The four full paragraphs contained in the second column of page 3468 of the January 22, 1975, Federal Register, I believe, confirmed the fact that not only might rebates not be these figures, but might be substantially less or nothing at all.

The consequences of this was that the ultimate impact of the President's oil import program could have been the total amount of the license fee, or $3.63 per barrel, in addition to the value of the loss of any entitlements.

The four paragraphs I have referred to describe the manner in which the FEA was to compute the rebate. It was to be composed of two components, one of which was the current entitlements benefits and the other an amount that would equalize the impact of increased fees on products with the increased import fees on imported crude oil, taking into account also the corresponding increased price of uncontrolled domestic crude oil. If one runs through the figures, he quickly reaches the conclusion that if the price restriction was removed from old oil, the rebate would have shrunk or disappeared. The question I was going to ask was this:

Will the rebates be the fixed figures of $1 for February, $1.40 for March, and $1.80 for April and the ensuing month thereafter or will they, in fact, be determined by the language set forth in that Federal Register notice and, consequently, possibly become zero? However, the FEA has hopefully clarified the matter by, in its amendments to the oil import program, announced January 28, 1975, netted the $1, $2, and $3 fee with the aforementioned rebates to produce fixed supplemental fees of zero for February, 60 cents for March, and $1.20 for April and the months thereafter. I have used the word "fixed" describing these supplemental fees and, while not conceding either their validity or their fairness as to amount, hope that the FEA also views them as fixed in the sense of being maximum fees for the term of the program and does not plan on employing the January 22, 1975, Federal Register formula, which I have mentioned, to increase their amount.

As to the proposed modifications relating to price regulations, we are pleased that the FEA has now recognized the severe economic inequity caused by the failure to accord "special product" treatment to residual fuel oil, with the result that increased costs can be and have been disproportionately allocated to this product. At the same. time, we believe the proposed modifications to the price regulations fall short of providing the needed assurance that residual fuel oil will not continue to bear an unfair share of increased costs.

The present price regulations allow increased costs attributable to special products-gasoline, No. 2 heating oil, and No. 2-D diesel fuelto be allocated to other products such as residual fuel oil. A brief look at the wholesale price index for the past 2 years shows that increased costs have indeed been loaded onto residual fuel oil and other products rather than placed on gasoline.

Under the proposed modifications to the price regulations, refiners would no longer be allowed to allocate increased costs attributable to No. 2 oils or gasoline to residual fuel oil. However, in grouping residual fuel oil together with aviation fuel and such other products as kerosene, butane, benezene, naptha, and propane in the new category of "general refinery products" and allowing the allocation of increased costs to any product within that category, the FEA is making it likely that residual fuel oil will continue to carry increased costs properly attributable to other products.

Take aviation fuel as an example. Over the past 2 years, it has approximately doubled in price-while residual fuel oil has more than tripled. Under the proposed modifications, refiners could continue to load increased costs attributable to aviation fuel on to residual fuel

oil.

In these times, the fact that there is a relatively inelastic demand for residual fuel oil, because voluntary conservation has already taken place, should not be the basis for unfairly loading increased costs onto this product while allowing other products with more elastic demands to carry less than their fair share of increased costs.

About 30 percent of each barrel of oil is used to produce the products in the general refinery products category-and of this 30 percent, about one-quarter is used for residual fuel oil. Thus, there is considerable potential for loading increased costs from such other general refinery products as aviation fuel onto residual fuel oil, causing it a vastly disproportionate share of costs.

Accordingly, I urge that the proposed changes in the price regulations be modified so as to assure that residual fuel oil, like the No. 2 oils, will not have to bear increased costs attributable to any other product.

In conclusion, I urge that the electric consumers of New England not be asked to bear more than their fair share of the costs of any energy program and that the old oil entitlement program not be eliminated for importers of residual fuel oil.

On behalf of the New England Power Pool and New England Electric System, I thank you for the opportunity to comment on your proposed amendments and will be pleased to answer any questions regarding my remarks.

Senator STONE. Thank you. Mr. Nichols.

Do you have any questions, Senator Johnston?

