Mr. LUKSTAT. Good morning, and thank you for coming to our briefing this morning on the regulations that have been issued for Phase IV.

We have Dr. John T. Dunlop, Director of the Council, who will have an opening statement-a few remarks; James W. McLane, Deputy Director, Bill Walker, the General Counsel, and John Larson, Counsellor to the Chairman.

Dr. Dunlop, if you would go ahead and open with some remarks.

If there are any people present who are not accredited Press representatives, I ask that you do not ask questions during this briefing, since it is a press briefing.

Thank you.

Dr. DUNLOP. Dick, I may assume, may I not, that the people present have copies of the Final Phase IV Regulations, dated August 7, 1973; copy of Questions and Answers, Phase IV Regulations, of today's date; and a statement on Phase IV Regulations?

Mr. LUKSTAT. Yes, sir.

Dr. DUNLOP. All right. I have just a few introductory remarks that might be useful to make. The subject of these regulations is, inevitably, technical, complicated, and of interest, in the operational side, to accountants, lawyers, and business executives. But I do want to set the stage for these more technical questions which I expect to follow by some general remarks about our process and procedures in reaching where we are.

First, some observations about where we stand on the various regulations:

In front of you, today, is the published version of our regulations for Phase IV of the Industrial and Service sectors, and the Wholesale and Retail sectors. These are being published five or six days before they go into effect on Sunday night, at 11:59, to be effective Monday, for practical purposes, of next week.

We wanted to have these regulations out early, so that people who have to live with them will have the opportunity to study them, to become familiar

with them, and to-in a sense become acclimated to them before they actually go into effect.

Later on this week, towards the end of the week, we will issue the Phase IV regulations that apply to Petroleum, and to the Insurance sectors.

I remind you that, on July 19, we issued the Phase IV Regulations on Health. They are now under review by an Advisory Committee, and we expect later in the Fall to have some revisions in those, growing out of the work of that Advisory Committee.

The Construction regulations were also issued on July 19 in final form. There may be some slight modifications in those, in due course.

I would also remind you, in this schedule, that, in the next week or ten days, we will issue for comment, the regulations applicable to the Food Industry in Stage IV, Beef. You recall the Food Industry was, on July 19, permitted to pass through raw agricultural product price increases. The Phase IV Regulations for the Food Industry do not go into effect until September 12, and we will issue for comment those applicable regulations next week, or in the next ten days.

I should also, in laying out this schedule, advise you that the forms that go with the regulations issued today-Forms CLC and related scheduleswill be issued later this week. They will be available here. They will be printed in the Federal Register, and they will also be available in the District Offices of the IRS.

I can tell that those forms are, even now, you in the printer's hands, so that we have reasonable certainty as to the time schedule I have just announced.

You will note, as I mentioned at the outset, that we have set forth for you, today, an initial set of Questions and Answers about Phase IV Regulations. We shall, from time to time, on a regular basis, be issuing additional Questions and Answers.

Also, later this week, we will be issuing a detailed release on the relations between the Cost of Living Council staff, and the IRS staff, with respect to processing of cases; requests for reconsideration and appeals; and the processing of various forms.

Now, with that time schedule behind us, let me now turn to say a word about the process by which these regulations that are in front of you this morning were developed.

We have received, as you know, somewhere in the neighborhood of 700 detailed comments on the

draft regulations that were issued on July 19. Those comments came from firms, from associations, from accountant groups, from legal firms, from consumer groups; from a broad section of the American community; and they were very detailed. They are available to each of you in the Public Reference facility, which is below the first floor in this building.

We have, this morning, in a prepared release entitled "Phase IV Regulations", set forth some of the major changes from those draft regulations to these final regulations.

I won't take the time to go through all of them. I would only indicate to you that they are extensive; that they do not-it is fair to say-change the policy of Phase IV, which was designed to spread the bulge of inflationary pressures. But these changes, I think you will find, are designed to make the regulations more administrable; more understandable; more responsive to the particular problems of those who must live under them.

