for that; that is what the chairman was asking. Tell us what that $10 means-and also, since you are in the business, you tell `us what the capital gains treatment for virgin timber is' The CHAIRMAN. Well, Senator, if I might just interrupt, I think that from a practical point of view it is fairly easy to understand why the man is making such a modest request of the committee. The House treated him better, but he got knocked out on the floor. He would. PAGENO="0346" 844 j~is~ as soq~i settle ~or half n 1oaf~ h~ping t~i~ time it w~1l s~i~k ii~ then, an~d ~t wili noein~ock~dout~ ~ M~ybe On the Senate floor we might have a greater deal of thaturity and: wisdom and they would accept somethkig based ox~ iogi~ ~rnd not on son~ethi~ig that is a teetical eonth~eration~ Mr. Sctrni~a. This is base~oñf1nanciei k~gic. The ç~i~ta~. What would we be payi~ng y~uif we pve y~u $10 n~ ton on your existing facili~tie~ On your i~th~g production~ Mr. Scino~. &s~er $5 million. Th~ C~i~xn~AN. About $5 million a year onyour~istiiig pr~4uction. Ho~ do yOtL arrive at that maxirnum~ Mr. ~ The rna~mnm was calculated to be 15 percent of the cost of The ~rniIl, which, added to the 1O~pereent investment tax credit~ would provide a~ total tax benefit of 25 percent of the cost of the milL This is the agiount o~ money which it ~ dete~niined was ~ieeded in the way of a 1~a~ç benefit in order to oktaii~ the kind of finax~cing that makes a mill of this size a viable ente~rprise, taking into ac~ount the very costly fin~ncing rates that are available to eop~p~nies such as we. The CHAIRMA~What would the maximum then be~? Mr. ~EA~CE~ The maximum would then be, ~or each mill, $11,200,000, ~epresenth~g 15 percent of the co~t of the $7~ millioi~, ph~s the I0~ percent investment tax cr~d~t-or $7.5 n~illion. So if you add the $7.5 thillipn t~ the $11.2~ million, you then have, roughly, $19 millipn. The CnAIE4~N. I do nQt ~ee w~y yqu haye to~L~are you t~Iking about the existii~g ~x c~te~it? ~tr. Duth~cE, The existing tax credit. The CHAIRMAN. Well, j do not see why yoi~i hav~ to a~ld that tp t~osts; that is there ~4ready. It s~eths to n~ that all the cpst you are talking about is the cost of *hat you are a~ki;g for, th~ cos~t of the change in the law that you would~ be aski1~g for. Now, wba~ would jthat be? We are hi1kingabpi~t the n~a~imum cost. ~r. Scv~u~ $~1 million. The CItAtRMA~. I~ that over 1 year qr qver, a period of time? Mr. ~ O~çr a perJpd~of 7 year~. Thq CHAIRMA~. S~ you are ~y a~dug fpr what would ~mount to only, hqpef1.illy, only abqut $1.5 mi~li~on a yea~-what you think woiih~ then make if feasibl~ to build how many additional mills ~ Mç.:$ctrnb~R. Thr~e~. The Ct~A~rn~4N. Three a~ddition~tl recycling mills. ~t~: Sct~p~tt, ~ight. Señato~ GRAvEL. The problem ~there~ Mr. Chairmai~, as I view it, is th~t they, are basing th~ir request on tl~ co~t of buiildin~ their mill now. J wouJ~d ra~her that we let the disciplinç of the .n~rketplnce do that, 4~d yqt~ jt~st tell us v~lie.re tl~e inequity in the m~rke~pl~ce e$sts. ~on see, what yqu ~re~aying is, we need tl~i~ to ~t the ~n~ancing for the milL While~fqur qöir~pa~r may have one problem, another ~ompany niay have anothe.~ ptqble~n~ and another b~g cq~glomerate n~v not hai~e th~ ~a~mç problem, o~ getting capital ~s you ~tre getting, So w~ caflnot ~it herd iith4 hand out a goodie to ~ou andone to them, knowing that they are unequal. What, you have got to do i~ tell us what the i~iarkct condition i~, and i~ you are equal In the marketplace, then you go to the financial marketplace and you finance it on your own strength. PAGENO="0347" if .yoi~ eaxrnOt ~do 4t~t~at, wa?y, then you ca~in~t loo4~ to us~ We have made you equal in the marketplace. The CHMI~N. Well, ~en~Wr th~avel i~ymptt~het~c to the p~ob~ern, but itt heihg very m~d~st in wbM yott are ~s1~ng~ you might have sho*n better j~iIdgirteut tha~i they Se~tor reeiizes, because ~fter a~il, t1~e H~u~e w&ts? better to you~ I takc it, then you ~re at~king for here, but they did not succeed either; that is, the House committee was more helpful to ~itt than ~rh~t'yott i~re askkig for h~rc. Se'mitor `Gitth~. I~ think that is not `the ease, Mr. Chttlr~ian. They only offered them $2 a ton, is wh~tt `th~r got out of tile House corn. mittee. They lost that on the floor, so they ai~e netbeing more modest. I thiuk they' a~e just pi~a~h~g it fro~i a diffé~nt ve~toi'~ And I am sympathetic to that vector. The only `thittg is, I wøuid rather ~ the discipline of the marketplace-and you ~ould~ help' us with that, by jn~tgivin~ us'wi~t'~the diff~ren~ is for the capital `gains treatment of virgin tim~ber, and then, if that is $12, if `that is $1~, then we have got a logical posture. The Oith~AN. Well,' I ath frank to tell you that in thy persO~iai judgn'ient, when `you are reeycli~g paper, ybu really have a iighb to claim e~ery bit ~s thuch ta~ advantage' as one has in cutting ne~ timber, because that is an item we h~Ve in~ short suppl~r. We ha~ve' to imptht a lnt of it, and we hav~ an unfavorable bM~titce of `trade ~1th Canada. So that I really think that ~óu have got' a right to ~t&~t fOr every tat'advantage that his cow e~part has. Md it might ev~n he in the national ithterest for' i~s to ~give you more t~iâti tha~t, because we ought to try to ene'ciurage people to pick up all of this trash rather than leave it out on `the ~tre~ts"and' haVe it cluttering up the etivirottment~ Md furthermore, We ought to irithebetter uu~e of ~esources. Now, ~vhea we ~&rsird~r tiii~ puthp'osai hi the committee, ~te are goin4' to be loOkhig at it' alOng With' Wiiat it~will eO~t~ to redyole aluthimim, aluminum cans, and what the~ potetttial is fo~ ree~cling glass and things of that sort. So, if we are going to d~ ~etMuig~i'n recycling, I would he inclined to do ~ôtnethM~ for t&~ r~cycling of'paptr as Well as thcycling thtminunt. 1 do tto1~ kncfw whether~ we ought to do any~ thing `abont tin cabs `or'not,but Ph'ate to ~ee them bc~ide the hi~hway~ I know that. So that if ,w& thtt~ `do so~ething~'I~ think this onght to be considered, and I would kq~e `that if we'deeideto try something in this area that the House Ways and: Means ntembers might be willing to take it back and have another try at it, if, we go to conference with them; because personally; I~ think that recychlng,~ particularJy in cer- thin areas-aluminum, pa~pet~ glass-~-has a lot of d~sirability a~d a lot of potential. , Senafrtor .FIA~KELL. Mr. Chairman, may I a~k Mr. Seudcler a question? Is the competitive ~advantage i.n the capital gains treatment' on timber? I was out,of the room for a whiie~ Mr. Scin~m~u. That is corrcçt~ Senator ITASK~LL. If we eliminated that ~adv~ntage, would you be roughly equal with them economically~ ~`[r. SCUDDER. Well, the timber iudus~ry has both capital gains treat- ment and tl~ie depletion allowance. Senator I-L~STEU~. Supposç we ~l~minated both; would you be roughly eqnal? PAGENO="0348" ~46 Mr. ScUt~Efl. W~ ~ild~be roughly ~q~ta1 but that does not meaii we would accomplish our objectiVeS~ `` S~iia~br' HA~kELt. Y~o~ had better define your ob)eetr\re.' Mr. SouD~i1~E. Well, ~ur objectives are to find ~ way to. build more mills, which has become extremely e~penSi~Te, and which we think, in their OWU peculiar way, really do benefit the interests of the Goveri"ñietlt. Senator HAsT~ELL.' Yes, I widerstand that. I am 3ust thipking sheer economics; If w~e took~ away the `c~pital' gains and the dep'l'etion on timber, would your costs of delivering newsprint equate then *ith the costs from virgin timber~ Mis. ScIxnrn~R. Well, bEaring in mind that ~O percent of this sub- stance, com~s'from outside the country----~ Sena'to' HASKELL. I realize that. Mr. SCIYDDER. Yes, it `would have the effect of equalizing our costs with' those of the domestics, domestic suippliers. Senator HASKELL. Thank you very much. Sen~tor GRAVEL. `And then you ~ould~ hate an advantage in the tharketplace because with the rapid increase in energy and since it takes mom energy to `produce from virgin stocks of paper, then you should enjoy the economic benefit. Mr. SOuDDER. Well, many, many o~,tho'se guys, many of the original old'miils'were on waterpower, if' it stays the same. Senator GL&VEL. ` Just so the Senator from Colorado understands our views, I hold the same `position. `Ydu' ha~ve got' a choice: it either is to wipe out the tax advantages that your competitors have or to give you atax advantage to equate what they have. And I can go `either way. The CHAIRMAN. Just to complete the picture, if you want to do this `by taxing the other guy even if you do that, you still have not met the Canadian problem or the problem of foreign imports. Most of this newsprint is produced abroad, is it not ~ Mr. ScimnER. Yes; it 1S. The CHAIRMAN.' So, if yoñ tried to put a tariff on the fellow who is producing it `up in Canada and eisewbem, you get a letter down here from the State Department protesting that this violates the (~ATT and one thing or another, we are not living up to some trade agree- ment, and it would create all sorts of things. It would be just a lot easier to do something for this fellow than it would to try to tax all of the rest of theme I will tell you right flOW. Senator GRAVEL. Well, can we pursue that for a moment'? I do not know if that would be accurate, Mr. Ohairfrian, if they are competing with the Canadian newsprint people. If w~ took away the tax ad- vantage on virgin timber; it costs more to produce a ton of newsprint from vin»=in timber in energy terms- The CJ~ATRMAN. How are you going to tax a producer in Canada'? Senator GRAVEL. You do not tax them, what you do- The CHAIRMAN. All you can do is put a tariff on his product. Sen9tor G1i&v1~L. If that is your~~roblem, then you cannot compete favorably with the Canadians. Mr. SOUnDER, That is not our problem. Senator GRAVEL. That is right, that `is not his problem. That is what I am trying to focus on. We do not want to be led astray here in PAGENO="0349" thinking that ar~oing to give you an ath~antage so you can com- pete witl~ tl~ Can~i~ns. Mr. SCUDD~Ii~. We do :dçi~pete succes~Eu1Jy with.'the ~ndnstry; we would like to do more of that. ~Senator Gm~~vEr~. I realize that. But I' for one, Senator, am not pre- pared to vote you a t~x advantage on that basis. I will vote you a tax advantage to equate what other advantages your competitors have. Mr. SCuDDER, The tax advftntage can be argued not to be a cost to the U.S. Government but to have certain returns that are worth- while to the U.S. Government. I think you are talking about something else, Senator Gi~vEr~. What? Mr. SouD1~eR. We think there are other advantages. Senator Gn~vEL. Then you are in the wrong bill. You should be in the tax refdrm bill. This is the energy bill that we are dealing with here, Mr. Chairman, and the motivation here is to save money Now, if you have got other tax problems, we can treat it in another bill. But let me go back to the motivation that we have. I would have a motivation for recycling because it saves energy, and the way to do that is to do away with-the disadvantage you presently suffer. Now, is that satisfactory? Mr. SCUDDER. It is not whatwe' are seeking; no, dir. Senator GRAVEL. So, you are seeking fundihg b~yond `the energy ad- vantage that we are looking for in this bill? Mr. SCtTDDER. We bring you `an energy advantage. We bring you an effect on the balance of payments which nobody else does prac~ tically. We do promote jobs and production ~n the United States, which I think is vital, and I hope the Senate is going to think it is vital because it is. Senator GRAVEL. There i~ no question. It is vital, but `I think this colloquy has brought out something very significant. The ChAIRMAN. I think it would be a little bit `easier to make your case if you would let these fellows who are going to be recycling aluminum cans, to come in here first because they are a bigger energy saver than you are, I believe. But in any event, I think that you have spelled out your problem, and I do think that we will consider the matter of recycled materials in connection with other things. 1 mentioned aluminum, for example, where there is a big energy saving, and while we are considering recycling, we might as `well consider your problems as well as the reSt of them, and we will try to see that you are treated fairly along with the rest. Thank you very rnueh. [The prepared statement of Mr. Scudder follows:] STATEMENT OF RICHARD B. SCUDDER, CHAIRMAN OF THE BOARD, GARDxN STATE PAPER Co., INC. My name is Richard B. Scudder. I am chairman of the board of the Gardeii State Paper Co., Inc., of Garfield, NJ., a firm which I founded in 1961 after par- ticipatijig in the invention of a process by which old newspapers could be de- ~n1~ed and recycled for the manufacture of newsprint. We presently operate mills near New York, Chicago, and Los Angeles, and are building a mill In Mexico in partnership with ap agency of the Mexican Government. Garden State makes newsprint entirely from waste newspapers, and together with its associate P50 Paper Corp., produces some 450,000 tons of newsprint per PAGENO="0350" PAGENO="0351" cycling of old newspapers natioirnlljr.~The actual recycled tonnage xnlld Increase frota. 2,200,000 tons annually to 2,700,000 tons from the efforts ~of onjy one corn- pany-Gard~p State Paper Comjmny-wherx the three ~iills It proposes to bUih~ are in full operation. M~1ny. ether mills might be buill. We have no estimates on the total effect upon recycling that would result from the adoption of the recycling tax credit proposal we have dis~ussed in the statement. We do urge, however, that a realistic apprOach must be taken to make recycling of valuable waste material resonrees a viable ent~rpr1se, We believe that oun~ pro~o~al if ~idopted w6üld be a good starti The details Of our propos~tl are con- ta~hed In the attacilmeut to my statement, I will be pleased to artswer any questions you may have, ATTACHMEN~ TO, STATEMENT OF EICH4RD B. SOTJDDEa Bnropn SENATE COMMITTnn ON Fn~ANCn * Proposal to proyid~ ir~~jpe ~ax ~nceutive~ foi' increasing recycling of ~dst- consumer solid wastO materials in tue ipa fiiet~e of products for which the tnitêd States is more th~u1 50% dependent on foreign sotirces. .L~EFITiTI9NS Recycled-The term "recycled" means the process by which waste materials av~ ira nsforffi~d Into new prothicts~ Post-copsumer solid Waste pi~terial-thc; term~ "post-~opsnpi~r saUd wa~tp ma- terial" means any natcrta1~wh4cli 1~s beep u~ed by ~n ultith~te consuhier and nhic~h haS no sigp~1lcant value or utility ehcept as a w~iste matetial * PRoposAL *, Allow a tI~ ci~edit of $10 for e'uth ton of post consupiCr solid waste matérial recy'cled hi th& tinithi ~tatës 4~y~ tll~ táx~ay~er during the ta~tab1e year ihtO neW ~le~nufkcthred fln~sbed produCts in a plant which meets the .fo~loming criteria: 1. The manufacturing pliuhit nmst~ba Const~pcted~ after ~he en~ctmept e~ this para~r~h a~4r c~i~tri~ctiO~ n~st cepimenee ~wi~hln ~ ye~s thçpeóf~ 2 The recycled We~ste materialS to whiCh the tax Credit 1~ atpllçable must be uSed hi thp~ ntahutsCtureb~ fin4Shêd~ro ~ct~ fo~vbich the United Stdté~ is rnore th~u 50% d~endent upon ~ot'nign sourres~ ~ascert~ed h~ the ~eas~ ury D~parii~i~t~ ~ *~ The a ip~ata c~ th~ Nec~rcacci w~e n~a~eyjal~ta,v çre~i~t all~ip~d the ~nd~r the provisions of th1s pa~ran1~a~h may not çacCed 1~% of the total coSt Qf the ~iIgxtu~ptCtqring fhCility,'iheludftg niaeliiheey; e~ülpirieiit' alid biYlMings, but eS~c1udthgIand áddsitèjrepatatlozi cd~tS. * * * If the awonnt:of *he greclit ~for any ~ e~rccedethe~ 1i$tbU~y ~or~a~ ~r 1the taxable ~yeai~ (~n unpred cr~d4t ~ea~) the ~cess t4~lJ;be treated ~asç (a) a recycled weste n~tcrial credit carryb~rck to each of the 3 taTabt~ years ~r~dedip~ theunhsed Credit yea~r àr~d * ~ (b) a tec~ed whste~inaterIal crOdit~attrryevérto eech of the ~ years fol1owingt~i~unnse~ crecljtyear., * * * : i *`~he recyele~ waate ~irçateri~i~ tax q~~dft~ allowed. bytlits paragr~p~ ~hall po `Uf~ct tl~ ~lio~iTh4hty of the minufaqtiiring faculty ~fot- th~ inveshn~nt ~ cr~dj jro~ id~d tmrsnant to S~ictuon ~t3 of the Iut~ru~al t~evenfte Oode ~ The QRA1R~N ~Tow ~ e wi1~ c~I Dr Fred Schrihnar~ cf ~r~d g4muirn~rn A~socia~es, energy con~ü1t~trit ahd thaii~nitht q~ e~iergy n~fo~matrnU ~e~iteI~? O~ i~R ñED st~HU1~1A~, flZD SCHITZ~tAN ~s~cr ATES, ENERGY ~ONS1JLTAN~ ANDI R1U~,* ~AL~~Rq~ TOB~ATIOi~ C1~NTE~R , ~ S * Mr SC~1JL~1A~ T ~ppreei~ltc~ t1&s op~ortunrty to thacuss tire eiiergy t~onsea~iork and cQ41Ter~ion~b~i1 and with your pcriniss~on. ~ ~yóu1d just marely like to sunimarizc my~t~ten~ertt. ** * * 55-583-75-pt 1-23 PAGENO="0352" 350 The CITAXRMAN. Yes~ we will print it in the record. Mr. SOITULMAN. M~ name is Fred Schulman. 1 am chairman of a technology assO~sment Oversight committee on underground coal mill- ing aimed at assessing the problems inv~lved in increasing coal sup- plies fOr electric utilities. I am also a. consultant to a New Englaid firm engaged in energy~ conservat~on and. :conversion. I am founder of the trade-energy information center which eon- sists of a small group of volunteers which has met about once a month since the first Arab oil embargo to discuss relatedissues of trade and energy. Today, since it is late, I will confine my summary ~o three main points. F~rst, can the bill now under discussion seiVe as a means to shift oil company interests and profits to domestic oil ~production, domestic refinery construction and away from operationa abroad especially away from international OPEC oil production? And if so, how can this be done? Second, I would like to discuss before this esmmittee, which is unique, in my opinion, because it has responsibilities not only in the energy area but also in the tax area and the trade area and you have had extensive hearings on these subjects whether U.S. trade ~poIieies can be used as a means to reduce exorbitant OPEC oil prices, and if so, how? It seems. to me that the combination of these three areas can be tised very effectively to maximize American strengths to obtain oil ifl adeqnate amounts at what you consider to be. fair prices and with beneficial effects on both inflation and jobs. Two examples will illustrate what I mean. We have read. in. the papers, I believe either tOday Or yesterday, that our detente partr~e~r, the Soviet Union, is in the market again for food. And, of course~th~ U.S.S.R. will be obtaining our food at the market~ price, which is a pretty low price. They are short of foo& that is whSr they are here and they know that our export and. dOniestie food prices are the same. When we were short of petroleum products during the Arab em- `barge, the Soviets did make available to us some petroleum products, `~iit at the price of $24.17 per barrel at a time when the average price for these products was somewhat over only $10. So~ they obviously took advantage of our.needs and have done some really good trading. Ann, it seems to me, that perhaps somewhere in~the bill we should l~ave son~e provisions that combine our own trading strengths to avoid this kind of double-barreled trade weaknesses; that we buy high when we are short and we sell low when they are short. . The second illustration I want to make is this problem of indexing, Mr. chairman. The CHAIRMAN. I might just interrupt-what you are saying is that when ~the Soviets trade with us they do not trade like they love us. ~1~r: SCHULMAN.. Yes; they trade like they are capitalists and we are n&b~ thl~d~ it always surprises me; The second illustration, Mr. Chairman, is that of indexing which we have heard so much about. NOw, if you tak~ a look at the data, and they will be in my statement, you will find that in the case of Iran, the prices that Iran paid for imports over the last 16 years increased about 74 percent; which means that if they wanted to recover this PAGENO="0353" 351 increased price level b~ the price o~ oil, they would have only receiveiL $1.55 in. revenue instead of $9.38 in revenue that they did receive. So,, that is a far higher figure than merely recovering the cost of inflation.~ Now, when iii say $9.38 revenue, that is not what I mean by postedi price. I am speaking about revenue to the Government. To this~ amount, you have to add profit, transportation, cost of production,~ taxes, things like that in order to arrive at the posted price. But this~ is what they received, $9.~38 in income from the posted price of $12~ but only $1.55~ would have matched all, the import price increases ~ Iran from 1958 through 1974. In the ease of Venezuela, the price level for the imports that they paid for increased over the same 16 year period by 106 percent whicl means Venezuela should have received only $2.06 instead of the $&6~ that they did receive. Now, at the same time, it is kind of interesting to see that Tram, th~ same country which overcharged us for oil by more than 500 percent~ last year, received 61 percent of its total food supply from the TJmitedi States. I do not have to go into industrial products, machinery, or arms purchases of which we supplied a very significant proportion of Iran's needs. ~ we dO~ have pr9d~iw~ts,J anag~a4to ~see, that QPEC c~n~trie~ want and are willing to pay for. The question is, can we use th~W m~eds for our technology and products in some way to help us in oar pwn energy situation? And the third point I would like to mention and discuss briefly i~ this. Are the incentives in the bill for energy conversion adequate audi can they be improved and if so, how? I will just take a few minutes~ to go ir~to these matters. Now, ~i~ing the past ye~u~thi~ ~oipini~tee ha~ heard and othç~s h~ye~ hë~ard, many discussion~o1 how unemployment an~ inflation ha~rebe~i~ caused by the high pnce of~in t~d oil Tb~e i~a~ i ~p~tly ~eleas~c1 a congressional budget document which went into this subjeet. There~ also was the analysis made by the Chase Econometric Assuciate~ fo~r the New York Times which was published in the Times and whida indicated the e~ects both on employment and inflation of the prn'~ posed $4 increase scheduled by OPEC for October and on d~coritroI äf old oil prices which only serves~ to increase the price of off as~weT~t as resulting in higher inflation and unemployment unies~ speei~I measures to prevent this are taken. The recent report on decontroiby Representative Dingell of the House Committee on Interstate audi Foreign Commerce confirms some of these findings. The point tf~at is often forgotten is this; that in the United States where we enj~crjr high wages and a high standard of living we have always been energy intensive in industry. We may call it wasteful, that is true, but ii~ order to compete in the world market we always maxi~nized' energy~ use in our industrial processe~ so as to req~ir~ ~qwer ta~or iii qrd'~ t~ coidpet~ siicces~fuily~tb~Qa~. Wehave~been abl~e to db that fôr'm~ ye~rs~b~ using lots of en~ergy. T~ the extent, theref~ra, tl'ia~ thepi~i~ of oil goes up. or the price of ener~y~goes up; we become~fess co~pe~ti~ tive in the worldmarket and we will lose iobs and business; * That is why, again~ I feel this committee is very unique iii that i1~ ~an consider the whole problem as a totality rather than ih~lii~s audi pieces. PAGENO="0354" The questioz~. is, how ~o you tral3slate this, in a few minutes int~ recommendations to serve the ~oals that 1 have just mentioned ~ Well, it seems very clear that one of the greatest pos~tive incentives ~or oil operations abroad~ rather than here in the United States, in Louisiana and New England, including builçling needed refineries as was ine~ntioned earlier, has been the tremendous tax incentives, if you will, whipli are given if oil is produced abroad. Now, it turns out that most, of the OPEC nations are assuming a larger ownership role in their own oilfields. In other words, they ~re ~`uying control, or nationalizing in some eases, American properties. ~&nd so what do we find ~ We find that buyback oii-buyback oil is ~he Oil that U.S. oil companies. mu~t buy back fi~orn the OPEC host na~ tions-could very well be treated, because there is nothing in the bill tl~at prevents~ it, as a tax credit, çlol~ai for dollar, by virtue of an IRS ruling, which Senator Chi4rc'h has si~ggested is being requested. Just as the ruling which d~anged i~o~'a1:ty pa~ments to tax credits j~qr foreign income taxes l~ck ir~ 1~5O, a~ Assistant Secretary of State George Mc~Øe testWed last year greaf~y increased incentives for for-. eign oil operations~ so will a bilyhack' oil ta± credit. As you know, the i9~O ruling shifte~I a tremen,d~u~ amoupt of activity and exploration from domestic operationS to foreign operations This is the source of ~ueh, of oqr problems with OPEC. If w~ r~alIy want to Tedure Our dependerice oil OPEC and if'we ieallv want to `aid domestic oil exp1~o~ation and oil reftnerie% it seeths to pie clear that we could very s~mpl~7 ~diift those incentiveS to do me~tic industr~v mather thai± to activities abrciad The se~ond i~this. We ilow pi~ovlde `investMent ~uar~Mee~, thr~ughi the, Overse~as Pi~ivatp Invest~nment Corporation, "to' `projects `over~as, but not to donie~tic oil operat~oris The gentlethait from Louisiana who `testified' earlier ulldiiig~ `~ fi~ier~ hi `LpuIsi*na i~y~lose i~y if he ~E~es~ not ~et crude oil ttt tIle pt~Oper price He has no nsl~ from patn*ialization Thit if you bn4l~ the refinery abrdad iron ~ui get OPTO ~uaiant~e$ `igainst Iqss~ ~ioth natipnalizatlon or certain ether risks And the question iS Wh~V~ T~ eei~a1~y if we want to discourage overseas oil investment Since we are talkmg about equity, why do ~u~e not provide ~t leaSt the s~ii~e kind' of treatment for' `dom'es~ic ~il `ii~$tment ~ Or better Vet, if we are trying t~ reduce `the antou'nt of ithrestMèpt ~1n~'Oil ubr~ad and ódnve~ `it `into investment he~e, why do ~ e not lust elpninate OPIC guar'ifltees for oil Operations throad ~ I ha\re in mind'the c~se ofLu?~bya, for example which natiomahzed the property of Mobil Oil and vhç!bln ~ mOnth later Mobil announced a $300 million additional ini~estmetit They do not lose arnrthhrig If ~he compensatiofi is not adec~uatp, OP~Q picks up the tab I am ~urc you' want to ~oAsi~dOr' whè,theF 6i*nOt'thatls the `propet~ th~ng'to `dO ifl. `the current s5tuatiOn th~t ~ `h~e. `` Finally, we also have the Export~I~pport Bank *hich provides low-. cost lo&ns f~t Operations abroad. `Should this be given for oiliopera~ ti~ns abroad ?` D~mes~ie in~i~sti~ycloes not get it. You heard testimoiiy this ,n4orning about tills gentl~epi~n from ~opisiana'wl'~o had to borro~~ ~3OO million to build a refttiery Now he does not get the low-.cost lOans that are' available `from `E~*ithb~nk If' ~rou build etpiipment PAGENO="0355" 353 abroad. It just seems to me, you may want to consider whether that is proper. With respect to the incentjves-I ~ertainly think it is quite wise to provide incentives in the bill for all ddm~ti~ Irohpëtr~letun sources. B1it t~hey should not be limited to the energy alternatives listed hi the bill. The incentives ought to be extended to ~uch bther alternathtes as geothermal energy and nuclear energy. Gdotherinal enex~gy call probably be available almost anywhere in the world at deep depths. According to sOme data that NASA has obtained fr~ffii the Apollo lunar surface experiments that were described at the Houston lunar science meeting that I attended in ~1arch 1973. Geothermal energy may possibly be gravitational in origin which is generated as various celestial bOdi~s move through space. You get earthquakes and movèthents of the crust Which generat~ frictioual energy and heat. rilkerefoFe, deep driliihg t~chniqu~s ou~ht ~o have some incentive consideration in the bi1l-n~t only fo~ oil but f~r geothermal enei~gy. Nuclear energy is not ru,ehMöl~ed ahywhere ir~ the bill ~thd it seeii~$ to me that it should also be inchided f Or slthllar iftcentiv~ treatnieiit. There areother ideas for alternate energy sources. It seer~s to me *e shordd not preclude them by simply not specifically mentioning theth in the bill. Let me mention ~ possible e~athple. It may well he that we can grow oil as a crop. When oil Was cheap this approach was not economically feasible but there ~re ways to convert agricultural prod- ucts and agricultural wastes into other organic compounds similar to petroleum. It is a niatter of ecohomics, it ha~ not beeh loOked into. But, do you want to encoilnige that kind of thinking. It is something to consider. I know my tithe is up and it iC late so I want to cqnclud~. The CHAIRMA~. Sir, if I might interrupt ~ou just for a moment ~ I am sure you, have given some thought to it but I have tob and r ani sure you will find that ~oti will make more money doing it th~ otliei~ way around; converting petroleum into food. Senator GRAVEL. It is five calories to one, five calories caloric count for one unit of food. rthat is what we are putting in now. The CHAIRMAN. I think you will find ~ou will make a lot more money if you convert petroleum into food. Mr. S~HULMAN. That is true. The CHAIRMAN. Thah you will, if you convert food into petroleum. Mr. SOHULMAN. Well, what I had in mind, obviously must be simple and cheap. Th~ CHAIRMAN. Right now they are still making nioney making fertilizer out of petroleum. Mr. SCHULMAN. I know. You are absoTutely right, Mr. Chairman. What I had in mind was simnly taking agri~ultural matter co~ntain- ng carbohydrates material and treating it with a digestive organism like cellulomonas which converts it into smaller organic compounds. If you do this in the absence of air you do get. some hydrocarbons. Tn the future, perhaps, iE ~ are cut off again from foreb~n oil and if we do not have the petroleum we need, that might well become a new source. PAGENO="0356" 3Z~4 You know, this is a very big poker game that we are all playing here. `J~he United States is dealing with OPEC countries which have ~reatly increased the price of oil and caused very high inflation in the tjnited States and around the world. Earlier you have heard of the tremendous increases in the cost of a ref1n~ry, the tremendous increasG in the cost of a coal mine and everything else. And the reason for this, Mr. Chairman, is, to an extent, not realized yet that since the price of ?Qil, in effect, is maintained by the cartel, ~t has caused the price 0± ~everything else to rise to what I call its equivalent in value to oil. Now, the equivalent value to oil of everything, including clothes, Ihousewares, food1 industrial prodttcts~, and so on is a 400 to 500 per- ~cent increase. This is essentially the excess OPEC oil price over the ~index price, as in the Iran-Venezuela case. So we are going to have a tremendous increase in prices which we are now seeing everywhere. :Phosphate fertilizer, as an example, has already risen more than 150 percent in price since 1973. Unless we can bring counter pressure to bear by using our strength in trade and aid, food, arms assistance, technology, and so on, to bring the price down, our prices will continue pto rise until they haye reached 400 to 5Q0 percent of the 1973 levels. If ~.our strengths in these areas are used as bargaining chips, we won't need ithe cumbersome quota system and licensing system to which the cham- ~ber of comerce and others have objected. I suggest, in lieu of that~ that there be a Petroleum Import Admin- ~stration of some kind at the Cabinet level, which can deal with the OPEC Qountries for oil needed by the United $tates. We should have ~authority to deny or to grant access to American food, trade, ma- chinery, arms assistance, and so on, in order to be,in a strong position to get a decent deal at lower prices for the United States. There. is a tremendous gap between the true value of oil, based on equivalent prices with other materials and the . actual price. If we do ~not succeed in getting oil prices down to its real value, the actual price .4f everything else is going to ri~e to its equivalent level with oil, which is 400 to 500 percent of the prices in existence in October of 1973. This could occur slowly or quickly, depending on whether th~ goods in ques- tion are in international trade or TIot. But they will tend to rise. Thus, there is much at stake. If we succeed in this, then decontrol of domestic ~oil will not result in harmful price increases because the OPEC level will be lower. I'd like to conclude with this story of the strange poker game which we are playing with OPEC. We have a hand of four aces and OPEC has three kings, so we think we win. But OPEC shows us three kings rand a knife, the knife being the threat of an oil embargo and says no you are wrong, we win. So we fearfully look at the three kings and the knife and we say, ~`You are right, you do win." And then realizing our poor situation, we ~xsk, "How come you are always so lucky?" And that is the trouble. We have four aces. And yet we let three kn~gs, three tens, or even a pair of duces beat us because we do not use ~our full strengths in trade, technology, arms assistance and food to- ~ether as a unit to get the energy access that we want at reasonable vrices. PAGENO="0357" 355 Thank you, Mr. Chairman, I appreciate this opportunity. I hope I have not taken too long. [The prepared statement and a biography of Dr. Sch~ilma~n, and newspaper articles by Dr. Schulman follow:] TESTIMONY or Dn. FRED SCII1~LMAN, TRADE-ENERGY INFORMATION CEN'mB, WASWNGT0N, D.C. I. INTRODUCTION Mr. Chairmanand Members of the Committee: I appreciate this opportunity to present to this distinguished Committee my views on the Energy Conservation and Conservation bilL As the energy crisis continues its destructive course, with its growing impact on industry, our standard of living, our foreign policy and our financial, social and political stability, it is clear that this Committee can perform a much needed service to the nation by clarifying the present confusion on energy policy. Because of your extensive responsibilities in a number of interrelated areas and your incisive hearings during recent months, on trade legislation, tax polIc~y and energy matters, the Committee on Finance has a unlçjlie opportunity to use its eon- ~iderable powers to provide effective energy legislation which would reduce or eliminate the present heavy-handed OPEC impact on our jobs, our prices and our ability to c~onduct an independent blackmail-tree foreign policy. Obviously, these are complex interrelated subjects which cannot be fully treated here, but they must be understood If both the public and industry are to support the sacrifiCes expected of them and the measures proposed in the bill or their modifidation. Relevant details on some of these matters are dis- cussed in the two Capitol lull Forum articles which are attached to this state- inent and they will nOt be repeated here. :i. RECOMMENEDED CEAIcGIF5 ~OR rOREIGN ~OIL OPRRATION5 The proposed Energy Conservation and Conservation Act of 1975 (11R6860) contains many desirable features. But If the aim of the bill is to reduce U.S. dependence on imported oil as quickly as possible, then other provisions are needed, and they are needed fast. At present, under current law and regula- tions, it is just too prpfitable to produce OPEC oil and to import it into the United States. The present bill does not remedy this fundamental defect of energy policy. This defect can, however, be effectively eliminated by this Cpm- mittee by recommending certain changes, affecting overseas operations, in the mx laws, investment credits, low cost Export-Import Bank loans and federal OverSeas Pritate Investment Corporation (OPIC) guarantees. First, in order to encourage domestic oil over OPEC oil, the bill should specifi- cally exclude U.S. tax credits for both foreign taxes in lieu of royaitjes and i~or oil bought by U.S. international oil companies from the equity shares of il fields o4vned by host OPEC countries. This equity ownership by OPEC governments is increasing rapidly by negotiation of participation agreements and by nationalization. Saudi Arabia now owns 60% of ARAMCO and is negotiat- mgfor a full takeover of 100%. The American partners of ARAMCO buy back this oil, usually below market price. These tax credits last year amounted to .,~16 billion. If these credits are not excluded for "buyback oil", they could -imount to $40-$50 billion in credits against U.S. income taxes. Surely, the Committee is opposed to thi~ non-congressionally approved giveaway and to the distortion it creates against domestic oil production. Second, there should be language in the bill which excludes the Overseas i~rivate Investment Corporation and the Export-Import Bank from making low cost loans or guarantees for foreign oil operations. Surely, we want to assist domestic oil operations; not subsidize foreign oil! Such a provision might have diverted Mobil 011, whose investments In Libya were nationalized, into invest- ing its money in U.S. oil operations instead of putting another $300 million Into additional oil exploration inside Libya. The importance of such a provision in the bill Is obvious. Finally, the Com- mittee may wish to consider adding authority in the bill for the Treasury to recover uevenue lost as a result of private IRS tax rulings which, without an Act of Congress, have the effect of significantly changing tax laws affecting PAGENO="0358" ~ii~~h . anth~i~if~y. ~oU~1 ~~ei~t t1~ke. i~~nee q3~ . impo1't*u~t tax. rulings affecting energy and Lax policy without ~ougressionaI dej.at~ similar ±o the landmark private IRS ~ ruling in 195~? which, Withoht ~ sauCtiotIr allO~ed~ ro~altie~ then ~iaid~to foréi~r~ers ftF use of oil ithid~, to be treated for U.S. income tax purposes as, foreign taxes, crethtalale dollar for dollar, agajust U.S. income taxes. This important ruling eansed scores of US. oil companies to~hift overseas their Irlajor futUre actttity because in the Uuited ~ royait4es are not creditable against inconie taxes~ Not only could large profits be made from cheap mid-eastern oil, but these profits could be kept or reinvested over- seas with little or no U.S. income taxen. As a result, great efforts were spent by the oil companies to develop large markets for oil in Europe and Japan and the societies of these areas were trkn~ftrtued frtnn a 1nrgei~ n~n-Untomotive ~ticiety in tU5t~ iilto tt largely autcUnotive snd 1neehath4ed~ ~ot1ety~hy 1900. Thus withiMitCongres~tonal d~lb~lte or a~ii~ro4al of the issues invol*~efi, this privateita~ ruIin~' l5I&1 e f~iundUtidh for d~tUlo~pl1ng foteign tUsfead of dôn~st1e~oil gouroes, We art ~tfl paying dtarly ftr~thi~ mistake in policy. in, EdL~ or sPudiAb TuADu nrPREDnWrATivE The United States is prtbnbly the werId~a ~trouges~ e~~po~nic a'nd~ t~ch- nological iiower. It is important net to frag~r~eilt lu tl4~. bill; the combtaoct strength of the UtUted. States ip ti'ade4 teoliwdegy aud agriculture so that this unified strcngt~ can be used as an i~npogt~i~t ~l~piei~t ~f ~nergy poU~y. clearly, th~ need for American k~ew~how, izi~ustria1 ~ods; a~n~s aild food cap, if w~ choose4 be used to ~sure access to Q~EC ~oil at, reasonable p~hes. This cau he accomplished, While at. the same thpe ~~~eting the ~qals ~f peducing oil imports asset forth intbis bill~ by ye~ng ilm the iSpeciai 1~ade Rqpiçesentafiye iSTE), exclusive power to .jmport~ all ,for~eigu petrolemn for auction to the ~doniestic petrohelin industry:. ~he ~T1~ ~1m~eady has, the cabinet l~ye'l statue he will need to equal that of the OPEC n~ste~s he will have to deal with. If necessary, a Petroleum Import Administration could be created to assist the Special Trade J~epresentative. Sucin an approach would dim te the need for an extensive licensing and quota system to control imports and would simplify ~dthini~tEatiou of~ the rth~ram by eliminatiOn of most hearings, d~cis10ns and appetls of licCuse and quota proceedings. Significantly; it centralizes American buying power fOr negotittlons with th~ OPEC oil Cartel ahdcan offer the carrot of trade, technology, food, and arms, or the stick of withholding tbem~ This ap~rOUch can brihg down the price of OPEC oh to levels closer to its real valfie; a goM li~iportant to the American ~*orkCr, businessman and public. ~For eicain~lt, the Shah of Iran has often linked the price~of OPEC oil with those `o~ goOdt iaibortM by Iran. What are the faCts? During the peni~d 1958 through iwr4, impOrtprlces in Iran' roSe 74%. Iran therefore wouldrreed to receive only ~1.55 per barrel in rader[ue to achIeve equa1lt~ In price, not the exorbitant $~.38 per barrOl itt revenue it received last year, Similarly, the prices of goods iffiptrted by Venezuela during the same 16 year period rose 106%. In order 10 achieve Indexing of oil with imported goods, Vdneaucla therefore Would heed to receive ohly $2.06 per barrel of oil, not the $8.6~ it did receive. Recent data from thO International ~an'k for Reconstruction and Development show simIlar trends. If the OPEO prices are allowed to remain at present high levels, then other goods will tise to seek itS real "equivalent value to oil." This means inflation levels rising to 400-500% of 1973~ Furthermoie, tho nrice Of oil affe~t~ aite~native futlo like coal and natural gas. `For each dollar `per barrel rise in oil pfices the price of a ton of coal will increase by about $4 ~er ton and natural gas prices will increase b~ about lTd per thousand cubic feet. Studies by Chase ~eonometric Associates and by others have shOwn the sttong impact of oil prices on employment and inflation~ According to data published by the Subcommittee on Energy and Power of the Rouse Committee on Interstate and Foreign Commerce, a rise of $4 per barrel in the OPEC oil price, now sCheduled for OCtobOr, will result in direct losseS ~f 60,000 homes and 430,000 car sales. Direct unemployment will rise by 280,000 pefsons. The cobsumet price index will rise an addltionth' 1.8% hilt the whole~a1e price index will rise faster, climbing to an additional 128% within a yeSr and to 18.6% within tfiro yeats. In other words, Industry will be hardest hit first, but consumers will feel the pinch of increased OPEC-Inflation some months later. When these effe~t~ ripple throfigh the economy and if they are added to the effects PAGENO="0359" ~357 of decontro11~d dOm~?stiC oil ~inder ~iresent drnid1t1on~ ~f Adquiescence to OPEC, we can expect that another millioti Americans could b~ put out of work. The suggested approach ~ati avoid this catastro~he. Sin~e OPEC oil is now selling far above its real value, the ~p~ciaJ Ti~ade Representative would be in a strong position to bargain ~v~ith OPEC to reduce its' prices in exchange for access to reason~bIy priced needed U.S. goods and technology. Even decontrol of old tiomestic bit woutd not cause the ~conoinic mischief nOw feared because lower OPUC oil prices would serve ~s ~r ceiling ~ ~qmest~c p11. A price of $7 to $8 is i~ot out of t1~p .q~estion if t1~e ~TR l~ giv~i tlte ~Omb~~ped autbO~ity desoribeq earlier. The 5~R could e~ijraU~e situations like o~fr Fecent pu~lrnse.pf oil froro the US~R. at high prjcps and pur sale to the Soyi~ts of h5w priced Mner~an grain. Records indictite ~hnt ~in~ the Arab oil ernb~rgp, when wr needed till, t~'e Soviets sold pP~14i14~ ~roducts to us at a~ avex~age price of $~4.i9 %vhen the aveiage price o1~ all ip~poFte~l pgt~Qleum pr'~o4po~s ~v~is $1O.~7, however, the VSSU canget our lq~y dprne~tic rpark\e~ price for the grain it poeds pow b~c~ause it can deal WivaleIy with our paiu oomp~r4es aud lt aoes ~iot have to make a (~ucl~pro-c1uo for pit as it wpiild if it ha~I to deal ~ the ~pe~ia1 Trade Representatiye. It is important to note that the S1~i ~pil1d use as ~a~gain- ipg points fpr OPEC, tliefacts that OPEC countries rpcelke Ia~ge ~e~eeh~ages of their food, iudustrial products and iirms from Americli; Thus, the U.S. ~l~~pflecl iran ja,st y~a~ with ~ qf it~ fopd imports aiicl fi4% of ~ts arms impPrts. Saudi 4rabi~ fe~ejyeU 2b70 qfits foo4 jn~p~rts an4 Ø~%. of its ~ ft~ppi tJie Uliited States. At the same time, because of the O?14~C o~ price f~ise of iOO%, tile ne~ativ(L,S. trade bai~nee with OPE~J rpse,~rom a deticit, of $0.9 billion in I~73 to ~t \vho~ph~g delicit of$$~9 billion in ~974. ~Y. CONCLV5~ØNS An extensive ~nalysis of the energy crisis by Profes~or Edward W. Eri~k~on, Leonard Wavernlrth, and M. A. Adelman and 38 other ~cbolar~, shows that thO sudce~s ~if the OI~FC ext ca~te1 s~as due 1arge~y ~o au Inteitlatlonal i!alltite of ~lohcy b'~ fhe Western irille~t~rial nrttlbns I believe that this Oblnnptte~ cxii help Festere the tTnifo~1 ~tes to its fó~kxuOr 1Jos&tioh hf ~1eitt1é~sh1p Ip eiier~T ~~ol1cy by ef~ectiveiy mee~hug the rh~1lenge of thd (WEC. nations. !1~he uiioUif~tioiis to lihoSho *hich I hhte shggested are aimed t~t Uxat kbaI. S Thank ~idu for the privelege thtlpp~uir. S ~iohaxrn~ OF t~n. P~I1~ g0~ LiFA~ Dr, Schulman h&hi5 the Ph~D. äeg9ee in chemistry frOm GeoFgethwn TlflF~Or~1ty and studied nuclear engineering at the University of California at `Berkdley: He baa bOon in the enèrg~ fléld for thoFe than 30 jiea~ and has piibikihed extensively. Dr. Schulinan tvas ChiOf of the Nucloar Systems progrhrh áONA~SA for snore than 10 ~eass, !tIteii ~as appothted Special `As~i~taht to the Matiager Cf the thergecl joint AEC~NASA Spade Nuclear ~y~tbixis Divts1~n, tud i)eleft in ~July 1013 tO~beConm an lndepOndetlt chnspltant Dr. kehuhuan aetvett xiii power and propultilon systems coordimttor for theChiéf of Ndt~a1 Oi~erd~ione (Development) and ~kks Technical Directorof H. L. `JOhnston, Itlc., a firm which speOialtaed In cF~O~entd research on hythogen f~ir rocket Onfi aeronhtlticai iip~Ii~ Cations~ ~He received (h~onp Achievement A~'ards from NASA for contribnt1oti~ to the Dynamic Spade POwer Systems Program ahd the Apollo Lunfir Suiftlc~ ithpcrltnChts Program and was commended for perfotinduice as a in0tnber oil the United States TeChnical Teams Iii Fiance ind Gdrthany in cOnnectiOn xs~ith energy research. Dr. Schulman is a Navy veterfin of World W~r II, sprving in the Pacific ai~ a Lt. (jg) and holds 5 battle stars. Ji)r. Schulman was a member of the Power Systems Technical Committee of the American Institute of Aeronautics and Astronautics for two terms arid is prvOently a fellow of the Washington Academy Of Scieheos as well as a methber o1~ both the AIAA and the American dhemicdl Society. He has Contributed nipye than 35 articles to journals, books, and technical society and citic tunCtiops and has been acthte in the field of education, teaching part-time at a nthhbei of institutions, CurrOntly, Dr. Schulman holds a visiting ProfessOrship at Geo~è Washington University and Is a fouridOr of the Trade-Energy flifotniation Center of Washington, D.C. He is married to the former Madelynne Gross of Mhiuea~olis, ?d[ithi. and they have four children. Dr. Schulman hks been intOrOsted in tiational needs aM priorities for many years. S PAGENO="0360" 358 ,[B'rom the Capitol Hill 13'orum1 May 12, 1975) Fom~iq~i PoLICY I~FLuz*cnn By QIL CoMy~NIEs (t~y Dr. Fred ~chulman) (t~r. Schu~inan is with the Trade-Energy Information Center) High prices, unemployment, high interest rates and bankruftcies, a weakened dollar, and political instability are all fruits of the energy Situation in the United States today. With all these miseries combining into the worst recession since the depression of the 1930s, you would think that legislative aëtion would ~e forth- coming in a serious attempt' to overcome sOme of them. A cursory look at the breakneck pace of current congressional activity would show that you would not be wror~g. This article will discuss briefly some energy legislation, with a view to identifying certain important aspects suitable for further discussion and possible action by those in a position to do so. Other aspects o~ energy policy and related tax legislation will be covered in subsequent articles. Last year during extensive hearings on multitiational corporations, Senator Prank Church identified ~Several areas of legislative oversight that may need correction. The Atheilcan oil industry not only controls all petroleum products, but also owns 72 percent of the natural gas, 27 percent of the coal, and 52 percent of the uranium in thO United States. Such fl~ure~ spell real vertical control of energy resources in this country. Is thitidesirable from either a ~ongressiona1 or a consumer point of view? Dur~ng the recession year of 1974, when unemployment nearly doubled, the next profits of the oil industry Increased 16't percent to $1~3 billion from $6 billion in 1973. From foreign crude oil operations alone, net income, after deducting oil depletion allowances Of 22 percent, amountOd to $2.1 billion. But foreign tax credits, never voted by Congress, amounted to $2 billion, leaving a tax payable to the United States of only $97 million, or less than five percent. As former Assistant Secretary of State George C. MeGhee testified, these' tax credits where created through the mechanism of a private Ills ruling in 1950 which allowed royalties then paid to fQrelgners for use of oil lands to be treated for US income tax purposes as foreign income taxes, creditable dollar for dollar, against US income taxes. This important ruljng caused ~cores of American oil companies to shift the emphasis of their operations overseas because In the United States, royalties are not creditable against income taxes. Thus we laid the basis for developing overseas rather than domestic oil sources, and we all are paying dearly for this mistake in policy. It is quite possible that unless effective legislative prohibitions are enacted against future private~ tax policy rulinga which could again bypass Congress, new tax credits for "buyback" oil from the Oil Producing and Exporting Conn~ tries (OPEC) may be allowed. In amount, these credits would dwarf the loss of the oil depletion allowance, thereby defeating the intent of Congress In passing the Tax Reduction Act of 1975. Such a quiet gambit would create an unlütended new bonanza for the oil companies. Language on page 43 of the Conference Report of March 26,. 