Senator JOHNSTON. Yes. Thank you, Mr. Chairman.

Why did you stop with nuclear and coal? Why did you not go out to the Continental Shelf?

Mr. NICHOLS. I support that drilling on the Outer Continental Shelf. We are participating in oil drilling. Unfortunately, we have not been able to get the rights to drill off the New England coast. We are working hard at it, and I hope you will support it.

At the present time, utility companies are actively participating in drilling both within the continental United States and offshore.

Senator JOHNSTON. That makes our agreement almost complete. I think both you gentlemen have pointed out what a terrible impact. the President's program would have on different segments of our economy, in your case different segments of the electric industry, and this morning we had testimony with respect to the airlines industry, and in the case of a host of other witnesses who have not and will not testify who also dramatically but equally find different segments of the economy being hurt.

I don't know of any way of making that huge higher tax program acceptable without putting this economy into a real tailspin. I think both of you have made a very good case.

Thank you.

Senator STONE. Senator Glenn, do you have any questions?
Senator GLENN. Thank you, Mr. Chairman.

I would like to ask one short question.

I have been in these hearings for a number of days, and I have been following the ripple effect going through our whole economy and how it gets passed on and the impact. It is rather frightening. You don't see see the end. It goes on and on and on.

Do you have any indications of actual business failures of highusage customers who are particularly dependent on your product, and is there anything along that line with regard to ripple effect? Have you actually seen any businesses put out of business or where employment has been reduced as a result of the increasing prices just over the past year-a situation which would be made even worse if we go in the direction contemplated?

Mr. FUQUA. I don't know that I could document specifically, Senator, any cases of bankruptcies attributable to the high cost of electric service at this point. Certainly, it would be a factor because of the tremendous increases.

You understand, of course, that these fuel costs almost uniformly throughout the country are passed along to the customer through a fuel adjustment clause arrangement. Otherwise, the utility companies themselves would go broke very shortly, because we could not possibly absorb the increased costs of fuel.

That is as good as answer as I can give at the moment.

Senator GLENN. You say you are studying coal as an alternative source. Costwise, by the time you get coal to Florida, how does it compare in cost to oil?

Mr. FUQUA. We studied coal for a long time-coal from Kentucky fields down to Tidewater and Hampton Roads and Port Evergladesand we found it was never economically sound. We have never found any coal supply yet that we feel would compete because of transporta

tion costs. However, we have been studying it, and we have gone down to Colombia where there are some reserves, and that might someday work out.

We feel that the nuclear powerplants are the salvation of the industry, and we have moved ahead as fast as we could on that. We have two in operation.

Of course, you realize that if we did not depend on those nuclears for part of our energy generation, we would have to burn more oil, and the price would be even higher. I think it is rather dramatic and, as a rule of thumb, we are talking in terms of $13, $14, or maybe $15 a barrel. An equivalent barrel of natural gas is $3. An equivalent barrel of uranium is $1.

So, it depends on the mix that you are able to use. That is an important thing. We have some who depend 100 percent on it.

Mr. NICHOLS. We have converted some of our facilities in the past year, and we have burned some coal. We have had to do it with environmental variances that were at most 7 months long. Buying coal with that kind of a restriction is a very difficult proposition. But, even so, by scouring the world markets as well as the U.S. markets, we have burned a considerable amount of coal that is the equivalent of about $8 to $9 for oil. Some of it was as cheap as the equivalent of $6 oil. This coal was partly domestic and partly foreign.

Senator GLENN. May I ask one more question, Mr. Chairman?

I know this gets into a very touchy and sensitive political area, but both of you come from areas which border offshore areas where oil is supposed to be available if we could just get out there and drill it, but there is a lot of citizen interest in not doing that.

Do you think people are coming around more to letting that be done? Do you think as a general comment that people are coming around to realizing the enormity of the situation we are in and being willing to accept the drilling?

Mr. NICHOLS. Definitely, yes. This does not mean there are not still some spokesmen who are in strong opposition, but the overall answer is definitely, yes.

Mr. FUQUA. I would echo Mr. Nichols on that point also.

