The purpose of this amendment to Part 150 of the Cost of Living Council Regulations is to add Subparts A through K, and P.

On July 19, 1973, the Cost of Living Council established Part 150 and issued Subpart N in final form, 38 F.R. 19462 (July 20, 1973). On the same day the Council issued a notice of Proposed Rulemaking, 38 F.R. 19464 (July 20, 1973) setting out proposed Phase IV regulations, and inviting interested persons to submit written data, views or arguments.

The Council stated in the Notice of Proposed Rulemaking that all comments received before July 31, 1973, would be considered by the Council before taking action on the proposed regulations. Six hundred and seventy-one comments were received before July 31, 1973.

Copies of each comment went to the attorney and the operations specialist or economic analyst who was responsible for the subpart with which the comment dealt. Many comments dealt with several subparts and thus were divided among Council personnel with responsibility for the different subparts. In addition, numerous consultations were held with affected groups of businessmen, consumers, attorneys, accountants, and others in Washington, D.C., Atlanta, New York City, San Francisco, Detroit and Chicago. Staff officials of the Council conducted an intensive reexamination of the regulations, independently as well as in light of the comments, in order to assure the maximum degree of clarity and consistency of the policy decisions that were made and of the regulations written to reflect these decisions. As a result of these efforts the final regulations contain numerous changes from the proposals that were published in proposed form on July 19, 1973.

SUBPART A-GENERAL

Subpart A provides the scope and general rules of Part 150. It specifies which of the prior regulations are superseded and which temporarily remain in effect.

Subpart A provides that reports due under the Phase III regulations continue to be required for any reporting period ending before August 13, 1973, even though Phase III has ended for most firms.

Subpart A also reiterates the Phase III rule that contract renegotiation provisions which depend for their operation upon the modification or termination of the Economic Stabilization Program are rendered inoperative as inconsistent with the goals of that program.

Subpart A differs from the proposed version primarily in that it now contains general rules formerly set out in Subpart E. This change in location is designed to provide a clearer and more logical grouping of Phase IV provisions. The general price rule is added to subpart A and clarified by the addition of the concept of an "adjusted freeze price" which is defined in §§ 150.72 and 150.302.

A new section on profit margin limitation is added which explains that a single profit margin is used for all manufacturing, service, retailing and wholesaling activities of a firm except where particular regulations under this part (such as Subpart N-Construction) require separate computation of a profit margain. The profit margain rules which were formerly located in subparts E (for manufacturing and service activities) and K (for retailing and wholesaling activities) are continued in general but modified in several important respects. A firm which does not charge a price in excess of an adjusted freeze price is not subject to

a profit margain limitation with respect to the first fiscal year ending after August 12, 1973. Also, charging a price pursuant to a contract entered into before the freeze does not subject a firm to a profit margin limitation. Finally, charging a price for a custom product or service will not subject that firm to a profit margain test if the revenues derived from the sale of the custom product or service amount to less than $10 million or less than 1% of its annual sales or revenues for the fiscal year, whichever is greater.

A new exclusion is provided which relieves from the profit margin test for a firm which, during its most recent fiscal year, derived both (1) 90% or more of its annual sales or revenues from the sales of exempt items or from exempt sales, and (2) less than $50 million of its annual sales or revenues from the sales of nonexempt items. Also, a profit margin overage will be excused by the Council to the extent that it can be demonstrated as being attributable to the sale of exempt items.

Subpart A adds two other new sections. The first permits a firm which has been authorized to adjust its base period profit margin pursuant to an exception granted before Phase IV to continue to calculate its base period profit margin pursuant to that exception. The second section explicitly retains the right of the Council to challenge Phase III price increases and to impose sanctions under the freeze regulations.

Finally, subpart A is changed by the addition of three sections, providing for criminal fines, civil penalties and injunctions. These sections continue the same general sanctions which were in force during the Phase III freeze.

SUBPART B-DEFINITIONS

Subpart B contains the definitions of general applicability to this part. Definitions which are applicable only to one subpart are placed at the beginning of that subpart.