1975 on the Tax Reduction Act of 1975 is unclear and may provide the needed loophole for such a ruling. This section says that certain payments for foreign oil purchases cannot be considered for tax credits, if the taxpayer has no economic interest in the oil and if the purchase price is not at a fair market price. Won't the oil companies interpret this language to their own advantage and use it to create another unintended giveaway? The interests of the public would be served by clarifying this language to better conform to congressional intent and by closing this potential loophole. At a time when imports of exorbitantly-priced OPEC oil are causing unprece- dented unemployment and inflation In the United States, there is no effective pro- gram to substitute alternative domestic fuels such as coal, nuclear power, or oil-shale. It is u~fort~nately true that 19 of the 21 electric utilities which had converted from oil to coal during the Arab oil embargo have shifted back to oil, Why? Lack of incentives, environmental restrictions, or what? Two of the three oil companies involved in preparing for oil shale production have stopped their development work. We all know that nuclear power is being delayed for a variety of regulatory, mechanical, safety, and environmental reasons. Yet nuclear power currently generates, electricity at a rate equivalent to total imports of Arab oiL Much more power could be generated safely-and without the loss of jobs that OPEC oil causes-if we made the effort. Part of the answer seems to be that PAGENO="0361" 359 under present tax and trade policies, the international oil companies së'Oih\ td' enjoy cozy relationships with both the Arab countries and the United States. John G. Sawhill, former Administrator of the Federal Energy Administratlom told a congressional committee that the oil industry exerts much more influence- in Washington than he had Imagined, and that he was surprised at the tremen~ dons number of oil industrey people here in Washington. Mr. Sawhill need not have been surprised. Back in 1953, a formerly top-secret memorandum to the' President through the National Security Council from the Secretaries of State, Defense, and Interior stated that "American oil operations are, for all practicil purposes, instruments of our foreign policy toward Middle East countries." rpj~ report used "national security" as the reason for secretly turning over key responsibilities for the conduct of American foreign policy, without congressional debate or approval, to the multinational Oil comj2anies. And so, far from being agents of the United States, during the oil embargo, when we really needed them, the oil companies were, in reality, agents of the host Arab countries-even to the extent of refusing to refuel American armed forces at the command of the late King Faisal. Thus, without congressional discussion of the national policy inter.' ests involved, the international oil companies proceeded to transform the back- ward Persian Gulf principalities into modern nation-states with the power to' reshape the policies of the free world against us. This occurred with a vengeanco' with the abandonment of the U.S. by all allies in Europe, except Portugal, during the October 1973 Arab-Israeli war and nuclear alert. It is interesting to speculate about the role of the congressionally unrestricted oil companies during the Suez Crisis of 1956. At the height of the crisis, Britisl~ Prime Minister Anthony Eden cabled President Eisenhower on September 6r 1956, saying that "if our assessment Is correct and theonly alternative to military' intervention is to allow Nasser's plans quietly to develop until this country and all Western Europe are held to ransom by Egypt acting at Eussia's behest, it seems our duty is plain. We have many times led Europe in the fight for freedom.~ It would be an ignoble end to our long history if we accepted to perish by de- grees." Well, the United States, against our own real interest, opposed the Britisb and saved Nasser. What was the influence of American companies with Arab oil concessions in forming this* policy? At any rate, less than two years later, Iraq fell, the Baghdad Pact collapsed, and the Soviet Union filled the power vacuum in the Middle East, gaining a network of military bases that today is drawn tightly across the oil-jugular vein of the West, It seems clear from this experi~ enco that Congress may well decide to put contraints in an appropriate bill to' insure Congressional consideration of all important policy-making decisions~ This would put Congress in partnerhip in energy matters as well as in foreign policy. Senate Bill 5. 505, relating to the creation of a petroleum import admin-~ istration, might well offer the opportunity. S. 505, whith was introduced by Senator Church, removes the multinational corporations from control over OPEC oil Imports by setting up a Federal Petro- leum Import Administration. Its goal is to redtice the power of the OPEG cartel over oil supply and prices by requiring sealed bids for all oil offered for import to the U.S. by, individual exporting nations. Oil companies, and others, are prohibited from importing oil. The goals of 5. 505 are clearly timely' subjects for congressional debate. Congress may well wish to consider upgrading the Federal Pertoleum Import Administrator to ministerial (cabinet) level in order to give him equal stature with, the OPEC ministers be will have to deal with. This can be done, for example, by removing him from the PEA and authority, and that Of the US Trade Negotiator, should be clearly defined and making the Administrator a Presidential Assistant with cabinet rank. IIi~ authority, and that of the US Trade Negotiator, should be clearly defined and separated. Specific authority to the Administrator should be considered to' enable him to deny American trade, investment, technology, and military assist- ance to those OPEC countries which refuse to participate in the US oil-import program. This authority is needed in order to provide necessary incentives foir OPEC narticipation. A further safeguard against future private tax policy rul- ings might be language to provide authority in the bill for the US Treasury' to recover all revenue lost from any private ruling which has the effect of chang-' in~r the tax laws without act of Congress. Strong remedies for deteriorating oil-induced world instability seem to bo' in order. According to the International Monetary Fund, the OPEC countries received, from oil exports in 1974, the fantastic Aladin-in-Wonderland sum of PAGENO="0362" 360 ,$i~3 bllli(gL ThiS caused a trade defi4~It in the itidi!istria]ized West amounting to $~67 biili~m. When it ~s remembered that a deficit of only $~L4 billion in ~972 ~f~4u1t~d in two devaluations of the VS dollar, the ef&~ct worldwide df ~ d~$~eit of $67 bwion can be seen to ~ be potantiafly calamitous to our weakened ~1~es apd ourmives. Fnrth~ar, Ii~nportation of whont $27 blilion worth of foretgi~ oji last year is equivalent to ~the loss of purchasing power supporting moi~e thàp fqqr nullwq Jobs. In other words, as all pro4uct~ seek to rise to their equltalent in yalue to OPEG cartel oU ~4O~3-5tfl~ percent), hi~at1on, liardshi~s and unem~ p1oyn~ent hecome the unwelcome gifts of the OPEC countries. It is, thèref~re, ~ipjte surprising that there are ineny who are hesitant ~bout talçing e~ectIve coupteraction. Why? ~`1naliy, the arrangements by Occiclential Petroleum, El Paso Natural Ga~ and others to explore and develop the Siberian oil and gas ~ie1ds are ep~iivalent to taking the Soviet side in the Sino-Soviet dispute. This is due to the fact that much of the territory is claimed by China. Obv&ensly this has enormous fore~gn- pqli~r implications which have never been prtaented or debated in Congress. The deciaion was basically made by the oil industry, as in the Arab countries, 1~ ~ooperatjon with the executive departtnents' only. Shnilar1y~ are there no imp,~gtant foreign-policy aspects of concern to Cuiig~ress in the ~ece~it decision to ship 1.4 millIon pounds of uranium oxide to the Soviet Uflion for tro~ssin~ Into enriched uranium intended for West Germany nncieai~ ~owër plants `1' It is time for n~ore ~ffecthre eo2igresslobal ~aa~t1olpatlon' It the 5t3king of npti~onnl dacisiots dealing with the~ related problems `of ~n'erg~ and tax peiicy~ Time is rupnlng out. [Frpip the Capitel ~jjl~ Foruni, ~une' 30, i9~] QPEC Bj~isp ~o~i ~oywsrq' (By I~r. Jl~rq4 ScIiphr~an) rftghey j41 j,wices . . will respit ip ~ ~ducti~n In prpi~oyp,ic gpawth, bA~Tmr tinemjcdovinent anj a ~optinijuig ~ rate pf ~$tt1o~ -Ipteyna~o~a1 ~coqow;s Report of thnPre~Ident, 1974~ , The Oii rrOduCii~ and Expqrtji~ Copqt~je~ (~E~) p1~a tQ in~reo~se tb~i; oil e~port pjke after ~pten~bej' 3~O to ~opi~ ~lj~5 p,e~ l~h~r~l. ~1wt th~ pp~ti~ tnte~, as th~ President's rp~O~t explains, is ~ threat tQ ~opr ~job YQUy sayipg~ and the eeenointc and socj~ll~e~lth pf the Thil~yd ~t~tes, A~t~op~~ tI~ re~tiqp- ship ~etpreen .es~caiatiqg o~l prjces ~nd. ca1~i~ig u1temp~Oyjnent ~i~s qppapent hi' early 1974, c~isting eeonolntc predjctjve mQ,del~ a~ê based ppon a price atructure which ~ no longer ~pplia~ble Howev~r~ the quadru~hn~ of cii prices- that the simpltaneoi~is dojb~in~ bf ~p~eip~ yqiept-bej~&~ ~p i~fld~rlyin~ etiology,. This yegy opr foreign fpei 1~l )~`ifl l~q $~5 )~i~on. `~o tji~ ~xt,ept tl~gt tjjjs awn, exceeds fair value. it renloves wealth ari4 jobs froth the United States iii ~ip~ nielnle am~pir~ts. For ~xai~wl,e, iipport ,pr~c~ `in Ij~n rose ~74 p~t~nt betwt~xt 1958 and 19Th. If oil I~evenues'~'ër,e to exactly mateh the inc~rea~e in iinpprp prices, TraIl would have reeeiye~ çply ~ pe~ harrej ~f oil last year inste~4 o~ ~he ,$~38 average actually thcelved. Sjpiilarly, anQtliej' O~C meyib~a, `~TenezIle1a, experiepeed qn avera~ ~jse ~qf ~06 perceijt ha iiiiport prices dpripg the same 16 gear period. I~ ~t were to ~hav~ tujjy recovered Its Import price ip- creases (iudex~ng), Vencauela ~ould ~ pe~ded to receive only $2,06 per barrel in 1974 Instead of tj~e ~$S.65 it ae~aI1y r~de~v~d, These ,Pgures represent excess payments over inde~tng to trap of 5~05 peRCept, a,nd to Venezuela of 3~9 percent. Theae are tra~ne ,ci~s~y iuippj~tan~ ~tgq~es, the sjgnificance of whieji is often missed wji~n estimatii~g tije harpjful effeyt~ Qf t~ae OPEC-cprtel price policy to the West. `Some general effects' on uneipployment, ln~qti~p an~ interest rates were given in my statement to the iJcq~e Ways aild ~teainl d~mniittee hearing on the President's 4utiiority to A4jqst Inlport5 of Petr~l~im in Januayy of this year, The price effects ripple tbroug~ the eptire ecenomy cqu~ing prige yises every- where as other goods seek t~ reach their "e~qnivalent value to oi~" wilieb. by OJ~EC action, now js in the 3~O-49~ per~ent incteaae range~ Thus many food ~rices have risen mere than 5O~ pérgex~t ~inee tije O~O price aetlops, despite plentiful, harvests. Coal costs t~ tjie, ~otQpiac El~etrjc Power Co. fa typical ei~iergy using utility) have risen 166 percent between September 1973 and Jan- uary 1~75. Cumulative effects of the rapidly rising costs of doing business have PAGENO="0363" 361 been devastating to small business, minority eiithrprise, and jobs for youths. A. J~rther .rise ot four dollars pnr bathn'eI in the OPi±~O ~U price~ now seheduled ~ot `atter September 30, will result in the threct loss ol! an additional 12t~,OO4~ jobs~ according to a recent study by Cbase Econonietrj~ Associates for the NeW york rfjfllCs Jf these figures are extrapolated to the President's plan to decontrol domestic oil, the resulting price rise will increase the net direct loss of jobs materials, credit, capital and labor which result from such price Increases, the overall loss of jobs caxi eularge the ttnemployrnen~ rolls by another mil1io~ Aihericans. The monetary outho s to OPEC from the Western World now exceed $6~ billion a year and may continue to draja our resources inderihitely. In eon~ trast, the Marshall Plan, which revitalised a devastated continent cost only $9.7 billion during itS three years. Also, Out `$25 billion outflow to OPEC i~ equal to the cost of our entire national rCsearch and development efforts botit private and govefninentaI~ which affects our jobs, national securil y, and heaith~ 1~inalIy, this $25 billion translates directly into jobs. In testimony before the Joint Economic Committee, Arthur Burns proposed a $4 billion program to generate SOb,000 jobs. Extrapolating the $25 billion outflow is equivalent to the loss of 5 million jObs. It is tb coincidence flint OPEC relaled unenip1oym~nf has now reached the highest levels sillce the Great I)epression. Betwe~n April 1974 and May 1975, uneniployrrtent climbed from 4.8 percisit to 9.2 percent-~ an additional 4.2 inilIi~n people uneniployed-and it iS still climbing. The $25 billion pumnp~d' from ohr economy represents a signifies nt portion of our GNP. But this massive drain of revenue has side effects wh-i~h coni- pound- and even outweigh-the original damnicge to the' economy sinCe Caclt lost job eventually results in fufth-er layoffs. Thus the $2~ billion is merely a brise from which to calculate the tfile ecoflomiC COst of monopolistic oil pricing. Similarly, the $75 bliliod spbnt by our trading partners on oil imports not ~!rnly weakens their economies but also has important negative implicationS for the American ecotiomr~y. OPEC dependency requires them to relinqaish a higher share of their own GNP. mm ecOnomic outcome is readily ap~larent. The reduction in purchasing po~ver lowers their demand for our export com~ niuditios. But a drop in Americrin Cxpom~ts and the liciverse cohsequences o~ the multiplier effect imply still further unemployment. higher oil prices also diminish the competitiveness of our export sector in iriternational trade. Because of America's traditional abundance of ra* mate- ririls, amid high wages, production in the ITS is much more fiiOl-intehsive than in other industrialized nations. IncfeaSes in oil ptices, therefore, have a more Selective harmful impact on total production coSts in the United States. Proflt~ are squeezed and sales and jobs are lost to foreign producers wireri energy costs are increased, Recycling of oil dollars to the industrial countries is mistakenly touted as a 9etropanacea. But fecycting~ prhmtarit~ mitlgSteS to a quesfiondille extent only some of I he balance-of-payments deficit, but not- the loss of inCo~t' rintl employment. If the recycled OPEC wealth can be, fully invested in long term compatible enterprise, then tlte multiplier ~ffect can be redu~ed but the $25 billion in goods and services are irrevocably lost, and the net effect- is still harmful to the US economy. The recycling decisions and policitieS, ffiOreov~r, rdst exclusively with OPEQ rather than with time Western nations. Such policies are suspect. OPEC may distribute funds in a way which maximizes its revenues, furthers ifs- political goals and harms the world economy. Already, the industrial labor block has had to resort to a $25 billion "safety net" to bail out countries with balance of payments difficulties. The stronger economies, notably West Germany end th~ ITS, must bear the major part of this burden with consequent weakening of our banking system jue to transfer of assets abroad. Besides lending to substantial income transfers from the US, precipitous oil price changes throw the economy into disequilibrium and cause massive dis- locations. Developing new, fuel-efficient technology, depreciating present equip- ment and replacing it with less fuel-intensive processes entails additional expenditures over a protracted period. Meanwhile, the inability of industry and labor to accommodate effectively to new oil realities results in persistent unemployment. The auto industry, for instance, present1~ suffers from its com- plementary relationship to gasoline. When consumers contemplate auto pur- chases, they weigh both operating and capital costs before making a decision~ PAGENO="0364" 362 ~Lncreases in petroleum prices affect the total cost of motor vehicle ownership and therefore seriously alter buying patterns. The result ia hundreds of thou- sands of lay-offs. Rather than being diffused throughout the country, these losses are concentrated over the short term in a few communities, which are conse- quently unable to provide alternative employment. Implicit in the structure of our national economy is a finely-tuned balance among several key factors and commodity prices. An imbalance in one invari- ably induces wild oscillations in the others, Compounding the problem is the expectation that OPEC's example will Inevitably spawn addition~il monopolistic cartels. Indeed, there is increasing evidence that OPEC is financially and politi- Lally supportive of such formations. Accepting the central thesis that a cause and effect relationship does indeed exist between higher oil prices and higher unemployment, it is not likely that we shall realize a significant economic turnaround without affirmative remedial measures that would alter the underlying causality. The most direct cure for our current economic malaise is to face the OPEC challenge to US employment and prosperity. Surely we ought to better understand what is happening. The first steps to correct the OPEC-caused unemployment and inflation are to identify OPEC and its policties as harmful to the interests of the United States and to adopt export policies of our own designed to reduce OPEC's power to harm US and world economics. At the very least, availability of US food, arms, technology and industrial goods, and plants should be contingent upon reciprocal avail- ability to the US of OPEC oil at fair prices. Second, US energy policies should not be designed to support, or have the effect of supporting. OPEC high prices. US energy and tax laws should be strengthened and enforced. Tax benefits and credits, for OPEC operations should be removed. The Supreme Court gave Congress a powerful tool when it ruled recently that corporation executives are responsible for their firms acts- including violation of any laws. Thus US oil company executives now do OPEC's bidding at their own personal risk. It seems that Congress is now in a better position to take the leadership to provide effective countermeasures to OPEC's economic warfare. World economics, at the very least, availability of US food, arms, technology ~and industrial goods and plants should be contingent upon reciprocal avail- ~biIity to the US of OPEC oil at fair prices. To do less is to short change the ~American people. To do nothing is to invite OPEC to dictate the amount of unemployment and inflation in the United States. It is obvious that we can and should do better. S The CHAIRMAN. Thank you very much, sir. Senator GRAVEL. I have no questions, Mr. Chairman, thank you. The CHAIRMAN. Thank you very much. That concludes today's hearing. We will meet again at 10 o'clock on Monday. [Whereupon, at 4:10 p.m. the meeting was recessed, to reconvene at 10 o'clock a.m., Monday, July 14,1975.] PAGENO="0365" ENERGY CONSERVATION AND CONVERSION ACT OP 1975 MONDAY, JULY 14, 1975 11.5. SENATE, C0MMITnE ON FINANCE, Washington, D.C. The committee met, pursuant to notice, at 10 o'clock a.m., in room 2221, Dirksen Senate Office Building, Senator Russell B. Long (chairman) presiding. Present: Senators Long, Talmadge, Ribicoff, Byrd, ,Jr., of Vir- ginia, Nelson, Mondale, Gravel, 1-laskell, Curtis, Fannin, Hansen, Dole, Packwood, Roth, Jr., and Brock. The CHAIRMAN. The hearing will come to order. We are pleased to have the Secretary of the Treasury as our first witness this morning. Mr. Secretary, you have worked long and hard to move this Nation to- ward energy sufficiency. We will be pleased to hear what your views are on this bill, as to how this committee can make it something that would be more in line with what the administration would think might do the job. Would you please proceed in your own fashion. STATEMENT 0]? lION. WILLIAM E. SI1VXON, SECRETARY OP THE TREASURY Secretary SIMON. Thank you, Mr. Chairman. I appreciate the op- portunity to appear before you to comment on H.R. 6860, which you are now reviewing, and to discuss a number of other considerations relating to the development of our energy policy. At the outset, I would like to reemphasize the urgent need to es- tablish a national energy policy and a comprehensive and integrated legislative program to help achieve it. Energy policy simply cannot be approached on a piecemeal basis. In formulating a sound national program, we must address both the supply and the demand aspects of the energy equation. The shortfall in domestic supply, of course, has to be accommodated through im- ports. The urgency of the import problem is highlighted by the fact that, during the first quarter of 1975, we imported about 37 percent of all the oil we used, at a value of close to $26 billion. The President has already determined that our current imports of oil are of such volume and under such circumstances as to threaten to impair our national security. He has acted within his authority to constrain demand through the imposition of an additional license (363) PAGENO="0366" 364 fee on crude oil and products. This limited action is an initial step~ but we need to get oii with further energy measures without delay. As you know, our current domestic production has been declining.. In spite of a 20-percent increase in exploration and drilling activity. during the last year, the decline in production has not yet been. i~vers~d4 In ~tlie ~vak~ ~ c~lini~ig proth~c~i~n, :~ve ai4 not well pre- pared to withstand another emba~ø. Crude oil production for March 1975 was 9.6 percent less than ih~ October 1913, and natural ga~ production had declined by 5.6 percent. While energy demand declined by slightly over 2 percent in 1974, recent indicators, particularly in the area of motor gasohne, are that consumption is moving up again. As the economy continues to re- cover, we expect dtniand for petroleum and natural gas to increase in the last haU of this year. The anticipated consequences are clear-demand, in the absence of new legislation., is g~oing to move up, production. will continue to (lechne; and we anticipate an inevitable increase in imports, with the r~sulting adverse impacts on national security and balance of trade. Since the President submitted his legislative proposals for a na- tional energy policy last January, the Congress has not~ enacted any' leoislation which w~ould address our energy problem in a comprehen- s~ve and balanced way. On the contrary. the Tax I~eduction Act of' I 97t~ while it was essential to help stimulate the economy, will nera~ tively affect our domestic energy progr~m through the changes in the depletion allowance. Altering the percentage depletion allowance has the net effect of withdrawing $1.6 billipn from oil producers this year and about $2 billion per year thereafter. The reduction in depletion is, in effect~ a permanent tax increase on the oil producer at the very time we need additional investment in domestic exploration and development. It has already had a significant adverse impact onexploration To remove this incentive without a compeTreating decontrol of prices will sub- stantiallv impede progress' toward our national goal of energy independence, WHle alternate energy sources, such as solar energy, oil shale, mm-. clear fusion and synthetic fuels~ are promising after 1th~5, the greatest energy notential for the next 10 y~ars isfrom our conveiitionral oil, gas~ and coal resources. Today almost 77 percent of our energy con-~ sumption comes frprn oil and gas and about 18 ner~ent froi~i cQ&. are our basic sources of energy. Our distribution facilities, as well as our, plants and equipment. are designed to use these sources S~ib~fantiaJ conversions of. our plants. our industries a~d our homes to ~ise otherenergy forms are,uo~ likely within the next 10 years. ~ecen'tly, the TLS~ Geological Survey released estimates of undis- COVc~TNI Oil and natural gas in the range of 50 to 127 billion barrels of oil and and 322 to 655 trillion cubic feet of gas. While these new ~sfimai'os are lower than the previous ones, they are significantly la~ér thah existing proved reseryes of 40.6 billion. , In addition~ thei~ are in. known fiel~ enormous quantities of oil thjrt haive not been pdijced as a result :of inadequate teehnoio~y and u~rteconbmtiic~fi `~rices~ `In fact, by 4present methods `we are able to pro- duce only about 30 percent of oil Which has been found. This means that almost twice as much remains in the ground as has been produced~ PAGENO="0367" 365 There are promising technological developments which maya improve the rocover,y rate, and increased prlces make it economical to develop these technologies and to produce these more difficult reserves. Clearly, a potential exists for additional production through addi- tional exploration and secondary and tertiary recovery hut only if there~ are sufficient financial incentives. The Proj ecti Independence rcpo estunatesthat by 1985 at $11 per barrel equivalent prices, domes- tic oil production will increase from current levels of about 8.5 mu- hon barrels per day to 13.1 million barrels per day, and that natural gas production will rise from 21.3 trillion cubic feet to 24.6 trillion cubk~ feet. I have emphasized the need for increased domestic oil and gas pro- duction because these sources provide real potential in the near term for significant quantities of udditional eiIerg~. In addition, we must look to coal and other sources. Today, this Nation has about a third of all the recoverable coal re- serves in the world. We are. the largest exporter of coal in the world, and at 1973 levels of consumption, we have enough coal to burn for 800 years. Yet, coal production in the TJnited States today is lower than it was 30 years ago. In 1960, coal represented `23 percent of our energy consumption; last year this dropped to 18 percent. This trend has to he raversed. Our goal of 1.2 billion tons per year of production by 1985 will not be reached if we do riot remove Government impediments and create incentives for expanded production. These must include im- proved transportation facilities as well as the opening of new wines, In the remaining areas, nuclear power is also a very prorilising source of energy. By 1985. it is expected to furnish 13 percent of our total domestic supply, up from 2 percent in 1975. There are ho~yever~ limitations in its use. It is confined to electricity generation, aqd its development is plagued by construction, regulatory and siting delays. This country was a pioneer in the development of nuclear power; yet~ today, it can take up to 11 years to build a PowerPlant in the TTnited States while only 4 to ~½ years in Europe and Japan. Why ~ Beca use of excessive governmental regulations. While there has been some progress in developing synthetic fuels, substantial volumes of these fuels are years away. So, for the next 10 years, our main focus for expansion of energy resources must be on oil and gas, coal and nuclear energy. We must continue to recognize, however~ that the chief barriers to all new energy production lie at our own doorstep, right here in Washington, D.C., in the problems created by tire Clean Air Act, the moratorium on coal leasing, as well as price and supply regulation affecting oil and gas. This administration is brmly in facor of protecting the public health through balanced ele~iu air standards and protecting the environment. At the sanie time, ~rhile never losing sight of our environmental and safety concerns, we must strive to ensure that our policies are properly balanced to meet our expanding energy needs~ [ have proviously discussed the extraordin~ry need for capit~rl in- vestments to meet future energy demands. The capital requirements for energy alone *ill approximate $1 trillion in the n~xt dècade~ The required investments for domestic petroleum are variously estithated t~ range betw~en $12 arid $20 billibn a year through 1985. The availability of such capital funds will depend on th~ ~r~flt~bil- ity of the oil industry. Recent reports indicate that, during the first 5~-583---75-pt. i-24 PAGENO="0368" 366 quarter of 1975, the earnings of major oil companies fell sharply from the level for the first quarter of 1974. This has been due ~to nationaliza- tion moves abroad and low margins on servicing foreign operations as well as the lack of price incentives at home. Concurrently, the major companies have announced substantial investment cutbacks. Since there is a direct relationship between the supply of energy and the investment made to secure that supply, the availability of capital will largely determine whether we receive the energy we need. Unless we recognize the need to increase investment and capital formation and realize that profitability is essential to this, we will not be able t~ de- velop needed supplies of energy and our reliance on foreign sources will increase. With that background in mind, I will turn to the bill on which you have asked me to comment, H.R. 6860, the Energy Conservation and Conversion Act of 1975, which consists of four titles. I will limit my comments primarily to tax issues, because Frank Zarb, who will be up here in a little while, will comment on the other issues. I would, however, like also to comment on the difficult problems associated with a quota restrictiOn on imports. There have been suggestions that, instead of increasing oil prices to reduce oil consumption, we should simply reduce the supply of oil available by placing a quota on the amount of oil that can be imported. Proponents of quotas argue that we could not consume oil that was not available. That sounds simple. HOwever, such an argument leaves off in mid- air, and does not consider what happens after the quota is imposed. One of two things is possible: prices of oil will rise, just as in the case of an import fee; or; alternatively, shortages and/or rationing will occur. If we put a quota on imports the price of oil will rise unless `cve take further action to prevent that rise. If we knew for sure that a 10- cent-a-gallon price increase would reduce consumption by one million barrels daily, we could be equally sure that an import quota that re- duced consumption by one million barrels would increase U.S. prices b~ the same 10 cents. We are dealing with the same supplies and the same demand, ~nd they will balance out at the same place. Thus~ an import fee and a quota are likely to have identical price implications. A quota system, however, has two disadvantages. First, a quota normally leaves the additional price increase in the hands of importers and producers, rather than in the hand~ of th~ Government. Second, a quota would probably be more disruptive of economic activity, becau~e the expectation of quota reductions would create new b~isiness uncertainties. Some proponents of a quota would introduce controls to prohibit the price increases that would normally follow from it. But such con- trols would, in turn, create shortages. At artificially low prices, the quantities demanded will exceed the supply. The shortages could then be distributed across the population by a system of allocation or rationing. We might embark on an era of chronic shortage and mal- adjustment, without the incentives to~ develop more sources of supply andY to accept substitutes. I do not think t~ie public would tolerate such a system. PAGENO="0369" 367 An allocation program is sometimes cited as a solution-pHmarily, I think, on the mistaken notion that it would avoid rationing. But allocation is itself a system of partial rationing which oecur~ at the business rather than consumer level. An allocation program would deny businesses some of the supplies they need to continue function- ing and would lead to business dislocations and the loss of jobs. Fur- ther, much of the impact will be felt by small and growing bti~inesses. The established and large enterprises can reduce, but others do not have such flexibility. We could find a continuation of the situation that occurk~ed last winter when plants closed because they could not get ~ sufficient "allocation" of natural gas. Undoubdtedly, thousands of jobs would be lost. At the retail level, quantities would be rationed by queueing, as was gasoline last winter. Nor would all of this necessarily prevent consumer prices from rising. To fully ensure that prices will not rise due to shortages, we would ultimately have to ration gasoline, fuel oil, fertilIzers, and petrochemicals. Rationing is certainly one way of curbing demand and a number of national leaders have proposed it. We could, perhaps, live with ration- ing in a period of temporary emergency. But, as a way of life, I sug- gest it is fundamentally inconsistent with our system and with the spirit of the American public. People should ask themselves which they prefer: a small increase in prices, or a system in which someone else could tell them i~ow and for the indefinite future where and when they might drive or how warm they might keep their homes. Does anyone honestly believe that the American public is willing to trade these basic freedoms, in perpetuity, for 10 cents a gallon? The President has proposed instead that we reduce consumption of oil by the most neutral and least bureauratic system a'~ailable- through the price system. rrhe energy proposals would raise the price of oiL At the same time, income tax cuts would increase the disposable incomes of evei~y household. rfaxpayers could, if they wish, continue to purchase more expensive oil and oil products, and they would have extra money with which to do it. The question they would face is whether they wish to spend that extra money for more expei~sive oil or whether they wish to use it for some other purpose, but the choice will be theirs. Imposing quotas as title I does and institutii~g rigid allocations or rationing will move us in exactly the wrong direction. Another undesirable feature of title I is that it eliminates the Pi~esident's current authority to impose import fees and tárjlls and replaces it with set duties on imported oils and authorities to raise these duties to a fixed level. We believe that this will severely hamper our domestic program by removing needed flexibility to maintain ade- quate price protection for domestic supplies. Title II of H.R. 6860 provides, along with a non-tax measute relat- ing to auto efficiency standards, for the repeal of certain excise taxes on buses used in intercity public transportation, and on rad*al tires and rerefined lubricating oil. The Administration itself has proposed a comparable change in the tax treatment of rerefined lubricating oil, but we oppose the selective or discriminator~ repeal of excise taxes. While repealing excise taxes on intercity public transportatioh might PAGENO="0370" 368 s~ve some energy by redu~ii~g the use of private .transport~tio~n~ our policy with ~espeet to excise taxes th~t flow into the Highway Trust Fund has been that all highway users should bear the cost of highway niaintenance, and we believe that the potential energy savings here do not warrant a change in this policy. Title IT also gives tax credits to, individuals, who install home in- sulatioti or soi~r energy equipuient, or who bnya electric cars. In Jauuary, the Preside~t proposed ~ tax credit for home insulation. It is a ri~latively inexpensive item, with proven energy-saving qualities.. By cOntrast, solar equipment and electric cars are expensive items, years away from development apd the cost effectiveness of which has not been satisfactorily proven. We do want to encourage solar eiiergy, and we sh6utd do so through Federal support of R. & D.; but not attempt to develop sucI~ iong-term. energy sources through tax in- centives. We oppose these tax credits to consumers because they appear' to. be prefliature. Title III provides for an Energy Conse'rvatmon and Conversion. Fund, for th~ purpose of promoting research and development. We oppose such a fund. All trust funds reduce fle~cibility in managing the national budget. Furthermore, trust funds make available large sums of money without first .defirdi~g needs and priorities, encouraging the Federal Government to overtake and supplant prntate sector efforts. When potential sources of re~enu~ are set aside for special purposes,. we do not hai~e access to those sources, which may not continue to be needed for the original purposes. With respect to this fund, for research and development, I would add that the pew Enetgy Research and l)eveiopmnent Administration. has undertaken, amd the Congress has approved, a major acceleration of Federal energy R. & D~ programs, including a 63 percent increase in fnnding in. fiscal' ~ar-~97~5: The Trust Ftmd' would seem to ignore these developments, and indeed earmarks amounts of funds that may bear little relationship .to the need for spending or the ability to~ spend wisely. Title HI also provides for a Ttust Fund Review Board of five niembems appointed by the President, ann whose duties would include~ evaluating proj~ctsfoi~~hieh' expeziditmi~es. are made ahd recommend- ing changes to Congress~ Although the Board would help select ERDA priorities, it would, have nô~ d~rect responsibility for ERI)A activities.. Such a role could possibly duplicate duties `of other Government agencies and frag~nen~t th~ mana~geriient elf o~t.. Title IV ~hns to. encourage businesses to use fuels other than p'etroheini and~ na'tur~J gas. . Patt I imposes taies, beginning ~in 1977, on the business use of petroleum and natural gas. There are two weaknesses here. First, the bill exempts from tax the oil and gas used by firms engaged in trans~o~rtation, agricuiture~ minii~g, electric generation in exi~tinrg piants;~textiM an~d gia~s'ntanufacture, or in rental housing or lodging. Additionalify,. `eer~ain. ta±-exem.pt, organizations would. not have to pay the ta~ on `pui~chases of oil apd gas~ The result would be an' e~emption~ for .man~y' inajor., industrial users of oil and gas, causing serious. efficiency losses in the business ~ector. ~ a~nd~gas usedhy husines~ were t~ eover.~ all businesses, the result would be an undesirable distortion in petro- PAGENO="0371" 36~ leurn usage. Prices on products would be titled in favor of ~asoiine for private cars, fuel oil and gas for home ~e~t1ng aild other non- This~ness uses. ret, one o~f the main purposes of the President's program is to reduce consumption; and the individual eonsun~r Oftèll offers the best scope for such reduction. Ultimately, the best way to cut down cor~umption of oil and gas will be to raise prices across the hoard, as was intended by the President's ~rogr~m, rather than to impose most of the conse~Uation burden on one or two sectors of the economy. Part II of title IV introduces aset of 5-year a~mortization pr~visions for investment in "energy-use property," inciuding certain f~cilities "used to produce coal oi~ shal~e oil, t~ l~quify oi~ gasify coal, to use solar ~energy, and to burn solid waste to produne thermal energy. Part II O1SO provides for p-year amortization for in~r~st~ne~t in certain rail- road equipmen~t and facilities and extends for 4 additional years the amortization provisi9ns çf section 184(e) relating to railroad roi1ing~ stock. Part III extends the investment tax credit to ~&ar energy eqpipment and denies use of the in~estme~nt credit fot~ investthent in electric generating phutts fueled by petroleum or natural gas. We do not feel that the 5-year amortiz~tion and investment credit proposals should be enacted. Wherever the economics are fa~torabie. there is no need for a tax subsidy for coal ii~4n~or for ntiiizi~ solid waste as a fuel. Instead, we ~hoii1d concentrate on meinuving the gov- ernmental iinpedintents. When the technoIo~des for su~h things as solar energy utilization and shale oil production exist, the economies of business decisionmaking sho~i1d sufilcM to induce their adhption. Where the technoiogies are lacking, what is needed is research and development-not an investment subsidy. Whatever the metitS of a policy of curtailing the constructiOn of ~il and gas-fired electri~ ~eneratii~ facilitie~, I would urge the corn- mittee to reject the proposal to deny the imrv~strnent ~redit fOr such facilities and to accept our appr~aeh to assist utiiiti~s which I will discuss in ~ moment, There may be eases wherO utility comupanies will be forced to u~e oil or gas, either becans~ they ate requited to meet environmental ~standards, or because they are situated where coal supplies are not available at reasonable prices. Denying investment credit would be another unavoidable capital cost that would be re- flected in higher prices for selected groups of consumers. ThUs, this proposal is inequitable. The administration has t'ecognized the advisability of easi~mg the capital cost of converting to facilities not fired by oil or gas. Ac- cordingly, we proposed to increase from 10 to 12 percent the credit for such facilities. However, denying the credit entirely so as to in- crease the capital cost of certain investments on the grounds that "they are "unworthy" is quite a different matter. In that sensq, ILR. $860 is an unacceptable departure from the general neutrality of the investment credit. Accordingly, I urge this committee to i~eject the changes in the in~estrnent credit pronosed. Finally, in connection with all the provisions of title IV, it is im- portant to note that tax subsidies generally address the results of the problem, not the causes, We must clear away the regulatory and price disincentives to energy development first. FUrther, tax subsidies gen- ~rally benefit only persons with tax liabilities. However, new aUd u~i- PAGENO="0372" a70 profitable businesses also should be encouraged to oonvert to aiterna~ tive enei~gy sources to conserve, orto increase supply. The Government could better direct its efforts to encourage conser- vation and conversion, directly, such as the programs initiated by FEA and 1I~RDA. The Government is already spending much money for energy research and development. Total outlays for ER1I~A, for exam- ple, are expected to exceed $3 billion during fiscal year 1976. Follow- ing further progress in technology and ufter identifying those energy areas which offer the best potential, it may become clear that we should step up Government efforts in well-defined areas. in summary, we find that we cannot supp9rt most of the tax aspects of ELIR. 6860, particularly in view of the unsatisfactory energy savings that we can expect from the bill. Likewise, these disappointing ex- pectations make it difficult to justify estimated revenue losses from ELR. 6860 of $768 million for 1976 and over $1 billion for t980.. More important, gross revenue gains would go into the trust fund and would be spent. However, the revenue losses from the bill must also be taken into account in assessing the `ull impact on the Nation's budget. Doing so, the ultimate effect of the bill would be to increase the deficit by more than $2 billion i~i fiscal 1976 and more than $g.5 billion in fiscal 1980. Having commented on the specific pro~visions of the bill under con- sideration, I would like to direct your attention to omissions which the administration feels are essential to the development of a compre- hensive energy policy. We need a definite plan to deregulate the prices of new natura~ gas and old oil-that part of domestic oil production which is still sub- ject to price controls. Decontrolling prices and eliminating allocations are, perhaps, the most important parts of the President's program. Keeping a dual price system for crude oil and the oil entitlements pro- gram creates distribution and economic problems, which could distort the marketplace permanently. Such distortions change the basis of decisionmaking from one based on cost effectiveness to one based on political considerations. Retaining such a system will threaten the ef- ficiency of the economy and ultimately result in higher prices to the consumer. A failure to increase prices will surely accelerate the already alarm- ing decline in supplies of natural gas. On June 6, the Federal Power Commission released preliminary 1974 statistics indicating a further decline in natural gas resources committed to interstate pipelines. Ded- icated reserved dropped from 134.3 trillion cubic feet at the end of 1973 to 120.4 at the end of 1974, the seventh consecutive year of decline. The FPC also released a staff report showing not curtailments of firm service by interstate pipelines of over 2 trillion cubic feet, roughly 10 percent of total U.S. production, from April 1974 through March 1975. Such curtailments are expected to increase to nearly 3 trillion cubic feet from April 1975 through March 1976. If supplies of natural gas decrease at current rates, replacement costs for alternate energy~ will increase dramatically, For example, the FPC reports that in January 1975 on a Btu basis, utilities paid almost 31%, times more for oil than for gas and nearly li/2 times more for coal. Homeowners and industrial plants are faced with similar or even higher costs. PAGENO="0373" 371 With deregulation and higher wellhead prices for natural gas, it will pay to drill in marginal areas, to work over marginal wells, to make distant pipeline connections which are not now econorr~ically feasible and to drill in the high-risk frontier areas where there is real hope for significant new discoveries. Without higher prices, gas sold in interstate commerce will continue to decline, increasing the unit Qf cost of pipeline deliveries, creating uncertainties in supplies for businesses and homeowners and requiring the use of high-cost energy substjt~ites. This, in turn, will further depress the amount of natural gas resources, which have already declined from 22 years' supply in 1955 to cur~ently less than 11 years' supply. Because of the uncertainties of past price control policy, we must also address the deregulation of "old" ~il prices. In doing so, we must keep in mind the dual objectives of increasing domestic oil supply and restraining oil demand. Beëause of price controls, about 60 percent of our production is * selling at an average price: of $5.25. In 1970, domestic oil production peaked, declined slightly for the next.3 years and accelerated to about a 5-percent decline last year. Oil production today is neai~ly 5Q0,000 barrels a day below last year's rate and about 1 million barrels ~ day below 1973. Decontrolling, oil prices will allow the free market to provi4e. the needed incentives to discover new reserves and increase recovery from existing wells which will help reverse this trend. Further, by allowing oil to be sold at the market price, consumption will be reduced. More- over, allowing oil prices to reach a level reflecting world conditions will also spur investment in alternate energy resources as well as the vigorous expansion of R. &. D. programs. Clearly, the most important element of an effective energy policy is the deregulation of energy prices in order to restore free market forces. In January, the President proposed immediate decontrol of crude oil prices, and a tax on producers that would assure that no sector of the economy would gain an unfair advantage from decontrol. * Since January, much has occurred to influence the structure of a legislative program for decontrol as well as the tax which should be applied to producers. Taking all of this into account and in a spirit of compromise, today the President has proposed phased, rather than im- mediate decontrol, with a ceiling on all domestic oil prices. The plan will phaseout price controls on domestic oil by January 1978. This phased decontrol program, combined with the $2 increase in import fees already imposed by the President, will reduce demand by almost 900,000 barreisper day by 1977, Such actions, coupled with the President's other proposals contained in the Energy Independence Act of 1975, will reduce our oil imports by 2 million barrels per day by 1977. H.R. 6860, on the other hand, can be expected to reduce imports by only about 300,000 barrels per day in 1977. Complete decontrol of domestic production, and the $2 impor1~ fee, would raise consumer costs by only about 10 cents per gallon, some of which has already taken effect. The President's phased decontrol pro~ gram will increase prices of all petroleum products by about I cent a gallon by the end of 1975, by about 4 cents bythe end of 1976, and by 7 cents when fully in effect by 1978. PAGENO="0374" 372 ITh cOfllUflChOfl with decontrol, we ft~E~ ~tifl seeking a ~ea~Oflthi(~ wind- ~fa11 profits tax,' \~rI~i~h would ~inc1ude ~ piowbacic provision. We must iecognize11~at d~e~Ietion ha~ been iem~ed and th~at ec~sts of finding and proiueing oil hive continued to iise~ further eroding the pr~fitabmIity of oIl producers and limiting their ability to mnoi~as~ then mnv~stm~nt. ~As su~h~ we would like~to ~work clo~ei~r witb~'this ~ornmi~tee in ~tr~cti~- ing at~ which will insure that profits are no more than are neédedt6 ~mn~ieasefutuI~e suppli~Ss. We believe that th~ta~ shdidd pha~e ~oi1t ~er a period of years to take account of ~ontiriuing cost increases and~~ ~ncn~ age inve~trnent in supplies 1~bat will come ~nst~eam$eat ~he *~it*l~t peidbd~ Eiirth&r, it~ma~y be m'o~t app~epiri~c to iinpos~tliç ta~ on oMy ~cdçl" oil-that Whieh is deeontr*illèd nuder the `~lan~s6~th~t the ~f unction ~ The thx ~ill be to phase 4n increases~$h producers' revent~es over an acceptabJe period. Under such a proposai,~th~tkx would ttot ap~]y to currently urthOhtrolled oil; on thO ~rodiicl~s t~hat~iwt ~rotits on tha±pro- duc~ion have n dhniM~hed by the ~1imination of p~centäge deple~ :tioñ amid the ~isi~i~' costsôf dis ~evyand de~skcl~piuent. A piowhaok ~pr ion twill p*otnde furth~surancl~t'~Price - re~ulation and~addtcd ta~eswill~mnt serve to seotw*g~ i~eeded ~n~mrest~ ment in new domestic supplies. A p~owb~ck proposal must ~ê re~f~illy drawn ~ aceàinpli~h th~ ~ein*e~t~n~ett obj~tir~+tthout~ ~nuon~ag~ng wasteful ~ In aidi~tioirt~tthi~ dggoittrólof thlip1i~s,tthe7Pte~id~entpvoPO$ed41t ~Jamiaiy a~r~grds~ive incI~eiaS~ in~ia~ esonpGt~oietuffi ~nu~ ~stro- icumn oductaas ~ Tl~a~exciset~xeson don~estie e~iIde oil and natmral gas. The President alsu proposed that thes&ta~ns ~aiad~fees be rebated to the American people. It i~ importai~t~ to ~*haBiZe that the Pi~i~ defr~?~ program is all~,interrbJ,ated~ ~No~ o~te~p tslionithbe c~nsidcred in isolation. ": With respect to the import fee, as you know, a $2 increase on oil im~oi~ts~ ~tnd ~O c~ts in~1~etbsee~ `p~o~ubts'~rc ~`th v~iwe~ect, The ~2~per-barrei ~ek~ise tax On d~me~t~c~ crud~e'thlr is needed, in part,' t~ e~ capture frOm doui~stic~pa~odu~ers th~ ~~icte rise induced by the import `fee. The President's proposal with respect to4iatural gas is a~ excise ta* `of 37 cents ~er. M ~t3. On a ~Btu equivalent basis this is equal to the $2- ncr-barrel tax on crude oil, UnlIke the, oil excise tax imposed on pros ducers to soak up a price increase to aonsumner~ the `gas `ext'ise `tax' is' imposed at the~consum~r lEvel tofacilitate orderly dscontrol"of prices, to accelerate adjustments of ,eonsumnption' pattern's, and especially to prevent diversion of oil `and coal d~w~nd to natural gas. Otherwisa, the increase in oil prices willeflc'ourage a shift of demand'to natural gus. After the deregulation o~ gas prices and with the replacement'Of old gas under long~ter~n contracts by~new gas, the 37 cents tax will srrve `to prevent imieasonable increaseS in `field priceS dtirin~ the ifl- tei'im period of price adjustment. The tax could "be progressivel~I phased out' us in, the case of t'be'oil excise tax, These measures will pre- vent windfall profits to gas producers~ Even without deregulation of gas prices, the tax is ne~essary to pro~ent shifting to lower cost, intar~ `state gas~ which would exacerbate interstate shortages. `Accordingly, I urge the Congress to `~onSider `enacting such a tax on natural gas, as well as the excise tax on domestic oil, and to eimät~ the PAGENO="0375" 373 ~ proposal to r~tnrn such taxes to the economy through rush payments and tax reductions. in addition to the previ~ousl~y mentioned energy p~oposnJs, an~y com- prehensive and integrated national energy pohoy must address the problem of utilities and their need fo~ expar1si~on. The proposa~s that I shall now discuss fol4ow the recoin endat~on~ of the President's Labor-Management, Con~mittee. We have said many times that the most fundamental problem of electric uti~1ities is that of adeqtiate rate~. Unless users of electric energy are required to pay the full cost of generatingit, including a reasonable return on invested cai~ital, investors cannot be expected to invest in the industry. These. proposals are designed to provide help through the tax system, but only if the regulatory authorities (To their part. These tax proposals iirovido incentives that will make it easier for State regulatory commissions t.o take diffláult but neces~ sary Steps~ The proposed legislation would db the following: Increase the investment ta~ credit permanently to 1~ percent on all ~leotric utility property exc~pt generating fat~ilities fueied~ by petroleum prodth~ts. No chang~ of the pereent~of-tax limitation is izrvolved. The increase in the credit is allowable only if constrnction work in progress is included in the utility's rate base and the behefit of the ihcrease is ~ for ratemaki~ng purposes. "Normal- ized" in this sense me~ns reflecting the tax behefit for rateiuaking purposes pro rata over the lif~ of the asset which generates the benefit instead of recognizing the entire tax benefit in the year the utility's taxes are actually reduced. In the absence of normalization, the entire tax benefit would flow throu~h iMmediately in the form of reduced utility rates for consumers, and no real econoMic benefit would result for the utility~ Give electric utilities full, immediate investment tax credit on prog- ress payments for construction of property that takes 2 years or more to build, except generating faeilities fueied by petroleum products, without regard to the 5-rear phase-in required by the rrax Reduction Act of 1975~ This neW provision applie~ only it the regulatory agency includes ~onstruotion work ili progress in the utility's rate base for ratemaking purposes. Extend to January 1, I~81, the period during which pollution con- trol facihties installed, in a pre-I9~ plant or facility may q~ialify for rapid 5-year straight line amoftization in lieu of normal depre- ~iation ahd the investment credit. Permit rapid 5-year aniortiz~ation of the costs of either converting a generating facility fueled by petroleum products into a facility not fueled by petroleum products or replacing a petroleum-fueled facility with one not fueled by petroleum. This aMortization is in lieu of normal depreciation and the investment credit, and is avai1abl~ only if its benefits are "normalized." Permit a utility to elect to begin depreciation, during the eon~truc- tion period, of accumulated construction progress e±penditures~ gen- erally the Same expenditures as those which qualify for the inve4mnent credit construction progress payments iitnder the Tax Reductiop Act of 1975~ Any depreciation taken during the construction period will iedu~e the depreciation deductions available after the prope.