ECONOMIC IMPACT OF PRESIDENT FORD'S

ENERGY PROGRAM

THURSDAY, FEBRUARY 6, 1975

U.S. SENATE,

COMMITTEE ON INTERIOR AND INSULAR AFFAIRS,

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Washington, D.C. The committee met, pursuant to notice, at 10 a.m. in room 3110, Dirksen Office Building, Hon. Henry M. Jackson, chairman, presiding. Present: Senators Jackson, Church, Johnston, Haskell, Glenn, Bumpers, Fannin, Hansen, Bartlett, Randolph, Hollings, and Pell.

Also present: Grenville Garside, special counsel and staff director; Daniel A. Dreyfus, deputy staff director for legislation; William J. Van Ness, chief counsel; D. Michael Harvey, deputy chief counsel; James Barnes, Benjamin Cooper, Thomas Platt, and Richard Grundy, professional staff members for the majority; Harrison Loesch, minority counsel; and David P. Stang, deputy director for the minority. The CHAIRMAN. The committee will come to order.

OPENING STATEMENT OF HON. HENRY M. JACKSON, A U.S. SENATOR FROM THE STATE OF WASHINGTON

Last Friday, this committee heard testimony on the President's energy proposals from members of his administration.

Today the committee will hear testimony on the economic impact of these proposals from several distinguished individuals.

Originally from labor, I regret Mr. Woodcock was taken ill last night, and we were advised earlier this morning that he will not be able to be here, and he had to return to Detroit last evening. He will be testifying at a later date.

So, the representative from labor will be heard at another time on industry, electric utilities, and higher education.

The administration and Congress are in agreement upon two final objectives: Energy independence and economic recovery. There is less agreement-in fact, healthy controversy on the relative priority of these objectives, on how we get to each, on how fast we can or must proceed, and, finally, on what price we must pay for each.

Two questions have dominated recent dialogo and debate:

First, can the President's attempt to reduce energy consumption by imposing import tariffs, excise taxes, and decontrolling oil prices be justified at a time when America, already ravaged by inflation, totters on the brink of a depression?

Second, to what extent can any energy conservation program achieve long-term goals overnight without jeopardizing economic recovery?

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We know that the President's proposals would increase the cost of oil, and with it, the cost of all energy to American business and American conusmers. We also know that such an increase-as in the past-will further fuel inflation. The administration concedes this, although it projects a much smaller inflationary impact than many experts foresee. Less certain is the magnitude of the depressive economic effect the administration proposals would entail. Whatever their dimension, the prospect of certain inflation and delayed economic recovery bring into question the underlying assumption of the President's program: that this country must reduce oil consumption by 1 million barrels per day by year's end.

I believe this committee has an obligation to scrutinize this assumption carefully, to understand fully the economic impact of the President's program in particular, and to explore generally the relationship between energy conservation and economic recovery. We will certainly welcome testimony this morning from our witnesses covering these issues, and to hear their point of view.

I will turn to my colleagues. Would anyone like to comment before going to Mr. Ignatius.

If not, we are delighted to welcome Mr. Paul Ignatius, president and chief executive officer Air Transport Association with a long and distinguished career, and served in the Defense Department with great distinction.

We are delighted to welcome you, Secretary Ignatius, if you want to put it that way this morning, and to have your comments.

STATEMENT OF PAUL R. IGNATIUS, PRESIDENT, AIR TRANSPORT ASSOCIATION, WASHINGTON, D.C.

Mr. IGNATIUS. Thank you very much, Mr. Chairman and members of the committee. I am pleased to have this opportunity to be here. I have a prepared statement which I proposed to read in its entirety, except for, perhaps, one or two quotes, which I can summarize to save the committee time.

I request that the entire statement will go into the record.

The CHAIRMAN. Without objection the entire statement will go into the record. You can skip through whatever areas you wish to omit from your spoken statement.

Mr. IGNATIUS. Mr. Chairman, the airlines that we represent are virtually all of the scheduled airlines of the United States, and they account for more than 75 percent of all the intercity passenger miles provided by public transportation in this country. They carry most of the first-class mail and thousands of tons of freight. To accomplish this, they use about 4 percent of the petroleum that is consumed nationally.