Subpart B differs from the proposed version primarily in that it includes definitions of "Base period profit margin", "Parent", "Price adjustment", and "Unconsolidated entity"; deletes definitions of "Controlled group", "Mass transportation system" (which is defined in Subpart P), "Pooling of interests", "Regulatory agency", "Spin-off", and "Split-off"; and makes substantial changes in the definitions of "Base period", "Firm", "Product line", "Profit margin", "Service line", and "Transactions".

The definition of "Base period" has been amended to separate the computation of base period profit margin from the definition of base period. A definition of "Base period profit margin” has been added. The base period profit margin. must be computed in accordance with the firm's financial statement for the years used, but adjustments to those financial statements may be required to reflect changes in the firm's activities in accordance with the provisions of Subpart I. In addition, if in computing its basc period profit margin, a firm uses a year ending during Phase II, in which the firm exceeded the applicable Phase II profit margin restrictions, the firm must reduce the operating income used in the computation to a level that would have been permitted had it been in compliance with the Phase II profit margin limitation. Consistent with Form CLC-22, a firm must deduct interest expenses on long and short-term debt in computing its operating income. Also, the phrase "cost of sales" has been changed to "cost of goods sold".

The definition of "profit margin" has been changed to reflect the changes in the definition of base period profit margin. Both definitions explicitly provide that for purposes of computing base period profit margin, a firm excludes revenues and costs attributable to items exempt under §§ 150.52, 150.53 (b), 150.54 (d) (3), 150.54 (d) (4), and 150.56, and revenues and costs of insurance transactions subject to Subpart M.

The definition of "Firm" has been changed, and is designed to achieve the same results reached in Phase II. The language is also changed to reflect the fact that the Council uses different aggregations for purposes of applying the term "firm" in differing contexts in the forms and regulations. For example, for profit margin purposes, a “firm” is a parent and consolidated entities, while for determining price categories, the Council uses "firm" to mean parent and consolidated and unconsolidated entities.

"Item" has been changed to include not only sale but lease, and not only something offered for sale but something sold. The term "Manufacturer" has been changed to "Manufacturing" with no change in the definition, to be consistent with the change in usage from Phase III. Similar changes in terminology occur with "service activities", "retailing" and "wholesaling".

The definitions of "Pooling of interests," "Spinoff" and "Split-off" have been deleted since these

terms are no longer used in the new provisions of subpart I relating to comparability of financial data.

Because of the change in the definition of firm, there are now definitions of "Parent," "Parent and consolidated entities" and "Unconsolidated entities."

Definitions of "Product line" and "Service line" are added which are consistent with the CLC-22 definition of product line.

"Retail firm" was deleted and incorporated into the subpart D exemption for small retail firms.

"Transaction" was changed to mean date of shipment in the case of products and date of performance in the case of service. This is consistent with the freeze rules.

This change reflects the fact that for purposes of calculating actual prices as of January 11, 1973, for the first CLC-2 required under Phase III rules, firms generally made their calculations on the basis of shipment prices as reflected on invoices. The change enables firms to use these calculations for determining base prices in Phase IV, and relieves them of the burden of performing new calculations. In addition, prices specified in contracts entered into prior to the freeze are declared allowable under § 150.76 of the final regulations.

SUBPART C-CLASSIFICATIONS

Subpart C classifies all firms as price category I, II or III, based upon the firm's annual sales or revenues. Specifically, a price category I firm is a firm with annual sales or revenues of $100 million or more. A price category II firm is one with annual sales or revenues of at least $50 million but less than $100 million. All others are price category III firms.

Subpart C has been changed to specify that, for determining price category, a firm includes a parent and the consolidated and unconsolidated entities which are directly or indirectly controlled by the firm.

SUBPART D-EXEMPTIONS

Subpart D sets forth a list of the items, transactions, and firms which are exempt from various provisions of the Economic Stabilization Program. Certain clarifying and substantive changes have been made in the proposed regulations as follows.

In § 150.52(a), raw peanuts, shelled or unshelled, have been added to the list of those agricultural products the sale of which is exempt until processing occurs. The Council during the course of the Economic Stabilization Program has treated raw peanuts as subject to the general rule of § 150.52(a) since virtually all peanut products in the United States are processed in some form before being consumed. The omission of raw peanuts from the list of exempt products contained in the proposed regulation was inadvertent.