~ty is completed. PAGENO="0376" P374 Permit a shaieholder bf a; regu1~tted public electric utility to post- ~pone tax on dividends paid by the utility 61i its common stock by ~seiecting to take additional eommo~ ~tockof the utilit~r iidieu of cash ~dividends. The receipt of the stock dividend will not be taxed. The amount of the dividend will be taxed as~ ordinary income when the shareholder sells the dividend stock aM th~ amount of capital gain realized on the sale will be decreased. Dividend stOck is deemed sold before other stock. The tax costs in connection with these utilityffieasnre~ ai~e approxi- -inately $600 million. Deferment of tax on stockY dividends-$200 million, and the others care listed. It is our view that the total tax cost of $600 million is eminently ~worthwhile, in view of the likely ~effect in minimizing severe power shortages in the future. These proposals are probably not the same proposals we would ad~ vance had the luxury of more time, a less critical problem, and the ~realistic possibility of an overall soluthm to otir country's economic problems. Some have pointed out that these proposals are exceptions *to our theoretical goals for a perfect tax system. However, we mttst ~be' practical, and `we must act quickly. These proposals ha~v& the sup- port of both business and labor, aM are, we believe, the most effective tools at hand to deal with the situation. In the aggregate,~ they will improve substantially the immediate financial position of utilities and `permit them. to resume the long~range projects critical to energy independence, greater employment and economic expansion. We recognize' other problems too, including the extraordinary ~political difflc~lties of facing those problems squarely `in 50 different States, as well as the delays and obsta~ies which are sure to occur. The proposals are designed to provide help through the tax system, but -only if the regulatory authoritiOs and constimers cooperate in doing ;th~ir part. Several of the tax proposals will provide incentives that will make it easier for State regulatory commissions to take the dif~1- -cult steps they must inevitably take. The increase in the investment -credit will be a cash contribution by the Federal Government for the ~construction of additional electric powerplants. But, because of the limitation that the credit may be used only to offset tax liability, the Tegulatory commisSions will have to do their part by setting rates that are sufficient to create a reasonable profit and a tax liability against which the credit can be offset. Similarly~ most of the benefits of the ~bill will not be available unless the commissions include that property in the rate base and provide a return on that investment. In closing, I would like to reemphasize the urgency of the develop~ ment of a~-nati'onal energy policy. This can only be achieved through ~ooperatiOn between the Congress and the exectitive branch. The President has presented to the Congress a comprehensive energy pro- gram. His proposed Energy Independence Act of 19~75 provides measures to achieve energy conservation, to iticrease energy supplies, to deregulate natural gas, and to improve our energy preparedness through a system of strategic rescrves~ In addition, he has asked for oil decontrol, a comprehensive energy tax package, including a windfall' Drofits tax and excise taxes on petroleum and natural gas which will he returned to the American people, and incentiyes for utility financing. PAGENO="0377" 375 This provides a complete ei~ergy program. It is not the only possible ~pproaeh, and we are willing to work with the Congress to develop reasonable compromises. However, we cannot compromise our basic objectives: Reducing energy consumption and oil imports while in- creasing domestic supplies. The bill under consideration would not ~dequathiy move us toward those goal& We stand ready towoirk with you to develop legislation that will achieve our vital energy objectives. Thank you, Mr. Chairman. Frank Zarb and Tom Enders are here with statements also, Ibeheve, sir. The CHATItMAN; I suggest that, since Mr. Enders has a relatively short statement, we let him either read it or summarize it before we ~start asking questions. This is as large an attendance as you will have a chance to speak to in this committee, Mr. Enders. Perhaps you should make your state- ment or summarize it now, and then we will open the cbmm~ttee to questions. STATEMENT OF HON. THOMAS 0. ENDERS~ ASSISTANT SECBZTARY FOR ECONOMIC AND BUSINI~SS APPAIRS, DEPARTMUT OF STATE Mr. ENDERS. Thank yoti very much, Mr. Chairman and distin- ~uished members of the committee. I would like to situate our national energy goals in an international context briefly in this statement, if I could, because it is clear t~hat the ~energy crisis is not only a crisis in our own economy, but it is a funda- mental challenge to our security as a Nation and to our role in the world. At present, the element in our economy most critical to employment and prosperity is subject to manipulation both as to price and as to ~supply by countries that do not necessarily have an interest in our well-being and success. Just as we are vulnerable, so are all the other major industrial countries, Most of them are far more dependent on oil imports than we are, most have fewer energy resources to develop. And this has meant that we should cooperate with other in4ustrial countries to overcome our vulnerability, because no single country can get the market powers, through conservation or through the creation of alternative sources, which is necessary to create a new balance in the world market for oil and thus bring the price down. In the next few. years, anyway, no single country can successfully defend against a new embargo, if it acts alone, or against massive shifts in petrodollars, if they are used in a predatory manner. And it is finally true that no ~ing1e country can expect alone to carry out all of the research and development or provide all of the capital required for rej~acing fossil fuels when they are exhausted. I think, Mr. Chairman, it is equally true that tile industrial countries would all suffer if we collectively fail to restore competitive conditions to the oil market. A degree of national `freedom would permanently be lost. It would be far more difficult to restore sustained growth in our economy. The industrial world would begin to split, as each country offered political and economic concessions in an è~ffort to make a separate peace with the oil producers. The future balance of power in the Middle East might be irreparably compromised. PAGENO="0378" It wa~ this sen~e o~f shared interest that 1~d. to the TJ~S. initiative tb convat4e~ the Washing~m Energy Oon~erence in February 1974, and the fot~ridation of the International E~iergy Agency in November~ of that yeai~ Eighteen o~inttles now belong to that age~1cy, and they are joined to~ther in i~snin~ thrE~E~ ob~eetives. First~ to provide `sècnrity dg~iiist a ~iew o~l emba~rgo by a coordinated program to build~ oil sto~ks, and to ~har~e a~ailable oil in an ~rne~ge~cy; second, to share equitably among the industrial countries the bui~den of conservation; ~fd third, t~ oMina~e our m~asures to ~ti~nul~te the development of alte~n~tive sources. Mr. eh~ii~nait, that is what we have b~en aimi~ng ~t. Let me report ö~ *here we are. First, on emergency planning. On the basis of the detailed agree- ment sigi~ed iii. No~e~ñb~, the lotehratioMl Energy Agency no* has the neee~sary planning ~nd machinery in a good state of readiness, shonld *0 be con~fro~ted ~ith a new embargo situatiom In order to~ back them up, each country must have authority to implement quick- acting conservatipn measures on a coordinated basis, and we need de- cis'ions to raiSe emergency oil ~tocks in all countries froth the present minithttth Of &~ days o± hnparts tO the' agte~d level of 90 days. in contrast to some other TEA members, th~ United States has lagged' in developing the needed emergency authorities. On the other hand, coñg~sionai `action toeFOatO ft 90~day petrolOurn reserve will put us ahead of our partners in this criticWi area. ~iOwèyer~ both emergency powers and more storage are necessary for an effective response to a new embargo. It is clear that irtstabflity in the Middle East creates~ a very real' p~otentiai for a new int0rru~tion in oil supplies. as to conservation. However necessary, it is painful and' costly to restrain demand for oil. And as a matter of simple politics, fe~ other ind~strhflized Oom*rics will be willing to stistain a strong' co~se~ratio~ni program over tIthe unless others join them~ and thcre is thns the possibility of changing tharket conditions and eventually bringing ~i' prices down. I think it is obvious, Mr. Chairman, that othè~ cofrhtrieS are nOt going to do ver~r much in conservation if they think that the United States~ where pet capita oil consumption is twice Gerinanj~'s and three times Jap'an's~ are not going to do so. For this~ reason We p~oposed, and the TEA adopted, the goal of saving 2 million baFrel~ pe~ day of oil b~ the end of 1975 fbi' the group of industrial countries as a whol'e, and distributed the target among countries ac-~ cording ~o their oil consumptiOn. Since we have half the oil consump- tion of the group, but target was 1 million batrels per day by the end of th~ yO~r~ us set by the President. Nearly all the other members of TEA have taken action to decrease' oil deinari~ by passing through increased crude costs to the end user, by n~ taxation, by such specific conservation measures as fuel switching a~id lighting and heating regulations. In c~~trth~, the United States has lagged. So far the only major conservation measute with immediate effect that this country has taken is the oil import fees. Decontrol of old oil over the phased schedule the President *111 recommend will add very substantially to' our conservation effort, bringing us up to the level where other countries are already. PAGENO="0379" 377 The lagging performance of th~ United Stat~es canbe se~ th. corn- parisons with other ëouutrie& results. J3etweet~ the first qu~rtei~ of 1972k rand the first quarter of this year, Germany's od consumptiOn fell by 1A~ percent, Italy's by 8 percent, ~Japan's by 8 percent, Britain's by 18 percent, ours by 6 percent. And yet of all these countries the recession, which of course has reduced deinar~d' for oil, was far more severe here than elsewhere. We have the world's highest per capita consumption of, energy, but we have not been doing our pa~rt. WE. 6860 would save us an esti~ted 31~,QO0 barrels per day by th~ end of 1977 which is, Mr. Chairman, not rn~h u~ore than the p~o.g~am Britain has already undertaken with an ec~n~iy one-tenth the si~ of ours. Third, alternative sources. rrhe basic actions to stirnn1~te `the de,- velopment of new energy mi~st pf `coqrse he national: the prOvision of subsidies to high cQst or unteste~l energy deyeiopn~ep~ts; ta~ `iii- centives; adequate domestic pricing policies; the remOval of u~u~eees- sary or' widesirable legal ,obstvnctions. But tlrnre ~re important contributions to be made internatiçnally. ., First, hyfinding `a way to cqoperate in ~ T~. witlif,, j~op~ard~z- ing proprietary riglits.N,o country has arnouppoly on ~cicutUh~ iina~i~ nation and inno~ati~n~ Even the Upited Stste~, w~tb it~ un~jor. ~ubTi~ and private indus~ry corn~hip~rn~t~Q ~nex;gy *~ & D~ ha~ np~c~ to through avoiding.duplication,by sharing ~ ansi ~hrgttg~ sc~nti11q cross~fertilization,. ., ` ~. ` ` ` Second, by en'cou~raging the flp~ `of, ~o~~eigIL p~pita~ 4nto a~easr ~ energy development where it.;is neqd~d ~ w~pted. ~ Simon has indicated, all of us have capithi-short cconom~e~; w~t ~ perhap~' a. trilliOp dollars of news eapita~ needed. i~th~ ~ej~y, se~tor in TEA countries over th~ ne~ct 10 yea4rs, we have ~n u~tge~st `4 i~id~ ing ways to encourage Meign investww~t ~~bhpu ~cppard~izrng ttie achievement of the n~tional ~ergy, poljq~ ~q~4 nt~pdep~dc~ce.~ Thir4~ by assuring that coupti ~ tl~t cop~rlbnt~e t~ ~t lie ,`~if,aVq of ~the whole gronp by deve~opip~ ~~g~er ,cpst ~ tc~ted against~ p9ssib1e~pr~ctatçi~\ pxieing:, by t1e~~E~, ~d~re, nq~ penalized, if f~r oticier iea~eps pr~c~s ~i1 on t]~ 1nte,pe~tUfl'tal oil iwirket.. Tlaisis the, pnrp~~ the .wip~ ~ c~4flçOpt; in which each coi~ntry in `the `TEA, ~hy [~WaIW `o~f, I~9~'Vp ~ applies a comparable level ~of bp~c¾er prqt~eti~i ~ Qontrary to' `what is often ~uggc~tedg this eh~nisn~wonJa not~ssur~, a minimum price to O?EO, it is a guarantee on1y t~ c4w~ o'tp lp- vestors' that they wii,L not face co~petitiou ~froip,in .qi~t o~1~ b~1~v `a minimum prc~estab1ished~ level, well ~ .epn~pt. wp~ld p~ic~s~ TEA countrIes agreed in pr~ncip1~ ~n `the U~ee,~p~nte~in M~reh They are now being ela~orated witb~ the Agepcy ~ `e~bje~ctIve of having a complete paoha~e re~dy, .for~ acJ~ption by year's ez4 Mr. Chairman, domesticairy apdi~tepat~op~41y~ weJaa~è' ju~tbeg~n on conservatIon ap~ ~lternati~o s~urces~ The `questi~n .w~ pu~t ask i~ `bow far we. muat go,iww fist, , ` , , r ` ,~ The answer must come, in. p~irt, fro~n enal~ si~ of the staying power of the oil cartel. In May, OPEC producOd ~ a~ `against 32.8 .mjffion,barrcls pe~ dayin Sept~~b~r l~73, `ju~t he~*rs the crisis. Despite the soft market the OPEC price structure ha~ come PAGENO="0380" 3~78 through 1~rge1y intact, although quality differentials have been re'-~ duced or eliminated, and credit terms lengthened. Now demand will firm, as we go into the winter and out of the recession. Absent addi- tional conservation measure~, `the OPEC market may rise to pie- embargo levels by the end of 1977. in the late seventies it may begin to fall again as North Sea, Alaska~a, Mexican, and Chinese oil comes on the market, in la~rge quantities. Even if there are no new cOnserVation measures, and if OPEC suc-~ ceeds' in raising prices to ~fFset any increased costs of its imports, some oil exporting countries ~cs~ill already have gone into balance of pay- meñts~ deficit durihg the period of 1975-77. Algeria is in deficit now ;~ so is Libya Venezuela and iran may follow. These pressures will in-j tensify in the late seventies as the OPEC market shrinks, when most. producOrs other than Saudi Ar~bia and Kuwait may go into deflcit~ A serious program of e6nservation-the ~ million barrels per day the' President proposed for the T7nited States by end 1977, matched by ether TEA members to make 4 million barrels per day-would greatly' intensify the pressures on the cartel. Given the cohesion OPEC has shown this year during the recession,, it is not Sure' ~ To, be' sure that the cartel loses its exclusive capacity to set oil prices,' and does not regain it, we probably would have to compress the OPEC market to somewhat over 20 million barrels per clay. In the next decade, this~ can only be done by a large-scale program of developing fossil fuels.. For the United States, this would imply an import level of three to million barrels per day in the mideighties as proposed by the' President. Mr Chairman, to see the meaning of this, consider the possible price increaSe Q~P~C now threat~ns u~s ~th Each additi~rnal dollar on the price of oil ~nii~ht red e"demand ;hy~ h~lf~tø' 1 ur~ barre'1s j~ei day, out of a market of a little more than 25 million barrels p~i~day OPEC can now absorb cuts like that without excessive difficulty. l3ut if we had the President's program in place, the scope for such price increases would be greatly reduced or eliminated in the next 3 years.. Not only would they be unjustified, as now; they would not be feasible.. In parallel with our effortto develop e~ective programs of consumer~ cooperation, we are a]so seeking to establish a basis for productive dia- log between consuming and producing nati6ns. The flr~t formal attempt to launch a multilateral energy dialog in Paris this past April did nOt succeed. In May, Se~retary Kissinger proposed a new approach to the launch- ifl2 of a dialog, broadening it to include the whole range of relations~ between industrial and dev~eloping countries. This would involve the establishment of three separate commissions: One to cover energy, one for raw materials, ar~d one to consider problems of economic develo~ ment,The~ reaction. to Secr~t~ry'Kissingér's pro~o~als'has b~en gener- aii~ ~ ~ that nfficient' ii ~an ~be~ reached ~long these lines ever the next several ~ inent to recon'~~ene the Paris meeting in early fall to prepare for the creation of the commissions, The purpose of this dialog is broader than energy;' it is to find u. i'ealistic aiiid equitable ~basis on which decisions affecting the main elements of the world economy can be shared between i~du~trial and~ PAGENO="0381" 379 developing countries. The oil producers must understand that uni- lateral exercise of their power to raise prices at this time would not be~ consistent with this purpose. Thank you very much, Mr. Chairman. The CHAIRMAN. I ask that the Senators limit themselves to I0'~ minutes in the first round of interrogation, and thereafter, we wilr have additional questions, if the Senators~wi~sh. Secretary SIMON. Mr. Chairman, Frank Zarb had to go back. He~ wanted me to assure you he will be up this afternoon, lie has other testi~nony, too, but he will come immediately after that. Eric Zausner,. his deputy-administrator,~designate, is here, and will respond to any questions. The CHAIRMAN. I did not think we would have a chance to interro- gate Mr. Zarb about his statement this morning, and I told one of the~ staff to inform him that we will plan to hear him about 3:15 this~ afternoon. Now, Mr. Secretary, I want you to know that I have been advising against the suggestion by some of our Democratic colleagues that we~ ought to send something the President has vetoed down to be vetoed a second time, and down a third time. I think that is just a charade. I think we ought to try to. work together on whatever we can agrees upon to try, to meet this Nation's energy needs. Could you recommend~ that the President sign the, bill that is present before the committee,. or would you? Would you recommend that the President sign the bill as it now stands? Secretary SIMON. No; I would not, Mr.,Chairman. The CHAIRMAN. Well it passed the House by only 30 or 40 votes.~ And that means th~t the bill would not become law, in my judgment. It s~ems to me that we onght to try to agree on som~thmg that has1 som&pos~ibilit~P of becotnirig law. Now you said nothing here about one thing that seems to m~e an~ essential element of solving this problem. For many years our utilities, particularly electric utilities, have structured their rates in such a way that would encourage waste. The early units of the power, which one has to buy, cost a great deal more than the final units, for one who, consumed a substantial amount of energy. It seems to me that we ought to flhd some way-I can think of some ways and you might think of some better ones-to bring about a rate structure that would encourage savings rather than one that would encourage waste. Would you favor something along that line? Secretary SIMON. I favor anything in the utility area or other ~reas, Mr. Chairman, that would eliminate needless waste. And the FEA has been looking at the block rate proposal whereby the consumers of the: commodity receive a volume discount. Eric, would you like to comment on what the progress ison that? Mr. Z~x~sNRR. Mr. Chairman, I think yo~ are probably:refer~ing to what w~ have called the "lifeline" cøhcépt, I b~li~ve, which i~t~ie idea that perhaps tire first portion~of energy use i~ either very ~heap or~ perhaps even free, and then it escalates after that. We have looked at t:hat some, We will be glad to provide the com- mittee some of the advantages and problems with that. I might also add, Mr. Chairman, that perhaps one of the key things on rate struc- tures is not just this block ra~te concept, but th~ question of peak load PAGENO="0382" pi~iciñ~~, wIilc~h I am sui~ you are familiar with. wh~re in fact a portion of the uti1ity~s financing csts are to meet peak needs, as opposed to base load, or the average use during a year. And there is very significant potential for savings there a~ well. The Cr~Aliu~rAN. WeB, if one structures the rates as they~ have ddxio 1dstorical~Iy, where y&n ~twrt out with a fee that ~rou pay, wh~Uier ~you are using the power or iiot, and thea you pa~y ~tt a relatively high cost for the ~st units and after you uSe a certain amount then the price goes down to~ abo~it~haif t~e unit price at which you stM't, that en- courages people to l~ve the air-cond1tioith~ on ~ll day, although there ~s no one in the hóu~e: it ~n~u~ges theni not to turn down the t1ierrnos~at at night and tjijngs of that sort, Ai~d likewise it tend~to retard the sale of ins~iiution, stOrm windows, â~d things of that soTt, 13eE~anse. the en~rgy thc~t i~ bthng ~wasted is the ~he~p energy, so that a very low cost, below the cost of prodiicti~n~nd delivery4 I~ seems to 4me we might well consider' simply initiating a t5~ waste, a~id ~h~y ~te ~t~ucture s~ ~a1~la±ed ~could just have an excise ta~ ~ ~ dehi~e~Yet~L Youm~ht snggest a better way that W~ Ctrnl~ d~ itt., Bnt o~o ray ~r ahothër, I ~hitik we wouhi do well to put on~it~ffi ~n ~this~ paekwg~ ~o tx~y tO ni~ke it ~ê'ry irnattracti~ie f~r `inyene to ha~ve ~ I ~te ~trn~ct1n1e 4enoouraguig people to waste energ~ And I hope that we can eoi~ne to ~oiM srnt of an agieenaent Secretary $n~rO~q I would hke I~o work with you ~n ~iething like that. llow~e t1~eid~of~ a `w~st~ tai~ presents sbine prdblem~. `Waste to one person might be uecessity~ to another. Furtheth~ore~ i~ is very~ difficult ~dministra VodeS~g~ oñ~I would ink, but we would be gläfd~i fr i~h~yan ~ui~th4s, M~. ~ ~T~tC ~ `That~f~ I 5xugOhi~tn ask, !Ot the ~ an& ~ rule, S~unth*~J~dle ~ ~ Senator Dor~z. Mi~'. Secretary, you ~ heed~ ~reco~ntiirD1~ df~ do~rie5~ic eiP pi~ices st~tmg~ on ~pai~e~ ~6 of ~roul' StTaten~J~tnt ~ f~~~gn c~u4~ oi~ ~ic4s Sre ~tuud~ ~i~ig1~~r flfl$~ a~ e ect~ctLtQ go h~tgher sViIl if tile DI?I~ cOuntr1~s db ~VI1kt I ylnthc4te nIe~ bmy~do arburld Oetobe~ I I tl~j~k fl~ mi~rt be w~1l 1tp 4ve, for the reco~d, ~otir ~eabtions to higher prices this tall by tIi~e foreig~i producen~ ~r~tar~ Snv~p~c~ F9r ibat ie~~n we als? pD~Qposed a~ cap on t1~Le leyei~ ~f p~p do ~ ~ d~ot~speç~~y tb~ea~3, I~ is ~ ~ n~ antacipation of pqten~ial poitheal action on the p~t of the OPEC nations. And a~ T have ~äid quite ofte~, ~he~'e ar~o economic or financial ju'~t~E1c1it1~r~s4 f~p~ tI~e prç~seut gpe~ q~ oil? mpi~h less a~i i~a~c ~ ~s a~ ~patipal ~om~ ~L~14 ~ j~oitiq~ eomTslcTe~at1q~n, pJy~a~icj~ui~ply. k, Se~ato~t JI~oI~ Naw ~ that ~TOUi~ ~eact~on to what t~y may Octoberl? .k SeeieU~y Sr~oN, Ijit i~ iny reaction ~i~t o~il~ to the j~reseut price oil, hut also to any futume action thatk tl~ey ~`~ht take to increase the price, tnt~h1y 1~poring~ the devastati~g eft~e~t i~ would have on developing nations, the third wofid, a~d t~e cçqnoi~c p~pact it would have on the industriahzç~d4 woild as well.. S Senator Do~ic Do you see any poss~hilmty of i~t~ mov~u,g the other waj, o.p~ Q~tçbe~ 1? Or is the were~ae~ ~I~e~dy set Ui ~coiicrete? 4 ~ometary Snn~~r I rç~aJ1v do ~ot kpo~ very much rnokre ah~ut it than a~l of the ~mericau ~p1~qplewhohiv~e r the c~mwe~it~ the so-eaJie4. PAGENO="0383" 381 phony economic justificai~ions that have been used for a price increase. As I ~say, we have documented this on many occasions, by a det~iied economic and financial analysis of the present prices in terms of trade, inflation, which totally refute those and every other bogus argument that the cartel has used. There is no justification as I say, for an increase. Senator DOLL Will the President announce, or have introduced, his specific legislation today, tomorrow, or early this week? I know he has met with congressional leaders this morning. Maybe you met with him concerning his decontrol compromise? Secretary SIMON. Yes, sir, that is correct, Senator Dole. I would expect the legislation will be up here this week. Senator DOLE. Now does that legislation have a windfall profits provision and a plowback provisiou? Secretary SmroN. We purposely left the specific details of a wind- fall profits tax open this time as opposed to the way we proposed it the last time, because, as I said in my prepared statement, much has changed since then. Congress has removed the dOthestic depletion al- lowance, which is effectively taxing the industry, and the results are predictable. Our cursory examination of capital expenditures for exploration and plant replacement indicates since. March of this year just four. companies have canceled $1.1 billion in expenditures. And I suspect that a lot more has been canceled. You know it is really just an illustration that we get seeming pleasure out of doing things to these so-called "guys in the black hats" who have been perceived to have bilked the American people for something that was beyond their control. And in the long run such an attitude is going to come back and bite us. Senator DOLE. I think, as the chairman indicated, there is a strong bipartisan willingness to try to work something out. 1 think the pres- ence here of 15 Senators on Monday morning would indicate We are energetically looking toward some solution. The administratioifs program has been criticized as being. unfair to low-income consumers and moderate consumers, and based on that I have two questions. As I understand it, those who advocate another approach might have the same impact, would not a high gasoline tax impact with the most severity on the same two groups, the low-income and the moderate-income? Secretary SIMON. Sure it would and to get the same reduction of our energy consumption, we would need a much higher tax. Senator DOLE. You are talking about from 7 to 10 cents at. the outside? Secretary SIMON. If you did it equally, it would be 10 cents right across the board on the President's original prop9sal. These impacts under our present proposal are 7 cents, yes, sir. But we have also looked at putting a large impact, in the short run, on gasoline and some of the other commodities. Senator DOLE. There is some justification that it would increase the cost to those income levels. Do you still favor providing some relief to these groups through increases in the minimum standard deduction and reductions in the lowest tax rate bracket? 55-583-7~-pt. i-25 PAGENO="0384" 382 * Secretari~ Sm~ You see, this is the point 1~hat the critics never bring upJ They flever bring up the fact that the President~s proposal redistributed as best we could, with emphasis on the low~ and lower- i~niddle-income groups, all of the. money that we took from th~m in taxes. The effort was to ~iake energy more~expensiv~ th~a~n. other goods and services, in ou~ economy. Senator DoLE. Pius there was an $80pt~yment fO~ the nontaxpayer. Secretary~Smox. That is right~ and this would have been a perm~- nent r~bate, as long a~ the ta~es~we~e in p1acè~ We ~thought this was a very equitable way to handle it. S Senator Doi~. .1 know the windfall profits tax has ndt been spelled out for any number of reasons, but could a pottion of these tax reduc~ tionsbe funded by having ~ windfall profits t~x whi~h* has a plowback of less than 100 percent? Say it wa~ a ~0 percent piowback. You might u~e~ the other. ~0 perc~nt to give tax relief to so~ie of th~ low-income and moderate-income groups? *~ S S S * Secretary SIMON. It could be. We feel it ought to be geared to~-~-in terms of a timetableü~the decontrql itself. * S * Senator DoLE. ~ow do I understand correctly that the President proposed a 30-month decontrol? * Seere~ry SIMON. That is correct, sir. * * S S S Senator DOLE. Do you know what the uaonthly percentages would be? * S Secretary SIMON. 3.3 percent per month. S Senator Don~. Just fiat out? Secretary SIMoN. Yes, sir. Senator DOLE, That is, I might suggest, a rathOr marked movement from the President's first proposal which was immediate decontrol, which indicated, I think~ a willingness oxi the part of. the President to come together with the Congress and attempt to work out a program. Secretary SIMON. Yes it is an effort by the President to comPromise. Recognizing the economic problems of sudden çleeontrol, it minirhizes these economic problems, and at the same time, it gives the signal to the producers, to those who must find the new energy. in this corrntry, the idea that they are going to have free market in which to sell it at the end of 30 months. S Senator DOLE. That is the only thing that I want-to move fast enough to really get the signal out. Secretary SI~1oN. I think so. * * Senator DOLE. M~time is U~. TheCmuRMAN. Senator Ribicoff. S * SenatoT RIthOOI~F. Thank you, Mr. Chairman. Mr. Sinion, the two keys to the energy program, as I read your testi- mony, are conservation and production. You state it will take $1 tril- lion to make us self-sufficient on alternate sources of enore'v, and vet you continuOusly contend that we have a shortage of capital in this country to invest ~1 trillion over the next decade. Most of this legislation that is beitig considered has a stick approach. I have e few sticks of my own in mind. Could we, ~chieve our results of more eqns~rvation and production by ,e carrot approach. looking forward to an overell conservation e~ pr'oduction investment tax credit? T think we would have to be careful to thake sure there wOuld not be duplication. The oil producers who now get intangible drilling expense~ and still oil depletion allowances, PAGENO="0385" ~383 have yort~iven any thought about the possibility of an overall conser- vation and production investment tax credit progra~in? Secrethry SnI0N. On the production `.sid~ yes, indeed, we have; S~nat.oi. senator Rrtncorr. What would that contain? Secretary `~I~rON. We have looked at this. Onecannot take the subject of energy and say we are going to give an x-percent investment tax credit for energy. Tax incentives work welL We all know that. They work wail if there is a free market. Thus the prime question is whether the t~xp~yer. should indeed subsidize this p~rticuh~r area in the na- tioñal in~berest, Oil, gas, coal, and nuclear energy operate in a fairly efficient market. The coiistraints are our public policy. We regulate the price of nat~ ural gas, We have land ie~tsing and' other policies that are constrai~its. You ask:yourself if tax incehtiyes should be used to offset these public policies. Then ~ve move to what is going to be our hope in the ~uture~-fusiou, fission, the more sophisticated nuclear teqhnology, solar, shale pib gasificaiton, and liqnifaction, all have great technologic~l difficulti~s. We do not know what their development is going tp eost~ Nobody can say with certainty that a barrel of oil is going to cost $4.or $6. as some claim today for oil shale. Others say $8 and others $12, to $16. T~me same is true in regard with gasification and liqui~action~ ` So a tax credit or a tax benefit would really he questionable in thos~ areas because we do not know what the cost wogid be. Now the President has proposed aid for coal-fired utilities and ~u- clear plants, through tax incentives designed to do a particul~r~ thing, provide us with the necessary electrical generating c~pacity in th~ 1980's to meet our needs. We should look at them because they do work well, as I say, Mr. Ribicoff. Senator RIBIcoEF. You say we should look at these but wO are trying to write a bill. As I understand it, the chairman's plans are we sit down next week to mark up a bill and since this is of such `prime impor- tance, we cannot wait for the future. I mean you have been urging haste and so has the President, and I believe many of us in Congress feel the same way. Do you think the Treasury T)epartment, Mr. Woodworth, our com- mittee staff, and my personal staff during this coming week could work to ether to try `for an overall conservation and production investment tax credit to submit to the committee next week when we mark up this bill? Secretary SIMoN. We would be glad to look at such a pi~oposai and work with Larry and your personal staff, yes, Mr. Ribicoff.' Senator Rnnco~'v. Maybe it cannot work out, but if it can I think we ought to try. I understand the complexity. It is going to mean a lot of work by all concerned during the coming week and I would hope you would give it a try.~ Secretary SIMoN. I will, Senator RnucoFr. Mr. Simon, OPEC has threatened to raise the price of the b~rre] of oil from $1 to $2 in December. The price of OPEC oil is already $13 a barrel. Every time foreign oil goes up, uncontrolled domestic oil goes up ~y the same amount, `to the greater profit of the oil companies. ` ` At what specific dollar level is the administration prepared to sup~ port a ceiling on domestic oil prices? And what specific measures are PAGENO="0386" 384 you now prepared to support to insure that domestic oil prices and the profits of domestic oil companies do not go beyond this point ~ Secretary SIMoN. $13.50 is the specific proposal as far as the cap is concerned, and also the windfall profits tax as well as the e'oise tax that the President proposed will make sure that no $egmont of the economy bears a disproportionate benefit for such a politically inspired price increase. And then, of course, the moneys will be redistributed to the Ameri~ can people. Senator RIBICOPr. What if OPEC oil goes up beyond $1~3.50? Are you prepared to say that the domestic oil prIce ~ili stay at $13.50 ~ Secretary SIMON. The proposal is to put a cap, if you will, of $13.50 with the windfall profits tax that would be designed to remove the windfall element1 and yet at the same time insure that the price incentive is still there to produce the additional needed su~pphes. Senator RIBICOFF. The $2 tariff on oil imports could eventually cost the country as much as $18 billion to $24 billion a year in direct and indirect costs, according to figures given me by the Library of Con- gress. I believe the public has a right to expect that a tariff involving such huge costs will have equally great benefits. Do you have any specific evidence showing how much these tariffs have actually reduced imports ~ Secretary SIMON. It has really been too early to look at what the savings have been in imports. One cannot make more than just a guess, really1 as to what the savings have been based on judgments of elas- ticity. But remember, if you correctly assess the impact, I think every dollar is a little over $2 billion per year as far as our revenues are concerned, and again, it gets rebated to the American people. Senator RIBICOFF. I am sorry, Mr. Chairman, my time is up. The CHAIRMAN. Senator Curtis. Senator CURTIS. Mr. Secretary, I want to commend you on a good, well balanced statement. I would like to ask you this. If the Congress enacts no legislation of the type that you propose, will it increase our dependence upon foreign oil in the months and years lying ahead? Secretary SIMoN. Yes; it most certainly will, Senator Curtis. Senator Cnn~xs. Now as we increase our dependence upon foreign oil, that in itself will tend to cause the price of foreign oil to go up. Secretary SIMoN. Exactly, and this is what we are trying to explain when people resist the notion of higher prices here domestically. Tf we do nothing, our domestic price is going to go up because of our increased dependence on OPEC sources and because of our importing more of this insecure and uncertain commodity. Uncertain, because OPEC can raise prices any time that they wisl~ because they control 67 percent of the world's proven reserves. Senator Cun~is, And if we continue to get more and more depen- dent upon foreign sources, we are then in a situation where arbitrary and capricious action would be more effective and we would have to accept it. Is that not right? Secretary SIMoN. That is 100-percent correct, Senator. We still can choose to act in our own best energy interest instead pf reacting to decisions by foreign countries. We have to start thinking ~f the energy PAGENO="0387" 385 crisis in this country as one affecting American jobs, homes, food and financial security. Senator C-tmrris. And the cornerstone of that is to increase domestic production of oil and gas. Secretary SIMON. Yes; it most certainly is. Senator CURTIS. Now do you find any provision in the House bill which would increase domestic production of oil and gas? Secretary SIMON. Do I find what, sir? Senator Cuirris. Any provisions in the House bill which would in- crease the production of oil and gas? Secretary SIMoN. Unfortunately not. The actions taken so far do just the opposite, such as reducing the depletion allowance. Senator CUnTIS. In view of the recent gas price increases, do you see any need for a gasoline tax as a conservation measure? Would a small gas tax such as 3 cents a gallon be likely to stimulate any mean~ higful reduction in gasoline consumption? Secretary SIMoN. No, sir, it would not. Senator CURTIS. How do you assess the likely impact on employment of the auto efficiency standards in the House bill? Secretary SIMON. We have not done an employment analysis of that particu1ar~ proposal, but we will do one and supply it for the record, Senator. [rrhe following was subsequently supplied by the Department of the Treasury :J A mileage improvement program affects jobs in the automobile industry and in the service industries associated with mOtor travel. Cars with low mileage amplify the effects of recent price increases in gasoline and decrease motor travel. This hits the service industries directly as we observed during the oil embargo. High gasoline prices lower the demand for low mileage c&rs, and, if high mileage cars are not available from domestic manufacturers, the public will turn to imports. Obviously, domestic employment in the automobile industry decreased from both factors in that case. The case for gasoline mileage lin- provement is clear, and I pete with satisfaction that Detroit is already respond- ing to these market forces by offering cars with greater mileage. Some data is available on the effect of the voluntary program upon the auto- mobile industry. The Federal Energy Administration has calculated that compared to the business as usual situation (that is no gasoline mileage improve- ment) the voluntary program will increase new car sales by 0.5 percent in T97~T, 2.1 percent hi 1~8O, and 2.4 percent hi 1()85. Domestic auto production estimates are unavailable so employment effects cannot be determined. But, for the reasons already given, employment would increase. Senator CURTIS. You do not have a guess at this time whether it will add to employment or decrease it? Secretary SmI0N. it would be really purely a guess. I imagine it would probably have a slight impact but I do not think it would be very great. Senator CURTIS. Do you agree that price controls on oil and natural gas have discouraged the use of coal as a fuel both by utilities and by other business concerns? Secretary SIMON. Of course they do. People are always going to substitute where they can get the same results with less money spent. You know, all of this debate, really puzzies me because in the final analysis, here in the United States; the products which people will be willing to pay for are going to be those produced, as an adequate PAGENO="0388" 383 j~rice is going to insUre aU adequate ret~irn ; and t~iings that people are not willing to pay fOr, ale ju~t not going to be prod~uce~L This is not only the essence, this is the genius of our free enterprise system and when we talk about tax policy, it is not taxe~ that subvert our economic system in this couht±y Itisour political system that subverts our economic ~ystemàUd does not allow it tQ operate efficiently~ purely and simply, a~nd utilities are a~perfect example of.it. Senator CnnTIs. In reference' to utiijttes, I. agree with the premise that our ta± benefits, our inveatment credit, must `benefit the company or they will not use it for expansion to meet~he needs of our economy+ Is that not correct~ ` ` Secretary SxMo~. The ultimate beneficiary, and thi~ idea is never explained or understood, is the American coflF~Umer, because by ex- panding the productive capacity in any area will lower prices to the consumer ultimately. Senator CURTIs. I am talking about the regulated utilities. If we require or permit an immediate passthrough to the consumer, it will notmeet the needs of their expansion. Secretary SIMoN. It certainly will not, Senator Curtis, and basically afl we are doing then is subsidizingthe consumer. Senator Cinms. Now, some of these regulatory powers are exercised by the States and some by the Federal Government. Do you have a comment as to how Congress could compel State regulatory bodies to observe tile policy that we. write in reference to how the passthrough should take place ~ `Secretary SIMON. I must admit that I have great trouble with the Federal override or with the Federal Government overdirecting the States. Our proposal is the carrot, if you will, Senator, that allows them to make these difficult choices, w~ hope, more easily. Senator CURTIs. I agree with yoUr premise and it secms to me in drafting the increased investment credit for utilities that this whole problem of passthrough is something to which we should give par- ticular attention. Secretary SIMON. Yes, it is. Of course, if they do not have a tax liability, all of these proposals are useless. Senator Cuirris. That is correct. Now, I think most everybody would agree, too, that for the near i~uture our principal energy resources are oil and gas and nucleiir energy and coal. It is not too early, however, to plan and provide for the research for other alternate energy sources. Secretary SmroN. Oh, it certainly is not. That is why we are going ahead with such great amounts of money for research and develop- ment. As I say, over $3 billion in 1976 will be spent on R. & P. which is the ultimate answer. Senator Cutrris. Thank you. Thank you, Mr. Chairman. The CHAIRMAN. Senator Talmadge ~ Senator TALMADGE. Mr. Secretary, I judge from your testimony there is very little in tile House bill you support ~ Secretary SmroN. That is correct because it just does not go far enough in meeting the goals that we must meet. Senator TALMADGE. I find some of it quite inaccurate, I may say also, it seems to me that what we must do is concentrate on trying PAGENO="0389" 387 to use the energy source that we have in abundance; and that is coal. And we muSt also concentrate, it `seems' to me, on trying to conserve the energy that is nonjob productive. At least some 5' or 6 million barrels a d~y is used by automobiles; is that not a fact t Secretary SIMON. Six million currently.: Senator TALMADGE. Six million? Secretary Sri~roN. Yes, sir. Senator TALMADGE. How much of that is in useless joyriding? Secretary SIMON. That is difficult really to qualify. I think the in- crease in price has discouraged some percentage of useless joyriding, but there are other considerations because of some very important industries in this country. During the gas lines and the embargo, the tourist industry landed on everybody in this room, including myself. If we weighed too heavily on gasoline, it would have quite an eco- nomic impact. Senator TALMADGE. Why could we not do a lot to eliminate the needless use of energy in automobiles by vigorously enforcing the `55 mile speed limit-j--we hate the law but it is not enforced-by canceling credit cards for gasoline and by closing filling stations on Sunday? Secretary SIMON. Well, as far as the 55-mile-an-hour speed limit, some States are enforcing it rigorously and I am told, although I have no firsthand knowledge of this, others are not. I think that it should be enforced. rfhere again, the role of the Federal Government in telling the State to enforce the 55 mile-an-hour limit is unclear to me. As far as closing gas stations on Sunday, that is of limited utility because people can buy gasoline on Saturday and indeed they did, on `Saturday and Monday instead. Senator TALMADGE. That is quite true but it would create a sense of emergency I think that would cause people to know that we are in an eniergency and cause them not only to conserve gasoline but to conserve it in other areas. Now, what can this committee do to try to mandate the use of coal for electric utilities and boiler fuel wherever practical? We have lots of gas and petroleum being used in that regard now~ as you know. Petroleum and gas we are short of and coal we are not. Secretary SIMON. That is correct and the President's, proposals are directed to giving incentives to assure more coal would be used. To amend the Clean Air Act-- Senator TALMADGE. You would do it by an incentive method in the tax system? Secretary SIMON. Yes, that we consider extremely useful and there again, as I said in my prepared statement, Senator Talmadge, if we h~d the luxury of time, these proposals `would probably not be what we would come' forth with because we do not want to mess un the tax system with special incentives to special industries. The lead time to construct a facility, especially ~ nuclear plant, is long and its cost, `is great. Many nuclear and coal-fired plants were canceled and deferred during the past year, `well over 200. We' hate to get those b~ck On the drawing board. It is' going to be yc~rs before they are' on~line;' Senator TALMADGE. I could' not agree `more: A few years ago, you know, when we overreacted with some of our legislation, we caused many utilities to convert from coal to petroleum. PAGENO="0390" 3S8 And now, it seems to me, we are going to have to go 180 degrees in the opposite direction and require them to convert back to coal. Would you agree with that? Secretary Sr~ioN. Yes, sir, I wOuld. Senator TALMADGE. Does the Federal Energy Administrator now have that authority? Secretary Sn~1oN. I do not believe any Federal i~uthority exists, except the temporary aixthOrity of the Emergency Allocation Act. Senator TALMADGE. I do nøt know if this committee has jurisdiction, but if we have, should we not try to approach it on that basis? Secretary SmIoN. Well, there again, we aI~e talking about a Federa~ override of the States with all of their different environmental agencies that have presented quite a problem in utility switching. I was involved in that problem during last winter's embargo when we encountered great resistance from some States as well as and their local EPA boards. And those that did shift to coal shifted right back again the minute the embargo ende& Senator TALMADOE. We have overridden the States in practically every other area of energy; in cle~an. air, water pollution- Secretary SIMON. The administration has a sitmg proposal, on which Congress has not yet acted, providing that States give the Federal Government plans for nuclear plants and refineries siting and indicating when they are going to come on-stream. If in a reasonable period of time-I think it was a year and a half or 2 years-they had not come forth with plans then the Federal Government would do it. But, we ought to give the States the freedom to plan their own futures and decide their own priorities. But, there should be a stick, if you will, in the proposal. If the States do not do what is in the national interest themselves, then somebody else will do it for them, unfortunately. Senator TALMADGE. One other area that offers hope in the field of energy, I think, is nuclear plants. You mentioned in your testimony that in Europe and in Japan they can go from the drawing board to a plant on-stream in about 41/2 years. ~And yet here it takes what- 10 to 11 years? Secretary SIMoN. Yes, sir, it does. And that is purely and simply the regulatory problem-getting through the massive paperwork, the env~ronmental problem, the siting, the fear of nuclear plants, if you will, the rising costs durrng such delays. When you compound at 8.5 or 9 percent a year and it takes 11 years to build a plant-you are more than doubling the cost of such a plant. Senator TALMAnGE. What cM we on this committee do to try to shorten that time ~, Secretary SIMoN. The President is working on that part of the reg- ulatory process. We have to remove these regulatory impediments and put a reasonable tune-frame on them if we expect industry to build such plants. Senator TALMADGE, It is incomprehensible and inconceivable that that much time could be wasted here when the future of this country and the industralized world is imperiled by these exorbitant prices we are having to pay for energy. And yet no one seems tç want to do anything about it. PAGENO="0391" 389 Secretary SIMON. I could not agree with you more. You know it has been 30 years since the end of World War II and nuclear energy provides us with 1 percent of our domestic energy supply. And that is a shame. Japan is building their first nuclear park right now and we do not have one in the United States. Senator TALMADGE. My time has expired, thank you. The CHAIRMAN. Senator Ilaskell? Senator HASKELL. Thank you, Mr. Chairman. I was interested, Mr. Simon, in your reaction to the chairman's suggestion on utility rates and particularly the peak load pricing. flas the Treasury th~p~rtment made any estimates of capital cost savings if some kind of off-peak pricing were adopted by utilities? Secretary SIMON. I wouJd like FEA to comment on that, they have been working on that~ Mr. Haskell. Mr. PASTERNAK. Mr. Ilaskell, Bruce Pasternak, Deputy Assistant Administrator for policy at FEA.. We have been doing a lot of work on off-peak pricing, peak-load pricing. As you probably know, we just held a major conference here in Washington in the month of July in which we had something like 1000 people from around the country interested in this problem. 