If I were to pick out from this release two or three that might be cited as of particular importance, I think I might call your attention to the first item under the Profit Margin, which change specifies that: The Phase IV profit margin limitation will not apply to a firm which does not increase any price above its base prices, or its adjusted freeze prices.

The purpose of that change is to make clear that firms which cooperate in keeping their prices at those levels will be excused from the limitations of the Profit Margin Test.

I might also note that, under the Retail and Wholesale area we have-as responses to numerous conferences and comments-provided that firms may elect to control their prices on the customary basis of a customary initial percentage mark-up, on a category basis as well as on a gross margin basis, giving firms the choice among those according to their practice.

Well, there are a number of others that my associates might wish to stress, but what I am trying to indicate to you is that, in a number of very important respects in dealing with the administrative side of the regulations, we have modified our original draft to take account of numerous suggestions.

Perhaps I might say, also, a word or two about the process, inside the Cost of Living Council staff, by which we handle these numerous requests and

suggestions for modifications in the draft ordersregulations.

First of all, all of these comments were reviewed by our Executive Secretariat. They were combined in order to eliminate duplications. Lists of these were arranged, of course, by the type of regulation we were considering and the sectors involved. And each day, over these last few weeks, the Executive Committee of the Council staff has met sometimes two hours, sometimes four or five hours, a day, often on week-ends, to review those suggestions one at a time; to debate and consult; to go back and get additional information, in many cases, in order to revise the regulations, and to make them the more administrable and the more understandable.

I need not say, except in closing, that I particularly appreciate the long hours of work by our Legal staff-Mr. Walker and his group, particularly as well as by those in the Office of Price Monitoring, which has had a heavy responsibility in working over these various suggestions.

I wish to leave you with a notion of a process which, I am sure, will not please everybody; nor, perhaps, anyone, fully, but it is a sincere effort on the part of our staff-a dedicated effort on the part of our staff-to take seriously, the questions, suggestions, comments, problems that were posed us in these comments; to consider them carefully, in issuing these regulations today.

Thank you. I and my associates will be glad to answer any questions.

MEMBER OF THE PRESS. Mr. Dunlop, you exempted copper scrap-or continued the exemption on that.

Are you going to exempt copper, lead, and zinc as you have silver? I know you received many complaints from the base metal industries.

Dr. DUNLOP. Well, Mr. McLane might comment on that in more detail.

I would simply say that we have only exempted from both the freeze, and under Phase IV, copper scrap; and while we have considered these other metals to which you refer, we have no intention of doing so at this time.

MEMBER OF THE PRESS. But silver still remains exempt? That is in your classification.

Dr. DUNLOP. Yes.

MEMBER OF THE PRESS. What is the significance of the "adjusted freeze price"?

Dr. DUNLOP. Bill, why don't you comment on that?

Mr. WALKER. The term "adjusted freeze price" carries forward the notion that was contained in the draft regulations of, essentially, grandfathering in existing prices. The term "adjusted freeze price" refers to prices that firms charged during the freeze but allow adjustments to be made for temporary special sales; for seasonal adjustments; and for higher prices of the imported product; and, of course, adjustments which were made pursuant to exceptions granted by the Cost of Living Council during the freeze.

But the objective of that provision is to permit firms to carry forward the prices that they have lawfully charged under prior phases of the Economic Stabilization Program.

MEMBER OF THE PRESSs. And not have a rollback?

Mr. WALKER. That is correct.

MEMBER OF THE PRESS. We are stunned by all of this! I am personally stunned by Point No. 5, which I find totally unintelligible, under "Prenotification and Reporting."

Can somebody explain the "110% rule"?

Mr. LARSON. You caught the one that is simplest of all!

For each item in the economy, generally, there are a range of prices. Items are not sold for one price, but they are sold for a range of prices, that has been going on for some long period of time. The intention of this rule is to allow the basic price structure in industry to continue, without collapsing the price structure that might have been suggested by the proposed regulations.

So, what this says is that you can charge a price: 110% of the base price, or 110% of the adjusted freeze price, plus the percentage of cost justification in your product line.