In § 150.52 (a) milled lumber has been deleted from the listing of nonexempt items to remove any confusion which might arise as to the scope of the exemption for lumber under § 150.54 (o). Millwork has been added as an example of a nonexempt lumber item.

Section 150.54 (n) concerning long-term contracts has been broadened to apply to any contract to provide coal over a period of at least five years to a public untility. The proposed provision required that a coal contract be entered into after August 1, 1973, have a term of at least eight years, and be for the provision of coal to a public utility under the jurisdiction of a regulatory agency.

Section 150.54 (0) concerning lumber has been amended to include tempered or untempered hardboard.

A new § 150.54 (p) has been added to continue the exemption for prices charged for copper scrap and copper based alloy scrap which became effective during the latter part of the Phase III freeze.

With regard to the small business exemption in § 150.60, it should be noted that as a consequence of the shift forward in the time period for determining applicability, a firm which qualified for the exemption in Phases II and III may not qualify for the exemption as now formulated as a result of a change in its circumstances, such as growth in employment or sales.

Certain technical changes, e.g., to correct erroneous cross references, have also been made.

SUBPART E-MANUFACTURING AND SERVICE ACTIVITIES

Subpart E has been modified in several respects. Since the rules of general applicability have been removed to Subpart A, Subpart E now applies only to manufacturing and service activities. A "Scope" section has been added that makes clear that Subpart E does not apply to those activities

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governed by particular regulations under this part (such as Subpart M-Insurance). However, a firm which is subject to Subpart E and which is also engaged in wholesaling and retailing activities governed by Subpart K may treat those activities as manufacturing and service activities, if the firm's revenues from wholesaling and retailing amounts to both (1) less than $50 million, and (2) less than 10% of that part the firm's total revenues which were subject to Subpart E in its most recently ended fiscal year.

A definition of "adjusted freeze price" has been included specifying those Phase III prices which may be charged in Phase IV without application of the Phase IV rules. This is a modification of the notion embodied in § 150.76(d) of the proposed regulations. The "adjusted freeze price" is, essentially, the maximum price permitted under the freeze regulations, modified to exclude from the freeze price temporary special sales, deals, and allowances which were required to be included under the freeze regulations. The "adjusted freeze price" takes into account exceptions granted dur ing the freeze and the special freeze rules which allowed for seasonal pricing and higher prices on imported items. The general rule for price increases under subpart E, as now stated, is that any price may be charged for an item which does not exceed the adjusted freeze price of that item or the base price of that item, whichever is higher. Where the base price is higher than the adjusted freeze price, a price above the base price may be charged only to recover on a dollar-for-dollar basis those net increases in allowable costs that have been incurred with respect to the product line or service line concerned since the base cost period and which the firm concerned continues to incur, subject to the productivity offset, the price reduction rule, and the profit margin limitation.

Where the adjusted freeze price is in excess of the base price, a price increase may be placed in effect only if the full extent of all price increases above the base price is cost-justified and is otherwise permissible under the Phase IV rules. This rule permits firms both to increase prices up to the adjusted freeze price level and to continue to charge prices at the adjusted freeze price level without application of the Phase IV rules.

A price category 1 firm which prenotifies its intent to apply a percentage price increase to a product line or service line, and any other firm which qualifies, by virtue of cost justification, to

charge a percentage price increase to a product line or service line, must apply the percentage price increase on a weighted average basis so that, for any fiscal quarter, the weighted average of all price increases and price decreases in that product line or service line does not exceed the percentage price increase prenotified or otherwise permissible.

A new rule has been formulated for limiting the maximum price increase for any one item in applying the percentage price increase to the product line or service line on a weighted average basis. The item maximum is 110% of the adjusted freeze price or 110% of the base price of the item, whichever is greater, plus the percentage of cost justification times the adjusted freeze price or the base price, whichever is greater.

The price reduction rule, which requires price reductions when and to the extent that Phase IV price increases are no longer supported by increased costs (i.e., when costs decrease), remains essentially unchanged.