1~T~ feel that there are sçine potential savings from off-peak pricing. But, there are also some problems that have to be investigated in terms of the ability of the poor to conserve energy in some of the inner city areas where they may not have the thermostats or the ability to conserve. So, we think it is a very lucrative area and one which we are pur- suing very carefully. Senator HASKELL. I wonder if you would submit, for the commit- tee's consideration, your analysis of the effect of adopting offpeak pricing for industrial and commercial users, particularly on capital requirements of off-peak pricing. I recognize the difficulties involved with adopting off-peak pricing for residential users. Could you do that? Mr. PASTERNAK. We would be very happy to.* Senator HASKELL. Mr. Simon, I was interested in your suggestion on the deferral of taxes for reinvestment of dividends on utilities and I presume this is somewhat comparable to the plowback provision suggested for the energy industry. You were before the committee the other day, I believe, testifying on the difficulties of financing the public debt. I wonder if you had considered the possibility of plowback interest on Government bonds and notes arid the like? Secretary SIMoN. I do not think that we have ever considered it. I believe at one time in history, U.S. Government securities were fully tax exempt. Senator HASKELL. Merely reinvesting the interest in Government bonds-I was wondering whether that. would be the equipment of a plowback and I was wondering what effect that would have? Secretary SIMON. Of course, the result of that, depending on the interest that was indeed plowed back on a deferred or exempt basis *The information referred to was not available at presatime. In order to expedite the printing of these bearings, the Information requested will appear in appendix B of these hearings. PAGENO="0392" 390 during llscal year, 1976, would amount to $36 billi6ii. `That is a rather expensiv~ subsidy. .` Senator H~S1~LL. Well, as you know, Mr. Simon, the housing indus- try is in difficulty and there is always the possibility of adopting a plowback on ~ayings and loan interests, or bank interests, if people reinvested in~ their savings aè~ount. And I wondered if you had ex- plored carrying this plowback theory beyond the energy industry and the ut4lity industry? S~er~t~ry SIMON. We looked at the exemption .o1~ partial exemption with a.cap on saving and loans and other thrift institutions and indeed, we are sympathetic to' their problems during the period of disinter- mediation. But, our economiè analysis showed, ~nd I will supply it'fo~ the record, Mr. Haskell, that it wouhi not cause a net increase in s~v- ings. It would cause some great shift, whh~h Congress perceived as a benefit to the rich because people in the 20 to 40 percent tax bracket- 20 to 30 percent tax bracket-would benefit very little. Senator HAsI~ELL. You see, Mr. Simon, that is where I part from your Tiue of thinking. I would consider a reinvestment in utility div- idends a benefit to the rich and I would consider ~ reinvestment by the energy folks as a reinvestment for the rich and I just wanted to make this point. I think they fall into this category. I would like to' ask you one other question. The cha~rrnan men~tionecl one omission~ in your statement and I observed another one. You did not `talk very much about conservation except by letting the price rise. Mr. Enders did talk about conservation. Mr. Enders, the last fellow in the administration to talk about conservation lost his job. Mr. ENDERS. I will watch it. Senator HASKELL, The Senator from Georgia, Mr. Talmadge, re- ferred to the automobile fuel efficiency provisions. The House has what I `consider a very modest stick to the folks in Detroit and I wondered how you reacted to that portion of the House bill? Secretary SIMON. On purpose I omitted talking about conservation. I directed my detailed statement to the area of Treasury's greatest interest. Frank Zarb is going to direct himself to conservation when he appears this afternoon. Senator HASKELL. Do you haye any views in view of the fact that you are interested in energy generally, obviously from the stimulating sources aspect. The other side of the coin is conservation. Do you have any personal views on that particular section of the I~Iouse bill? Secretary SIMON. I think that the voluntary agreement that we have with the automobile industry which `is going to, increase the effi- ciency of autouiobiles by 40 percent' before the end of this decade is the way that we should approach it, Mr. Ilaskell. Senator HASKELL. On the vo1untar~ basis. Well, that i~ all I have~' Mr.' Chairman. I might say, Mr. Simon, when I practiced' law and somebody said they would do something,, I always said, "Put it in writing." So, the way I look at jt as far as Detroit is concerned, if they say they are going to do something, I would prefer to have it in. writing in legislation. Secretary SIMON. We have a written agreement with them, Mr. T'laskell, it was signed with the Secretary of Transportation. `Senator HASI~ELt. Thank you, but I would prefer it in the form of legislation that may be a little bit more binding~ PAGENO="0393" 391 ~ you, Mr. Chairman. The CHAIRMAN. Senator Packwood? Senator PACKw00D. Bill, as you know, I prefer to work backwards from where we want to go, and then see what steps are necessary to get there. So follow along with me while 1 make some statements, and ask if you at least agree with where we are trying to go. It seems to me there are three things that are needed. One is to reduce imports, and we need to do that both from a balance of pay- ments standpoint and a national security standpoint, regardless of whether we have adequate energy in total. Are you okay on point one? Secretary SIMoN. Yes, sir. Senator PAcK.woou. All right. rFwro is increased productioii of energy in this country. Three is to conserve the use of energy in this country. Secr~tary SIMON. I agree with all three, Senator. Senator PACKwool. it seems to me that you and the House bill agree on all three of the goals, but you differ on means, a~d you sub- stantiall~r differ in your assessment of the effect of the House bill. And I am inclined'to agree with you on almost all aspects as to the effect of the bill. As -far as the imports are concerned, they us~ tI~e quota system, and theii they have so many exceptions as to make the qu9ta almost nieaninghess. But if by chance it did work, as you very well said in your testimony, they have not tak~n intO account as to what they ~re going to do with the shortfall. They have no rationing program. They assume no price increase, despite the fact we have a shortfall of oil. Is that correct ~ Secretary SIMoN. Yes, sir, that is correct. Senator PAclwOoD. Okay. Secretary SIMON. You know, there are not any ea~y options, Senator Packwood, unfortunately. I wish there were, but they went by long ago, due to the inaction of the past 20 years. rf})~ energy decision is a tough decision right now, but we have to make this tough decision and pay the necessary price to put us in command of our own ceo- nomic destiny. I mean this purely and simply. Senator PAciwooD. Youi difference on the tariffs is-and again, I agree with you-we go the tariff route rather than the quota route in attempting to reduce imports. - Secretary SIMON. The quota, as I said in my testimony, does the same thing as the tariff. Senator PAcKwooI. I agree. Now, on the production of energy, the house has a w~ioIe variety of tax incentives to produce energy. Tile administration says that their tax incentives are better, but again- and I agree with you, we are both pointing in the same direction. Secretary SJMON. Yes, sir. - Senator PAcKwooD. On conservation, the house has a variety of tax credits which, in my mind, will not work. They are not going to con- serve very much energy. The principal one, as far as the tax credit is. concerned, is the home insulation credit, and then they pretty much rely on price for the rest of the conservation. Secretary SIMON. Yes, sir. - Senator PACKWOOD~ I find both the house bill and the admini~tra- tion's bill weak from the standpoint of conservation, because I am not PAGENO="0394" sure the price mechanism alone is going to result in the conservation we want. Secretary SIMoN. We have building standards as well. Senator PACKWOOD. Pardon me. I had forgotten the building stand- nrds. I guess what bothers me about your position is that you want to conserve energy only because we are temporarily short. I do not sense any commitment to the conservation of energy from the stand- point of the environment or ecology. Just because we are energy-short, we have to conserve to get~ us over a hurdle I think that is a short- sighted view to which the House addresses itself even less, and you do not need to answer on that, because that is just my personal opinion of what we ought to do with energy. Let us go to gasoline in particular. You figure that the $3 import fee and the $3 excise tax will incre3se gas 9 to 10 cents a gallon? Secretary SIMoN. It is the $2 import fee. The whole President's pro- gram would have been 10 cents across the board. But, as we said, we were looking at ways to, in the, short run, put more on gasoline. Senator PACKWOOD. I was talking about $3, as we looked at it last February, and what we were projecting it would cost if we put the entire package into effect, 9 to 10 cents a gallon. Now, do you seriously think that. 9 to 10 cents .a gallon will substantially reduce the consump- tion of gasoline? Secretary SiMON. We believe it would reduce it by the amounts that we projected. The longer run elasticity, as far a~ gasoline is concerned, is greater. When people demand more efficient automobiles, Detroit is going to produce them, as indeed they are producing them right now. As far as home insulation, building of homes, and all of the rest of our building standards and others are going to be affected, because your percentage increase on the other commodities-on distillate, on home he~ting oil and the rest-your percentage increase is larger, be- cause that is cheaper than a gallon of gasoline. Senator PAci~woon. Well, the argument that the executives in Gen- oral Motors, Ford, and Chrysler made last week was the same as this; the market is pushing us in that direction. We are voluntarily going to achieve the 40-percent increase. But I am intrigued with something in Frank Zarb's testimony. On page 24 and 25, he says: We believe that the voluntary fuel efficiency agreements made by the major manufacturers and announced by the President continue to be the most effective way to achieve increased automobile fuel efficiency without placing such a bur- den on manufacturers so as to increase possible unemployment. Let me stop there for a momen~. The House bill, at least through 1980, is imposing by law the same standards, or very close to the same standards, as the voluntary agreement that you already have. Is that not correct? Secretary SIMON. Yes; that is essentially correct. Senator PACEWOOD. So you should not have any substantial burden on unemployment, at least through 1980, unless the voluntary stand- ~irds that we have already agreed to are going to be a burden on unemployment. Secretary SIMON. If we start down the path, Senator Paekwood, of the Government legislating various set~ments of our economy, you know what the next step is going to be. It is predictable. PAGENO="0395" Senator PACKWOOD. I understand. But I just want to make sure that, at least through 1980, the House legislation or the voluntary agreement produces roughly the same thing. Secretary SIMoN. That is correct. Senator PACTW00D. And then Frank continues: A 40-percent increase in automobile fuel efficiency is expected to re~u1t by 1980 from the agreements and interim goals. * * * Should the automobile manu- facturers fail to achieve the goals annoum~ed by the President, the Administra~ tion will seek appropriate legislation at that time. Can you speak for him? Is what he is saying that if along the way, if the manirtacturers fall by the wayside, if the market does not push it to that level, we will then consider legislation to make sure we get to that. Secretary SIMON. That is correct, Senator. Senator PACJ~WOOD. All right. Last question, a two-part question. One, considering all of that, if you could have an energy program exactly as you wanted, with all of the President's powers on tariff intact, with all of the tax incentives that you want, with all of the ~nergy conservation matters that you want, would you in addition support legislatively a substantially higher gasoline tax? Secretary SIMON. Well, when you say substantially, we favor, es- pecially in the short run, a higher gasoline tax than the rest of the barrel. Senator PACKWOOD. I am talking about a 20- to 30-cent tax, in addi- tion to everything else? Secretary SIMON. I do not think we would need it to reach our goals. Senator PACKWOOD. Last question. Would you support a sticker tax at the time of purchase on so-called gas guzzling automobiles ~ Secretary SIMON. I have always been intrigued with that idea, but we think that just increasing the price of gasoline is going to accom- plish the Same thing. People who want a 15-mile-per-gallon car, or people with a 25-mile-per-gallon model say, all right, I will buy the one at 15; I do not drive that much, so I am not going to use that much gasoline. You know, you are talking about something pretty funda- mental in our country, and it is called freedom of choice. And if you feel that that is a precious commodity, or that we do need Government to make up the minds for the American people, super. I do not. Senator PAcIcw000. But you intrigue me, Bill, in this sense. You do not mind using the price mechanism to enforce *conservation- Secretary SIMON. Take utilities, for example. Sooner or later, peo- ple are going to find out, that we are going to have .brownouts and blackouts, I discussed it a little while ago, in response to Senator Curtis, It is a political problem, not an economic, financial, or tax problem. So we will have brownoiits and power. shortages and black- outs and two or three Secretaries of the Treasury from now, we will be up here explaining that we will have to have a higher price. And then we will recognize that a higher price is needed to pay for it, or we are going to nationalize it or regulate it and subsidize it. These ~re your options. It is pretty simple. Senator PAOKWOOD. Your time is up. Secretary SIMON. I am sorry. You are on my favorite subject. PAGENO="0396" 394 The CHAIR~1AN. Senator Gravel? Senator GRAVEL. Mr. Secretary, ~tou have got some more time h~re~ The House Ways and Means Committee passed a recycling credit that lailed on the floor of the House, because some felt it would create a loophole. There are substantial energy savings to be madeitirecycling paper, bauxite for ~iuminum, iron ore for steel~ rubber, glass, and what have you. Also~ there are obvious beneflts~ because we are going to be faced with cartel pricin~ in many of these resource areas. So there are economic beueflts to recycling not to speak of'th~ obvious en- vironmental benefits'. What counsel would you give us here, in the Senate committee: in order to realize these energy' benefits to rec~ cling? Recycling has a disadvantage with r~pect tovirginhia'terials, because we have tax loopholes. For example, we have depletion and~ capital gain treatment for timber~ What counsel would you give us? Should we either wipe out all of the existing loopholes,' which would cquali~e the sittpttion for recyclahies, or should we pass a tax credit to give reeyclables the same advantage in the economic marketplace as, virgin products? Secretary SIMoN. Of course, we look at recycling, and'we think that' the present price `and anticipated price in the future, as uncertain as that is, will accomplish the recycling itself without the need for addi~ tional incentives, if you wilL it is' administrath~eiy, Seitator Gravel, extremely difficult to look at each particular. commodity that operates in the particular dynamics of its ow~i market place and own substi- tution, some of it being quite expensive and some it, indeed, unknown, such as the shale and gasification, liquefaction that I talked about before, to really put a ta~ like that into place. But we would be willing to look at it with you; ~res~ Senator GRAVEL. I would like to do a ht~ie bit more than just look at it. if we recycle aluminum, we can probably save 80 percent of the energy that goes into the processing of bauxite~ it is not a very coni- pticated matter. We have a depiction allowance for bauxite, so why can we not turn around and give a similar tax credit to arrive at that equivalency for recycled aluminum? That would make it economi- cal to pick it up and recycle it? Secretary SIMON. Bruce knows something on this subject. I do not pretend to be an expert on the recycling side. Senator GIiAVEL. Please. Mr. PASTE1~NAK. Senator, my firSt assignment when I came to Washington 2 or 3 years ago, to the Council of Environmental Qual- ity, was `to work on a recycling tax credit. And in fact, the economics' have changed over' the past few years. In those days, way back ih 1972 and 1973, recycling and resource recovery was not economic, It ~vas more expensive than just traditional ways of doing things in solid `waste recovery. As the price of energy has increased, as the avail- ability of landfills for getting rid of theY solid wastes has been harder to get, recycling has become more favqrable, and i think the economics show that the change is progressing and cqntinuing. Our feeling is that- ~Senator GRAVEL. Senator Nelson is pointing out to me we are still ~not focusing on the question. I am prepared to give credit to the Arabs :~o~r helping us think of recycling, but what have we done ourselves PAGENO="0397" 395 with respect to the tax advantage that virgii~ bauxite, iron ore~ find timber have against recyôled materials? We can write a law saying we will give them a certain advantage, equal to iron ore. Now, would you rather have us create that credit, or would you rather have us wipe out the tax advantage that iron ore already has? That `wo~lçl certainly hasten the day we do more recycling and save more energy. Secretary SIMON. I would be glad to go to work with you on that, as far as the tax benefits are concern~d, specifically. Senator GRAVEL. I am not looking to go to work on it. TQ me it iS very simple. Are you prepared to say that we cani wipe out the deple- ~ion for iron ore, and therefore give recycled `scrap ii~on, the, same advantage; or are~ you prepared to say that we should pass a tax'~redit for scrap iron? Secretary SIMON. Well, the credit syslem again may not be the(best system to employ. No; I am not prepared, without looking at it vei~y carefully, to say we ought to wipe out the existing depletion on other minerals in th'is country. Senator GRAVEL. Well, I am rather upset, since ~his,is something the administration has been working ~t. In fact there have been a lot of organizations working on it. It is not a new subject. It will save considerable quantities ~of energy. It has been debated in the House, and essentially you are telling me that you will think about it. I thrnk, for a promising area, that is somewhat inadequate. Moving to another subject, I notice in your statement that you are treating the whole trust fund concept lightly. There is no question that it does guide certain quantities of money in one direction. But it helps create the assurance of those funds.' Now, let me give you an example. The ERDA budget was cut about $100 million iii solar by 0MB. It was cut another $100 million in end~ use conservation, which everybody beats their breast about but does very little about in terms of putting up the money. I got from the Corps of Engineers a fioure `of $500 million that we could use to ac- celerate our hydro deve~opment for power in this country. That is $700 million right there that could be added onto the budget to guide us toward greater independence in energy. Yet it was stopped by the actions of the administration and 0MB. Now, if we had a trust fund, we, could do as we did with the high- ways. We could meet the need for a period of time. The fact that it may have outlived its usefulness certainly `is no reason to not under- take this trust fund for at least a decade to get us out of our difflcuity~ Secretary SIMON. Of course, the priorities-and where th~ R. & P. momiey should be spent, and the amounts of money that should be spent, are determined by the experts; Bob Siemons and his group and the line people are going to `have disagreements that more money should be spent in one area than another. But that is their expertise.' Senator GRAVEL~ I wish it were the experts, because the' solar deci~- sion was made at 0MB, and not by Siemon~ and his people. `In falt, at a lower level, the technicians felt that they could spend the money. Now `there is no money, essentially, for end-use conservation. Secretary STMON. You are going to have disagreements at the ~ower level, Senator Gravel, constantly on th~ difficulties. PAGENO="0398" 396 Senator Ga~&vRt. Would i~he trust fnnd not help obviate that? If we are really in a crisis situation with the energy crisis, would a trust fund not permit this to vector the resources necessary `to do the job? Secretary SIMoN. I do not think that would change the underlym~ difference of opinion that might occur as to where these moneys should be spent; no. Senator Gn~vRL. Would there be a quarrel about $500 million more to accelerate all of the hydrodams and fac~ililities that are being built in the Nation today? Secretary Sm~rbN. It is a thatter of what your priOrities are, As far as coal gasification and liquification versus solar, that might be 10 years away. We should get moving on the ones that are more neai term; while continuing to work on the others at the same time, but recognizing that even if we spent a hell of a lot mOre money on it, it would not come on that quickly. Senator GrL&vEI~. End-use conservation, Mr. Secretary, is something that could be realized tomorrow, and the administration has literally no budget in that area. The CHAIRMAN. Just ill the event that an objection is heard from the Senate as to the committee meeting, I am going to order that the reporter sees that at this point Mr. Frank Zarb's testimony is printed and that it `appear at the appropriate place In the record. Senator Mondale. Senator MONDALE. Mr. Secretary,' the theory of the administration's energy package is clearly that higher prices will both conserve en- ergy and spur new domestic production. For over a year now new oil produced in this country has been priced over $11 a barrel, while price controlled so-called old `oil has been selling at $5.25, and yet our figures show the production of new oil has dropped by 750,000 barrels per day, while production of old oil has actually rethained constant. Why has not the price incentive been working during this period `of time and what indications do we have that it will work better in the future'? S~ecretary SIMON. It is just a lag time, Senator Mondale. Explora- tion has increased 20 percent last year, and it takes 3 to 4 years before it is realized in tangible energy production in this country. Produc- tion is going to decline, even if we continue to have an increase in exploration over the next few years because it does take time to bring it on-stream. Senator MONDALE. In other words, the figures that indicate that the higher priced oil has dropped over the past year by 750,000 barrels a day, while the lower priced old oil ha~ remained constant, do not bother von? Mr. PA~TERNACK. it should be noted, though, that in fact drilling of new oil wells has gone up 45 percent the first quarter of this yeai~', as compared to previous years, so I think it is a) problem with lead times. It takes time to bring on the ne~ wells; even if you started drilling today, it would take 3 to 5 years to bring them' around. Secretary SIMON. That is an impressive figure, that 45 percent. De- pending on what perCentage are successful you will see the whole thing turn around~ but not for ~e~reral years. Senator MONDALE. There is a pretty clear, consensus that we must get more domestic oil produced through secondary and tertiary re- PAGENO="0399" 397 covery, and the administratio~i has indicated that only if we decon- trol the price of oil would we be able to realize these production gains and, yet, figures indicate that we can expect oniy 350,000 barrels per day of additional oil production by 1980 through secondary and. ter- tiary methods, which works out to about $180 a barrel. Is this not a rather high price to pay for greater domestic energy production and are there not less expensive means of oettrng at the same end ~ Secretary SIMON. I would like t~e FEA to comment on the secondary and tertiary aspects. Mr. PASTEENAR. I think that i~, again, the same problem of lead time. While your number is pretty accurate for 1980, by 1985 you could increase domestic oil production by over 1.5 million barrels a day from advanced recovery, tertiary ~eeovery techniques, and it is somewhat misleading to try to put a marginal barrel price on the in- creased production of oil that you get from each new `barrel because, in fact, there are reductions ifl domestic energy demand that oecur and in imports `as well, that occur from the higher prices. I think you will have to look at those too. Senator MONOALE. This i~ a question Imight put to both Secretary Simon and Mr. Enders. The administration has imposed a $2 per barrel oil import tariff on all imported crude oil, including that imported from Canada. Mr. Zarb with the FEA has been most co- operative, as has been the State Department, in attempting to work out arrangements with the Northern Tier States to enable our re- fineries to continue to import Canadian crude oil by changing it' to domestic crude. As you know, most of those refiners in that Northern Tier are totally dependent on the Canadian crude. They were established for that purpose, yet does not the import tariff work contrary to this purpose by, in effeét, telling the Canadians that we want less of their oil in spite of the fact that we have in other ways indicated a desire to keep the level of Canadian imports up? Mr. ENOERS. Senator, it does not tell the Canadians that we `want less of their oil. `What it does is say that Canadian oil, which is imported `into the United States, will not get a windfall advantage, vis-a-vis all other oil. Therefore, it is necessary to keep from dis- criminating in favor of a set of exporters or a set of importers who otherwise could clean this $2 oi~ themselves, vis-a-vis all other comnetitiors. We have seen that the Canadian Government is Ouite active in making sure that its prices are at or above the world level so that this is a consideration for us. That is different from the matter of finding a way to take account of the future needs of the Northern Tier refineries, which as you indicated, Senator, we are pretty en- couraged that we can do. Secretary SIMON. That would be pretty much my response to that, Senator. Senator MOi~DALE. One final `question, Mr. Simon. The administra~ tion has nroposed, but not defined, a windfall profits tax. Would you be willing to consider rebating that tax to consumerS b~v way of increasing the individual dependents credit now found in the tax law, that is $30 a dependent? 55-583-75-pt. 1-26 PAGENO="0400" 398 Secretary SIMoN. We proposed various mechanisms in the original propo~al. I would say that we would be willing once it is structttred to take a look at any part of our ta~ system to determine the most efficient way and equitable way of `x~ébating. I have n~ closed mind on this. / Senator MONDALE. You would uot rule out that possibility? Secretary.Snxo~. No, sir. Senator MONDALE. Thank you, Mr. Chairman. The CHAIRMAN. Mr. Byrd. Senator HARRY F. B~no. Jr. Thank you, Mr. Chairman. Mr. Secre- tary, to follow up one of Senatoi~ Packwood~s questions, the price of gasoline has beem increased rçu~hly 50 percent in the last 2 years. What eft~ect has that had on eonsuth~t~on ~ Secretary SIMoN. I want FEA. to gis~e the specific figures,becaus~ there is a mjstake~ impression that the increased prices ac~Oss' the board have not resulted in any saving. Others say erroneously that the ~ has accounted br all of the sa~ings. So let us loOk at the period before the recession stitrting September 1974, really had its impact, and compare what. our. energy growth. was before, and after the energy price was quadrupled. There had been about 7 Or 8, percent increase overall in the economy. Energy use had been growing a little in excess of 4 or 5 percent, but in that 6 months before the recession really hit and after prices quadrupled the growth rate dropped to between 2 and ~ percent. The CHAIRMAN. If I might just ask the Secretary to suspend for just a moment. The Senate is in session and objection has been heard to the committee~ meeting, so I now declare this meeting adjourned, and we will now meet as a group of Senators discussing the energy problem. Senator Byrd, you go right ahead, You are now advising a group of Sen~itois. Secretary STMo~. I liked the first, part of your statement,' Mr. Chairman. Senator CITRTIS. ~Fhere are no rules now. It `is a free for all. The CHAIRMAN. You are advising a group of Senators. who happen to be members of the Senate Finance Comwittee about energy, Mr. Secretary. Senator HARRY F. BYRD~ Jr. Mr. Secretary, would you delay just a moment, Mr. Ojiairman, I regret that I am in the position of asking the questions at the moment because I subscribe to the Senate rule that if the Senate is iii session we should not hMte committee meetings if there are objections, so I am in the position of going against my own philosophy on this. ` / The CHAIRI~AN. Senator, we are not meeting as a committee as of now~ so I think I protected you. / / Senator HARRY F. BYRD, Jr. All right. We will proceed temporarily. Will ~ou proceed, Mr~'Secretary.' ` / / Secretary SIMON. Yes, due to the higher price, not only do we save the approximately 2½'perce~it but we also `stopped the growth of over 5 percent a year, so we have saved and there is elasticity admittedly. Senator HARRY F. Bv~n, Jr. Well, let us get some figures as to the use. Ha~ the use of petroleum deëreased? `, / Secretary SIMON. Yes, and I would `like FEA to gi~re you'the ekact figures. PAGENO="0401" 399 Mr. PASTER~AK. In fact, Senator Byrd, the gasoline consumption in 1973 during the summer, for example, which is where ~e are today, was about 7 million barrels a day, roughly. It ~as less than 7 miliithi barrels a day last summei~; it is al~out 69 to 7 million barrels a day right now. If we had not had the increased energy prices it is our esti- mates-and we have checked them with all of our previous forecasts- that we would be consuming about probably 8 million barrels a day right now. So, in fact, there has been roughly a 10 percent decline from where it would have been had we not had the increased prices, and that is true across all petroleum products. It is the growth curve that we have knocked off completely over the last 2 years. Senator HARRY F. BYRD, Jr. It took the 50 percent increase to do that? Mr. PASTERNAK. It took probably a little less than 50 percent in- crease, but that is about the kind of elasticities that we are talking about, and that is one of the things that I think sometimes get con~ fused. We are not assuming that a 100 percent increase in the price of gasoline would amount to a 50 or 100 percent decline in demand. We are assuming that a 100 percent increase in the price of gasoline would amount to roughly a 10 or 15 percent. Senator PACKWOOD. How much ~ Mr. PASTRENAK. About a 10 to 15 percent. Senator PACKWOOD. You say for a 100 percent increase? Mr. PASTERNAK. For short-run elasticity, yes. In the longer run that builds up; that builds up to about 20 percent, .2 or .3 elasticity over a few years. Secretary SIMoN. That is what is going to happen. As Detroit in- creases the efficiency of automobiles, we go from an average of 12½ miles per gallon presently, or 13, up to 20. Senator HARRY F, BYRD, Jr. Well, insofar as the use of gasoline is concerned, we are using the same amount now, 7 million per day. Secretary SIMON. 6 million per day. Senator HARRY F. Bynn, Jr. You said roughly 7 million. Mr. PASTERNAK. In the summer peak of close to 7 million. Senator HARRY F. BYRD, Jr. Mr. Secretary, to follow up Senator Talmadge's question with regard to coal, I am not clear as to what is being recommended as an incentive to convert to coal. Secretary SIMON. Well, of course, the incentives are there for the utilities 1)0 convert from oil fired to coal facilities through the tax in~ cemitives, The strip mining legislation that we are all familiar with, the siting legislation, the 12 amendments to the Clean Air Act, all encourage the use of coal. Senator HARRY F. BYRD. Jr. Well, the strip mining bill, as such, does not encourage the utilization of coal. The veto of the bill would en- courge it. Seeretai~v SIMON. An acceptable bill would. I think that the measures that have been taken, including, of course, the increased price per ton of coal, have been a significant incentive because we have seen Pittston Co. and I am sure there are others, increase their capital expenditure programs very significantly. Senator HARRY F. BYRD, Jr. But on the surface mining legislation, I want to be sure we are clear oh this, it was the veto of the surf ace mm- PAGENO="0402" 400 ing legislation that helps and not the surface mining legislation, is that correct? Secretary SIMmt. lie veto helped, yes, but, of course, a proper strip mining mill would, indeed, act as an incentive when they would know what the ground rules are. Senator IIA1iRY F. I3fliD, Jr. But the surface mining legislation that was enacted and then veto~d~-~that would not~---- Secretary SIMON. No, sir; it would not. Senator IHIAIUiY F. BYTW, Jr. It was the veto that helped insofar as that particular piece of iegisl~tion is concerned. Secretary SIMON. Yes, sir. Senator HARRY F. BYRD, Jr. Thank you. I wanted that point to be clear. Thank you, Mr. Chairman. The CItAIRMAN. Senator Nelson. Senator NRLSON. Mr. Simon, one quick question~-some moments ago, I think in response to some question of Senator Packwood's, you said there wete no easy answers to the energy problem, that they disappeared because of inaction over the past few years. Secretary SIMoS. I said 20, Mr. Ne1~on. Senator NELSON. Oh, you said 2U. Secretary SIMON. Yes. sir. You know what I meant by that really, Senator Nelson, was that due to the quadrupling of oil of the OPEC nations the economic inipact of such a dramatic price increase in such a b~sic commodity on our consumer~s and our industry in this country is apparent to everybody. If we had removed all the impedi- inents and been allowed to bring on all the alternate sources of energy the last 20 years, the increase in price ~would have been more gradual. That is why I say it is a tough energy choice today. Senator NELSON. I do not want to quarrel about that. I do not quite agree with that. Who is handicapping anybody on the price of oil? As a matter of fact, we kept out imports, in order to keep the domestic price higher than the world price. Secretary SnioN. But the problem-just take the natural gas area, where for 21 or 22 years, we effectively controlled the price of natural gas, at uneconçmic prices, with the expected results. Senator NELSON. But we did not do it with oi1~ But that is not a question I wanted to get into. Everybody in the Administration, or out of the Administration, in Congress, editorial writers, have all agreed, that the OPEC price was arbitrary, inflationary, that it was not related to cost of produc- tion or free market. And during your testimony, you said today that there was no economic justification and the argument of the OPEC nations was bogus. But if the price is inflationary all over the indus- trial world, and if it is a disaster for the industrial world, as Secre- tary Kissinger stated, when he was in Europe a couple of months ago, and the arguments in support of the price are bogus, why in heaven's name is the President insisting on sticking $2 on top of the worldwide inflationary price, at a time when we are trying to control inflation in this country? It absolutely baffles me. Secretary SIMON. What we wish to do is to transfer the decision- making from the. OPEC nations that have a monopoly to our domestic economy. A higher price is going to~ result in A, the conservation PAGENO="0403" 4~O1 and B, the increased supply that is needed to do this. Unfortunately, it does take a period of time to do it. Senator NELSON. I do not swallow that responses You already said the OPEC price is arbitrary. The argument is, it is political, it is inflationary, that the price ought to be lower and that inflation is creating a disastrous situation in this country, and then, plink, you put $2 on top of it, and now the OPEC na~'ons are saying- Secretary SIMON. But you neglect, Mr. Nelson- Senator NELSON. Let me finish. And now the OPEC nations are saying, well, after all, our price is not unreasonable at all; the Presi- dent uias added $2 on top of what has been ~ttacked as an unreason- able price. We are going to add some more. And I have IIQt heard any reasonable response to that. One of your arguments has to be wrong-either it is not inflation- ary, and you are not worrying about it, or it is inflationary and you are making it worse. Secretary SIMON. It has got a one-time inflationary impact, but you neglect to mention, Mr. Nelson, and most critics do, that the money is going to be rebated, and the consumer price index does not take into consideration the fact that the consumer is no worse off than he was before, because the has the money in his pocket that was removed through the higher price of oil and gas~ of energy in this country. And he can make, the freedom of choice, then, as to what he wishes to spend it for. Senator NELSON. There are not any economists in this Nation that are going to support that statement. When you put that price up, it is going to go into wage contracts throughout the country; it is going to go into the increase in the cost of living, it is going to go into an increased cost of producing every product in this country; it is going to increase the cost of fertilizer, manufacturing, transpor- tation, everything. You cannot rebate all of that. Secretary SIMON. The on&~time economic or inflationary impact, and I stress that it was one-time, was 2 percent, and that is pretty generally agreed to by most economists. Senator NEI4S0N. I do not see what is one-time about it. I do not know whether Rihicoff's figures are correct or not. I-Ic said $20 billion a year. It is $20 billion every single year. Secretary SIMON. The money gets rebated every single year. Senator NELSON, But the cost of the product-you are not rebating to the manufacturer. Secretary SIMON. It is not a continual increase. The price does not go up. If bread goes to 25 to 30 cents, and just stays there, you do not count inflationary impact each year. That is one-time. Senator NELsoN. The cost of manufacturing, the cost of that prod~. uct going into manufacturing has increased, permanently. You are not rebating that price. Now, you are attempting some Rube Gold- berg device of getting back to the people some kind of a rebate, which I do not think is very practical and workable, but it just absolutely baffles me to see the administration attacking the OPEC price as irrational, and then adding to the irrationality. Secretary SIMON. The indirect cost impact, was taken into con- sideration, in our arriving at the 2-percent effect on time CPI, and also in the rebate process. PAGENO="0404" 402 Senator Ni~so~. Those a~e tlm funniest answers I have ever heard. OI~EO is irrational, but the President is rational by putting $2 on top of the irrational price. I guess I will get a copy of the record for dis- tribution to my constituents in order to define the President's position, but it certainly does not malte much a~nse to me. On the question of the automobile, that was raised by Senator Pack- wood, you have repeatedly said, and I generally agree, that if we can have a free market operate,that i~ what we ought to do. But when you have got monopolies involved, the free market does not work very well. And that is what we, have had in oil, monQpolistic influences in oil, and in coal. We allowed the free market to operate on the automobile, incidentally, ~nd that destroyed mass transportation in this country. My question on the automobile-your proposals are to let the tree market handle everything, and y~t, when it comes to mandating any actiVity by anybody, the administration opposes it. The voluntary agl7eement with the automobile industry to inereasC fuel efficiency by 40 percent is not anything. They ~an do that toniorrow. There is no new technology. It is just a lighter automobile~ That is all, less power. And if they simply drop all of their bi.g models, they would reach that standard tomorrow. I think the problem faced here is, this is not a c~iMs; it is a disaster. The public does not understand that. I do not think the leadership in the administration understands it. But if you are going to do something about a disaster, it seems to me, you have got to interfere in the market- place. If we mandate doubling the mileage of the automobile, which can be accomplished, by the time the automobiles were all in line, on the highways, with double the mileage, we would have savings of 40 billion gallons of gasoline a day, a little less than that. We would save 3 million barrels a day. We would have 11/9. better than 1½ Alaska pipelines. It w~uld be dramatic. Now, it would be an interference with people's choice, as General Motors said the other day, and Ford and Chrysler; there is no doubt about that. But there is going to be a dramatic interference with everybody's choice in this country in the next 10 years if we do not do something dramatic to resolve this problem. And what we are doing, it seems to me, is totally inadequate. Why do we not face up to this as a disa~ter, whi~h it is, and mandate that we are just going to get rid of that huge, gasoline-consuming auto- mobile, that would cut in half the consumption of gasoline in this country, which would be more dramatic than anything the administra- tion or anybOdy else that I have heard of has suggested thus far. Secretary SIMON. I disagree on one thing. I think that you and I do have an understanding of the problem. I think that we have a very fundamental difference of opinion in the approach that should be taken to attack the problem. The automobile industry is going to make automobiles that Ameri- can people are going to buy: Automobile manufacturers have made or attempted to emphasize smallcr a utomobiles. We have had a bio auto- mobile society, and we have tried to educate the people since the em- bargo, and the escalating costs, that this was an inefficient way indeed to be spending their money. We have a written agreement that is going to increase by 40 percent the efflëiency of the American autoniobile be- fore the end of this decade, which is going to accomplish a 40-percent saVings in gasoline. PAGENO="0405" 403 We think we are accomplishing the same thing and still maintaining the freedom of choice and avoiding the bureaucracy, that always forms a further encroachment on freedoms. And as I say, I think this is just a fundamental difference of opinion, but it does iiot mean we do not understand the problem. We think we do. We kno~ ~ve do, and we know you do, too. Senator NELSON. Thank you, Mr. Chairman. The CHAIRMAN. Senator Hansen. Senator HANSEN. Thank you, Mr. Chairman. With respect to legislative solutions to produce drainatu~ results, Mr. Secretary, it occurs to me that one of the best examples I can think of that illustrates the point being made by my good friend from Wis- consin is to observe that, whe~i we were all cranked up on pollution here, a few years ago, and we were not yet aware of the extent of the emerging energy crisis, we took some pretty dramatic a~tion. We forced the automobile manufacturers to install pollution devices. And about the most we got accomplished with those was a very dramatic drop in gasoline mileage. is that not a fact? Secretary SIMON. Yes. Senator HANSEN. As far as this Senator is concerned, I would just as soon read a little more of the testimony from experts before we take any more dramatic action. I think it might be indicated. Secretary SIMON. I agree with that, SenatQr, Senator HANSEN. I have before me a copy of the U.S. ~ews & World Report, June 16, and I would like to read from it a little bit. The senior yice president of the First National Bank in Midland, Tex, says: The loss of depletion not only took a lot of money out of the industry, it showed people that Congress is still in a vindictive mood toward the oil, industry. When it should be encouraging exploration, It warned oilmen that they had better wait and see what happens next, before they proceed. I have a copy of a letter from Dave True, the immediate past chair- man of th~ National Petroleum Council, and he points out that in the 3 months since the President signed into law H.R. 2166, the Tax Ee- duction Act of 1975, the average number of drilling rigs active in the State of Wyoming has decreased from 129 to 99, which is a decrease of over 23 percent. During this same period last year, the average num~ ber of drilling i~igs in operation increased by 13 percent. The Society of Independent Professional Earth Scientists, a very sophisticated group of petroleum geologists, tells the same story in a report they made that resulted from inquiring of the different drilling companies in America what was going on, and the number of drilling rigs has dropped, the number that is working now, compared to ~t year ago. The backlog on the number of wells has dropped dramatically. In other words, there are not as many wells that people want to drill now as there were awhile ago. I make these observations because it seems to me they underscore the point that you make, that We have a twofold dilemma facing us. One, how to achieve conservation; and No. 2, how to do somethiug about increasing supply. And if I understand you correctly, I think that you are saying that the President, in taking the action he has so far in~ tended to discourage further importation of foreign oil, which creates balance of payment problems for America. It results in an increase in unemployment here in this country by discouraging domestic cx- PAGENO="0406" 404 plaration. I mean, what has been done absent the President's action has had the effect of that, and if by increasing the cost of imported oil, we will, as I am certain-I agree with you and the President-encour- age domestic production, we will be creating jobs here in America. We will be increasing the percentage of our total energy that comes from petroleum, domestically, by that action. Do I read your testimony to imply this? Secretary Simon. Yes, sir. Senator HANSEN. Well, now, we have l7een talking about Canada, and what has been done there. I understand the Canadians have already said that they are going, despite tl~e assurances given us a few years ago by our good friends to the North that we could always count on them-to do what is in their own beet national interest. Is it not a fact that a few years ago, Canada was exporting oil from its western prov- inces and importing oil for those people in the eastern provinces where most of the consumption takes place, the cost of the imports being con- siderably less or being less than the value of their exports? Was that not the case here a few years ago? Secretary SmI0N. Yes; that is correct, sir. Senator HANSEN. And did that situation not turn around when they found that they were selling oil for less than it was costing them to import it, and as a consequence, they raised the price of oil very dramatically, and now, they have even gone further in saying that it will not be too long until they intend to use most, if not all, of their oil, to satisfy their own energy requirements? Secretary SmoN. They have the same domestic energy policy that we do, in attempting to achieve self-sufficiency. And they are building this Montreal-Sarnia pipelinc~ to snpply the eastern provinces~ that presently are supplied from Venezuel~ and other potentially insecure sources. Senator H~csEN. Now, the House, instead of biting the bullet as I think it should have, has tried to waffle all around the real critical issue of increasing supply, and has done a little bit about trying to discourage consumption, and, has taik~d about quotas, and one thing or another. What would be the impact o,f quotas on Canadian im- ports, as you view their situation now today? Secretary SIMoN. I do not have any numbers, I do not have the numbers~ that would relate to Canada or any other country. Mr. ENDERS. Senator hansen, the Canadians have made very clear that they are going to decrease their exports to us on a quite sharp schedule and, on the. basis of decisions that they have taken, we have no expectation at this moment that we will be importing oil from Canada in 19S0. That may conceivably change, but the outlook at the present time is that it probably will not. On that basis, it means that the Canadian exporters, if there were a quota system, would have a smaller and smaller portion of it. I think probably the availability of Canadian oil rather thafl the size of the quota would be governing. Senator HANSEN. If I could be pei~mitted just one final question, Mr. Chairman, let me ask-is it not a fact that the Canadians probably intend to cut back their exports at a sharper rate than would result from the imposition of quotas by Congress? Mr. ENDERS, That is correct, sir. Senator HANSEN, Thank you, Mr. Chairthan. PAGENO="0407" 405 The Cx~&nusxA~. I have been advised that the Secretary of the Treas~ ury is due to make a speech at 12:30. I believe we should permit him 4o m~ke his speech. What time do you think you might be able to return, Mr. Secretary? There are three Senators, Senators Roth, Brock, and Fannin that have not had an opportunity to ask any of their questions. I would like to a~commodate them if we can. Secretary SIMoN. I could come back at approximately 1:45 p.m., for awhile, Mr. Chairman, arid then I have a lot `of appointments this afternoon that are going to have to get rejiggled if I do that. The CHAIRMAN. 