Now, the last clause which says that you have to multiply that times the freeze price simply gives you a dollar determinant when you go out, but this allows you to go up the line. Say, a 6% increase would allow you to go from a dollar price, to charge a maximum price of 116%. That would be continual. This reflects the fact that there is a whole range of prices.

Dr. DUNLOP. After prenotification.

Mr. WALKER. Let me supplement that, if I may. The rules require prenotification of price increases by large firms. Once they have prenotified a price increase, and the 30-day period of time has elapsed, they must price their products so that, for all of the items within the product line

for which a price increase is prenotified, the weighted average of the prices does not exceed the prenotified amount of the price increase. The 110% rule is a "cap" on item prices within that product line. That "cap" notion operates within the product line on an item basis, in the manner that Mr. Larson suggested.

MEMBER OF THE PRESS. Isn't this going to tend to be the norm then-a flat 10% ?

Mr. WALKER. No. No!

MEMBER OF THE PRESS. What would keep it from being that?

Mr. WALKER. There is a requirement that all of the items sold in a product line must price out on a weighted average basis in a manner consistentin an amount consistent with the prenotified price amount.

MEMBER OF THE PRESS. I don't understand what you are saying.

Dr. DUNLOP. Let me try it this way:

Suppose you prenotify, and the Cost of Living Council permits a weighted average, in a category of items, of 2%. That, presumably, is based on a cost justification for that category of goods.

Now, what this rule refers to is that any individual item within that category may be raised by 10-plus-2, but that clearly doesn't mean that all of the items in that category can be raised that amount, because the average the weighted average of all of the items in that category must be 2%.

MEMBER OF THE PRESS. In order to reach that for the category, if you are limited on some items within the category, you then can take what you have left over from the items and put it on other items?

Dr. DUNLOP. Within the same category.

MEMBER OF THE PRESS. Within the same category.

MEMBER OF THE PRESS. Does the firm, when it prenotifies, prenotify just the category, or item by item?

Mr. WALKER. The firm, when it prenotifies, will generally prenotify on a product line, or a category basis. It will prenotify for appliances, for example. Then we will price washing machines and dryers within that product line, in accordance with that prenotification.

MEMBER OF THE PRESS. Over all, do the price increases have to be cost justified?

Dr. DUNLOP. Absolutely!

MEMBER OF THE PRESS. In other words, they have to be based on additional cost to the producer.

Mr. McLANE. It is important to point out that it is on a dollar-for-dollar basis. It is not a full cost pass-over, but just a dollar-for-dollar basis that you are allowed to pass over.

I think a second point on this price increase in a product line that should be pointed out is that if, on an item within that product line, you plan to raise your price of that item within the product line, you must prenotify for that one item within the product line, or for the product line as a whole.

MEMBER OF THE PRESS. A consumer should not be surprised to see some price-the prices of some items go up 10% or more during Phase IV?

Mr. WALKER. That is correct. There is provision made for individual item price flexibility within the product line. However, the limitations that are imposed insure that the items within the product line, as a whole, will not exceed the amount of the price notification and, in any event, may only reflect increased costs incurred since the last quarter of 1972 on a dollar-for-dollar basis.

Dr. DUNLOP. May I remind you that the tough rules on cost justification, that were announced earlier, are incorporated in this. That is to say: I remind you that by picking the base we did; of the last quarter before January 11, 1973, we have wiped out a great deal of cost justification that existed in many companies. We have also, as you know-as Mr. McLane said-in permitting cost pass through on a dollar-for-dollar basis, eliminated a substantial amount of leeway that might previously have been permitted.

We, in this way, have built a very tight-we think-cost justification situation. But, instead of requiring a firm to ask permission to raise each individual item, in the interest of administration; in the interest of some flexibility within the enterprises, we have said that cost justification, and price consequence, must be related to a category of products; not each particular size of a television set; not each particular quality of a television set within a grouping of products. We have said the category must be restricted to the amount of cost justification which we have found, and to the amount of prenotification which the company has built.

MEMBER OF THE PRESS. What is the difference between this and Phase II?

Mr. WALKER. On the issue of product line pre