Senator GLENN. I don't like eastern Ohio looking like a combat zone from strip mining either. I think what scenic detriment we do to the ocean by putting a couple of drilling rigs out there does not compare to the alternative of not having jobs available.

Thank you, Mr. Chairman. I have no further questions.

Senator STONE. Which of the groups served by your customers would be hardest hit with the passthrough of fuel adjustment if the Ford proposal of extra taxation on the use of imported oil went into effect, Mr. Fuqua?

Mr. FUQUA. I suppose I would have to answer that the fixed-income retiree would be the hardest hit and the most disadvantaged. Senator STONE. They would be burdened the most?

Mr. FUQUA. Yes, sir.

Senator STONE. Are there further comments?

If not, thank you very much for testifying. It is not our purpose to make things harder but to make things easier and better. Again, thank you for your time.

Before I turn the Chair back to the Senator from Louisiana, I would like to state in preparing for this hearing, we extended an invitation to Dr. Irwin Steltzer and Dr. Herman Roseman, president and vice president of National Economic Research Associates, to appear regarding the effect of the various components of the President's proposals on the electric utility industry. They are, in my opinion, among the most sophisticated and reliable authorities in the Nation. regarding the economics of the utilities.

Unfortunately, both of them had previous commitments, but National Economic Research Associates did send us a statement by Dr. Roseman analyzing in great detail the proposal to include construction work in progress in utilities' rate bases, and the increase of the investment tax credit for utilities. With unanimous consent from the committee, I would like to place Dr. Roseman's statement in the record of this hearing.

[The prepared statement of Mr. Roseman follows:]

NATIONAL ECONOMIC RESEARCH ASSOCIATES, INC.,

January 31, 1975.

This memorandum comments on the proposals in the President's State of the Union address of January 15, with respect to construction work in progress and investment tax credit.

1. The fact sheet which accompanied the address states that the inclusion of CWIP in rate base would add 11 percent to electric utility rates. My inquiries at FEA indicated that the source of this figure was a recent speech by John Nassikas. In what follows I will describe my independent estimate.

The Office of Accounting and Finance of the FPC, in "A Study of the Electric Utility Industry" in September 1974, indicated that electric utilities had about $19.6 billion in construction work in progress at the end of 1973. Their figures also indicated that the amount of CWIP had been increasing by about $3 billion per year. Suppose it were $22 billion at the end of 1974. Suppose that the average utility is allowed a 9 percent after-tax rate of return on rate base. Putting this amount in rate base would then mean additional after-tax reve nues of $1.98 billion. Assuming a 48 percent marginal income tax rate, this would imply a $3.8 billion increase in before-tax revenues. According to a chart in the same publication, electric utility revenues in 1973 were about $32.6 billion. Total electric revenues in 1974 were up about 20 percent, which indicates that revenues in 1974 were about $39 billion.

Combining these two computations indicates that allowing construction work in progress in the rate base would increase revenues by something like 9.7 percent. This is close enough to the 11 percent used in the fact sheet to President Ford's address to indicate that his figures are not far off the mark.

2. There are a number of ways in which including CWIP in rate base will impact on the finances of utilities. One way is by directly increasing cash flow. As I have already indicated, including CWII' in rate base would imply an increase in after-tax earnings from operations of approximately $2 billion. This is a large amount relative to the financing requirements of the electric utility industry.

1 Fred Searls read an early draft of this memorandum, corrected some of the conceptual errors in it, and added some important refinements. Any errors which remain are, of course, my responsibility.

2 Curiously, the Office of Economics of the FPC. in "An Analysis of the Electric Utility Industry's Financial Requirements" (p. 24), published in September 1974, estimated that including CWIP in rate base would increase revenues by about 7 percent.

In most utilities the interest on the debt portion of funds used during construction is already taken as a current deduction in computing income taxes charged to operations. A few companies, however, get this tax effect out in computing the allowance for funds used during construction and hence do not use it as to reduce taxes charged to operations. For the latter companies, inclusion of CWIP in rate base would also mean deducting the interest portion of AFDC in computing income taxes charged to operations. Although this effect may be substantial for individual companies it probably would not have a material effect on the overall totals used here.