1:45, would that be all right with these three Senators? Senator BROOK. I wonder if somebody else could just answer the questions, Mr. ähairman? The CHAIRMAN. Pardon me? Senator BROOK. I would i~ot mind asking my questions to his assist- ant if that is going to strain hi~ schedule too much. Senator Ro~rr. Or could we submit our questions in writing? * Secretary SIMoN. Sure. I would be glad to do that, Senator Roth. Senator FANNIN. Mr. Chairman, we do have legislation on the floor. I think it would be fine if we could submit the questions. The only request I would make is, in consideration, if I could have assurance from the Secretary that he will read th~ chapters I have marked in this book on solar energy because I think it will give him a different picture as to the potential we have on solar energy. With that understanding, I will be very gilad- Senator BROOK. Inasmuch as it applies to Arizona, of course, Senator FANNIN. And the Nation and the world. The CHAIRMAN. Well then if we have an understanding then that the Senators can submit their questions and I believe that Senator Brock would like to ask his questions and let whoever you care to designate respond for you, Mr. Secretary, we will proceed on that basis. You will be excused and I hope you can make your speech. If you have got a magic carpet, you might make it, you have got 4 minutes to get there. Senator Haskell? Senator HASKELL. Mr. Chairman, I would merely like permission to insert in the hearing record letters from the presidents of GM, Ford and Chrysler which embodies the so~calied commitment that was made by the automobile companies with the U.S. Government. The CHAIRMAN. Fine. tiThe material referred to follows:] GENERAL MoToRs CORP., Detroit, Janw~ry 10, 1975. Hon. Roonns C. B. MORTON, ~eeretary of the Interior, Wa~hington~ D.C. DrAB Ma. SacRwrAar: We are pleased to respond to. your letter of January 8 as chairman of the Energy Resources Council and assure you that Gener~il 5Tbe Information referred to ~ias Cot a*ailable at presstlrne. In order to exoedite the nrintlng of these hearings, the information requested will appear in appendix B of these hearings. PAGENO="0408" 406 Motors ba~ comthitt~d tt~elf to; nil nih-out effort to improve ,autornotiv? energy e~eièncy ahd to meet ,~r exceed, th9 l98~ fuel economy Objectives stated In your letter. This commitment is being carried out in a number of ways. Our i~ese~fch and en~iueering programs' to ilnpvove' the filel econOmy of"aU our cars a~e ,runurng full tilt. Also, we have committed ourselves to, large ipyestments m'fnidulties `to build a much greater perceiltage of smaller~ more enetgy.efllilent cars To meet the growing small ear demand, we have spent about i~2 billion sinee the beginning of the program for the Vega, inthóthiced in 1971. Additionally, we have greatly expanded our capacit~ to build'smaller engifies. As we advised Secretary Brinegar on Deceniber 20, we have committed our- selves to provide passenger cars in 1980 with weights, engine sizes and meehan- ~cal improvements such that the sales-weigl~ted ~fuel Oconomy *iil average 18.7 miles per gallon, assuming carryover o~ 1975 eiñlSsious standards, no .addtti~nal weight for safety or' damageability standards and the market mix of cars that we anticipate (using the EPA city~ and highway lest cycles). In response to your January 8 request, we reiterate this commitment. We must emphasize most strongly the need for a productive pause in new safety regulation, as well as the need for Congressional action In the retention of 1975 vehicular emissi,On standards, if we are to attain the fuel econo~ny goal. Our letter of December 20 to Secretary Brineg~r therefore suggested. that 1975 standard~ for both emissions and safety be continued in order to achieve the desired result. Obviously, for example, if we were `to be required to meet emission levels of 0.9 gr./mi. hydrocarbOn, 9.0 gr./rnl. carbon monoxide and 3.1 gr./mi. nitrogen otides-rather than carry over the' 1~75 standards- the resulting fuel economy would accordingly be less than what would be attained, at higher levels of tilese same exhaust constituents. Moreovnir, the cost to the customer would be increased. Additionally, we must also indicate that Such restrictions' on emizsions Will limit our choices in the development of requisite engines and control ,systems. Some qualified technical experts are on record In support of this view, They assert that more stringent emissions standards would serve only to narrOw the methods of accomplishing control Objectives, with minimal improvethent to the environment and substantial cost to consumers. Similarly, the addition of any weight to the vehicles to meet new. safety standards will adversely affect our efforts In achieving the desired fuel' econ- omy. As we advised Secretary Brinegar On December 20, w~1ght additions due to safety-related' itemS will cause fuel economy reductions on the order of 11 gallons per 10,000 miles per 100 pounds of additional weight-or approxi- nmately 1% loss in fuel economy per 100 pounds of additional weight. Each 100 pounds of' mandated safety weight effectively can, add as much as an additional 100 pounc~s to the car for needed support structure and other rqquire- nients. Thus, the assumption in your January 8 letter of "new federally mandated safety standards requiring, on the average car, not more than 100 pounds be- tween the 1974 and 1980 model years could result in appreciable additiOnal need for imported fuel oil. As to the remaining points raised in your letter: (1) We would expect to continue to participate Il voluntary fuel `economy labeling, such as the 1975 program, and to work with appropriate a~encles to improve, as possjble, presentation of laformation to consumers to allow tbew to make meaningful comparisons of fuel economy. (2) We assume the Presidentially-~ppoj~ted task force to study and recom- mend emissions and safety standard~ and filel' economy objectives beyond 1980 would work *ith the lñ'du~try in developing such standards and objectives. (3) We asSunie' that `the fuel economy monitoring program including semi- annual reviews of fuel economy Improvement plans' nind progress would be one that is mutually satisfactory to the government and the industry, I'Iowever, we ask that consideration of this proposal be deferred until details of the program are delineated. Such a program would have to give recognition to the competitive factors in the auto industry and the need for confidentiality in treatment of in- formation acquired through such a process, Moreover, the mandatory fuel economy, standards `which could evolve from such a monitoring program have potential in themselves fOr being less effective than the market forces of a voluntary system in reaching the fuel consumption objectives of the total program, PAGENO="0409" 407 it should be noted that such standards could have the effect of placth.g i'esttie~ tions on the availability of certain cars-regardless of consumer needs or in- lended use of such vehicles. Moreover, it is frankly conceivable that the custoznel demand for a mix of various cars that would eme~ge in any particular model year would he quite diffe~ent from the tnix which a manufacturer wpuld be re- quired to produce in order to conform his production tO a fuel economy standard. The probability is that the manufacturer would be faced with the requirement to reduce his output of a particular type of passertger car to redress the ba1a~ce and come within the standard. One consequence of this could very well be the (levelopment of a quasi-black market for that particular type of car during the latter months of a production year. An additional consequence would be to delay the removal of older, less fuel- efficient carS of this type from the road rather than to replace theta with more fuel efficient, safer, low emission vehicles, since these proposed standards would discourage the prOduction and sale of these cars. in conclusion, we mast emphasize that we share fully with you the desire to projuce and market more fuel-efficient automobiles that will aid the nation in icducing its dependence on imported fuel oil. We assure you of our commitment to do the engineering, employ the technical advances and make the capital in- vestments to accomplish our objective of a GM sales-weighted passenger car average fuel economy of 18.7 miles per gallon. We are sure that you recognize that certain unforeseen events beyond our Con- trol could cause variation in the outcome. For example, our products, facilities, production and distribution planning will, of course, be in conformance with our commitment. However, in any model year conditions in the economy or the market may not make it possible for us to sell the mix of products that would be required to meet our commitment. Nonetheless, we will do our best to meet this important objedive. We stand ready to work cooperatively with whomever you designate In devel- opiiig details of those items which will require study and agreement In the interest of achieving a program that will serve the nation. Sincerely, E. lvi. ESTES, President. Tirs SECRETAflY or mE INvEntoR, Washington, DXI., January 8, 1975. Mr. 11 M. llsvzs, President, General Motors, Detroit, Mich. DEAR Mu. Esans: The Administration requests that General Motors Corpora- tion make a public commitment to achieve, by the 1980 model year, a sates- weighted fuel economy for all its passenger car fleet of at least 18i miles per gallon (using the EPA city and highway test cycles). Such an improvement by 1980, with appropriate year-by-year. progress before 1980, would represent a Z3% gain over General Motor's 1974 fleet average of 12.2 mpg. For vehicle emission requirements, the Administration intends to propose to Congress that Federal emission standards be modified for 1977~80 model years to the levels of the present stricter California standards for emissions of hydro- arbon and carbon monoxide (i.e., 0.9 grains per mile and 9.0 grams per mile, respectively). Nitrogen oxide emission standards, which are now recognized to have been originally set on the basis of faulty data, will be. proposed to remain at present Federal levels (i.e., 3.1 grams per mile) pend~ug development of proper data and analysis. Test requirements for these standards would be proposed fo be on the same or similar basis as for 1975 cars. Our studies indicate that the above combination of emission levels and fuel economy represents a reasonable balance to meeting the essential National objectives of clean air and energy consei~vation For purposes of computing potential fuel econotay Improvements, it has been assumed that new Federally mandated safety standards will not require, on the average car, more than 100 pounds between the 1974 and 1980 model years. it is our judgment that, through a combination of engine modifications, weight reductions, transmission improvements and various other actions, General Motors can achievo these fleet average fuel economy gains while contributing to our other National goals. PAGENO="0410" 408 To recommend pro~per levels and timing of emission standards, safety stand- ards, and fuel Oconomy objectives beyond 1~O, we will propose that the President appoint a Federal task force which would incinde the Secretary of Transporta- tion, the Administrator of the Environmental Protection Agency~ and the Director of the National Science Foundation. This task force would be charged with conducting necessary studies and making apecific recommendations to the Presi- dent by January 1, 197~3. We also request General Motors agree to a fuel economy monitoring program which would include semi-annual reviews of fuel economy improvement plans and progress. Details of the monitoring program would be developed jointly between your Company and the secretary of Transportation so as to be mutually satisfactory. If this monitoring program shows that there is likely to be a sig- nificant short-fall in meeting the above fuel economy objectives, the Administra- tion would then propose that Congress enact mandatory fuel economy standards. Finally, we would expect General Motors to continue to participate in the EPA/PEA Fuel Economy Labeling program. This is a continuing program antici- pated to have full and uniform participation by the 1976 model year cars. We would appreciate being advised as soon as possible if General Motors will commit to these objectives. Sincerely, Rooms C. B. MoRToN, Chairman, Energy Resources Council. Foiw Moron Co., Dearborn, Mich., January 10, 1975. lion. RoGERS C. 13. MoRToN, ~creiary Of the Interior, Washington, D.C. DEAR Mn. SECRETARY: This is in response to your letter of January 8 that pro- poses, among other things, more strict vehicle emission standards and requests a commitment from Ford Motor Company that With increase average car fuel economy to at least 18.7 miles per gallon by 1980. Ford is deeply committed to fuel economy improvements, both in the national interest and for competitive reasons. Our commitment is evidenced by the intro- duction in the past two model years of all new, more fue]-efficient products, as well as major manufacturing changes to increase our small car capacity. Our aim, however, is to fulfill the commitment to better fuel economy and adequate emis- sion control at the lowest possible cost to the consumer. To do otherwise would add to the depth of the recession in the near-term and help to rekindle inflation in the long term. As your letter recognises, the presently established automotive emission stand- ards fot 1977 and beyond must be changed if the ambitious fuel economy goals you propose are to be achieved. Maximum fuel economy gains can be achieved at low- est cost to the consumer by a carry-forward of the 1975 49~state control levels for HO and CO (1.5/15). The nationwide application of the stricter California stand- ards (.9/9) would, in our view, delay fuel economy progress and add to con- sumer costs and inflationary pressures-without producing appreciable air quality benefits as cOTn1~ared with a carry-forward of 1975 standards. In addition, it wquld sharply reduce any possibility of system redesign to remove catalysts-an action that could ~e~mit substantial redhetions in new car cost and increase refinery yield of gasoline through the use of lead additives. We can, uf Course, meet the .9/9 emission leV~els, as we do so today on prodmic- tiott units sold in California. It Is abnndantl:y clear however, that today's Cali- fornia cars cost more ahd gire less fuel economy than today's 49-state cars. Re- gardless of What fuel economy improvement Oan be attained at your proposed standards, snore fuel ran be saved, *vOre quickly and with less cOst and less invest- ment if the standards are held at present 40'etate levels. At issue, then, is whether the incremental gains in emission control levels warrant these negative trade-offs. We believe they do not. We find no evidence that the proposed tightening of HO and CO standards for 1077-80 productlnu Will have a significant effect On national air quality. In these circumstances, we must reiterate out view that the optimum course of action is a carry-over through 1980 af today's 49-state standards, and we shall continue to advocate this position as vigorously ~s we can. We urge the Admin- istration to continue its review of this issue so that final legislative proposals may PAGENO="0411" 409 be passed on the best possible assessment. In this regard, we strongly endorse your determination to utilize a voluntary compilatice program in the pursuit of our common goals. Selection of a voluntary program-rather than a mandated legislative route with its go/no-go inflexibility, costly and frustrating aciminls- trative burdens and the inherent adversary relationship between government and the private sector-Is most encouraging to us. This decision will put competitive forces fully to work iii the public interest, With respect to the other points in your letter, we endorse uniform fuel economy labeling, the provision for fuel economy monitoring by the Department of Trans- portation and I wish to commend your recognition of the need to establish, as soon as practicable, optimum long-range emission control levels that will reflect a reasonable balance between the costs and benefits of improving the nation'u ambient air quality. In summary, Ford Motor Company believes it can, by' the 1980 model year, achieve a sales-weighted average passenger car fuel economy of 18.7 miles per gallon, as measured by the present EPA city/highway test procedure, assuming that the 1977-80 emission standards are set no lower than 0$ gpm hydrocarbons, 9.0 gpm carbon monoxide and 3.1. gpni oxides of nitrogen. It is our considered judgment, however, that the iniposition of more strict 110 and CO control is con- trary to the public interest and a most regrettable additional burden to place on new car customers who ultimately must, through higher prices, ~ for what we view as the totally unnecessary and not insig$llcant capital investment and product costs that will be incurred. I hope you will recognize that we are speak- ing not only for the account of our customers bpt for the weU~are Qf our em- ployees as well, thousands of whom are without employment, victims already of the depression-inflationary spiral that will be fed further by this ill-timed proposal. Your desire to increase passenger fuel economy is no greater than ours. To ask us to achieve it in a manner that is wasteful of both capital and energy supplies is enormously disturbing to us. On the other hand, it is even more disturbing that we-find ourselves continually in a year-by-year adversary relationship with the Federal government over con- stantly changing standards. Accordingly, in the interest of seeking an accom~ modation that should be in our common interest because it holds the promise of stability for planning purposes, we pledge that we will work in good faith toward achievement of the fuel economy goat at the emission levels set forth in your letter. Very truly yours, Lan A. Ix000CA, Presictcnt. Tim SECRETARY OF THE INTuRTOR, Washington, D.C., January 8, 1975. Mr. LEE lAcoccA, President, Ford Motor Co., Dearborn, Mich. DEAR Mn. lAcoccA: The Administration requests that the Ford Motor Com- pany make a public commitment to achieve, by the 1980 model year, a sales- weighted fuel economy for all its passenger car fleet of at least 18.7 miles per gallon (using the EPA city and highway test cycles). Such an improvement by 1980, with appropriate year-by-year progress before 1980, would represent a 30% gain over Ford's 1974 fleet average of 14.4 mpg. For vehicle emission requirements, the Administration intends to propose to Congress that Federal emission standards be modified for 1977-80 model years to the levels of the present stricter California standards for emissions of hydro- carbon and carbon monoxide (i.e., 0.9 grams per mile and 9.0 grams per mile, respectively). Nitrogen oxide emission standards, which are now recognized to have been originally set on the basis of faulty data, will be proposed to remain at present Federal levels (i.e~, 3.1 grams per mile) pending development of proper data and analysis. Test requirements for these standards would be pro~ Posed to be one the same or similar basis as for 1975 cars. Our studies Indicate that the above combination of emission levels and fuel economy represents a reasonable balance to meeting the essential National objectives of clean air and energy conservation. PAGENO="0412" 410 For purposes of con~p~tiflg p9tential fuel economy improvements, it has been~ assumed that new ~`ederal mandated safety standards will not require, on the averaée ~ more t1mai~ hOO poüu4$ between the 1974 and 1980 model years. Jt:ls Our ju4gmept that, thi~oUgh ~t eombinat~on of engine n~odiflcations, weight reductions,. tr~usmission imprpvëxnents and various other actions, rord ~am achieve ~he~e ~eet average `fuel ecoi~othy gains while contributing to our other National goals. To recommend proper levels ~nd ~hning of emission standards, safety' standard~, and fuel ecouowy objective beyond 1980, we will propose that the President appoint a Federal task force which would include the Secretary of; `l'rausportation~ the Administrator of the 13n~rironmuental Pro~~ction Agency, and the Director of the National Science Foundation. This task force would be charged `~vith conducting necessary studies and making specilic recommendations to the President by January 1~ 1976. `We also request Ford agree to a fuel `economy monitoring program which. would include semi-annual reviews of fuel economy Improyemnelit plans and progress. Details of the nionitoril* program would be developed jointly between your~ Coi~pany `and the Secretaiy of Transpqttation so a~ to he' mutually satis- factory~ If this monitOring program shOw~ that there is ll~ely, to I!e a significant short-fall iii. meeting' the at?o~e fuel econOmy ob~jective$, the Adininistrathon would then propose that ,qo~gre~s enact thandatory fuel economy standards. Finally, we would ~xpeCt~ Ford to continue to participate in the EPA/F1~A Fuel Econemy Labeling program. This is a continuing prog~ath antici~át~d to have full and un~fori)~ participation by the 1916 model year cars. We would app~reciatè being advised a~ aoon as possible if Ford will commit to these objOctiveiL ` , Sincerely, ROGERS C. 13. MORTON,, Cha4rman, Energy Resouree.9 Council. CHRYSLER Cour, Detroit, Mich., January 10, 1975 Hon. Roamth (1 B. MORTuN, Secretary of' the Interior, , WashingtOn, D.C. DEAIm Mn. SECRETARY: Chrysler CorporCtlon is pleased to commit itself to an' all-out effort to meet or exceed the 1980 fuel economy objective under the tethis and conditions you outlined in your letter of January 8, 1975. We are sure that you recognize that certain events beyond our control, such as inability to sell automobiles in the projected mix, could cause some unforeseen variation in the outcome. We think it only fair to point out, moreover, that we continue to believe that the public interest would be best served by a carryover' of the 1975 federal standards rather than the more stringent `standards contained in your letter, because of the following beneficial effects: 1) It would cause no measurable sacrifice of air quality; 2) It would yield additional fuel savings; 3) it would be less costly; and 4) it should obviate any need for removing sulphur from gasoline. However, if the decision must be made on the basis of time emission standfirds cited in your letter, we commit ourselves and our resources to this effort. We stand ready to cooperate with whomever you designate in developing the program details. Sincerely yours, JOHN J. RICCAEDO, Preaident. THE SECIiETARY or TIlE INTERIOR, Wa8hington, D.C., January 8, 1975. Mr. JOHN J. RICCARnO, I~esident, Chrysler Corp., Detroit,' Mich. DEAR Mn. RICCARDO: The Administration requests that the Chrysler Corpora- tion make a public commitment to aehieve, by the 1980 model year, a sales- weighted fuel economy for all its passenger car fleet of at least 18.7 miles per gallon (using the EPA city and highway test cycles). Such an improvement by' PAGENO="0413" 411 ±0~0, ~ith appropriate yetr-by-year progress before `1980, would represent a35% gain over Chrysler's 1974 fleet aver~igq Qf 13.8 mpg~ For vehicle emission requirements, the Administration intends to propose tO Congress that ~edera1 emission standar4s be modified foi~ 1977~-80 model y~ars to the levels of the. present stricter Califorala staMards for emissions of hydro- carbon and carbon monoxide (i.e., 0~9 grn~ns pe~' mile and 9~0 grams per mile, res~ectiv~l'y)~ Nitrogen oxide emission standards,, which are now recognized th hav'~ been originally set on the basis of ~adlty data, will, be proposed to remain at present Fede~al levei~ (i.e~, 8.1 grams per mile) pending development of proper data and analysis. Test requirements for these standards would be proposed to be on the same or similar basis as for 1975 cars. Our studies indicate ~th~t the above dombination of e~nissiou levels ~nd fuel economy represents a reasonable balance, to meeting the essenti~d National objectives . of clean air and energy conservation. ` . For purposes of computing ~otentihl' fuel economy improvements, it has `been assumed `tMt new Federally mandated sa~ety standards will not require, on the average ~ar~ `mere `than 100 pounds between the ~974 and 1980 model years. It is our judgment that, tbrop~h a combination of engine niodifications, weight reduction's, transmission improvOthents and various other actions, Chrysler can achieve these fleet average fuel economy gains while' contributing to our other Natioñäi goala. To recommend proper levels and. timing of emission standards, safety stand- ards, and fuel economy objectives beyond, 1980, we wil~ propose that the Presi- dent appoint a Federal task force which would include the `Secretary of Trans- portatiçni,~ the Administrator of the Environmental Protection Agency. and the Director of the National Science Foundation. This task force would be chnrge~ with conducting necessary studies and making specific recommendations to the Presidefit by January 1, 1976. We also request Chrysler agree to a fuel economy monitoring program which would incifide semi-aninual reviews of fuel `economy improvement plans and progress, Details of' the monitoring program would be developed jointly betweein your Com~any and the Secretary of Transportation so as to be mutually satis-' factory. If' this monitoring program shows that there is likely to be a significant short-fall in meeting the above fuel economy objectives, the Administration would' then propose that Congress enact mandatory fuel economy standards. Finally, we would expect Chrysler to participate in the EPA/FEA Fuel Economy Labeling program. This is a continuing program anticipated to have full and uniform participation by the 1976 model year cars. We would appreciate being advised as soon as pos~ible if Chrysler will cotn- mit to these objectives. Sincerely, floozns C. 13. MoRToN, Chairman, Energy Reseurces (Jó'uncU. The CHAIRMAN. Mr. Secretary, it may be that some of tile other Senators might want to ask further questions. If they do, perhaps you might be able to visit with them later on in the day, after Mr. Zarb has testified. What is your situation after 5 o'clock? Secretary SIMON. I have to fly up for an engagement that has been on my calendar to Buffalo this evening and fly back late tonight. I am leaving later this afternoon for that. The CHAIRMAN. I see. For the time being then, we will excuse you, Mr. Secretary. Secretary SIMON. I will be glad to come back anytime, Mr. Chairman. The CHAIRMAN. Mr. Zarb will be here this afternoon. Senator Brock? Senator BROOK. Are we going to stay now? The CHAIRMAN. Well, you said that you would be satisfied to ask, your questions of one of his assistants. Mr. Parsky is here. PAGENO="0414" 412 Senator BROOK. Yes, if the Senator from Colorado is going, to leave I wanted to ask one question relating to his earlier quest~or~. Senator HAsKKu~. Ceirtai~ly. Sertator BROOK. Mr. Parsky, earlier in the hearings Senator RaskeU suggested that the pro~posed deferment of tax on dividends woula be an incentive or an advantage to the rich. Now, if I understand the proposal, it is that instead of cash dividends that the utUitie~ would be allowed to issue stock. Mr. PARSKY. That is correct. Senator BROOK. And the: stock would not be taxed until sold? But at the time it was sold it would be taxed at ordinary ii'icome rates? Mr. PARSKY. That is correct, it is j~ust adelerment, Senator BROOK. Then there i~ no possibility of the so-called rich being given a tax break by this device because if they had gotten their tax dividend they would have pnid a tax? Mr. PARSKY. That is right. Senator BROOK. And they would have had the cash remaining. If they do not sell that stock, they do not pay the tax but as soon as they sell it they pay the full tax at ordinary rate~? Mr. PARSKY, At ordinary income rates and I do n~t have the b~eakdown, Senator, of the ownership of utility stocks and who would benefit and who would not 1rpm that'. But, in ~ny event, it is not a tax that would, at no point be recovered. It is just a defethient. Senator BROOK. My point is that there is no advantage t~ a, stock- holder in this system. The advantage lies in the maintenance of capital. level for the utilities for inv~estwent purposes but the individual gets no benefit whatsoever? Mr. PARSKY. That is correct. Senator BROOK. Because if he wants the cash so he can spend it for his own consumption he has to sell the stock at which point he pays the regular income tax rate? Mr. PARSKY. That is right. Senator IL&5KELL. Would the Senator yield for just one cou~ment? Senator BROOK. Yes. Senator IJASKELL. I have suggested that possibly the same treat- ment be given on interest on GovernMent bonds and on savings ac- counts and the Secretary responded that that might be interpreted `as a benefit to the people in the 20-40 percent bracket who he charac- terized as the rich. And I merely stated that I felt this fell into the same category. Senator BROOK. Well, let me make this point. I think I agree with both of you, that may sound confusing, but I think if you will study' the tables of those who own stock you will find that the a~rerage income of a stockholder in this country is about $16,000 a year. That can hardly be categorized as rich in today's society. Now, the owner of bonds, in contrast, would have a considerably higher-and I have forgotten the figure but Mr. Parsky can supply ft. Mr. PARSKY. Sure. Senator BROOK. But the owner of Federal and in particular tax- exempt bonds, the municipal securities, is a much higher income type of person and he would benefit by your propOsal. Senator }IA5KELL. I was referring to the holders of Federal Gov- ernment bonds and also savings accounts. PAGENO="0415" 413 Senator BRoOK. In that case I think you will find-at least I believe that it is true-that even there the average income of those individuals is higher than the average stockholders. But, the point I am trying to make is, in this particular instance there is, no advantage to the stockholder, be he rich or poor, because when be gets that income in a cash form he pays a tax on it at the ordinary income tax rate. So, there is no advantage to him unless he postpones it to retirement age and at that point his tax level is lower because his income is lower. In that case you could have a point. Let me just make a couple of other points-maybe Mr. Parsky, you would supply for the record if you have these figures, the average income level of utility stockholders and of stockholders in general. I would be most interested in seeing those figures. Mr. PARSKY. Certainly we will supply those.* Senator BROOK. Just a couple of other points and, Mr. Chairman, if I might continue-you say, or Secretary Simon said that we will get a response to this increase of say, 9 or 10 cents a gallon because the automobile manufacturers will produce lower consumption cars and that houses and buildings wIll have better engineering, better insulation. I think that is probably true but, does not that statement presuppose adequate capital inventories to make capital investments as opposed to consumer investments? Because when you do $1,500 or $2,500 worth Of insulation on your house that is a today purchase, it drains the capital formation market much more than the payment of an addi- tional $12 a month on utility bills. So, what you are requiring then is a sizable increase in capital formation in order to achieve a reduction in consumption. And I find that strange because Mr. Simon has made quite a point in recent months of the concern that he has with the adequacy of capital forma- tion in this society. Mr. PARSKY. Well, I think there are several points r would make. First of all, you have to take into account both the short- and long- term energy savings and you, have to also take into account the pro- posals we wot~ld have with respect to energy taxes and use of the price mechanism which would affect, to some extent, an increased willing- ness on the part of industry to invest and other tax reform measures which Bill has outlined, that would increase the willingness on the part of industry to invest. I think that use of the investment tax credit, looking at the possi- bilities for integrating the corporate and individual income tax and a number of other mechanisms, will increase the emphasis on capital `formation and savings. Senator BROOK. My time has expired, Mr. Chairman. The CHAIRMAN. The committee will meet again. I will say at 3:15, when Mr. Zarb is available to us this afternoon. Thank you very much. [The prepared statements of Secretary Simon and Mr. Enders follows:] *Tbe information referred to was not available at presstlme. In order to expedite the printing of these bearings, the Information requested will appear in appendix B of these hearings. 55-583-75-pt. 1-27 PAGENO="0416" 414 STATEMENT OF THE HONOEAnLE WILLIAM E. SIMON, SEORETAgY OF THE TEEASIJEY Mr~ Chairman and members of this distinguished Cpmmittee: I appreciate the opportunity to appear before you today to comment on H.R. 6860, which you are now reviewing, and to discuss a number of other con~idera- tions relating to the development of energy policy. INTRODUCTION At the outset, I would like to reemphasize the urgent need to establish a national energy policy and a comprehensive and integrated legislative program to help achieve it. Energy policy simply cannot be approached on a piecemeal basis. In formulating a sound national program, we must address both the supply and the demand aspects of the energy equation. The shortfall in domestic supply, of course, has to be accommodated through imports. The urgency of the imi~ort problem is highlighted by the fact that, during the first quarter of 1975, we im- ported about 37% of all the oil we used, at a value of $25.8 billion annually. The President has already determined that our current imports of oil are of such volume and under such circumstances as to threaten to impair our national security. lIe has acted within his ~autbority to constrain demand through the imposition of an additional license fee on crude oil and products. This limited action is an irkitial step, but we need to get on with further energy measures without delay. As you know, our current domestic production of crude oil and natural gas has been declining. In spite of a 20% Increase in exploration and drilling activity during the last year, the decline ut production has flQt yet beeiirev~r5ed, In the wake of declining production, we.. are not well prepared to withstand another embargo. Foi~ example, dOmestic crude oil production for March 1975 was 9.0% less thai in October 1913, and: hatürdl gas prèduI~tlon had declined by 5.0%. While energy demand declined by slightly over 2% in, 1974, recen~ ln~icators, particularly in the area of motor gasoline, are that .cpnsumption is moving up ag~iin. As the economy continues to recover, w~ en~ect demand for petroleum and natural gas to increase in the last half of this year. - The anticipated consequences are clear---demand~ in the absence of new leg- islation, is expected to move up, the production will continue to~ decline; and we anticipate an inevitable increase in imports, with the xesulting adverse impacts on national security and balance of trade, CURRENT STATUS ON ENERGY LEGISLATION Since the President spbmitted his legislative proposals for a national energy policy last January, the Congress has not enacted any Iegislátlon*hi~h would address. our energy problem In. a comilrehensive and balanced way. On the contrary, the Tax Reduction Act of 1975k while it was essential to help stim- ulate the economy, will negatively affect cur domestic energy program through thO changes in the depletion allowance. Altering the percentage depletion allowance has the net effect of withdrawing $i .6 billion from oil producers this year and about $2 billion per year there- after. The reduction in depletion is, in effect, a permanent tax increase on the oil producer at the very time we need additional investment in domestic explora- tion and development. It has already had a significant adverse effect on explora- tion. To remove this incentive without a compensating deOontrol of prices will substantially impede reaching our national goal of greater energy independence. ENERGY ALTERNATIVES While alternate energy sources, such as solar energy, oil shale, nuclear fusion and synthetic fuels are promising after 1985, the greatest energy potential for the next ten years is from our conventional oil, gas and coal resources. Today, almost 77% of our energy consumption comes from oil and gas and about 18% from coal. These are our basic sources of energy. Our distribution facilities as well as our plants and equipment are designed to use these sources. Substantial conversions o~ our plants, our industries and our homes to use other energy forms is not likely within the next ten years. Recently, the U.S. Geological Survey released estimates of undiscovered Oil and natural gas resources in the range of 50-127 billion barrels of oil and 322- PAGENO="0417" 415 655 trillion cubic feet of gas. While these new estimates are iower than the preVious ones, thOy are significantly `lkrger than existing proved reserves of 40.6 billion barrels of oil (including natural g~s liquids) and 233 trillion cubic feet of gas. in addition, there are in known fields enormous quantities of oil that have not been produced as a result of inadequate technology and uneconomical prices. In fact, by present methods we are able to produce only about 30 percent of oil which has been found. This means that almost twice as much remains in the ground as has been produced ~nd is in Included in known proved reserves There are promising technological developments which may improve the recovery rate, and increased prices make it economical to develop these technologies and to produce these more difficult reserves. Clearly, a potential exists for addit1~nai production through additional ex- ploration and secondary and tertiary recovery; but only If there are sufficient financial incentives. The Pto~ect Indepehdence Report estimates that, by 1985 at $11 per barrel equivalent prices, domestic oil production will increase frbm current levels of about 8.5 million barrels per day to 13.1 mfflion barrels per day, and that natural gas ~rod~etiofl will risefrom 21.3 trillion cubic feet to 24~6 trillion cubic feet. I have emphasized the need for ~ncwa~sed domestic oil and gas production because these sources provide real poten~tial in the near term for significant quantities of additional energy. In additiop, we must look to coal and other sources. Today, this nation has about a third of all the recoverable coal reserves in the world. We are the largest exporter of coal in the world, and at 1973 levels of consumption we have enough coal to burr~ for 800 yearS.. Yet coal production In the United States today is lower than it was thirty years ego. lo. 1960, coal represented 23% of our energy consumption; last year tbi~ drOpped to 18%. This trend has to be reversed. Our goal of 1.2 billion tons per year of productiOn by 1985 will not be reached if we do not remove government Impediments a~hd create incentives for expanded production. This ~ust inqude improved transpor- tation facilities as well as the opening of new mines. In the remaining areas, nuclear power is also a very promising source of energy. By 1985, it iS expected to furnish 13% of our total domestto. supply, up from 2% in 1975. There are, however, limitations in its use. It is confined to electricity generation, and its developmetit is plagued by construction, regula- tory and siting delays. ~Tbis country was a pioneer in the ~levelopment of nuclOar power; yet today It can take up to 11 years to build ~ power plant. in the United States while only 4 to 41/2 years in Europe and 3apan. Why? Because of excessive governmental regulations. While there has been some progress in developing synthetic fuels, substantial volumes of these fuels are years away. So, for the next t~n years, our main focus for expansion of energy resonrces~ must be on oil and gas, coal and nuclear energy. We must continue to recognize, however, that the. chief ba ~- riers to all new energy production lie at our own doorstep, right here in Wash- ington, D.C., in the problems created by the Clean Air, the moratorium on coal leasing as well as price .and supply regulation affecting oil and gas. This Administration is firmly in favor of protecting the public health through balanced clean air standards and protecting the environment. At the same time. while never losing sight of our environmental and safety concerns, we must strive to ensure that our policies are properly balanced to meet our expanding energy needs. rIrnANCIAL nEQUIEEMaNTS I have previously discussed the extraordinary need for capital investments to meet future energy demands. The capital requirements for energy alone will approximate $1 trillion in the next decade. The required investments for domes- tic petroleum are variously estimated to range between $12 and $20 billion a year through 1985, based on 1973 dollars. The availability of such capital funds will depend on the profitability of the oil industry. Recent reports indicate that, during the first quarter of 1975, the earnings of major oil companies fell off sharply from the level for the first quarter of 1974. This has been due to nationalization moves abroad and low margins ou servicing foreign operations as well as the lack of price incentives at borne. Concurrently, the major companies have announced substantial invest- ment cutbacks. Since there is a direct relationship between the supply of energy PAGENO="0418" 416 and the investment ihade to secure that supply, the availability of capital will largely determine whether we receive the energy we neecL Unless we recognize the need to Increase investment and capital formation and realize that profit- ability ii essential to this, we will not be able to develop needed supplies of energy and our reliance on for~1gn sonrces~will increase. OOMMRNTS ON ILE. 6860 With that background in mind, I will turn to the bill on which you have asked me tO comment. H.R. 6860, the Energy Conservation and Conversion Act of iD75, consists of four titles: Title I-Import `rreatment of Oil Title II-~Otber Energy Conservation Programs Title III-~Energy Conservatiol~ and Conversion Trust Fund Title ~V~Eiicouragiflg Business conversion for ~keater Energy Savings I will limit my comments primarily to tax issues, because I know thatFrank Zarb, the Administrator of the Federal Energy Administrati~n, will conient in ~Tetall on other issues. I would, however~ like also to comment upon the dl~cult problems associated with a quota restrictiOn on Imports. / TITLE! There have been suggestions that, Instead of ii~creás1ng oil prices to reduce oil consumption, we sboul& simply reduce, the s~ippIy of oil available by placing a quota on the amount of oil that can be imported. Proponeüts of quotaS argue that we eould not consume oil that was not available. That sounds simple. However, such an argument leaves off in midair,'and does not consider what happens after the quota Is 1inposE~d. One of two things is pos- sible: prices of. oil will rise, just as in the case of an import fee; or, alternatively, shortages and/or rationing will o~cur. QUOTA WI~E~OUT IrUnTEER CONTROLS If we put a quota Oti imports, the price of o11~will rise unless we take furthet action to prevent that rise. If' we knew for sure that a 10-cent-a-gallon price increase would redU~e consumption by 1 million barrels, daily, we could be equally sure that ~ti import quota that reduced consumption by 1 million barrels would Increase U.S. prices by the s~une 10 cents. We are dealing with the same supplies and thes~me dem~ind and they will balance out at the same place. Thus, an import fee and a quota' are likely to have identical price implications. A quota system~ bøwever, has two disadvantages. First, a quota normally leaves the additional price increase in the bands of importers and'producers, rather than In the hands of the governmetit. Second, a quota would probably `be more disruptive of. economic activity, be- cause the expectation of quota reductions would create new business uncertainties. QUOTA WITE CON1~ROLS Some proponents of a quota would introduce àontrols to prohibit the price increases that would normally follow from it. But such controls would, in turn. create shortages. At artificially low prices, the quantities demanded will exceed the supply. The shortages could then be distributed across the population by a system of allocation or rationing. We might embark on an era of chronic short- age and maladjustment, without the incentives to develop more sources of supply and to accept substitutes. I do not think the public would tolerate such a system. An allocation program is sometimes cited as a solution-primarily, I tbink~ on tue mistaken notion that it would avoid rationing. But allocation' is itself a system of partial rationing which occurs at the business rather than consumer level. An allocation program would deny businesses some of the supplies they need to continue functioning, and would lead to business dislocations and the loss of jobs. Further, much of the impact will be felt by small and growing businesses. The establl~hed and large enterprises can reduce, but others do not have such flexibility. We could find a continuation of'the situation that occurred last winter when plants closed because they could not get a sufficient "allocation" of natural gas. Undoubtedly thousands of jobs would be lost. At the retail level, quantities would be rationed by queneing, as Was gasoline last winter. Nor would all of this PAGENO="0419" 417 necessarily prevent consumer prices from rising~ To fully, ensure that prices will not rise due to shortages, we would ultimately have to ration gasoline, fuel oil, fertilizers and petrochemicals. Rationing is certainly one way of curbing demand and a number of national leaders have proposed it. We could perhaps live with. rgtioning in a p~riod of temporary emergency. But as a way of life, I suggest it is f~ndamentaliy incon~ sistent with our system and with the spirit of the American public. Even in timeS of emergency, rationing has never worked fairly or efficiently. To cut a million barrels a day from our consumption by rationing only gasoline for private households, We would have to hold drivers to an average of less than 9 gallons per week-a reduction of about 25% from today. To reach a 2 mil- lion barrels a day reduction by 1977 would require a second 25% reduction. Some persons would obviously need more, which means that the basic ration for ordinary persons wonld have to be even less. But gasoline accounts for only part of each barrel of oil, and we would clearly need to ration the remain- ing products, too-fuel oil, jet fuel, diesel fuel, refinery products going into petrochemicals, etc. Who would decide which persons needed more and which needed less of each of these things? Every family, every c~ar and motorbike, every store, school, church, every manufacturer-everything and everybody- would have to obtain a permit for a certain quantity of gasoline, electricity, natural gas, etc. Those allocations would have to be changed every time someone was born or died or moved or got married or divorced, and every time a business was started, merged, sold out or bought another, or the church or school added on a new room. And some government official would have to appi~ove it. Last year, when we considered the feasibility~ of rationing gasoline, we com eluded that while it could be implemented, it would take four tb six mOnths to set up, eixtploy about 15 to 20,000 full-time people, incur ~2 billion in federal costs, use 40,00Q post offices for distribution, and require 8,000 state and lodal boards to handle exceptions. When we consider the problems of just getting the mail delivered, are we really ready to trust an army of cl~1l servants-howev~r able and well intentioned-to decide who ~1eserves just what af this basic <~ommodity? People should ask themselves which they prefer: an, increase in prices~ or a system in which someone else could tell them now and for the indefinite future where and when they might drive or how Warm they might keep which rooms. Does anyone honestly believe that the American public is willing to trade these basic freedoms-in perpetuity-for 10~ a gallon? The President has proposed ihStead that we reduce consnmption. of oil by the most neutral and least bureaucratic system available-~-through tbe~ price system, The energy proposals would raise the price of oily At the same time, income tax cuts would increase the disposable incomes of every household. Tax- payers could, if they wish, continue to purchase more expensive ofi and oil products. And they would have extra money to do it With. The question they would face Is whether they wish to spend that extra money for more extensive oil ot whether they wish to use It for some other purpose-~--but the choice will be theirs. Imposing quotas as Title I does and instituting rigid allocations or rationing will move us in exactly the wrong direction. Another undesirable feature of Title I is that It eliminates the President's current authority to impose import fees and tariffs, and replaces it with set duties on Imported oils and authorities to raise these duties to a fixed level. We believe that this will severely hamper our domestic program by removing needed flexibility tO maintain adequate price protection for domestic supplie~. TITLE II Title II of ILR. 6860 provides, along with a nontax measure relating to auto efficiency standards, for the repeal of certain excise taxes on buses used in inter- city public transportation, and on radial tires and rerefined lubricating oil. Th~ Administration itself has proposed a comparable change in the tax treatment of rerefined lubricating oil, but we oppose the selective or discriminatory repeal of excise taxes. While repealing excise taxes on intercity public transportation might save some energy by reducing the use of private transportation, our policy with respect to excise taxes that flow into the Highway Trust Fund has been that all highWay users* should bear the cost of highway maintenance, and we believe that the potential energy savings here do not warrant a change in this policy. PAGENO="0420" 4~1~ Title II also gites tax credits to individuals who install home iqaulatien or solar energy equipment, or who buy electric cars. In January, the President proposed a tax credit for home insulation. It is a relatively inexpensive ftem, with proven energy-saving qualities. By contrast, solar equipment ~nd electric cars are expensive items, years away from development and the cost effective- ness of which has notbeen satisfactorily proven. We do want to encourage solar energy and we should do so through Federal support of R&D; but not attempt to develop such long-term energy sources through tax incentives., we oppose these tax credits to consumers because they appear to be premature. TITLu II]: Title III provides for an Energy Conservation and Conversion Fund, i~or the purpose of promoting research and development, We oppose such .a Fu14, All trust funds reduce flexibility in managing the national budget. Furthermore, trust funds make gvailable large sums of money without first defining needs and priorities, encouraging the Federal government to overtake and supplant private sector efforts. When potential sources of revenue are set aside for special purposes, we do not have access to those sources, which may not continue to be needed for the original purpeses. The Highway Trust Fund, which the President lies recently announced lie will reduce, offers a good example of why such J~unds should. be approached with great caution. Consequently, we resist the prolifera- tion of trust funds, although we are prepared to discuss various ways in which to promote needed commitments to the development o~ new energy resources. With respect to this Fund, for research and development, I would add that the new Energy Research and Development Administration (ERDA) has wider~ taken, and the Congress has approved, a major. accelerati~n of Federal energy R&D programs, including a 63% increase in funding in FY 1975. The Trust Fund would seem to ignore these developments, and indeed earmarks amounts of funds that may bu~ar little relationship to the nee~l ~f or spen~ing or the ability to spend wisely. Title III also provides for a Trust Fund Review Board of five mq~nbers appointed by the President, and whose duties would include evaluating, projects for which `ezpenditu~rcs are made and r~commending changes to Copgmss~ Although the Board ~ouid help select .ETIDA priorities, it wouiçl have no direct responsibility `for ERDA activities, Such a role could pessibly duplicate duties of other government agencies and fragment the wauagemqnt effort, TITLE iv Title IV aims to encourage businesses `to' flse fuels othei~ than petroleinu and natural gas. Part I. imposes taxes, beginning, in 1977 on t1~e business use of petroleum and natural ggs. There are two weakpesses here., First, the blil, exempts from tax the oil aM' `ga~ used by th-nth `engaged in transportation, agriculture mining electric generation iq exl~ting plants tex tile and glass inanufaäture, or in rental J~iousing.or lodging, Additionally, `certain tax-exempt organizations would not h5xe to pt~y the ta~ or~ purchases Of oil and gasP The, result would be an exemption for many major, in4nstrial users of oil and gas, causing serious eflleienc37 losses in the business sector. secondly, even' if the tax On Qil and gas used by business were to cover all businesses, the result would be an undesirable distortion in petroleum usage. Prices of products would be tilted in favQr of gasoline for private cars, fuel~bil and gas for home heating and other non-business uses. Yet one of the main pur~ poses of the President's program is to reduce consumption; and the individual consumer often offers the best scope for such reduction. Ultimately, the best way to cut down consumption of oil and gas will be to raise prices across the board, as was intended by the President'.s program, rather than to impose most of the conservation burden, on one or two sectors of the economy. Part II of Title TV introduces ml set of five-year amortization provisions for investment in "energy use property" including certain facilities used to produce coal or shale oil, to liquify or gasify coal, to use solar energy, and to burn solid waste to produce thermal energy. Part II also provides for five-year amortization for investment in certain railroad equipment and facilities and extends for four additional years the amortization provision of section 184(e) relating to railroad rolling stock. Part III extends the investment credit to solar energy equipment PAGENO="0421" 419 and denies use of the iuv~stment credit for investment in electric generating plants fueled by petroleum or natural gas. We do not feel that the five-year amortization an~l investment cyedit proposals should be enacted. Wherever the ecOnomics are favorable, there is no need for a tax subsidy for coal mining or for utilizing solid waste as a fuel. Instead, we should concentrate on removing the governmental impediments. When the tech- nologies for such things as solar energy utilization and shale oil production exist, the economics of business decision-making should suffice to induce their adop- tion. Where the technologies are lacking, what is needed is research and develop- men~-not an investment subsidy. Whatever the merits of a policy of curtailing the construction of oil and gas- fired electric generating facilities. I would urge the Coinpittee to reject the proposal to deny the iiivestment credit for such facilities and to accept our approach to assist utilities which I will discuss in a moment. There may be cases where utility companies will be forced to use oil or gas, either because they are required to meet environmental standards, or because they are situated where coal supplies are not available at reasonable prices. Denying investment credit would be another unavoidable capital cost that would be reflected in higher prices for selected grouj~s of consumers. Thus, this proposal is inequitable. More importantly, however, this proposal would, for the first time, introduce extvaneçus selective criteria for investment credit qualification. The economic and tax policy justIfication for our investment tax credit are somewhat more com- plex than oIlier incentives for business investment, but its neutrality is a highly desirable characteristic. The Administration has recognized the advisability of easing the capital cost of converting to facilities not fired by oil or gas. Accordingly, we proposed to increase from 10 to 12 percent the credit for such facilities. However, denying the credit entirely so. as to increase the capital cost of certain 3nvestments on the grounds that they are "unwortfiy" is quite a different matter. In that sense, the hR. 6860.proposal is an unacceptable departure from the general neutrality of the investment credit. Accordingly, I urge this Committee to reject the changes in the investment credit propnsed by HR. 6860. ~inally, in connfiction with all the provisions of Title IV, it is important to note that tax subsidies generally addres~. the results of the problem, not the cau~es~ We must clear away the regulatory ~nd price disincentives to ~uergy devol9pment first. Furtl~er, tax subsidies generally benefit only per~oms with tax liabilities. However, new and unprofitable businesses also should be encouraged to convert to alternative energy sources to conserve, or to increase supply. The government could better direct its efforts to eneourag~ conservation and conversion directly, such as the programs initiated by FEA and ERDA. The government is already spending much money for energy research and develop- ment. Total outlays for ERDA .for example, are expe~ted to exceed $8 billion during fiscal year 1fi76. Following further progress in technology and after iden- tifying those energy areas which offer the best potential, it may become clear that we shOuld step up .go~rernment efforts in well-defined areas. In summary, we find that We cannot support most of the tax aspects of HR. 6860, particularly in view of the unsatisfactory energy savings that we can expect from the bill. Likewise, these disappointing expectations make it difficult to justify estimated revenue losses from H.R. 6860 of $768 million for 1976 and over $1 billion for 1980. More important, grOss revenue gains from H.R. 6860 would go into the Trust Fund and would be spent. However, the revenue losses from the bill must also be taken into account in assessing the full impact on the Nation's budget. D ing so, the ultimate effect of the bill would be to increase the deficit by niore than $2 billion in fiscal 1976 and more than $3.5 billion in fiscal 1980. COMMENT ON THE DECONTROL OT PRICES FOR NEW NAtURAL GAS AND OLD CRUDE OIL Having commented on the specific provisions of the bill under consideration (HR. 6860), I would like to direct your attention to omissions which the Admin- istration feels are essential to the development of a comprehensive energy policy. We need a definite plan to deregulate the prices of new natural gas and old oil-'-that part of domestic oil production which is still subject to price controls. 