The rule in the proposed regulations concerning contracts entered into during the freeze has been altered with respect to the periods of time applied under that rule and has been moved to subpart H (Prenotification and Reporting) since that rule provided a temporary waiver of the prenotification requirement. The new contracts rule in subpart E applies to the price specified in a contract for the sale of an item entered into before 9:00 p.m., e.s.t., June 13, 1973, with respect to delivery or performance occurring after the beginning of Phase IV and before January 1, 1974. The new rule states that that contract price is allowable without regard to the Phase IV rules and without regard to profit margin limitation.

Subpart E concludes with the rule requiring that increases in allowable costs be reduced to reflect productivity gains. This rule remains essentially unchanged from Phase II.

The profit margin rule, previously set forth in subpart E, has been expanded and restated in subpart A.

SUBPART F-BASE PRICE

Subpart F provides the rules for calculating base prices, including base prices for new items and custom products and custom services. These rules remain essentially unchanged. In general, the base price with respect to an item is the average price at which the item was lawfully priced in transactions with the class of purchaser concerned

during the base price period. The average price is determined by dividing the net sales of that item by the quantity of the item sold or leased to the class of purchaser concerned during the base price period. The base price period is the last fiscal quarter which ended before January 11, 1973, in which transactions occurred with respect to the item and class of purchaser concerned. A provision has been added for using an accepted sampling method for calculating the base price of an item in certain circumstances.

Temporary special deals or temporary special allowances may now be excluded in computing the base price of an item. Along with this change, "temporary" has been defined to mean in effect for 31 days or less.

With respect to determining a base price for a new item, the rule as applied to firms engaged in wholesaling and retailing has been modified to provide that the product shall be priced within the merchandise or customer category into which the new product falls in accordance with subpart K.

The prenotification requirement provided in the proposed Phase IV rules with respect to new items has been eliminated. Subpart F now provides for quarterly reporting of new items when projected sales for all new items in the current fiscal year amount to $10 million or more. The requirement applies with respect to each new item with projected annual sales of $1 million or more. This regulation is designed to permit the Council to review whether items qualify as "new items" and whether the base price of new items has been determined in accordance with subpart F.

SUBPART G-BASE COST AND CURRENT COST

Subpart G establishes the rules for determining base costs and current costs.

Previously, the base cost of direct material and labor was the rate at which these costs were incurred on the last full day of business in the base cost period. The base cost period remains unchanged (the last fiscal quarter which ended before January 11, 1973, in which costs were incurred with respect to the product line or service line concerned). However, the base cost of labor is now the rate at which those costs were incurred on the first full day of business in the base cost period. With respect to all costs (including cost of direct labor) other than labor costs, the base cost now is

also the rate at which those costs were incurred on the first full day of business in the base cost period. Unchanged is the rule that if base cost for all costs other than labor costs cannot reasonably be determined as stated above, the base cost is the average cost incurred throughout the base cost period.

Under the Phase IV rules as proposed, the current cost period was the fiscal quarter for which a quarterly report is required. For prenotification purposes, the current cost period was any representative period in which normal, recurring costs were incurred prior to the date of the prenotification document.

The current cost period for quarterly reporting purposes is now the last accounting month in the current fiscal quarter for which a quarterly report is required. The current cost period for price category III firms is the last accounting month in the current fiscal quarter for which compliance is being measured. The current cost period for prenotification firms is the last accounting month preceding the date of signature of the prenotification document except that with respect to labor and other costs which may be calculated as of a date certain, the rate at which these costs are incurred on the day which is the date of signature of the prenotification document may be considered as the rate on the last full day of the current cost period.

Except as indicated above, the rules for current costs for labor and all other costs continue unchanged. The rate on the last full day of business in the current cost period is used, except that, with respect to all costs other than labor costs, the average cost incurred throughout the current cost period may be used if current costs cannot reasonably be determined by the method prescribed.

SUBPART H-PRENOTIFICATION AND REPORTING

The general prenotification rule, found in § 150.51 (a), has been modified to require that a price category I firm may not increase the price for any item above the adjusted freeze price for that item or above its base price for that item, whichever is higher, until it has filed a notice of the proposed price increase with the Council and 30 days have elapsed since the filing of that notice. The section, as proposed, made reference only to increases above base price and a waiver of prenotification was provided for prices established pursuant to § 150.76 (d) of the proposed regula