1)econtrolling prices and eliminating allocations are, perhaps, the most important parts of the President's program. Keeping a dual price system for crude oil and PAGENO="0422" 420 the oil entitlêmei1ts ~rograrn creates diWtribntion and economic problems which could perinanent1~~ distort thet rn~rketplace. ~ucb distortions eh5flge the basis of decision-making from one based on cpst effectiv~eness to. one based on f~o1itical considerations. Retaining such a system will threaten the effk~iency of the economy, and ultimately result in higher prices to the consumer. L~ECON~ROL OF NSW 2~ATtRAL GAS A failure to increase prices will surelyaccelerate the already alarming decline in supplies of natural gas. On June 6, the Federal Power Commission released pre~ liminary 1974 statistics indicating a further deeline in natural gas resources committed to ihterstate pipelines. Dedicated reserves dropped from 134.8 trillion cubic feet at the end of 1973 to 120.4 tcf at the end of 1974, the Seventh eonsecntire year of deel~ne. rrbe PPC also released a staff report showing net curtailments of firm service by interstate pipelines of over 2 trIllion cubic feet (roughly 10&% of total U.S. production) during the period April 1974 through March 1975. Such curtail~ mez~ts are expected to increase to nearly 3 trillIon cubic feet for the period from April 1975 through March 1976. If supplies of natural gas decrease at current rates, replacement costs for alternate energy will increase dramatically. For example, the FPC reports that in Januar~V 1975 on a BTU (heat) basis, utilities paid almost 31/2 times more for oil than for gas and nearly 1% times more for coal, Homeowners and industrial plants are faced with similar or even higher costs (because of beating plant modification) for substitute energy, if natural gas supplies continue to decline. With deregulation and higher wellhead prices for natural gas, it will pay to drill in margjnal areas, to work over marginal wells, to make distant pipeline connections which are not ouw economically feasible and to drill hi the higb~risk frontier areas where there is reaibope for significant new di~coverles, Without higher prices, gas sold in interstate commerce will continue to decline, increasing the unit of cost of pipeline deliveries, creating uncertainties In supplies for busi- nesses and homeowners and requiring the ttse of high cost energy substitutes. This, in turn, will further depress the amount of natural gas resonreeS; which have already declined from 22 years' supply in 1955 to currentl$r less than 11 years~ ~supply. I do not believe we shOuld plate homeowners and industry In such jeopardy. ~LIM~NATIOl~ OF TEE TWO-TIER PEIOE SYSTEM FOE OE~DE OIL ~ecauseo~ the itneertaintles of p~st price control policy, we must also address the deregulation of "old" oil prices.: In doing so, we must keep In mind the dual ~ objectives of increasing domestic ui supply ~tnd restraining oil demand. Because of Drice controls, r~bout 0 percent of o~r production is selling lit an average price ~f $5.25~ In 1970, domestic oil production peaked,, declined slightly for the next three years. and accelerated to about aS percent dei~line last year. Oil production tçd~y is nearly 500,00 barrels a day below last year's rgte~and about 1 million barrels a day below 1973. Decontrolling o~l prices will allow the free market to provide tbe4ie$ed lneen~ tlves to discover new reserves and Increase recovery from existing wells *bi~h will help reverse this trend. Furthçr, by allowing oil to be sold at the market pr1ce~ consumption wjill be reduced. Moreover, allowing oil prices to reach a level reflect- ing world conditions will also serve as an incentive to investment in alternate energy resources and to the vigorous expansion of R&D. programs. Clearly, the most important element of an effective energy policy is the dereguia~ tion of energy prices In order to restore free market forces. In January, the Presidentprc~posed immediate decontrol of crude oil prices, and a tax on producers thal wouh~l assure that no sector of the economy would gain an unfair advantage from decQntrol. Since January, much has occurred to Influence the structure of a legislative program for decontrol as well as the tax which should be applied to producers. Taking all of this into account and in a spirit of compromise, today the President has proposed phased, rather than immediate decontrol, with a ceiling on all domestic oil prices. The plan will phase out price controls on domestic oil by January 1978. This phased decontrol program, combined with the $2 increase in import Lees already imposed by the President, will reduce demand by almost 900,000 barrels per PAGENO="0423" 421 day by 1977. Such actions, coupled with the President's other proposals contained in the B~nergy Independence Act of 1975, will reduce ~ur oil imports by. two miilioii barrels per day by 1977. fl~R. 68~0, on the other hand, can be expected to reduce in ports by only about 300,000 barrels per day in 1977. Complete decontrol of domestic production, and the $2 import fee, would raise consumer costs by only about 10 cents per gallon, some of which has already taken effect. The President's phased decontrol program will increase prices of all petro- leum products by about 1 cent a gallon by the end of 1975, by about 4 cents by the end of 1976 and by 7 cents when fully in effect in 1978. In conjunction with decontrol, we are still seeking a reasonable windfall profits tax, which would include a plowback provision. We must recognize that depletion has been removed and that costs of finding and producing oil have continued to rise, further eroding the profitability of oil producers and limiting their ability to increase their investment. As such, we would like to work closely with this coin- mittee in structuring a tax which will ensure that profits are no more than are needed to increase future supplies. We believe that the tax should phase out over a period of years to take ac- count of continuing cost increases and to encourage investment in supplies that will come on stream near the end of that period. Further, it may be most appropriate to irnpo~e the tax on only "old" oil-that which Is decontrolled under the plan-so that the function of the tax will be to phase in increases in producers' revenues over an acceptable period. Under such a proposal, the tax would not apply to currently uncontrolled oil, on the grounds that net profits on that production have been diminished by the elimination of percentage depletion and the rising costs of discovery and development. A plowback provision will provide further assurance that price deregulation and added taxes will not serve to adversely discourage needed investment in new domestic supplies. A piowback proposal must be carefully drawn to accomplish the reinvestment objective without encouraging wasteful drilling or other extravagance. nxciss r~xns ON NATURAL GAS ANn DOMESTIC cntmn OIL In addition to the ~Lecontrol of oil prices, the President propos~ed in ja~uary a progressive increase in import fees on petroleum and petroleuxxiproducts ~s well as excise taxes on domestic crude oil and natural gas. The President also pro- posed that these taxes and fees be rebated to the American people. It's important to emphasize that the President's program is all interrelated. No one part should be considered In isolation. With respect to the Import fee, as you know, a $2 increase on crude oil Imports and 60~ increase on products are now in effect. The $2 per barrel excise tax on domestic crude oil is needed, in part to recapture from domestic produ~er~ tbe~ price rise Induced by the Import fee. The President's proposal with respect to natural gas is anexcise ta~' ot ~3"d per in.c.f. On a ]3TU equivalent basis this is equal to. the $2~ per barrei~taks on crude oil. Unlike the oil excise, tax imposed on producers to ~oak up a price' in~ crease to consumers, the gas excise ta~r is imposed at the consumer level to i~acili- tate orderly decontrol of prices, to accelerate adjustments of consumption patterns, and especially to prevent dl~ersion of oil and coAl demand ~bc~ natural gas. Otherwise, the increase in oil prices will encourage a shift of niemand' to natural gas. After the deregulation of gas prices and With the replacement' of old gas under long-term contracts by new gas, the 37~ tax will serve to prevent un- reasonable increases In field prices during the interim period of price adjustment. The ta~ could be progressively phased out as in the ease of the oil excise tax. These measures will prevent windfall profits to gas producers. Even without deregulation of gas prices, the tax is necessary to prevent shifting to lower-cost, interstate ga~,'wh1ch would exacerbate interstate shortages. Accordingl~ 1 urge the Congress to consider enacting such a tax on natural gas, as well as the excise tax on domestic oil, and to enact the President's proposal to return such taxes to the economy through cash payments and tax reductions. ELECTRIC UTILITY PLANTS In addition to the previously mentioned energy proposals, any comprehensive and integrated national energy policy must address the problem of utilities and their need for expansion, the proposals, that I shall now discuss follow the recommendations of the President's Labor-Management Committee. PAGENO="0424" 422 We have said many times that the most fundamental problem of electric utilities is that of adequate rates, Unless users of electric energy ar~ required to pay the full cost of generating it7 including g reasonable return on invested capital, investors cannot be expected to iniTest in the industry, These proposals are designed to provide help through the tax system, but only if the regulatory authorities do their part. These tax proposals provide thceiitives that will make it easier for state regulatory commissions to take difficult but necessary steps. The proposed legislation would do the following: -Increase the investment tax credit permanently to 12 percent on all electric utility property except generating facilities fueled by petroleum products. No change of the percent-of-tax limitation is involved. The increase in the credit is allowable only if construction work in progress Is ineltided in the utility's rate base and the benefit of the increase is "normalizeil" for rate- making purposes. "Normalized" in this sense means reflecting the tax benefit for raternaking purposes pro rctta over the life of the asset which generates the benefit instead of recogniting the entire tax benefit in the year the utility's taxes are actually reduced, In th~ absence of normalization, the entire tax benefit would flow through immediately in the form of reduced utility rates for consumers, and no real econOmic benefit would result for the utility. -Give electric utilities full, immediate investment tax credit on prOgress payments for conStructian of property that t~tkes tkvo years or more to build, except generating facilities fUeled by petroleum products, without regard to the five-year phase-in required by the Tax l~eduction Act of 19Th. This new provision applies only if thO regulatory agency Includes construction work in progress in the utility's rate base for ratemaking purposes. -Extend to January 1, 1981, the period during which pollution control facilities installed in a pre-1969 plant or facility may qualify for rapid 11ve~year straight-line amortization in lieu of nOrmal depreciation and the investment credit. -Permit rapid five-year amortization of the costs of either converting a generating facility fueled by petroleum products into a facility not fueled by petroleum profiucts or reflacing a petroleum-fueled facility with one not fueled by petroleum. This amortization is in lieu of normal depreciation t~nd the investment credit, and is available only if (1) Its benefits are "normalized" for ratemaking purposes, and (Ii) construction work in progresS Is Included in the utility's rate base for raternaking purposes; -Permit a utility to elect to begin depreciation, duritig the construction period, of accumulated construction prOgress expenditureS, gener&1l~+ the same e~- penditures as those which qualify for the investment ~redIt constrtictfon progress payments under the Ta~ Reductiofi Act of 19'T~. An~ depreciation taken during the construction period will reduce the depreciation deductions available after the property i~ cOmpleted. This early depreciat1on~will be available only if the ratemaking commission InclUdes cOnstruCtiOn work in progress in the utility's rate ba~e and "n'ormailzes"the tax benefits forrate- making purposes. OOimti~tiCiion of gencratl~ facilities which will be fueled b~ petraleum products will not ~ual4f~ for such depret4ation. -Permit a shareholder of a regulated public electric utility to postpone tax * on dividends paid `by the utility on its Common stock by electing to take additimial common stock of the utility in lieu of cash dividendg. The receipt of the stock dividend will not be taxed. The amount of the dividend will be * taxed as ~ordiaary income when the shartholder sells the dividend `stock an the amount of capital gain realized on the sale will be decreased (or the amount of capital loss increased) accordingly. Dividend stock is deemed sold before other stock. The tax costs in connection with these utility measures are approximately $600 million. The breakdown is as follows: -The increase in investment credit to 12%, and the credit for progress pay- ments on eonstruction-$100 million -~--Extension to 1981 of the credit on pollution control facilities and the rapid five-year amortization of conversion costs-negligible -Allowance for depreciation of facilities under construction-$300 million -Deferment of tax on stock dividends-$200 million It is our view that the total tax cost of $600 million is eminently worthwhile, in view of the likely effect in minimizing severe power shortages in the future. These proposals are probably not the same proposals we would advance if we PAGENO="0425" 423 had the luxury of more time, a less critical p~roh1em, aud the realistic possibility of an overall solution to our country's economic prOblems. Some have poibted out that these proposals are exceptions to our theoretical goals for a perfect tax system. But the fact is that we must be practical aiid must act and act quickly. These proposals have the support of both business and labor, and are, we believe, the most effective tools at hand to deal with the situation. In the aggregate, they will substantially improve the immediate financial position of utilities and per- mit them to resume the long-range projects critical to energy independence, greater employment, and economic expatision. We recognize that other problems exist. We recQgnize, too, the extraordinary political difficulties of facing those problems squarely in 50 different states, as well as the delays and obstacles which are sure to occur under those circum- stances. The pro~iosa1s are designed to provide help through the ta~ system, but only if the regulatory authorities and consumers cooperate in doing their part. Several of the tax proposals are designed to provide incentive that will make it easier for state regulatory commissiOns to take the difficult steps which must inevitably be taken. The increase in the investment ~wedit will be a cash con- tribution by the Federal government for the construction of additional electric power plants. But, because of the limitation that the credit may be used only to offset tax liability, the regulatory commissions will have to do their part by setting rates that are sufficient to create a reasonable profit and a tax liability against which the credit can be offset. Similarly, most of the benefits of the bill will not be available unless the commissions include that property in the rate base, and provide a return on that investment. CONCLU5ION In closing, I would like to reemphasize the urgency of the development of a natioaal energy policy. This can only be achieved throtigh cooperation between the ~)ongress and qre Executive Branch. The President has presented to the congress a co~nprehensive energy program. His proposed Energy Independence Ac~ of 1~75 prOvides measures to achieve energy conservation, to increase energy' supplies, to deregulate natural gas and to improve our energy preparedness through a system of strategic reserves. In ~ddltion, he ha~ asked for oil decon- trol, a comprehensive energy tax package (including a windfall proffts tax and exci~e taxOs on petroleum and natural gau which will be returned to the Amer- ican people), and incentives for btilit~V fifiancitig. ThiS provides a complete energy program~ It is not the only ~possible approach, and we are willing to wqrk with the Congress to develop reasonable comprothlsea~ IThwever, we cannot cothpromlse our basic objectives reducing energy consump- tion and oil ipiports whiie increast~gdpme~tic supplies. The bill iuider consiffern- tion would not adequatejy mOve u~ toward those goals. We otbud ready tO Work with you to develop legislation that will achieve our ~itaI energy objectives STATEMuNT BY TiroMAs 0. Exazus, AssIsTANT SEOEENARx or STATE von EcoNoMIc AND BusiNEss AFFAIgS Mr. Chairman, my statement is short.: I The energy crisis is not only a crisis in our economy. It i~s ~á fundamental challenge to our security as a nation and to our role in the world. At present, the element in our economy most critical to employment and prosperity is subject to manipulation both as to price and as to supply by coun- tries that do not necessarily have an interest in our well-being and success. Just as we are vulnerable, so are the other main Industrial countries. Most of them are far more dependent on oil imports thati we are; most have fewer energy resources to develop. And the industrial countries have a strong interest in cooperation with each other to overcome their vulnerability. Alone, no single country can through conservation and the creation of alternate sources create a new balance in the world market for oil, and thus bring the price down. In the next few years no country can successfully defend alone against a new embargo, or massive shifts in petrodollars. Finally, no tingle country can alone carry out all the PAGENO="0426" 424 resea~eh and~development or provide all the éapltal required for replacing fos~il fuels when they are exhausted. But it is equally trire that the liPlustrlal countries would all suffer if they failed to restore competitive conditions to the oil market. A degree ef national freedou~ would permanently be lost. It would be far more'diffi~ult to restore sustained growth. The industrial world would begin to s~lit as each cottutry offered political a~id economic concesalons in an effort to make a separate peace with the oil producers. The future balance of power in the Middle East might be irreparably compromised. It was this sense 0± shared intereat that led to the U.S. initiative to convene the Washington Energy Conference in February 1~74. As a consequence the International Energy Agency was founded in November 1974. Eighteen countries now belong to It. The lEA's objectives are: -To provide security against a nOw oil embargo by a coordinated program to build oil stocks, and to share, available oil in an emergehcy; -To share Equitably among industrial countries the burdOn of conservation; and -To coordinate our measures to stbnuat~ the developmept of alternative sources. II That 1~ what we are alining at. What has ~o far been accomplished? ~irst, emergency planning. On the basis of the detailed agreement signed in November, the IJ~A now has the necessary planning and machinery tn a good state of readiness, should we be confronted with a new embargo situatiOn, In order to back them up, each country must have authority to implement quick- acting conservation measures on a coordinated basis, and we need decisions to raise emergency oil stocks in all countries from the present mInimum of 60 clays of imports to the agreed level of 90 days, In contrast to some other lEA members, the U.S. has lagged In developing the needed ethergency authorities. On the other hand, Congressional action to create a 90-day petroleum reserve will put us ahead of our partners in th'i~ critical area. However, both emergency powers and more storage are necessary for an eftective response to a ne~v embargo~ ~lt is clear that ~inet'abi1Ity In the Middle East crea~tes a very `r~al potentialfor a' new interruption In oil supplies. , Second, conservation. However neeessary~ it Is' palnfui a~d costly to restraii~ demand far `oil. And as a matter of simple politics, feW other ind~nstr1alized countries will ~be willing to sustain `a strong `conservation program over time unless others join them, and there is `thuS the possibility of elffing~ng market cOnditions and eventually bringing oil' prices `down. ]~`or this' reason we proposed `and tire lEA adopted the goal of savIng 2 MMBt) of oil by the end of 1975, and distributed the target among countries according to their oil consumption. ~1nce we'have half the oft consumption of the group, our target was 1 MMI3D b~ the end ot the year. Nearly all the other members of the lEA have taken action to deereaCe oil demand, by `passing through increased crude costs to the end user, by new taxa- tion, by such specific conservation measures as fuel switching and lighting and heating regulations. In coiftrast, the U.S. has lagged. So far the only major conservation meaSure with immediate' efteet that this country has taken is the oil iin3port fees. Decon- trol of old oil over the phased schedule the President will recommend will add very substantially to our conservation effort, bringing us up to the level where other countries are already. The lagging performance of the United States can be seen in comparison's with other countries' results. Between the first quarter of :W73 and the first quarter of this year Germany's oil consumption fell by 14, percent, Italy's by 8 percent, Japan's by 8 percent, Britain's by 18' percent, ours by 6 percent. And yet of all these countries the recession, which of course has reduced demand for oil, was far more severe here than elsewhere. We have the world's highest per capita consumption of energy-twice Germany's-but we have not been doing our part. H.R. 6860 would save us an estimated 314,000 bd by the end of 1977-not much more than the program Britain has already undertaken with an economy one- tenth the size of ours. Third, alternative sources. The basic actions to stimulate the development of new energy must of course be national: the provision of subsidies to high PAGENO="0427" 425 cost or untested energy developments;' tax incentives; adequate dome~tie pricing policies; the removal of unnecessary or undesirable legal obstructions. But there are Important contributions to be made internationally. -~By finding a way to cooperate in R & D without jeopardizing proprietary rights. No country has a monopoly on scientific imagination and inno~atlou. Even the U.S., with its major public and private industry commitment to energy R & D has much to gain through avoiding duplication, sharing costs, and scientific cross-fertilization. -By encouraging the flow of foreign capital into areas of energy develop- ment where it is needed and wanted. All of us have capital-short economies; with perhaps a trillion dollars of new capital needed In the energy sector in lEA countries over the next 10 years, we have an interest In fi~ding ways to encourage foreign investment without jeopardizing the achievement of the national energy policy goal of independenCe. -fly assuring that countries that contribute to the welfare of the whole group by developing higher cost energy sources are protected against pos- sible predatory pricing by the OPEC, and are not penalized if for other reasons prices fall on the International oil market. This is the purpose of the minimum safeguard price concept, in which each country in the TEA, by meanS of its own choosing, applies a comparable level of border protec- tion to energy investment. Contrary to what Is often suggested, this mecha- nism would not assure a minithum price to OPEC; it is a guaralitee oply to our own investors that they will not face competition from imported oil below a minimum, pre-establisbed level, well below current world prices. TEA countries agreed In principle on these three points lb March. They are now being elaborated within the Agency with the `objective of having a complete package ready for adoption by year's end. III Domestically and Internationally, we have just begun on conservation and alternative sources. The question we must ask Is bow far we must go, how. fast. The `answer must come, in part, from' analysis of the staying power of the oil cartel. In May OPEC produced 26 mmbd as against 32,8 mmbd in Sep- tember 1973, just before the Crisis. Despite the soft market, the OPEC price structure has come through largely intact, although quality differentials have `been reduced or elimiflated, and credit terms lengthened. Now 4emar~d~ will firm, as we' go into the winter and out of the recession. Absent additional con- servation measures, the' OPEC market may rise to pre-embargo levels by the end of 1977~ In the late 1970's It may begin t9 fall again as North See, Alaskan, Mexican and ChineSe oil comes on the market In large quantities.. Even' if there are no new conservation measures, and if OPEC succee~ts in raising prices to offset any 1n~reased costs of Its import~, some oil exporting countries will already have gone into balance of payments deficit during the period 1975-77. Algeria is in deficit now; so l~ Libya: Venezuela ahd Iran may follow. These pressures will Intensify in the late 1970's as the OPEC marl~et shrinks, when most producers other than Saudi Arabia and Icuwalt may go into deficit. A serious program of conservation-the 2 mmbd the President proposed for the U.S. by end 1977, matched by other TEA members to make 4 lnmbd-would greatly Intensify the pressures on the cartel. Given the cohesion the OPEC has shown this yearfl during the recession, it is not sure that such a conservation program would suffice. To be sure that the cartel loses its exclusive capacity to set oil prices, and does not regain it, we probably would have to compress the' OPEC market to somewhat over 20 mmbd. In the next decado~ this can only be done by large-scale program of developing fossil fuels. For the U.S., this would imply an import level of 3 to 5 mmbd in the mid-1980's, as proposed by the President. To see the meaning of this, consider the possible price increase OPEC now threatens us with. Each additional dollar on the price øf oil might reduce demand by half to one mmbd, out of a market of a little more than 25 mmbd. OPEC can now absorb cuts like that without excessive difficulty. But we had the President's program in place, the scope for such price increases would he greatly reduced or eliminated In the next three years. Not only would they be unjustified, as now: they would be Infeasible. PAGENO="0428" 426 Iv In parallel with our effort to develop effective programs of consumer coopera- tioti, we are also seeking to e~tablish a basis for productive dialogue between cOnsuming and producing natIons. The first formal attempt to launch a multi- lateral energy dialogue in Paris this fast April did not succeed. In May Secretary Kissinger propOsed a new approach to the launching of a dialogue, broadening it to include the whole range of relations betWeen indils- trthl and developing countries. This would Involve the establishment of three separate Commissions: One to cover energy, 0110 for raw materials, and one to consider problems of economic development. The reaction to Secretary Kis- singer's proposals has bOen generally positive, and we are optimistic that suf- ficient consensus can be reached along those lines over the next several weeks to permit agreement to reconvene the Paris meeting in early Fall to prepare for the creation of the commissions The purpose of this dialogue is broader than energy; it is to find a realistic and equitable basis on Which decisions affecting the main elements of the world econoniy can he shared between industrial and developing countries. The oil producers must understand that unilateral exercise of their power to raise prices at this time would not be consistent with this purpose. For two years we have ~ll been trying, in the United. States and among Indus- trial countries~ to build agreement around the tougher energy policies we must all adopt. We have So far achieved far less than we require. But it would be wrong to judge what now can be done by what has been done. It has always been true that the great democracies are extraordinarily difficult to get moving lInt When they do, they go very far. I think both otir friends and our advnrsaries should keel) that in mind, Mr. Chairman. So should we, for it is high time that we get on with it. [Whereupon at 12:30 p.m. the committee recessed to reconvene at 3:15 p.m.; the same day.] W~ERNOON SESSIQN Senator TALMADGE~ The Committee will please be in order~ I expect the chairman it~omentarily. I have not ~eard from him, but I will take the liberty, a~ ranking majority member, tO c~il the meeting to order. We have with us the distinguished Administrator of the Federal Energy Administration, the Honorable Frank G. Z~rb. Mr. Zarb, we are delighted to have yoti back before our committee. Yo~i may insert your statex~ient, in~the rdcord in full, if ~ou ~esire~ and summarize it and proceed in any way you~see fit, sir, STAT~M~N~ OP flON. ~`RANK G ZARBADMINISThATOR, FEDERAL ENEEG~ ADMINISTRATION Mr. ZARB, Thank you, Mr. Chairman. I will, with permission, insert my entire statement for the record and take only a few minutes to summarize, so you cat~ get on with your questions1 Senator TALMADGE. Without objection, it will be inserted in full. Mr. ZAnB. You have heard from Secretary Simon this morning, arid I am familiar with his statement. A great deal of what he s~iid is a duplicate of that which I will raise here today. I have been evangelizing on the subject, Mr. Chairman, since Janu- ary of this year. We ha~te had any number of opportunities to testify, PAGENO="0429" 427 and I am sorry to say that since January our situation has worsened a~ a Nation and unless we de something pretty quickly, it will be materially worsened in the year or two ahead. Our imports are continuing to increase as our domestic production decreases. We have witnessed the nature of the cartel and the fact that it will take advantage of that situation wherever it can, whether it be in the rising of prices, or inducement of others to do so. Even our good friends to the north, the Canadians, charge us something above the world caitel prices. So, as a Nation, in these 7 months of debate, we have perhaps èrystal- lized some of these issues better. Indeed, we have all perhaps learned something and benefited. But, as we have done so, our national condi- tion has worsened. The President has put forward a program, Mr. Chairman, that out- lines a formula for this Nation to come to grips with both conservation and the bringing on of additional supplies. We did not start, nor are we now, of one fixed mind, not willing to look at and consider other options and alternatives. We have been doing just that for the last several months. Howevei~, we do urge and ask rather desperately that we get on With the job and enact necessary legislation; legislation which will let us begin the process both of becoming independent as a Nation and demonstrating both to the producers and the rest of thç~ world that we have the will and the courage. The rest of the world already knows we have the resources to take the necessary steps. to bring down our consumption of oil production and bring on our own substitute products. Mr. Chairman, my statement ~s comprehensive and complete. I know that there are special areas that the committee wants to get, into, so I will terminate my remarks at this point so that we may get to, the questions. Senator TALMADGE, Mr. Zarb, thank you very much. I find some difficulty with the President's program, because as I see it, it is predicated. on the assumption if you raise the price of a product high enough, the utilization will fall off, and therein you have a reduc- tion in the consumption of petroleum. I am certain that that is true, hut I find it most inequitable. For instance, if someone wants t~ tour from Miami to Mahie and various other points in the country has the financial resources, the increased price of gasoline and petroleum means nothing. But it means a great deal to working people-and working people live all around me; a good many of them are blue collar workers and some white collar workers. I live 25 miles south of the city of Atlanta, the heart of Atlanta. Virtually all of my neighbors work in Atlanta. That means a 50-mile round trip daily, 5 days a week; 250 miles a week. Getting about 12 miles to the gallon, they would use a little more than 4 gallons of gasoline daily. In 5 days, they would use 20 gallons of gas. With the $3 tariff raise in price-I believe Secretary Simon said they will be paying an additional 10~ per gallon for gasoline. Mr. ZARB, The import tariff is in some places $2, Mr~ Chairman, and that has the effect of about 3ç~ a gallon. Senator TALMADGE. It is 3f now. PAGENO="0430" 428 Mr. ZARB. Yes, sir. Senator TAL~1ADG1~I That would be ~ ~oi~isiderable burden on working people that are already hard pressed by inflation. Ours is a mObile society throughout the country. The illustration I gave you about my neighbors is true all over America. What is your response to that? Mr. ZARI3. Mr. Chairman, let me start by saying that there is no free lunch in this business. What we do is going to cost. Senator TALMAIGE. Will you yield at that point. I do want to an- flounce we will follow the chairman's rule that he invoked this morning of ~ minutes f~r each Senator's interrogation. I hope you have started the clock with me. and let it ring on time. Go ahead, sir. Mr. ZARE, The obtaining of our mdependence, as far as reducing consumption and bringing up supplies, is. going to cost this Nation from $6 billion to $800 billion over a 10-year period. Unfortunately, no matter what we do in Congress, no matter what we do as a Nation, the cost ~anñot help but fall on the individual consumer. If we do nothing, and continue down the path that we have been following until now, our domestic production will continuO to decline. It is declining now at the rate of 6 to 8 percent a year. Our con~mptiG~r will increase, and ~with decreasing~domestic production, our imports will increase. The pro- ducing natiOns have already demonstrateU a capability to raise prices without any economic rationale.. I am sure that they will feel free to dos~ in the future, particularly if we do not have what it takes to put our energy house in order. I am sure you realize that the policy choice of a price mechanism to achieve conservation was not an easy decWon for the President. It is not a political answer for a President or anyone else to talk in terms of high prices. We examined the various alternatives, particularly with respect to equity, especially for those in our society who have the small- est economic voice. We loOked hard, as the House looked hard, at a quota contrOl and allocation system, and we came back to the method- ology of price as the only means of gettingthis job done, both short term and long term. We need to hthre ah incentive for energy conserva- tion in our free-enterprise on econOmy: where homeowners make differ- ent decisions on ceoling and henting units; insulation, and storm windows, automobile drivers make different de~isions with respect to automobilies, and plant managers make different decisions with re- spect to the kind of equipment and processes they use in their factories. An energy ethic needsto be entered intO this decisionmaking process. Over a 10-year period We hope the American people will learn tO use, appreciate, energy as a valuable commodity in our society. The impacts of the other programs, such as allocation and price cOn- trol, ~are rather serious on those who can least afford this program. I can point to the horrible disadvantages to this group during the em- bargo. They certainly were more neglected than those who could afford to make special arrangements with their seller, or appeal for special treatment under the law. The price mechanism does indeed raise prices, but the President's program provides for those dollars to be collected by the Governm&nt PAGENO="0431" 429 and then returned to the people, with an extra amount going to people in the middle and lower income tax table portion. And. for the life of me, Mr. Chairman I do not understand why some of it has not been done already. Thus far, we have collected about $800 million in tariffs. We proposed this at the outset since we are going to impose a tariff on import oil. Because new oil follows the oil market, an increase of new free domestic oil would occur, simply because of our tariff on the imports side. We proposed a simple excise tax that simply would have severed that much away from the producers, back to the Treasury, and recycled to the American consumer. At this point in time, if an excise 1~ax had been enacted and that is a very small provision and has nothir~g to do with the windfall mecha- nism, we could have collected since February 1, about $1.5 billion. If the President's program, or that portion of it, were enacted, we could be refunding that to the American people today. Those of us that are concerned with the economy, as I know we all are, and the equity situa- tion with respect to low income people, must keep in mind that any mechanical means we use is going to have some inequity. We have looked at various approaches, Mr. Chairman. We went through this with the House side for 3 months, and they brought in their econogiists. They looked at quota controls and allocations and what that would do to the economy. The only meaningful way to get this job done, so that we have a long-range impact or everi a short-range impact, is to readjust the value of energy in our society. Senator TALMADGE. I agree with you. It is absolutely imperative that we do something. And I think this is the most serious crisis that our Nation has been confronted with perhaps since World War II. And in my judgment we have got to mount an operation similar to the Man- hattan project to develop alternative sources of energy supply. And that is long range. Short range, it seems to me, we can take a few simple actions which would be quite effective and rio cost to the taxpayers. You and I have discussed this on one or two occasions. You were not Overly impressed, The Secretary this morning stated that we were using I believe about 6 million barrels of petroleum a day on automobile traffic. Do you have any idea how much of that is purely pleasure driving. Mr. ZARB. Our estimates are at least one-third of that is for sO-called pleasure driving. Senator TALMADGE. I would guess one-third also. And that is based on purely a guess, with no statistics, if you have been to any college e~tinpuses-mny time is expired. The CHAIRMAN. Go ahead, finish your statement. Senator TALMADGE. If you have been to any high school or college campuses recently, and I go to them quite often, you will find acre~ and acres of automobiles there. Unfortunately, most of them have credit cards and parents that are billed once a month. If those credit cards were cancelled I think that within itself would stop lots of this ~nonsense. Also, I think that we must vigoroi~ly enfOrce the 55-mile speed limit, and you can do that, if you let the States know in no uncertain 55-583-75----pt. i-28 PAGENO="0432" ~4BO terms, that if they did not comp~y, their Federal highway funds would be withheld. Then we should close filling stations on Sunday-not that it would snve ~o n~ucb, gasoline, it y~ould saye some-~-of course, you and. 1 kuow~they can buy it on Saturday, but such closings would create a sonse of emergency which, I think, would prevail throughout the whole country. The `p~opie would be conscious of this emergency. They are, not conscious of it now as long as they can drive up to a gasoline tank and get fuel. They think it is just an oil company rip off. I hope you ~will give serious consideration to those things. It would not cost anything to enforce it. )~ou wonid be in business, if you took the action tomorrow before sundown. And I a~n convinced that would save an euoimwus amount of petroleum. Ti~ank you, si~, The CiTAIRMAN. Senator Haskell?, `Se~iator HASEELL. Thank you, Mr. Chairman. Mr. Zarb, when Mr. Simon wa~ here this morning, I observed that his statement did not make any reterence to conservation. Of course, I woi~iJd hope that you and I would agree that the problem is increas- ing suppiy and ~lso ~ and he paid that your state- ment would address itself, to conservation. But I have gone through your statement, and I do not see it. Maybe it is be.caus~ one of your predeccssors talked about conservation, and he finds himself now elsewhere. Do you have any thoughts. on conservation? Mr. ZARB. Well, Sunator, as you must know by now, I am not re- luctant to talk about issues concerning energy conservation. When you refer to conservation~ T assume you n~ean voluntary conservation? Senator HASKELL. No, that is not really what I meant. I notice that on page.24 of your statement, you say, "We believe that the voluntary fuel efficiency an~reepieuts. made by the major manufacturing, an- nounced' by the President, continue to he the most effective way, to achieve increased fu~l effici~ncv." Now~ I assurne~ therefore,, that you rely on these a~reements~ and that you woUld object to mandating certain fuel ef~1ciepcy levels over a period of time in a statute, I gather I have to he correct on that~ or you would at least have spoken up in favor of `the very mild Heuse provision that is in the bill. Mv, ZAPB. My auswPr is in reference i~o the mUd House provision that was in the bill, Tf the bill had other remedies that we thought were essentiaL we would po~ obie~, to them,, and. I will dare to make a statement thet we would not have objected to that particular pro- visio~ But I r~afly d0 want topoint out what appears tobe-~---- Sqpator HA ~ May we stick with this. I thinj~ it, is important. You would not object to a statutory direction to Detroit on an ipcreas- ing level `over a period of years to brino' up the fuel efficiency of the Americap automobile. Am `I correct? Have I, stated your position correctly? ` ` , ` . ` Mr. ZAne. I suppose you are statinc~ it corr~ctly. I do want to point out my feelings on the matt~r,~.,thoug~, I said we would .haye a~cepted wjthopt ~trenuQus ~objection that, position it~ the 1-louse bill~ if other things were provided to get the iob done. Senator, we have sometimes overemphasized what we are accomplishing in some of these activities, PAGENO="0433" `431 ~iich as l~islat~i. Th ~e~rô~t~ we fe~l t~ t"~é~i~e ~i~fly gettin~ to an issue which has caused sothe o~ our pr6I?Iems, " ` Senator FIASKELL. Mr. Zarb, if I might interr~t~-~ou see;' Mr~ Simon said, let us rely on these voluntary agreem~nts Now I h~e these voluntary agreements before me, and I do nOt ~think they `ate agreements. Perhaps I do not know how to read a letter. But ,1~te is a' letter from the president `of General Motors, adchessed to fQi~ner Secr~tary Morton, dated January 10, saying' that th~arO' going to raise. their mileage by 40 `percent. At the end of t'ii~ letter is this phrase "However, in any model year, additions `iii the economy or the market m~y make it not possible for ua to sell the mix `of' prod- ucts that would b~ required to meet our co'mmitmOht~"-which is ~n `out if I ever saw one. " Then, there is a letter from the president of Ford~Motor' Co., also `addressed to Secretary Morton, and he says-~well, I `eannot find the exact sentence. But he has an equally large loophole. A~d this i~ why I hate to hear the administration say, yes~ we have commitments from the motor companies, when they do not appear. Now, would you like ii~ to get some stati1tor~ ~Ottrndtments, and if so, what form shduld they take? ` ` ` ` ,,`, ` ,~ Mr. ZARB. Senator, we need tQ effect conservatioi~. a~ros~ the board, and we need to do it strongly. That means that we earn~ot focus exelu- ~ive1y on gasoline and' fuel, as though we cãn~achievé a ~asoli~ie savings `and have done the job, beèau~e that will riO~. do'~th~e jbbL Gd~ohne p~ duction is only 40 percent of a ci~ude barrel. In. response tq your second question, we ought to keep in mind' that when we talk~ about read- justment of the automobile fleet, that this should be d~iie ~u an ordeHy basis starting in 1977-78, and then phased in ~ Now, ~teep in mmd that~ our fleet turns over every 7 to 10 years,' so th~twhãtéyer begins in 1977-78 has an impact on the total energy question some years before it really ha~ a be~ring~ So, we should riot eaieiiiate `that" `once this is doiie, it has meally done a magnificent job in conservation iii the short term The IH~ouse, having gone through the s~nie analysis that we did, and talking to the same peopl.e ~ did, ~nalIy came to the conclusion that the 40-to-45 percent improvement average fleet mix was the right way ,to ~go ~iu the effeeti~tely legislated voluntary ptog1~am that the Pre~ident has achieved. F~ankiy, my v'ie~ is that if we get an~r i~asonabie'hie~Oase' ingaso- line plices; as we have, and sustain that for sOme ~periOd~' of `tiie~ the market is going tO more than thie~take both of those ~rovMions,' be- caus& the ArneHeah people make the final `decisidii t'herei They'*iriade a decision when gasoline reached 19.9 cents a gallOn, andthey `got a'free set of glasses with each fill-up. They ord~r~d thron n~piated dun- boa'ts~from Detrort~ and that iswhat' Detroit j~roduc'Od; ` ` ~ Now, if you look around you, and examiiie. th'O kihdof advertise- rnents:that we see, ~ou?Il notice that luxury. `cars ar4"ad~rertising their improved mileage per gallon.' That trend is `goi~g to ~incrthse, `aii'd because of the marketplace, the minimum will pmk ~ip~Sb;dh ~ns~srer TJ~e `need for this ~r~dual process was established ~yen by `t~o~ee frqm their hear. inns Wt113 economists etLghIeer~ and or~an17ed labor from Oetro]t~ PAGENO="0434" 432 to your question, when all was said and done, ~we had other aspects of the House bill that were efiective, We would have accepted the legis- lation knowing all along that, (A) it is not going to have a mean- ingful impact short-term; and (B) that the market forces were probably going to overtake whatever was legislated in that particular division. Senator ITASKELL. My time has expired. Thank you, Mr. Chairman. The CHAIRMAN. Mr. Dole? Senator Dor~E. In conjunction with the line of questioning just engaged in between Senator Haskell and Mr. Zarb, I would like to place in the record at this point a telegram from the plant manager of the GM assembly division plant in Kansas City, Kans., strongly objecting to any statutory regulation requirement. [The material referred to follows:] General Motors just telephoned the following "Urgent Rush Wire"-A copy will be mailed to us. rroin: Fairfax plant In Kansas City, General Motors Corp. To: Senator Dole. Important that you know of the potential damaging impact that stringent mandatory fuel economy standards legislation could have on new car sales and auto related employment in the State of Kansas. Both S. 1883 reported by the Senate Commerce Committee and H.E. (3860 now before the Senate Finance Committee would set such standards includtng a requirement that average fuel economy of new cars sold in 198~ be at least 28 mpg. These bills would be especially ln~urious to plants and employees engaged in the production of full-sized motor vehicles. A recent employment survey of GM plants showed that 2,600 employees work at jobs related to the production of full-size cars. Further recent data shows approximately 2,267 GM employees in Kansas on indefinite layoff equal to 47.8% of November 1973 hourly employment. Difficult fuel economy standards, particularly the 28 mpg requirement for 1985 could result in further uneniploy- meht and severe personal economic problems to auto workers in Kansas whose jobs depend on full size car production. Strongly urge you to oppose and work to defeat these unnecessary and potentially damaging billS especially at this time of high unemployment in the auto Industry. Fuel economy improvement objec. tives are being met in response to the demands of new car buyers. Thus~ manda- tory fuel economy standards or fuel efficiency taxes are unneeded and could fur- ther diarupt the industry and have severe Impact on 13.5. auto industry employ- ment and prevent achievement of full economic recovery, B. D, hAMILTON, Elant Manager of GM ~4ssembly Di'vision Plant, 13'oArf asp, Kansas City, Kans. Senator DOLE. Mr. Zarb, if the price of old oil is decontrolled, ap- proximately how much additional oil could be recovered by 1985? Mr. ZARE, Appro~cimately 1.4 million barrels a day. Senator DoLE. Do I understand that the President's plan would be available sometime this week? Mr. ZAnB. Approximately, within a week. Senator DOLE. is the President's 30-month decontrol mechanism 3.3 percent a month? Is that accurate? Mr. ZARE, That is correct. It has one additional feature, which was not in this ~original program, and that was the ceiling to be plated on new and reh~ased oil. Senator DOLE. That is $13.50. Mr. ZARn. ApprO~imateiy $13.50; it would average to be $13.50. Senator DOLE. And that would be whether or not the price of OPEC oil was as high as $16 a barrel. It would still be an average of $13.50? PAGENO="0435" 433 Mr. ZARB. Y~s, sir. Senator Don~. Is there any reason the administration is not sending, along with the decontrol plan, a windfall profits section? Mr. ZAni~. Well, we have submitted wrndt~all tax legislation for so long now, we have thought that we really had enough done. Typically, with Ways and Means, we testified, in favor of a windfall tax pro~ gram, giving the principles to adhere to, and do not draft legislation as we do in other forms of legislation. So much depends on the direc~ tion that Congress moves in. If it moves in favor of this excise tax that I just described earlier, that will change the formula windfall. If it decides it does not want an excise tax, than the windfall will change. Depletion has changed the plowback thinking that was in the original testimony. I think that we have said a lot on the s~bjeot. We have testified many, many times on the question. I think that all of our comments are in the record. Senator DoLE. So the administration still favors the windfall profits tax with a plowback provision? Mr. ZARB. Yes, sir. Senator DOLL In line with Senator Talmadge indicating what we can do to save some fuel without any additional cost, how much fuel would a Federal right turn on a red light save? Would that amount to anything? Mr. ZARB. We just do not have that. It is something we would have to do some work on. I notice that someone introduced a bill last week, and perhaps there is someone else's that we can build upon. It is probably a drop in the bucket, but it is one of the painless solutions that does, in politics-might appeal to those in politics. Senator DOLE. Apart from the conservation effects of higher energy prices, is there any alternative method to increase domestic production without increasing the price of petroleum products? Mr. ZARB. Well, there really is not, over the long term. We had to insure that the time of return would make people invest their dollars in further development and exploration and subsequent research for resources. There is just no way to escape the price crush. As I said earlier, if we do nothing we will be just paying- Senator DOLE. I think that Secretary Simon indicated this morning, I think the overall cost of the administration program would be an average of 10 cents per gallon? Mr. ZARE, Yes, sir. Senator DOLE. That is to decontrol. Mr. ZARE, And it has. Senator DoLE. That is, as opposed to the gas tax, which that would reach the range of 20 to 23 cents. But I think the point I want to make, and the point you have made very well many times, is there simply are not any painless solutions, are there? Mr. ZARE. No, sir, there are not, and Senator, I would just point out that Senator IIa,skell raised some questions about mandatory steps that could be taken, where those are essential, and we did not think they were needed in the automobile area, because we thought that they were legitimately building standards, so on a very narrow range would have some formal efficiencies that we are not happy with the PAGENO="0436" 4a~ relationship between the marketplace. The relatioi~s~iip between bi~yer andsè~lIer~onstA~ucthni is sub~tanti&fly. 4i~Fe~nt. We proposed hu bin~g standards, but that title ]tas not b~en passed. We asked foi~ appliaiice labeling iegisiat~on,' so that con~mers can mak~ a j~dgment; one appliance against another, with resp~ct to energy effi~iexic~y.~Thati is. somewhat of a mandatory approach. This title ~iso hàs;hot been p~s~ed. We asked for special authoritie,sto. assist poor people to ~nterize their homes~ using yoluntaryheip in Federal. funding. Tlmt~itle has notbeen passed; . even those approaches that are not; based on a price mechanism, hut on a mandatOry~kind of. approach, will ge~ the. job done. It does take a mix, and as you point out quite well, although every little bit that counts, evei~littlé~bitdoes noi~do the ~hole~ob., Senator Potrh Do you favor any provision in 68~O other than the, tax ereditfor~ins~il~tion that'i,s the House:passed' bill? Mr. ZARB, Well, I would say not, Senator Dole~:That is probably th~ one are~i to whi~h `we could subscribe. There were some excise taxes in the original form which had a meaningful conservation effect, but in the hearing process and so on, they were watered down to some- thing; that~we~thi~'1~ would be deceiving. Our total problem with the bill isthat it~ju~t dees not do the job. `It s~ys sovery~ very little. ThE~ Oi~~ MrI~ibicoff. .. Senator RIBICOFF. Mr. Zarb, what would your reaction be to a wind- fall prbfiteta~wliich; cycles much of the r~enuerfroth the tax back to the cdnsurn~r~ who pay the higher oil p~ices in the form of credits against their income tax? Mr. Z~ne. Senator; I would say that, in principle, that is `exactly in line witI~ thQ Pre~ident's thinking, and I say in principle, because th~ hext `ste~ Oflce you have gotten by the principle, is the calculation of the' revenue distribution system. Remember, when the President first submitted a windfall `profits tax we did `not have a depletion change, so that~dis~ussion was somewhat easier; At this point, we have to hav~ a whole iietw'loOk ~t that, but' we are'subscribing principally to exactly what y~u juststated. ` `Senator Rii~nx~~. That is very complex. Let u~ Say you wanted to do, and needed a lot of help, Are you in a `position or the admin~stra- tiOn~ b~ore wC finish Our work next week, of coming up with a recom- mendation along that line~ to be put into this bill? Mr. ZARB. Yes, sir. Senator Rmicorr. Then we can expect that the' early part of next week the committee will have a look at that proposal? Mr. ZARB. Nov, I assume tI~at we are going tp connect that to a de- coiit~ol propôsa~l-~t1ie l~resident's deconttOl plan. `Senator RiBIc~or~. T~et us see what youi~ plan is. I mean, I think it could have a great effect upon: all of `us. J `think'it cO~ild effed thy' thinking. I1~ I felt that the windfall profits tax wO'pid be~-the whole: deoontrol would be cycled back to the copsurner, that could make a difference in'my tote, ahd I do not know, it could affect other votes too. ~o I think that i~s importa~it. `Mr. ZAnB. All `right, sir, we will go ahe~d~ wjth it. I just want tO point out that, when we look at: the total deeonti~oI revenue recycling to the consumer over a period of time, ~e mu~t realize that `it is g&ng PAGENO="0437" to be inor~ and iiiOr~ ~tly to `de~reldp oiI~ Ways `and M~ans' oi~igi~al bill had tbis in mii~d'to"a~khoWl,ed~th~ fact th~tt it `Would `b~ more co~ly so that'~in~1f all taxe~ became~esSer and"I~ser rand, bad a~pbase~ Out) period ~ve~ a certain period of `time. Sënat~r Ri~i~o~i~. But, r assun~'ybW'ha17e a formula computer~zed~ and youi~ ~corioTrui~who ~r~it~k~ thi it. `It'is `eornplex~ but I.think a lot of us would like, to take a look at it. Now~ there h~ b~eii ~ lot of talk about the prospect of another shortage of ga~othie; a~ denied, keeps bouncing back again. Do you expect such a shortage, and how do present inventories of gasoline stand~ Mr. ZAIuB. `The ~ite~nt energy `sources are substantially loWer than they were last year at this tim~,' Senator Ribicoif. As you know, we realized some Wee'k~ ago that gasoline inventories weFe down under 200 million barrels and that gave us some concern.' We raised that ~oncern with the ii~dustry and asked for ~t report from the industry~ a~ report that we have obtained; and an indication of what their plans `are for additional refining. ` ` `` ` `In each .inst~thce they' reported that they are iñcrea~ingtheiI~' refin~ ing, had at that moment a higher level of crude stocks than they had a year ago, and, in our `opinion, sufficient ~eflning capacity to' itisure that we avoid shortages this summer. It `is still my view that if `this incrensë is sustain~d'in production, `and we do `iiot have an outlandish increase in consumption, we will `not have a majOr shortage o~f gasoline this summer. , ` ` " ,, ` `Senator Riei'cori~. Althotigh on a nationwide basis, one-third of our energy requirements are' met by `oils' in New England 85 percent of our energy needs' are met by. oil an~i much of this is imported. As a result, our New England utilities pay twice as much as the national average for energy. ` ` ` Now, if you decontrol theprice of oil, New England consum~rs:will suffer the most and I am assuming Minnesota too, Wisconsin. Do you have any specific proposals on how to protect th~e New England area from disproportionate suffering as a result of decontrol? Mr. ZARB. Senator, apart from the winter,' .1 do not,think there will be unfortunate suffering in New England. I think, as you point out, New England uses oil for 85 percent of its energy generating as com- pared to some 20 percent across the Nation. ` The, important feature in. New England is that they now depend upon hike-priced imported oil for a good portion ~f their consump- tion. The successful, decontrol,of `all oil prices will have a more mean- ingful impact on the rest of the Nation and. close the, gap that i~ now between New England and other parts of the Nation. This will have an equalizing effect so far as New England is concerned. Senator Riaicorr. The equalizer will be that the price to everyone will, go up. , , ,, ` ` ` Mr. ZARB. It will go up severely in other parts of the country,) as compared to ~ew England, because of their high imports at this time. New England, noyv. gene~ates all of its ~1ectricity with oil that is imported. A good part of their fuel oil is imp9rted~ so, the, fact that New England relies so heavily on imports right now, indicates that their prices would go up less with a national decontrol prograrq a~ect- ting domestic production. ` PAGENO="0438" 436 We have an analysis as to how it affects various parts of the country. We will submit it to you and submit it for the record. Senator RIBrno~T. Now, as you and Mr. Simon have testified~ a very large proportion of petroleum used is for gasoline, for pleasure driv- ing and automobiles. Does the administration support the use of taxes to force significant improvements in the gas efficiency of cars as quickly as possible? Could you tell us what were the advantages and. disadvantages of the measures that the House Ways and Means Committee considered to increase efficiency of cars? Mr. ZARE. First of all, gasoline is indeed a sizable consumer, 40 per- cent of total crude barrel, and as you point out, pleasure travel is a good portion of that percentage. But, I hasten to add because it is going to come back to visit us at some point, that somebody's pleasure is oftentimes somebody else's business. As we look at the toruist business in some parts of the country, and realize that some States are dependent upon tourism for a substantial part of their income, we have to decide how to recognize such in any caculation on the importance of the so-called pleasure driving category. If the House passed a bill on automobile efficiency that Was almost identical to the President's agreed to program with Detroit, I would find it hard to be against legislation that I think legislates what the President intended to do in the first place. But, to repeat what I said earlier, I really believe that with the way the market is working now, the market is doing what we said needed to be done by legislation. In my view, the workings of the market will far exceed any objectives that we try and set up by legislation. The CHAIRMAN. Mr. Packwood? Senator PAOEWOOD. Given normal circumstances, what kind of re- duction in gasoline consumption do you expect as gasoline taxes in- crease? Mr. ZARB. We do not have a gasoline elasticity chart with us but June numbers are about ready to be finalized. It looks like our June consumption this year will be equal to June consumption last year, and, equal to the 1973 June consumption which is a phenomenal event. So, with some disclaimers, as we do not know the effects of the re- cession, the fact is that prices already have a meaningful impact. Senator PAOKWOOD. Run that by me again, the prices have a mean- ingful impact even though the consumption is the same as last year. Mr. ZARB. Yes, sir, because our consumption of gasoline has risen this year. Our own analysis was that our rise in consumption would be from 7 to 8 percent, Not having such a rise in the rate seems to indicate that we have curtailed consumption. Just look at the advertisements of the major automobile producers and the kinds of merchandising they are doing on miles-per-gallon basis. Senator PAOKWOOD. If it has that effect, and if the rebate can be used to return money spent for higher energy, why not increase the gasoline tax 20 or 30 cents, draw down the consumption, alleviate the difference and achieve a substantial savings with no harm to middle and lower income. PAGENO="0439" 437 Mr. ZARB. I agree with everything you have said. The whole series of processes that you have just described except for the 20 to 30 cents gasoline tax. When we talk about 20 to 30 cents gasoline tax, we think we are going to take all of our conservation out of that one prod- uct. It does not work that way. We have 60 percent crude barrel that is not gasoline. The second problem and condition in not getting the job done, is that it is terribly unfair when you visit an oil well in various parts of the country. In Massachusetts and. Manhattan we drive so much differently than we do in Nevada and when you take oil or gasoline you do not save 60 perce~it of, crude barrel and you are not being very equitable to various parts of the country, Senator PACKWOOD. I should preface my question as I did earlier. Take your present fuel rates to the $3 tariff that you want combined with a $3 excise tax on each barrel of oil and add 20 to 30 cents gaso- line tax. Mr. Zarb, in my view, that would be somewhat overkill as required to achieve the results that we think should be begun on a nor- inal basis. We are talking about self-sufficiency by 1985 and curtail- ment of extra consumption by 11/2 to 2 million barrels per day by the end of 1977. That is curtailment from what it would be if we do not get busy and do something. It is growing at that rate and it will all come from the Mid East. We think that that would be a more excessive conservation program than is required to get the job done on that basis. But a $2 tariff, a $3 excise tax, a reasonable excise tax on natural gas, and believe me, next winter we are going to wish we had moved this summer on natural gas conservation, would end decontrol, would bring us the elasticity that we need and at the same time, various policies of production that we require. So, while I am always in favor of more extreme conservation, I just do not think that an extra 20 cent gasoline tax on top of these other measures is required. Senator PAcKwooD. I think you are unduly optimistic as to how gas will go down. Even at $3 tariff and $3 excise, you are only talking about roughly 9 to 10 cents a gallon. Mr. ZARB. There are two effects, Senator, at which we continue to look. One is the 10 cents a gallon tax and that is because of elastic properties of gasoline as compared to heating oil where we have to go so much slower. You have that effect plus you have the normal inflation factor in terms of just costing more, not only to develop it, but to store it, pipe it, and to pump it. I can only point to our experience in the last year and the changes that are occurring in the market, changes that we see in the automobile market. I am confident that we are going to look back on this period 2 years from now, if we take some of these other measures, and see that we made a very meaningful impact on all the energy consuming devices in our society using price and using rebate mechanisms to mini- inize the hardship and economic impact. Senator PACKWOOD. Even if we were guaranteed to continue to sup- ply oil to communities, if we had it, dQ you think we ought to be con- serving energy anyway? PAGENO="0440" 438 Mr. ZARB. Yes, sir. I do not know what a guarantee is anymore. Senator PACKWOOD. I do not either, that is why I preface it that way. But, if you could have one, if you could buy all the oil you wanted at a rational price, whatever that might be, you would still support con- servation measures? Mr. ZARB. You bet. Senator PAOKWOOD. No other questions. The CHAIRMAN. Mr. Roth? Senator RoTH. Mr. Zarb, as you well Iknow, many of the east coast States, including my State of Delaware, are being threatened by a seirere natural gas shortage this fall and I understand it has been anticipated that the commercial firms may lose ti~ much as 70 percent. And with the only option being to close down, this is going to cause unemployment. I wonder what proposals you or your Agency have to help out in this area? There was an editorial the other day in the Washington Post spelling out the sources of the problem. I wonder what your Agency would propose to do about this immediate problem? Mr., ZARB. Senator, the' first thing we ought to do is take the con- trols off of that product a~id that would give us the prospect of some relief 2 or 3 years away. Senator RoTH. I am talking about next winter, now. Mr. ZARE. OK, I am just pointing out that if we do not take some measures now in that direction the winter after this one coming will be even more serious `and we will be looking at alternative measures. In the meantime, we are now in the process of `completing an analy- sis, making fairly accurate judgments, I think, of how short we are going to be in the future. ` And you are quite right, we are going to have a more severe `im- `pact this winter than we did last winter. Our adternatives are very small. We h'a~è to be in a position to allocate' what, We have available to us, and you cannot allocate natural gas like we did oil. The transportation, the whole matrix of distributions, makes a dif- ference It is not easy `to allocate natural gas,' if you will. `Second, you allocate substitute fuels. We allocate fuel oil replacements and sometimes propane where we can, `although, there is not nearly enough propane to make up th~ difference. We have this funny system right now where in some State's natural gas is relatively inexpensive and as a result it is not being used in any degree of conservation, but only two States away they cannot get at an official price. People are going to be nnemployed because of this situation. We need to have, in my view, an excise ta~ on natural gas which would bring it upto the value of oil. Because there is no such tax, we have those `who do not switch from n'atnra~l gas to another product because, for them, natural gas is cheap. It i'sintolerable. " I ~vould also" pGint out, Senator Roth,' that `our authorities to man- `date conversion of coal expired Yune 30; and `as yet `have not been renewed by the Congress, although we have ~got an `adequate head "start `~n that program. To mandate conversions from `both gas and oil to' coal for our generator plants we certainly' need that authority renewed, , `,` ,`i PAGENO="0441" ACI Senator RoTH. You mentioned'the allocation, Mr. Zarb. Pasternack is doing natural gas studies. He might want to point out something to you. Mr. PASTERNACK. Senator, as Mr. Zarb indicated, we have a major interagency task force going right now to e~aiuate the natural gas shortage and to recommend policies to the President for dealing with this winter's problem, not next winter's or the yea~s after, but this winter. We are right now in the process of first identi~fying* the economic impact on very localized spaces because it is a local problem, even though it is a national problem as a whole, it has local impacts. And so we have identified a number of States which are in the worst shape and, of course, the east coast in particular, is very hard hit. Second, there are a range of alternatives we can look at dealing with increased availability of alternate fuel, suggesting propane, naptha, and some other fuels. We are looking to provide incentives in a number of ways, to conserve natural gas in efficient uses. There was a very good example last year in Dauville~ Va. Several plants in the town were about to shut down, did shut down in fact, so industry and residential users got together through a cooperative program. The residential users cut back on their natural gas consump- tion to enable the industry, to keep functioning. We are in the process of building a very substantial public education program, starting this sub~mer to educate the Arner~c.an public ançl industry and consumers alike how these programs can ~work.. We are also looking at programs where any St~te, interstate pipe- lines can purchase natural gas from the produt~i~g states if it is available inexcess from those States. There ai~e a whole range of alternatives. We will be making our conditions to the President on this very shortly. Senator ROTH. I would just like to say that it is important that we have plans. And I congratulate you for what you are doing. I thi'nk that it is absolutely imperative that we get plans now and not before it hits us. I would just like to point out that if you come and ask me for dereg- ulation, you tell me at the same time that consi~mers are going to end up paying more, but we are going to have no assurancQ that gas is going to be available for Delaware. And there is going to be unemployment. That is a pretty hard bargain for me to take. And I insist that we find some answers. Let me ask you this. I noticed that in the Washington Post'editori~d, they proposed that industry should be allowed to ~o. and buy gas at the interstate rate, that is one question I ha~Ve : Why could you not deregulate insofar as business is concerned to make sure that plants do keep going and that you do not have unemployment that we are threatened with these days? Mr. ZARB. Part of that is the rolemaking that th~ FTC i~ ódhsid- ing right now to allow this kind of negotiation t~ go.on~ Over the long term~ it is.going to incentivise the development of more natui~al gas. *0 Senator ROTH. No, I am talking about the short range prospects. Would you support le~i~lation to get that aulihori.ty ~f FTQ ~ Mr. ZARB. I believe FTC has the authority now. ~ ~ PAGENO="0442" 440 Mr. PASI~ERNAOK. In short-term situations they have that authority. Senator RoTH, They could permit industry that is threatened with shutdowns to pay interstate rates, in effect, deregulation of that gas, for that purpose? Mr. PASTEENACK. They could put interest rates-pipelines to pur- chase gas for that purpose. The CHAIRMAN. Senator Mondale. Senator MONDALE. Sir, you could submit for the record gas priceá that you do not have with you ?* Mr. ZARB. Yes. Senator MONDALE. As you know, and we have discussed it personally in the past, the upper Midwest is very concerned about United States- Canadian relations, the problems related to that matter, and short- term and long-term questions of moving oil and gas across the border. Can you comment on that? Where we are. Mr. ZARB. There has been no change in the Canadian position. I do not see anything on the horizon which would prompt them to change that point of view, if that is true. And I expect to be out sometime be- fore the end of the year having some discussions with Canadian officials. But if that is true, that means that We are going to have to take some steps to insure that the northern tier has sufficient crude to keep themselves supplied, which is going to mean a matter of changed pipe- lines, in some cases, so that we can have it delivered to one part of the country. It is going to require some domestic readjustment to see that we get sufficient crude up in these areas. We are now, probably, in the final stages of discussion on this ques- tion. And I am hopeful that in a few mor~ months we will have it re- solved. We have ~ little bit of time In that they are not moving overnight. Senator MONDALE. I thought a few weeks ago they indicated there had been some temporary tentative announcement by our government and theirs, that they would be willing to encourage exchanges between companies. Mr. ZARB. That is~ correct. Senator MONDALE. That is a new development, is it not? Mr. ZARI~. I am not sure whether it is a new announcement. The bottom line is still going to be new oil. But if we provide oil in one part of the country for them, it is almost like using a distribution system. The bottom line is new oil. And as you know in natural gas they have already ahnounced that they have increased their prices to us some 60 cents. S Senator MOi~rnALE. One final question: First of all, I want you to know we appreciate the attention you have given to this problem. We hope that we can have your sypathetic cooperation because literally there is no other place to turn to. This~ morning I used figures on the production of so.called new oil, for the last year, as compared to the past years, I think those figures indicated that since the policy of deregulating new oil and controlling old oil had been in effect, new oil production has actually dropped * C1~EA aubsequently sUbmitted a document entitled "National Petroleum Product Sup- ply and Demand 1975" a technical report by the Office of Policy and Analyses, Quantita- tive Methods. This was made a part of the office hike of the committee. PAGENO="0443" 441 by some 750,000 barrels a day, while production of old oil has re- niained a constant. That is the first year's experience we have of this high priced incentive. Can we afford many more years of that kind of success? Mr. ZARB. Senator, first of all, with respect to old oil, there is no question on that matter. It is going away, and getting lesser of an amount. Senator MONDALE. But I am talking about the past year; the pro- duction numbers on old oil are constant, are they not, or virtually constant~ Mr. PASTERNACK. The production on old oil has declined slightly over the last year. Senator MONDALE. ~By how much? Mr. PASTERNACK. It is a couple of hundred thousand barrels a day, I believe. Senator MONDALE. Over the last year? Mr. PASTERNACK. Yes. Senator MONDALE. 200,000 barrels a day? Mr. PASTERNACK. Roughly. Senator MONDALE. New oil has dropped 750,000. Mr. ZARB. Do you mean in percentages, Senator? Senator MONDALE. No. Production of new oil has dropped by 750,000 barrels a day, based on March 1975 figures, and the production of old oil has been constant. You say that that is not correct. Mr. PASTERNACK. I do not have the figures in front of me, bnt those figures sound a little bit off, because total domestic production is down about 400,000 to 500,000 barrels a day. So I do not see how those numbers go together. Senator MONDALE. These are the March 1975 figures. Does that help? Mr. ZARB. What is the source of those numbers? Senator MONDALE. The KGB, I guess. [General laughter.] We got them somewhere. Mr. ZARB. Well, why do we not submit for the record our official numbers, and see how they compare? [The following was subsequently supplied by the Federal Energy Administration:] DOMESTIC OIL PRODUCTION [Million barrels per day! Old New and released January1974 February March April May - June July August - September October November December 5.344 S.677 5.370 5.375 5.519 5.530 5.603 5.730 5.776 5.655 5.759 5.512 2.405 2.289 2.417 2.422 2.Z26 2.10~1 2.101 1.910 1.810 1. 885 1.805 1.837 Senator MONDALE. I do not know, because my staff guy aoes not know, either. Am I correct that so-called new oil production has dropped substantially in the last few years? Did that surprise you? PAGENO="0444" 442 M~. PASTERNAOK. No.1 thir~k that there is a very obvious reaso~1 for that. In just about `the turn of this decade, in 1970, We saw a tre- mendous decline in domestic exploration, as there was a moratorium resulting from the Santa Barbara incident. There was a moratorium at the ~nd of the ,19~0?s in offshore development, in offshore exploration, a result of the Santa' Barbara incident; and that, in effect, is what we are seeing today frorn the ~- to 4-year leadtime that you would have~ had from tho~e days. I think that what you will see over the next 3 years i~ `new oil productIcth increase substantially as a result of the increased exploration in 1974, plus some of the new fields that have cthne on line~L__~~. Senator MONDALE. Now, the number of new wells being drilled; do you have figures in terms of new proven reserves that have b~en'found? Mr. PASTERN'ACK. We can supply those for the record. ~Senator MONDALE. Are they substantial ~ Mr. PASTERNACK. I do not think that we have seen substantial addi- ~tions to proven reserves in the, last year. Senator MONDALE. Could you `submit: those `figures on actual, new proven reserves for the record ~ I would `appreciate it. [The Federal Energy Administration: subsequently submitted three ~ociiments-~GeoIogica1 Survey Circular 725' entitled "Geological E~ti- ~mates of Undiscovered Recoverable Oil and Gas Resources in: the United ` St~te~," the "initial Report on `Oil and Gas Resources~ Re~ serves, and Productive Capacities", sübñiitted in compliance with Public taw 93-275, Section 15(b), and a' supplement to th'e initial r~port `containing the, reports of the statistical and mathematical con-, sultants. These documents were made a part of the official files of the C,ornm~ttee,: The summary of the initial report follows:] OIL~PTER I" SUMMARY `A. reliable and detailed assessment of the domestic reserves and resources of oil and natural gas the United States can, count on I~ absolutely essential to the formulation of any realistic plan to bring tl~e nation to a point of energy self-Sufficiency by 1985. The Federal Energy Administration (PEA) has completed a year-long `study of proved reserves of crude oil and natural gas. Preliminary estimates show that, as of December 31, 1974, the United $tates `had proved reserves of 38.2 bil- lion barrels of crude oil and 237 trillion cubic feet of natural gas. The preliminary estimates are based on a survey by the PEA of all oil and ga~ field operators in the United States. The results of the survey are detailed in Chapter IV of tbls,,report. ,, The PEA estimate of 38.2 billion barrels of proved crude oil reserves is 11 per. cedt, higher than the estimate of 34.2 billion, barrels of proved crude oil reserves published by the American Petroleum Institute (API). In addition, the PEA estimate of 237 trillion cubic feet of proved natural gaa' r~5erves is marginally higher than the estimate of 233.2 trillion cubic feet of proved natural `gas reserves published by the American Gas Association (AGA). The, published AGA figure of 237.1 trillion cubic feet of natural gas proved reserves has been adjusted to subtract 3.9 trillion cubic feet of gas which lies been produced and' is being held in storage, and is not included In the PEA esti- mate. These estimates seem to differ no more than might be expected' front estimates from different sources. The `significance of the differences will be cleaTe~ after the processing of the data collected in PEA's study has beau completed.' , `` ` PAGENO="0445" 443 Both tJie PEA estimates and the estimates published by industry trade groups define proved reserves as those oil and natural gas resources that have actually been discovered and can be produced under current economic and ~ecbnologiCal conditions, The PEA estimates dO not include indicated reserve-small, quantities of oil believed to be economically producible from known reservoirs using proven bu~ as yet not installed recovery technology. New information on the amount ef indicated reserves is still being compiled by PEA. Even greater quantities of recoverable oil and gas remain undiscovered. Some of these are in undiscovered reservoirs in known fields (inferred reserves). T13e greater portion is in undiscovered fields. The U.S. Geological Survey (USGS) estimates that the total of inferred reserves and undiscovered recoverable re- sources probably equals 106 billion barrels of oil and 686 trillion cubic feet of natural gas. Estimates such as these are subject to wide estimating errors. There are 19 chances in 20 that the oil potential may he at least 73 billion barrels and one chance in 20 that it will be as much as 150 billion barrels. Similarly, estimates of natural gas potential range from 524 trillion to 857 trillion cubic. feet. In addition, from 17 to 28 billion barrels of natural gas liquids may be recover- able from the processing of natural gas which may be produced from as yet undiscovered reservoirs. The most probable estimate of natural gas liquids re- coverable from this source is 22 billion barrels. These estimates of oil agd natural gas resources were preparOd by USGS for PEA. They are discussed in `detail in Chapter VIII of this report. That chapter also cogipares the latest USGS figures on undiscovered recoverable re~ sources of crude oil, natural gas, and natural gas liquids with three previous estimates published by USGS and with studies' giade by the National Academy of Sciences~ the National Petroleum Council, the American Association of Petro~ leum Geologists, the Potential Gas Committee and the Independent energy consultants, M. King Hubbert and L. 0. Weeks. Some of the Ieadin~ estimates are shown in Exhibit I-I. The resource estimates prepared by USGS are markedly' lower than those' that it has previously published. Its most likely estimates are close to the more conservative ones that have been made by others. Both resource and reserve estimates (Exhibit I-2) are' limited to oil and gas recoverable with current technology, ExHIBIT I_i ._UompariSOfl~$ `of e~tin~ete8 of tT.$. undiscovered reeovcrahle oil a4u1 gas resources 350 Crude Oil 300 255 250 200 141 ~ 105 103 100 50 USGS MPG USGS NPC 196i 1971 1975 1973 1 2 `3 4 1. 55120 C155.,155 522. 1965. &d5oot~0 thotUt" 964, io~1o0ee o*t~ Aopth 2. ~ ~f `ctotsoo~ 00096910t0 ~8. 15. 1971. $~ °~°M 5. ~96j519O61 frao It's osth,~t2. IOOI51400 006051 dspth to 8,200 ft PAGENO="0446" 444 EXIIIBIT T-2.--U.S. Resources, reserres and vtor~ production of crude oil and natural gas 120 ~00 110 600 100 90 500 50 C) ~70 400~ g60 50 300 40 200 30 20 1OQ 10 *~ 2~t ~5~1ude ~`i.ndicated resëz'~es of crude Oil. A recent FEA study ~ug~ests ~that ultimately as much as 65 billion barrels more oil may be recoverable from known oil reservoirs if new enhanced reco~rery techniques are successful. The realization of a significant portion of this poten~ tial will require advances In applied technology and prices high enough to co~~e~ costs substantially greater than those of current recovery procedures. The data above suggest four conclusions: 1. Though U.S. proved oil and gas reserves may be higher than had been indic~tted previously, ahnual additions to reserves must be greater than in recent years If domestic producing rates are to be sustained. 2. Remaining volumes of recoverable oil and ~as in the JJnited States are large enough to warrant expanded efforts to find and pro4u~e them. 3. Recoverable oil and gas resources have limits which may be approached In the next fifty years, though those limits cannot now be determined with ce~rtaInty. 4. There is a need for: (a) rntensifiea exploration to define those limits. (b) Advancement of recovery technology. (c) Develo4~ment of alternative energy sources. (d) Conservation of all energy resources available to us. (e) Economic incentives to make exploration, recovery, development and conservation financially attractive to investors and consumers. If present firm plans for domestic refinery construction are carried out, the Nation shOuld be in a position to reduce the proportion of its petroleum product requirements which are imported. (See Ohapter IX.) It will, however, continue to need some imported crude oil to supplement domestic production to meet the raw material requirements of its refineries. The foregoing summarizes information developed to date by FEA to meet its obligation under Section 15(b) of the Federal Energy Administration Act of 1974. PEA's full program of analysis to meet the requirements of the Act included the operator survey of reserves and productive capacity, the resource evaluations, an~I the refining eapacitcr study previously noted. In addition, collateral programs were undertaken to ~ro~4de checks op the validity of the operator survey, to obtain information on major oil and gas fields Crude OiZ 686 ~tura1 Gas 38.2 ~Recxwerab1e 8~S~r*s* PrclducUon Sesourceg FE~ tJSGS PAGENO="0447" 445 which the survey could not provide, and to test alternate methods for the development of oil and gas reserve estimates. The principal elements of PEA's study are summarized in Chapter II. The collateral programs include engineer- ing analyses of 59 large oil and gas fields, (Chapter V); analyses of oil field producing histories (Chapter VI); and an investigation of reserve and produc- tive capacity estimates from State agencies and trade associations (Chapter VII). Chapter III provides, for the benefit of those not familiar with petroleum geology and engineering, an abbreviated description of methods relevant to the estiamtion of oil and gas reserves. Examples of applications of these methods are included in Appendix D, which summarizes the preliminary results of engi- neering analyses of each of 25 oil and gas fields. During the past year, FEA's analysis of oil and gas resources, reserves, and productive capacity has been dedicated to the design and conduct of an experi- mental program for continuing study of these factors, while at the same time developing information for the earliest possible use by the Administration and Congress in their consideration of Nat~onal energy policies and programs. This report provides the preliminary portion of that inforttaation. A later report, in September, will present final estimates of proved reserves from PEA's survey of oil and gas field operators and added information from that survey on indicated reserves and productive ca~acit~y. It will also report the results of engineering studies of 84 additional fields which together with 25 field studies included in the current report will cover more than half of the Nation's proved reserves of oil and about 30 percent of natural gas reserves. Results of the operator survey will be checked against these field studies as well as against data developed from PEA's analyses of field production histories and against reserve and productive capacity estimates from other sources. Experience gained from these studies will be drawn upon to formulate rec- ommendations for a continuing program for monitoring the Nation's oil and gas resources and reserves and the rates at which they can be produced. Senator MONDALE [presiding]. Senator Curtis? Senator CURTIS. Mr. Pasternack, what is the definition of new oil? Mr. PASTERNACI~. New oil is any oil that has been produced in new properties that was not in existence in 1972, which `was when we started a number of these base regulations; and the second is that it is any oil that is produced in excess of 1972 production levels on the existing property. Senator CURTIS. Where does oil produced by secondary and tertiary recovery methods come in? Is it classified as new or old `oil? Mr. PASTERNACK. It depends. If, in fact, the secondary and tertiary recovers has enabled an oil property to produce at levels higher than it was in 1972, it is considered new oil. If, in fact, all it has done is en- able it to maintain its previous level or not even reach its previous level, it is still considered old oil. Senator CURTIS, Do you decide well by well, then? Mr. PASTERNACK. Yes. You decide it on property by property. Mr. ZARB. The most prevailing circumstances would have it not new oil. Senator CURTIS. Would have it not new oil? Mr. ZARE. Yes. Senator CURTIS. Thatcould be greatly affected by decontrol. Mr. ZA1u~. Yes, sir. Senator CURTIS. I have been told that in the early days of oil drilling in Pennsylvania, for instance, the driller would skim off about the first 15 percent, and that many other places in the country, considering the technology available at that time, plus The very low price of oil- at many wells, they took the first 30 percent, because it was easyto get, and most economically feasib~le. It is important that we recover all that oil, is it not? 55-583-75-pt. i-29 PAGENO="0448" 446. Mr. ZAIm. `yes, sir, and we calculate, conservatively that that would represent 1.4 n'~iilion barrels a~day by 1985. Senator Cunms. Over ~h$ we~re'dealing'now? Mr. ZAI~n~ In 1985. ~. Senator CURTIS. An inei~e~se of that pi~ich? Mr. ZARB. Yes, sir. Senator Cuwu'is'. How mai~y `bârrëls of oil' do we us~ a day? Mr. ZAth3. By 1985, we will be using 22 million bar~~els a day. Senator CURTIS. `How much oil are we1u~ising in production of electricity? Mr. `PASTERNAOk. We are nsingabout .5 tO 7 million barrels a day, something in that rang~.: ` . `,; ,`, , Senator Cuims. Whit kii~d of oil~ it~ Mr. PASTERNACK; it is residual oil. Senator, CURTIS. Somet~hin~ ~bout `30 percent of `our electricity is generated by burning oil ~ is it not? ` Mr. PASTF~INACK. Yes. . . ` " Senator Cuims. Now, what impact will that have on all the other uses of petroleum, if we were to ~convert' totally to coal for the pro- cluetion~of electricity? `` , `, ~r. PASTERNACK. lit would bate a sul~tantial ,i~pact on our other uses of petroleum. . . ` . . ` ` Senator~Quirns'. Can you spell it out with"any figures?' Mr. PASTEiiNACK. Webélieve that :~it' tive" coal-conversion program can save anywhere from half a milliOn `to a million barrel~ a day within 5 to 10 years. ` . , Senator CURTIS. That is a million to half a million barrels of crude percl~y? Mr. PASThRNAC~1. That is right. Senator CURTIS., So it would make more product available for all end uses, whether it is'gasolixie or whatever? Mr. PASTERNACK. That is correct. Senator Cuirns. I notice that part of the recommendation relates to tax benefits for the conversioh from. petroleum to nonpetroleum~ for the production of the electricity. What'govornmental programs Or ont- side foi~cë~ are holding up the conversion of electrical generating plants' to cOal? Mr. ZAIm. One is t'he environmental' implementations, whore we need to have both the modification of the Clean Air Act that we have asked for in amended form; and `secondly, under normal ciroum- tances, we need to have an Environmental Protection Ageuicy apnroval of our calculations. . ` . So the environmental consideration is set No.1. Second, we have the ability to get cc~ai `to where it can be burned. Our transportation facilities are not what they should be in that particular area'.' In' sOme cases, the financial `iiwestment required to burn coal is as much as building `an entire new plant. Capital hivest- mont is the second part of that critical path, the first being the. en- virOnmental issuos~ As I pointed out earlier,' we started the program by `using the authorities `given us by the Congress. We used these mandatory `authoritieS, which expired in `June, `and we are waiting for a renewal. ` ` . ` . . PAGENO="0449" 447 Senator CURTIS. Do mandatory authoritjes override the euyiron-. mental agencies? Mr. ZARB. No, sir, `the way the' law is written, we must iuake our own determinations on environmental effects, and the Enviroiim~tal Protection Agency has the ability to review our data and then make a decision of their own. Senator CURTIS. In my State, we have been undertaking to build a huge coal-fired electrical generating plant. It is of such magnitude that the district is buying their own train or trains. The~ are. also building 35 miles of additional railroad., Bi~t the Sierra Club inter- vened in the proceedings before the Federal Power Commission. The delay has `already cost the State of Nebraska $3S million. If it :~ns the full course, it will be $100 million. We are rather a small State, populationwise, `yet we seem helpless to move any faster. I see my time is up, but that situation, should be remedied if thefl President's efforts on speeding up and simplIfying Governme~ital regulations- . ., ` ` ` Mr. ZARB. In the President's energy. package, he include4 certain modifications of the Clean Air Act~ Both Russ Train and I have testi- fled in favor of it. We both believe that It will help our energy situa- tion, without endangering our environmental goals. Senator MONDALE. Senator Brock, `. :, , Mr. P,ASTERNACK~ I `would like to interrupt. The number on the~ oil consumption ot electrical utilities is about 1.5 percent. Senator CURTIS. That is what would be saved if we ceased using oil for generating electricity? ` ` ` ` Mr. PASTERNACK. That is what we now consume in the generation of electricity. Senator CURTIS. 1.5 million barrels a day? Mr. PASPERNAOK. Yes. Senator CURTIS. What is our total consumption now? I have got it for 1985, but what is it now? . Mr. PASTERNACK. Total consuthption right now will average, ,this year, at about 16.9 million barrels a day. . Senator BRoOK. It is 9 to 10 percent, which is the figure I was 4ues- tioning. I knew you-- Mr. ZARB. The other part of residual oil imports is New York and parts of the Northeast. . ` .. Senator BROOK. I am fascinated by this' prospect of switchiug. to coal. You do have a good deal more oil used for heating purposes than you mentioned on your ½ million for electricity. If you include, that, you probably can get close to 5 million barrels, can you not? Mr. ZARn. Yes; the residual ~onsumption in total, is about. 3 million barrels a dayS with the remainder being the heating utilIzation of the residual oil, SQ I would say at. least `3 million barrels. Senator BlocK. Now, you say we have not ~ot the real capacit~, but we have got some of the finest ports in the United States, in Eqston and in Norfolk. We ship almost' all of the coal' for export for, this country out of Norfolk. Why can we not ship- Mr. ZAim. Weil', we can. I point~d out the rail capacity. because in some parts of the country we just cannot move coal without rail,, par- PAGENO="0450" 448 ticularly in the interior of the Nation. But if we can solve these en- vironmental concerns, then I believe we will be able to get coal into some of those areas. Senator BROOK. All right. Now, let's ~o to the second point on the relative cost versus oil. Is that control still economical? Mr. Z~RB. Yes, sir. Senator Bnoon. Considerably so? Mr. ZARB. Yes, sir. Senator Bnocic. So the only constraint that is stopping you from doing what you would like to do is an environmental constraint? Mr. ZAIm. We could do more without the environmental constraint. We point out that there are some facilities that would have to make a very heavy capital investment to burn coal. Now that is not the rule; that is the exception. There are other areas where they now run on in- trastate natural gas, which is relatively cheap. In this case they have no incentive to convert, unless we mandate it. Senator BROOK. Now you have come up to the second point that I wanted to talk about. You made the statement: "Believe me, this win- ter, we are going to wish we had done something abont natural gas." I would admit to a bias because Tennessee is more affected than other States, but I have got people out of work now and I am going to have a lot more this winter, because this Congress has not acted, has not acted in several years. Ai~d I do not know what it takes to educate somebody that something has got to be done, but I cannot accept Sen- ator Roth's hope that we can allocate it around adequately. I do not think you can allocate adequately, because of the constraints on the pipeline system, and the long-term contracts and the commitments that have been made. I think my State is going to get just clobbered this year, and I am sick and tired of hearing people say, well, I cannot go for deregulation, because it would mean increased prices. Price does not mean a whole lot, when you are out of a job, and that is what we are facing in Tennessee. I do not know what it takes to ring some bells arour~d here, but somebody has got to get honest and start talkin~r about real world economics. Mr. ZARB. Well, Senator, I can tell you that we mean to be in a posi- tion, before the end of this summer, of laying out specifically what we anticipate happening around the country, and how much we are going to be able to do to help minimize it. But there will be no surprises here, except that when people do look at what we anticipate in terms of impact this winter, I think there will be a general surprise, and per- haps that will help to focus attention. Senator BROOK. I will admit I am fortunate in my hometown. I had a very foresighted president of our local natural gas company, and 10 or 12 years ago, he made a decision that natural gas was going to run out, because the Congress did not have the courage to deal with the problem, and he put our community on a special rate then. We have been paying for it ever since. But we have still got natural gas. It is not true in Nashville; it is not true in other parts of my State. I `do not know what Bill Roth of Delaware or Bill Brock in Tennes- see are going to do this winter to help. I do not know what you can do to provide, us some relief. I do not know how to get people~s atten~. tion to this problem. I do not know what it takes. Whatever you can do would sure be appreciated. PAGENO="0451" 449 I would ask one question-I think your proposed excise tax is 37 cents per 1000 cubic feet. That will give an equivalency of about $13 a barrel of oil. Is that right? Mr. ZATu~. Yes, sir. Senator BROOK. Do you really think that is adequate? Mr. PASTERNAOK. 37 cents per Mcf is equivalent to $2 a barrel of oil. Senator BROOK. That is what I was worried about. I think that is right. It is the $2 import tax that you- Mr. ZARB, It equalizes the fee tariff. Senator BROOK. Now, the Btu cost could not possibly be under 37 cents; it would be closer to $1.25, maybe $1.50, would it not? Mr. PASTERNAOK. Yes. Just to get a perspective, the average cost, delivered to electrical utilities now, for natural gas is about 54 cents per million Btu's. Oil is running about $2 per million Btu's. The 37 cent excise tax was not only arrived as a Etu equivalent to the $2 im- port fee, but also because we believed that 37 cents excise tax would substantially reduce the curtailment problem this year, as a surcharge. Senator BROOK. Well, it may not be very good politics, but I do not think 37 cents is anything close to-either, if you want to talk about equivalent Btu and real price, I think you ought to be talking about a heck of a lot more than 37 cents, either in the form of deregulation or the form of excise tax. If we cannot get a deregulation bill through this Congress, then we are going to have to put on an excise tax that will give us an equivalepey, in terms of Btu costs, because it has got to cost money, or you cannot slow down the waste. And I give you an example. We had a person with General Motors here, what, Friday, and he said that he was using natural gas in his plants. Why? Because it was cheaper. He did not need it. But it was a rational economic decision for him. It was rational only because we in the Congress have held the price below its real economic cost. You have to offset that in Texas right now, probably in other States of the Union, on the basis that it will guarantee them 10 years of natural gas at $1.75 per 1,000 cubic feet or more, with an escalator across. And industries are coming down, because that is still a better buy than they can get in any other energy source, and we are sitting here-- the rest of the States are getting half by totals. We are getting a half by this lid we have on natural gas. We are running out of our basic sources, and the Congress refuses to act, and I think there must be some sort of medal for incompetence that we could award. I do not want to berate you. I appreciate the response you have made. Mr. ZARB. We would gladly accept the 37 cent plus deregulation and think that that would have enough of an impact to give us a good headstart in this area, and hopefully we can get something done this year so that we will not really suffer a. few years out. Senator BROOK. You have my support. Senator GRAVEL [presiding]. I would like to cover several items. There may be a vote-there is a vote-and I will just take a few moments and then we will adjourn. I have a Btu tax proposal that I have had for some time. I do not know if you are familiar with the legislation that I have introduced PAGENO="0452" 450 in th~ past. My feeling is, of ~.ourse, that it is equitable, If you are going to tax energy, then you ought to tax on it on a uniform basis, all forms of energy, so that you do not discriminat~ against one form of energy as opposed to another form of energy. What would be your reaction to a Btu tax, to fund the trust fund? Mr. ZARE. Senator, we need to discourage the use of oil and gas and encourage the use of substitute fuels. With respect to a trust fund, there are two defects and some benefits. The two detects are, first, where does the money come from? And if the money comes from tar- iffs ~nd other taxes, and goes into a trust fund, we do not have it re- turned to the economy. So, you have got a difference in economic impact in that inability to deliver it to people who deserve some equity. Second, the. trust fund, for example, that was produced in the House bill subjected the expenditures from that fund to the appropriations process. What we had suCceeded in doing was to take out of the econ- omy some $1 million or $2~ million a year and not put it back very expeditiously into the economy, not havix~g funded to the correct levels. So we have one independent variable driving, anOther and then finally making it go through the appropriations process anyway, so that we have not achieved anything except to set up another vehicle. I ~ould like the notion of taxes, particularly long term, Since if has to be more valuable to ~ociety. I would like to he sure that we con- tinue to encourage the use of alternatives to oil and gas particularly ovei~ the next 3 to 5 years. ` Senator GEAVRL. You will not `deiiyer any money with that ma- chinery because yçu take" it bnck. Yoi~ are talking aboñt giving it back to the consumer or giving it `tO the Treasury, and you are not putting capital where it belongs; that i's to `periñit1 the private sector to expt~nd the energy capabilities' of this country. Your proposal does not do that one iota, as I see it. And of course, the DemOcratic proposal that has been enunciated somewhat here is that we have `to protect the little guys. So we are gOing to give `the cost increases, which is to punish th~m for using energy, back to the poOr people. So that in point of faOt, we get nothing back from the p~odu~ers and we go merrily down the spiral of creating scarcity, which is what produces the high price. `Mr. Zim. I think not. The President's program seeks to return "the takes, such as an excise tax or a tariff, which have' nothing to do with the market mechanism or windfall, to, people as a neutralizing factor with re~pect to the im- pact `on the economy. So I thinI~ that is not pos~ible. The private capital features are going to come from our ability to get out of the way. The decontrol situations say that we make room for private capital flow into that sector. Aild I think the President's program does that. Senator GRAVEL. But oVer 30 i'~onths, ahd by that time we could be in a lot more trouble than We are in now. And I appreciate the reason why he has done it this wa~ Because of the politics played with on my side of the aisle~ which" h~ve bo~ed him in. If he deregulate~, the prices goes up. We will blame it On President Ford apd we do not blarrie it on the coiigr~ss~' So' nobody is prepared to really take some `leadefship for the ~meri~än `people an~d d~ what we know has to be don~-that is to deregulate, whethë~ w~ do it 30 mouths `from no~t Or in a slow painful process PAGENO="0453" 451 Are you familiar with the Nathan report? The Nathan study? It shows that over the past 10 years, since 1959, we have not seen the economic price of oil equal the sales price. In other words, we have not been to the point wher! there has been an economic return. That is the reason why we have seen our supplies continue to dwindle. Now, in the face of that, I believe-you know, you are committed to another direction-that would indicate that we should deregulate right now. Forget the 30 months. That is hocus-pocus for the voter. Mr. ZARB. Senator, I think there are two issues here. One is an obvious compromise of what seems to be the attitude of the Congress so that we can do something. The other question is, if we do get the 30-month program enacted and enacted now, the industry can plan so that they can see the light at the end of the tunnel and begin the process of getting the job done. I think all things considered, this is the best formula to get some motion. We have been talking for I months now about an. energy program, and we have gotten not one meaningful piece of legislation. Senator GRAvEL. I would hope to offer the amendment that got lost in the House on recycleable materials. We could save ~t lot of energy costs if we could begin to prepare `for the cartel actions that are going to visit us with respect to these imported resources. What would be your reaction, to a tax credit for paper, scrap iron, and for bauxite for aluminum? What would be your reaction? Mr~ ZARB. In principle, I do not think we would object, Senator, but I would like to look at the numbers and exactly who they affect: Some- times when we get int~ this, we start out with great motivation and we wind up subsidizing those who least need the subsidy., Senator GRAVEL. The other alternative, of course, would be to wipe out the tax' advantages that the virgin materials have. WMt would be your reactio~i, to that? Mr. ZARB. I woud like to look at specifics; that is too much of a generalization. Senator GRAVEL. Very good, Mr. Zarb. I appreciate your patience, you~r testimony,' and your candpr. And I understand the restrictions that you have. We appreciate your leadership. [The prepared statement of Mr, Zarb follows :1 STATEMENT OF FRANE G. ZARB, ADMiNISTEATOR, FErntRAL T~NEROY ADMINISTRAvION Mr. Chairman, Members of the Committee. I am pleased to have the opportunity to appear before you today to discuss II.U. 6860, as amended, the energy legisla' tion recently reported out of the Ways and Means Committee and subsequently passed by the House. In my testimony, I wish to address two major items: First, I wish. to review the AdminiStration's proposals for achieving energy independ- ence and reiterate our willingness' to work with the Congress to achieve an energy program which will result in necessary import reductions; second, I would like to comment on Ti.R. 6860 and' provide the resñlts of our analysis regarding import reductions achieted by that bill. , TH~ PRESIDENT'S PROORAM ,` , In viewing today's energy~ sjtuation,' we must recognize that a severe energy problem does indeed, exist, and, ~iiat, the era of cheap and abundant fossil fuels is over, The need for action is patently c'ear, and I shall not take up any more of the ,Committee's time `reciting tha lengthy litauy of where we have been and where we will be, sh~u]d remedial action ,not be forthcoming. Allow me just to brIe~y outline~our current situation: `. ` , ~ PAGENO="0454" 452 1. The United States, at present, imports both crude and product at a seasonal low of 5.4 million barrels per day (32 percent of our total demand). At the close of this year, we estimate that figure to surpass seven million barrels per day, nearly 41 percent of total demand. 2. Consumption currently is about 15.7 million barrels per day. At the close of this year, we estimate that figure to be apprOaching over 18 million barrels per day. 3. Domestic production of crude oil is presently a little over eight million barrels per day, a 7.2 percent decline from the same period last year, and Over one million barrels per day below 1972. An~ this decline will continue next year. When these facts are combined with the recent reports that the Organization of Petroleum Exporting Countries (OPEC) is considering additional price in- creases, the picture clearly emerges that this nation's backward slide away from energy independence has not yet been reve1h~ed. The 1973 embargo clearly demonstrated the consequences of energy depend- ence on uncertain foreign sources of supply. That previous embargo created a loss in the Gross National Product estimated to range between $10 to $20 billion. The embargo also created a direct unemployment effect of 500,000 jobs. By 1977 imports will rise from 6.0 million barrels a day, of which about 1,5 million barrels a day was derived from Arab sources, to almost eight million barrels a day; and the increase is almost entirely attributable to Arab sources of supply. If another Arab embargo occurs the shortage will be twice as great as during the last embargo; and the GNP and unemployment effects will be cor- respondingly severe, The alternatives we face must be addressed with these facts clearly in mind. One possible alternative is to do nothing, but a lack of action only postpones decisions we will eventually have to make. Without appropriate actions, our cost for imported oil, which was $3 billion in 1970, and $26 billion last year, could reach $32 billion in 1977. The only real alternative is the development of a viable, comprehensive energy program which demonstrates this Nation's willingness to take the difficult and expensive steps to implement an energy conservation program and to develop new energy resources. Such was the purpose in sight when the President first introduced his com- prehensive energy program to the Congress almost six months ago. To this day, after that length of time, it remains the only integrated plan for dealing with our vulnernability to supply interruption and price n~anipulation by foreign powers. The President has prescribed tough action to cure our energy ills. Be, as you are already aware, originally outlined three time-phased goals. One: In the short-term, a cut in our oil imports of 2 million barrels per day by the end of 1977. Two: By 1985, imports of no more than 3-S million barrels per day--and the capability of immediately replacing that amount from storage and standby measures in the event of a supply disruption. Three: Accelerated development of energy technology and resources so that the United States can meet a significant share of the energy needs of the free world by the end of this century. To carry out these goals, the President has submitted to the Congress the pro- posed Energy Independence Act of 1975, a bill which provides measures to achieve energy conservation, increased supply, the deregulation of natural gas, and in- creased energy preparedness `through a system of strategic reserves. This bill combined with oil decontrol, a comprehensive energy conservation tax package (including a windfall profits tax, and e~c1se taxes on domestic production of petroleum and natural gas), and incentives for utility financing provides a com- plete energy program. Because this program utilizes the price mechanism to achieve energy conserva- tion through demand constraints, the President proposed ~t system of permanent tax reductions to refund the increased costs of energy to Americans. These tax reductions are distinct from the temporary anti-recession tax reductions already enacted into law. Under the President's program, the cost of energy becomes more expensive' in relation `to other goods, but through the tax reductions `to every consumer recommended by the President, the consumer receives increased income to meet increased energy costs. Another alternative would be the greater uSe of government controls-import quotas, allocation systems or rationing, sunday closings of gasoline stations, no- driving days, etc. All of these actions and others were reviewed during the PAGENO="0455" 453 embargo. We chose some and rejected others, Those actions we chose were d& signed to help us through a short-terki crisis. Thrt `we now face a potentially long term crisis, Each regulatory optiOn would involve self-imposed shortages, burgeoning bureaucracies~ and disruptions in the lives of all American eitizens. Also, to be effective, those controls which were chosen would have to be in place for `a long period of time because of expected shortages. We do not believe that the American people would be willing to accept, nor should they be subjected to, such long lasting, pervasive controls over almost every aspect of their lives. Certainly the President's program will set into motion powerful forces to reduce energy consumption and to substitute domestic for foreign supplies. Such must be the case, for the longer we delay action, the longer it will take for these forces to work. The longer it takes for the forces to work, `the more vulnerable our economy and our foreign policy become. In an effort to reverse this trend toward dependence on foreign oil, the Presi- dent raised crude oil import fees by one dollar a barrel on February 1. After a 00-day delay, in which he hoped that a comprehensive legislative package could be enacted, he imposed an additional one dollar per barrel fee on June 1. The effect of these measures on our level of petroleum imports will be both immediate and cumulative over time. By 1977, we estimate that our demand for imported oil will be redttced by more than 300,000 barrels per day-a short-term goal that no Congressional propos~1 thus far tendered can match. Retail gasoline prices have risen by 1.8 cents per gallon as a result of the February one dollar increase. The June 1 action will mast likely result jn an increase of approximately 1.5 cents per gallon. To furnish a substantial incentive to reverse the trend of declining domestic production and further stimulate conservation, the Administration has urged the phased decontrol of old domestic crude oil combined with a windfall profits tax. The President's plan to decontrol the price of old oil will allow the price of controlled domestic oil, presently at $5.25 per barrel, to rise gradually to the price level of presently uncontrolled oil. The' effect of this plan will be two-fold': First, industry will be given an impetus to increase the production of our own supplies of petroleum as domestic oil prices are permitted to rise, and secondly, the subsequent Increased overall price of oil will reduce demand. In 1977, this decontrol plan, In conjunction with the increased import fees, will `reduce the demand for imports by approximately 880,000 barrels per day. flowever, just as phased decontrol has the greatest effect on reducing petroleum demand, it also involves increased cost. Phased decontrol, if put into effect in the last six months of 1975, and assuming the imposition of the increased import fees, would cause gasoline prices to rise about one cent in 1975 and seven cents when the program is fully effective. The effect on electricity prices will be slight, less than 2 percent by the end of 1977. Additionally, an acceptable windfall profits tax would, as stated by the Presi- dent, recapture excess profits and assure that the end of controls does not result in one sector of the economy benefitting unfairly at the expense of other sectors because the money collected would be returned to the consumer. To spur production of crucial natural gas supplies, the President has proposed the deregulation of new supplies of that resource. The Senate will be debating various approaches toward the natural gas problem in the near future. Natural gas accounts for `about one-third of the Nation's total energy require- ments. In addition to being the dominant energy source for U.S. industry, It also provides heat for 55 percent of the Nation's homes. The Federal Powor Commission (FPC) has been regulating the wellhead price of natural gas sold interstate since 1954. During the last decade, a steady decline in real prices in the gas fields has resulted in declining levels of new discoveries, as regulation has failed to provide the incentives to explore for and develop the increasingly costly gas reserves. Unless long-term trends relating to drilling and discovery are reversed, the availability of natural gas is headed for a sharp decline in the years ahead. At the same time, regulated field prices, along with other advan- tages of gas (e.g., its, convenience and clean-burning cha racteristiCs), have escalated the demand for this fuel, especially in the industrial and the electric utility markets which account for about 60% of gas consumption. By increasing the demand for gas and'decreasing the amount supplied, FPC price ceilings have been instruniental in creating a costly shortage of the Nation's cleanest fuel PAGENO="0456" To reverse thisj:r?r~4 to~vai~c1 d~cij~ij~, nat~ai gas. sujJ~~±l~e P~e~i~e~it ~ propOsed that the jric~ of ~iew natt~rai. ~s ~e ~er~gu1at~d to sj~n~r ~nv~trn~n~ i~t the expto~ation and ~e~e1opn~eiil- o~ n~w ~e~erve~ ~Utu~s, the deregulation o1~ new natural ~ gas ~4~ou1d ~i1ow the 4~i~t~ wéi7~~. price to ii~re~ü~e more rapi~i1y than contintted regu1~t~o~ WQU1~ pé~mit UoW~vt~r t~n~ e$~ect on ~iat~ira1 gas prices paid by the rc~ide~itia1 è~stothej W0141d b~ ~i~tU ~ui~ gi~adua1 foj~ two ie~isoi~ First as i~ite~state ga~ is ~o1d ~ncje~ conti~ets o~! ~ to ~O years ~t wc~u1d be a number of years bt~fore aU~ gas cottl4 b~ d~egi~i1ate4 ~eco~id less t~n p~ie fifth ot tJ~e re~identLa1 price can b~ artrjbnted ço t1~. price o~ ~ ~t the field Xi price controls on new natuiäl ga~ in lnt4~lshte m~tZkets J~ad been ~ifted at the begin ning of this year the nnpaet dir the 4vèi ag~ annual rési~entu~l bill would be $638 in li~75 ~10 21 in i~76 and $lil 80 iii 1977 In percentage terms this ~ ould me~in an increase of 3.9 pur~ent lh 197~, ~,2~pê~ceut in 1976, and S pe~ie~it in 1977. If new gas pnce~ for ga~ sold int~,statê ale not deregu~atecl the effect on tire Nation will be deleterious at the very least (1) there ~r~Il be fnrtjrer unemploy ment and reduced industrial produ±ton as a l~e~ult of curtaliments to industrial production as a resuitof eurta1lm~nt~~ to indiisty'ial dustomer~ (2) gas will be roplaceci by oil and the ~oluthb of oi~. imports ileeded to repli~ce gas could use to an estimated four million barrels pei~ day in 198~; (3) to th~ exteht that natural gas is not available, nmaintenänceof ~ir~ and water qUality s~anda~rds will re~uir~eonsiderabl~ added e~pen~e as a i~sñlt of ilrcreaseq reliance on oil, ceal or nuclear generating plants; ahd (4) commsiithers in thO ~ntqrstate market will continue to be dtsadvantnged, becáuae the lnter~tat& tiipelmnes that serve them will be unable to maintain even current sales levels. Deregulation of tia1~ural gas is the; only practicarwa~ of a4bidffig theprobtems assocWè~ with ~nbstantial eurtailments. .; Most recently; thePresident'sLabor~Managemnep~ Commnitte4 has recommended legislative and administrative measures which need to be taken to increase elec- tric utility eonstructTon and output. The ~áthrilhistrativ~ r&~bii~niendatiomi, in- cluding the establishment of a~ task force tb work on expediting the conafritction of electric utility plants, have al~ead~ ~b~en irnpleniented~ It is the legislattee initiatives which now need'to be takeh up. ; ~ ; The President has efidorsed the Labor*Management~ Committee's legislative recommendation,g a~d Secretary Simon preSented the President's specifiC pro- posals to the Ways and Means Committee on July 8th. The proposed legislation. woul~d do thefiollowiug ~ Increase the investment tax credit permanently to 12 percent on all elnctric utility property except generating facilities fueled b~ petroleum preduets~ No change of the percent-of-tax limitation is in:yolved. The increase in the credit is allowable only if con~truction work in progress is included in tire utility's rate base arid the benefit of the increase i~ "normalized" ~for ratemaking purpo~es. "Norm~lized" in this sense means reflecting the tax benefit for ratemaking purposes pro rata over the life of the asset which geñer~tes the benefit instead of recognizing the entiretax benefit in the year the utility's taxes are actually reduced. In the absence of pormalization,. the entire tax benefit would tiow through immediately in. the form of reduced utility rates for consumers~ and no real economic benefit would result f~r the ut~ljty. Give electric utilities full, immediate investment ta~ credit on progres~ pay- ments for construction of property that takes tw9 yC~1rs or niore to build, except generatipg facilities fueled by petroleum prod.uct~, without regard to theflve-year phase-in required by the Tax Reduction Act of l~75. This new provision appl~es only if the regulatory ~gency includes Construction work in progress in the -utility's rate base for ratemaking purposes. . . S Extend to January 1, 1951, the period during which pollution control facilities installed in a pre-1969 plant or facility may qualify for rapid five-year strgight- line amortization in lieu of normal depreciation and the investment credit. Permit rapid five-year amortization of th~ costs of either converting a petro- leum-fueled generating facility into a facility not fueled by petroleum products or replacing a potroleuth-fueled facillt~v with one not fueled by petroleum~ This amortization is in lieu of normal depreciation and the investment credit, and is available only if (i) its benefits are °norrnalized" for ratenmaking purposes, and (ii) construction work in progre~s i~ included In the utility's rate base for ratemaking purpoCes. Permit a utility to elect to begin deprecig.tion, during the construction period, of accumulated const~uctiOn pro~ess expenditures; generally the same ex~endi- tures as these which qualify for tire investment credit construction progress payments under the Tax Reduction Act of 1975. Any depreciation taken during PAGENO="0457" the construction period will reduce the depreciation deductions available after the property is com~1eted~ Phis e~Iy depret~iatioñ ¼~'it1 `b~avai1abh~ only if the raternaking commission includes ~ eon~trfl&~tio~i work in p~g±ess in the utility's Mte Mse and `4noithali~ès" the tax benefits for ratemaking purposes. Construction of generating facilities ~vhIch will be ftiêled by ~ ~etrol'eurn products will . not qualify for such depre~iatlon. Permit a sh~rcho1der' of a regulated public electric ~utility~ to postpone tax on dividends paid by~tbé utility on its common~stock by elbctiag to take additional common stock of the dtility in lieu of cash dividen~5. The receipt of the stock dividend will not be taxed. The amount of the dividend will be taxed as ordinary income wh~n the shareholder sells the diuridend stock and~tbe amount of capital gaim reaIi~Od en the sale will be decreased (or the amount of capital loss in- creased)' accordingly. Dividend stock~ iS' deem~d noid before other stock, We estimate this program Will reduce electric utilities' tax liabilities by $600 niffliOn for the fiscal year .1976, and by an increasing amot~nt In subsequent years. `Iiiaddition to the .reeo.midendatioti of~ the `La'bor~Management Committee, the President himself has recommended legislative changes In utility regulation in the Utilities Act of 1975, Title Vu of the Energy. Independence Act of 1975. Title VII was proposed to* `make selectiye changes in state utility commission regulation by eliminating prohibitions against' off~peak pricing (so that utilities may charge lower prices ,to customers `during off-peak hours), by eliminating undue regulatory lag, by prohibiting suspension of proposed rate schedules by more than five months, and `by eliminating prehibitipns against use by a utility of a normalization method of account Title VII' would `also elijpinate fuel ad~ justment clauses'wbich do not allow utility raie~ to accurately reflect Increasing fuel' costs~ , , ,. ` ` ,. ` ` Each of these actions: (1) import fees (2~ oil decontrol (3) natural gas de- regulation and (4) utilities ,incentives,' ~om,bined with the other items con- tained in the Energy Independence Act of 1975,. was and is necessary if we are to find a solution to our energy problems. The program the President put for- ward is a compreliensiye:ouie. 1t will reach thC go:als, thê,,Presideut set. forth and which, I tbink~ the American people are ent'itled'to~ "` ` Unless the Congreiis:acts now to enact a constructive .~nregy development and conservation program, we may never veach tbo~e goals. `` ` ` U.n. 65 6Q,,, And now, I wOuld' like to co~nrnOnt On H~. 68~0 ~tse1f. We are opposed to en~ aetment of the Energy Oonsctvatidn `and Co~vevsi.oh Act of 175 in its. pyesent form. `The bill recognize's the need `tO' redw~e' the ?~atiqn's dependence upon an upcertain supply of imported oIl but it f ills serio~tsly ~llort u~ achlEa ing its objectives. It fails to `p~ös~ide ~de'quatO `and ~j~piop~iate' taxes `an petroleutp and natural gas to `achieve necessary cOfiservation, Its emphasis ,is nuisdire,cted to- ward automobil~~ fuel. standards and, import ,qpot~s. It proyid~S a long series of expensive tax c~edits, and `accelerated Uepr~ciation pro~isi'Qns for enqrgy-related. materials Whtch are expected to result ju hittl,Oör n~ en~~gy savings. However, let me haSten to say, that HR. ~60 was neither Conceived ~ior origi- nally, drafted to provide' as. little ~netgy savt,ngS~'a it does, in its present `form. The, predecessor to HR. 6860, HR. .5005, while containing' ~trovisions `not in keeping with the President's p~çgram, `nCvè~tb01ess would, haye saved `substan- iially greater amounts of energy thati Will' ILR. ~ `We `di~ not agree with the methods or focus adopted by H.R. 5005 to. save energy,. brit the impart reduc- tions more closely followed the' goals' set by the Administration for the .next few years. ` Even with the tariff and exercise tax on businçss u,se of petroleum and nalhral gas, H.R. 6860 is eypected to reduce imports `by only 1~5,,000 bbh/day in 1975,, 214,000 bbl/day in 1976. arid 314,000 bbl/day"in 197?, the year `in which the President's program would be saving. 2,000,Q00, bbl/day. More' `lmpo~tantly,~. because H.R. 6860' effectively rolls back the second "dollar of the supplemental import fee, and losea the import reductions, attributable thereto, the. blhl'5 net effect rfroni ,what' the President. has `already' done,, is e~sentially, no additional savi~igs. By, 1985, when the, President's prog~m was ,estlpiated to be saving 7~'2 ,itiilliqn bbl/day of petroleum, HIt. 0860 would,, l~e saving othy 2.1 nifi1~on bb1/day~ ,a dif~etence of Over 5~ InliliOn bbi/à,ay ~n' imports. Even assuming, that, the' pri~'e of imported'oil drops to $`t.OO'à barrel' after 1978 (in 1973 doihirs), the total outfi~w,, in U.S. dollars in 19S5 rqs~lting merely from the ,djffererwe in import ~av~gs `between H.R..,6860 and thq'P~e~idept's , pro~rain i~ ,oyer $12.T PAGENO="0458" 45~ billion per year. If in fact the price of imported oil does not drop in the next few years, the outflow will be substantially greater. We believe that the President's program is the only comprehensive plan set forth thus far which is capable of achieving the 2,000,000 barrel per day import reductions necessary by 1977 to start this country on the road to energy inde- pendence. Unless substantial demand restraint measures are Incorporated which affect all sectors of the economy equally, that import reduction level will not be reached. A bill which results In only about 15 percent of those necessary import reductions is unwise legislation. The only desirable provision of HR. 6860 is section 231. which provides a nonrefundable tax credit of up to $150 for 30 percent of qualifying residential insulation expenditures made up to $500. The credit i~ available through December 31, 1977 to encourage energy-saving retrofit of residential housing. This credit, originally proposed by the President in January of this year, is estimated to save approximately. 20,000 bbl/clay of petroleum in 1975, 65,000 bbl/day in 1976, and 110,000 bbl/day in 1977 when the credit ceases~ Because a home once retrofitted with insulation continues to use less energy throughout its useful life, this 110,000 bbl/day saving will continue for years in the future. Any energy program adopted by the Congress should contain such a provision in order to provide a financial incentive to the average American to cut down on the use of energy in his home. The excise tax on the business use of petroleum and petroleum products contained in section 411 of H.R. 6860 indicates a Congressional realization that increased prices will result in petroleum demand reduction, and a com- prehensive domestic exercise tax on petroleum would be a desirable concept. The President proposed such demand reduction measures in the form of a two dollar a barrel excise tax on all domestic crude oil. Section 411, however, is not such a comprehensive excise tax and It falls on too narrow a sector of the economy. Section 411, an presently drafted, would Impose an excise tax on the business use of petroleum of 17 cents per barrel in 1977 rising to $1.00 per barrel in 1982 and thereafter, and en excise tax on the business use of natural gas of 4 cents per Mcf in 1977 rising to 18 cents in 1980 and thereafter. The tax does not apply to use as a fuel in vehicles; vessels, or aireraft; in residential facili- ties, including hotels and motels; for use in mineral extraction (mining); for farming purposes; nor does it apply to fuel used in. electrical generating units constructed or acquired before January 1, 1976. With the many exemptions contained in section 411, the effects of the tax do not spread equally across the economy ~s we believe they should. It will take a comprehensive domestic excise tax on petroleum to provide substantial energy savings achieved through the price mechanism resulting in import reduc- tions over the next two to three years. It is imperative that any energy program contain substantial demand con- straints in order to lower total consumption without the need for an ongoing allocation program, If foreign supply Itself is merely restricted, as I will discuss shortly in regard to the quota sections, then an artificial shortage would `be created. Artificial shortages may require allocation in order to most equitably distribute access to petroleum supply, and allocation results inevitably in increased bureaucracy and distortion of the market mechanism. Energy con- sumption must be substantially reduced In the next few years and the most equitable way of reducing consumption is by allowing each end-user `to deter- mine `his own consumption based on market forces, rather than allocating fixed amounts to energy consumers. This leads me to what we believe are the least desirable provisions of H.R. 6860. Title I of the bill provides for a system of quotas, license `tickets, and duties on imported petroleum and petroleum products, and repeals certain Presidential authority under Section 232 of the Trade Expansion Act of 1062. Specificall,v: Section 111 imposes quotas on oil imports of 6 million bbl/day beginning in 1975 `and 6.5 million bbl/day for 1977, 1980 and thereafter. Two million bbl/day of the quotas are set aside for residual fuel oil of which up to 400,000 bbl/day may be distillate fuel oil. This is a temporary exemption to assure that the im- portation of residual and distillate fuel oil will not be restricted for the next three years. Section 112 urovldes for the sealed bid auctioning of import license tickets by the l~'ederaI Energy Administration to distribute access to Imported oil. Tickets purchased in this "major" auction would be fully marketable. A separate PAGENO="0459" 457 sealed bid auction is established for small refiners and independent marketers. Tickets in this "minor" auction would not be marketable. Section 121 establishes a 2 percent duty on imported petroleum and a 5 percent duty on imported petroleum products which may be raised by the President to 10 percent in either case (or 1 dollar, whichever is greater), however, the Presi- dent would not be able to raise the duty on petroleum products to above 5 per- cent for two years after enactment. Of particular importance is the fact that section 121 also repeals Presidential authority under the Trade Expansion Act of 1962 to adjust imports of petroleum and petroleum products except during periods of war, attack on the United States, or during actual hostilities involving the use of U.S. Armed Forces. With respect to section 121, I am very much concerned over the repeal of Presidential authority to adjust petroleum imports except during actual hostili- ties for the following reasoils. First, the "national security" can be threatened under other circumstances than those which involve actual hostilities. The rapid rise of petroleum imports and the even more rapid ~ise of petroleum import prices are conditions which certainly threaten the national security, not just because of the outflow of U.S. funds, but principally resulting from a growing reliance on uncertain sources of petroleum supply. If petroleum imports continue to rise, the President will need the flexibility to take actions designed to halt the flow of imports. Secondly, the elimination of Presidential authority to set import license fees and tariffs effectively rolls back import tariffs to less than half their present levels, and will result in an increase in foreign imports due to the lowered price. At this time with respect to crude oil, there is a supplemental license fee of $2.00 per barrel and a basic fee of $0.21 per barrel. Assuming II.R. 6860 became law, and the elimination of Presidential authority was replaced by the duties contained in section 121, and assuming an $11.00 per barrel import price, the total import charge on crude oil would drop to $0.22 per barrel [2 percent of $11.00] with Presidential authority to raise it to $L10 per barrel [10 percent of $11.00]. This precipitous drop in the price of imported petroleum would serve to make it more attractive to a prospective purchaser and would only tend to increase foreign imports. In addition, there are a number of other serious problems created by section 121. Since the 10 percent limitation serves as an upper limit for duties on both crude and product, there is no flexibility to establish an appropriate differential between the duties on crude and product to protect domestic refining capacity. The concept of this differential is recognized in the bill's establishing the basic tariff for products at a higher rate (5 percent) than the basic tariff for crude (2 percent). The concept is not carried through, however, in the provisions al- lowing the tariffs to be raised up to 10 percent ad valorem. Furthermore, the restriction in section 121 which fixes the rate of duty on petroleum products at 5 percent for two years effectively prevents the President from raising the rate of duty on crude oil to over 5 percent, since to do so would reverse the crude- product differential. The separate "minor" auction to allocate petroleum to small refiners and inde- pendent marketers is unnecessary and will result in a windfall to bidders in the "minor" auction. The bill provides that the amounts of petroleum made available to the "minor" auction shall be such so as to ensure that "(i) any small refiner can operate his refineries at capacity, and (ii) any independent marketer can adequat~ly supply his regular distribution channels" (Sec~ 112(c) (3) (B)). When sufficient fungible goods (import tickets) are supplied to an auction so as to satisfy the needs of all bidders, as would be done in the minor auction, then the need to bid up the price will be negligible and a low energy bid will result. This energy bid, lower than the average bid in the "major" auction, results in the small refiner windfall. A small-refiner windfall will create extensive pressure for expansion of the preferred group and for increases in the volumes made available through the small refiner auction. If the quota provision is retained, the bill should he amended to provide a set-aside in which small refiners are guaranteed specific volumes of import tickets to be sold at the average price established in the major auction. As I pointed out, section 111 sets aside from the quota level two million barrels a day for residual and distillate fuel oil for three years. This exception was designed to assure that areas of the country which are dependent on imported fuel oil would be given a chance to locate new sources of supply or to convert to coal where possible. 1~his provision would even further restrict the amount of PAGENO="0460" 458 CI tide oil which could be import~I into tlns country as the 0 niilliop barro~ per *thy residual aui~ Uistilate ~xeept~ion i~ subtracted from the total ~1aj1y quota to arrive .~t the q~iqt~ ~I~ye1 for. cri~cl~ ~1,'~nd may further ~ggrayate th~ possibility of artificial ~hqrtã~ges ~ated by t~ quota. ~ ~ : ~ ~ ~ ~ ~ ~, Anot1~ problem *fl:h ~theqpQta, ~ection .Ô~ILR. i~6O is ~he e~rnptiçn of pretro~ cl~en~ical .feedstocl~ 1~rQm ~he q~ntitative ~limjtatjons. ,This increases the tQtal volume~ which may be imported; Since these :1~eedstocks would ~not have to be CQve~ed by licenses obthined in the auction, imports d~f ~etrochemica~ feedstoclçs would be subsidizOd to ~the extent of the cost of ~uction Import licenses. There seems no substantial reüon for thi~ pref~rence and Its prOsencé would again create substantial pressu~qs for expanding this fávo~èd categorj by admnistra~ tive interpretation,~Thjs p~ovt~ion wOuld also di~tOrt import patterfls, cáusinga* shift from crude, oil, tO eligible feedstQcks. Petrochemical ±eed~tock~ outside tf~e quota should at least be ~iibject' to an adtlitiOnal import licdnse fqe `èa;ual to the average price for import tickbts estabUshed in tile, "rna~or" ~uctiob: Finally, use of~ an impOrt quota req~iires careful prediction of con~umption levels or else ártilicial shortages ,and,'result&nt hither prices may be' created through excessive lQwurink `Of' the ~ resulting in the necessity for allocation program with its incun~bOiat inequitie~ and market distortions.' This possibility particularly `a1~ises `in the years `past 1977 when declining clomestie production may create more severe supply problems and ~orce increased relian~e on foreign' imports. Sections 211 through 217. establish fuel efficiency standards for automobile~. Iliach manufacturer is ~`equired to nehieve an average level of fue~ eëonomy for his fleet, computed separately `for, ~OthOstfe and imported car~. A `luallufacturer' 15 deemed to meet ,the s~amiard if' hjs' fleet average is wi~h{n 0.5 mpg of `the standard. Should the Ibaxiufaeturèr's fleet average fall below the Stahdard s~t for that model year, then the manufacturer becomes liable for a civil penalty. The `j~ena1ty Is $5 for èa'~lr 1/10 mpg that the manufacturer's fleet average falls below the standard, multiplied by the total number Of cars manufactured by the' manufacturer for that year~ The initial fuel efficiericy'standards set forth'iri the bill are 18.5 mpg for 1978,, 19.5 mpg for 1979, and 20.5 mpg for 1980.. The secretary of' Transportation will determJne the standard for the years 1981 through 1984 leading to the year' 1985 when the bill dictates a fuel effieiellèy standard of 28.0 mpg. Th'e standard for any year may be lowered where the Secretary of Transportation determines that `Snission standards applicable to 1977, or later model year automobiles are more stringent than emlssioi~ star~dards applicable in 1975. The Secretary may adjust `the fuel efl1cie~icy standard b~ the amount Of lessened miles per gallon attributable to the stricter standards. ` ` We believe that the voluntary füOl efficiency agreements made by the' malor manufacturers and "anhoun~ed by the President ëontinue tO be ,the mast effective way to achieve. increased' automobile "fuel efficlenc~ without placing such a burden on manufacturers so as to increase po~slb1e unemployment. A 40% iii~ crease in automobile fuel efficiency is expected to result by 1980 from the agl~e~e- inents and with intOl~im goals, Federal monitoring, and' public reporting ,of progress announced by the President, no legislatiOn `th, needed in this area a:t this time. Should `the automobile' manufacturers `fail to achieve the goals annOunced by the Président; the AdministratiOn will seek appropriate'legi~lati'~~~ at that time. ,` ` ` ` ` lilt. d860 also provides tax credits for residential solar energy equipment and for electric carS. While these might' seeth toOncoiii~Oge OnOrgy consOrvation, eabh in fact would prOduee little Or no ehergy ~avihgs, WoCId unnecessârjjy ,subsidi~e~ persons'who would hffve purChased such ,iteths ahywa~, and i~ unwarranted. Section 232 provldOsa nOh-'~efufldab1O ta~ ~red1t `of iI~to, $~,000 (25 ~ercent of expenditures up to $8,000) forexpenditures made to fit a residential' ~lwelling with solar heating and ëOolfn~'equij~ment. Such equipment at this time is expen- siVe and is priced ôüt of the reach of thost thiddle `~1~ss homOowners. The solar energy tax credit Is hot' ez~ecied~o induce ma~ persons to add `solar equipththjt to their h'omes'be~use'ofthO `high initiCl'expehse, `` ` ` This `Admintstratio~ is thktiig sighi~can~ st~~s"to'hasfen the commercial' use of solar energy, including preparation of a National Plan for AcCelerated `Cotr~ meruam~atioh of Solar Energy Alternative strate~Ies of market stupulation are a key elenfeht'ii~'fbO PlSii. ~ th5 Efie~gy Research and t~ev~élopxnent AdminlstréU4~t the flepathnent Of Rousing a~&d PAGENO="0461" 459 Urban Development, and the National Science Foundation are working to expedite and promote use of solar energy, but specialized ta~ credits (which would pri- marily benefit high income tax payers) are not, in our opinion, appropriate. Section 233, which was added by amendment during debate in the House of Representatives, provides a non-refundable tax credit of up to $750 (25 percent of expenditure up to $3,000) for the purchase of an electric highway car. Clearly, we have to move toward a personal transportation system which does not solely rely on petroleum. Electric vehicles may eventually become a viable alternative to the conventional internal combusion engine. However, the initial high cost and relatively limited range of the electric highway vehicles available ~today puts them in the luxury class. A tax credit, at this time would benefit pri- marily those few individuals with high incomes and special circumstances who would normally have otherwise purchased an electric vehicle. rlhe Administra- tion is committed to encouraging and supporting the research necessary to im- prove battery technology and thereby lower the high cost of electric vehicles. We, therefore, oppose the enactment of this provision. Another of the provisions to which we most strongly object is Title III, which establishes the Energy Conservation and Conversion Trust Fund. The Admin- istration has long opposed the establishment of trust funds for specific purposes. Our reasons for such opposition are amply borne out by reference to the High- way Trust Fund; namely, that trust funds tie up enormous sums and create their own constituencies and lobbies. The President has recently announced his proposal to cut back the Highway rrrust Fund and return much of the revenue to the States. All expenditures needed for energy research and development can be easily and efficiently handled through the regular budget and appropriatiolls process. It would be ineffective management to commit by law funds which five years from now might be used for better purposes. Finally, let me address those provisions of H.R. 6860 which attempt to increase energy supplies through a series of tax incentives. Sections 421 through 424 would provide accelerated 60-month amortization for qualified energy use equip- ment such as shale and conversion equipment, coal processing and deep mining equipment, and coal pipelines; qualified railroad equipment; and railroad rolling stock. Section 431 would extend the 10 percent investment tax credit to insula- tion and solar equipment. We believe that each of these provisions will result in little or no increased production of energy resources, that companies would pro- ceed to purchase and utilize the same equipment without the credit or accelerated amortization, and that these provisions essentially result in a tax windfall with a resulting substantial revenue loss. Section 432 would eliminate the investment tax credit for new electrical gen- erating facilities fueled by petroleum or natural gas. The concept of promoting electrical generating capacity now powered by petroleum or natural gas Is a good one, but we believe that section 432 would go about it the wrong way by attempt- ing to use the elimination of tax credits. The Investment tax credit for utilities was temporarily increased from four to ten percent by the Tax Reduction Act of 1975. The President has proposed a permaneut increase in the investment tax credit to 12 percent for electric utility equipment not powered by petroleum or natural gas, and we support that proposal. In summary, I wish to say again that the road to increased energy supply and reduced energy consumption can most effectively be accomplished through a price mechanism which will at the same time encourage development of domestic energy resources and constrain consumption. Such a price mechanism must raise the price of energy in relation to other goods but yet rebate the amount of the increased prices through a progressive tax mechanism. The major items to be considered in this respect are phased oil decontrol cothbined with a windfall profits tax, import duties, deregulation of natural gas, utilities incentives, and the other items contained in the Energy Independence Act of 1975. Unless Con- gress moves rapidly to achieve these objectives, we will continue to place a dan- gerous and growing reliance on oil imported from uncertain sources. I again pledge the full cooperation of the Federal Energy Administration to work with the Congress to implement a comprehensive and timely national energy program. [Whereupon, at. 4:45 p.m., the committee recessed; to reconvene sub- ject to the call of the Chair.J 0 PAGENO="0462"