I appreciate this opportunity to be here before the committee and I am going to discuss particularly the impact of the administration's proposals on the airlines.

The concern that this committee has showned for energy matters over so extended period of time and its continuing efforts to insure that complex questions are resolved in a manner broadly serving the national interest are certainly commendable.

Also commendable, I believe, are many features of the administration's program. The airlines strongly endorse the following elements of the program.

First, increased public education on energy conservation. Activation and development of naval petroleum reserves. Development of a strategic petroleum storage system. Establishment of thermal efficiency standards for new buildings. Tax credits for home insulation. Expanded research and development of alternative energy sources. And continuing petroleum product price controls, including incentives to allocate a greater share of costs to gasoline as a conservation

measure.

We disagree, however, with the administration's plan to impose new taxes on crude oil and to decontrol domestic oil prices. Our objection arises from the adverse impact these proposals would have on the airlines and other common carriers and because we believe they would add to the twin problems of inflation and recession that now affect the U.S. economy.

On the 9th of December, at a hearing before a panel of Cabinet officers chaired by Secretary of Commerce Dent, I made the following comments on behalf of the airlines, and I will paraphase this.

I pointed out that the "Project Independence" report, said that in the short-term our savings would have to come from conservation, but I went on to say that if the Government believes that economic methods, such as taxes, are needed to trigger a shift from private to public transportation, it is important that the methods be in consonance with the objectives.

Thus, a tax on fuel used in public transportation would be inconsistent with the objective, and in addition force inflationary price increases on users of public transportation.

A month later at a press conference in Washington, I was asked about what effect a tax on crude oil might have on the airlines. At the time the press was speculating that such a tax and tariff might be included in the President's proposals.

I said, in my statement, quoting—

I would be concerned if public transportation found it necessary to pass through in the form of substantially higher fares the amount of a new tax on petroleum. My reason is not difficult to explain. If the trucks and the trains and the busses and the airlines have to pass through this tax to the users of transportation, then the cost of everything will go up whether it is a loaf of bread or a pair of shoes or whatever.

When the President announced his energy proposals in his State of the Union message on January 15, 1975, they contained the tariff and tax on imported and domestic crude oil, and the intention to decontrol the price of old oil on April 1, 1975. Knowing of the concern expressed by the airlines about these proposals, FEA Administrator Frank Zarb invited me to meet with him on January 18.

Mr. Zarb told me that he and other members of the administration understood that the energy proposals might have a severe impact on the airlines, and that the prices through a reduction in the corporate income tax rate from 48 percent to 42 percent would be of only limited value to the airlines.

Without in anyway suggesting at that time that the administration was prepared to make any adjustment to lessen the program's impact

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on the airlines, Mr. Zarb nevertheless said he was anxious to obtain additional factual information in order to have a better understanding of the extent of the problem. We have had subsequent discussion with Mr. Zarb and his staff and other administration representatives, and I wish to commend them for the interest they have shown.

Let me now review briefly what the impact on the airlines is of the administration's energy proposals.

We believe, Mr. Chairman, that these proposals could increase our annual fuel costs by about $1 billion, broken down as follows:

First, the $2 a barrel excise tax on domestic and imported crude would cost the carriers in their domestic operations, we estimate, about $400 million annually.

Decontrol of the price of domestic crude, which is scheduled for April 1, in the administration's proposal, would cost the carrier in their domestic operations another $500 million annually.

In addition to these costs, totaling some $900 million, there would be added costs of about $100 million due to the use of domestic fuel in international operations of U.S. carriers.

It is important to note that increases of this magnitude, and the amount will vary from about $1 billion to about $900 million depending upon estimates of projected fuel consumption, would be on top of the overwhelming price for jet fuel already sustained by the airlines. During 1974 the price of jet fuel doubled for domestic airlines and tripled for U.S. international carriers, adding about $1 billion to airline costs.

Sizable fare increases were requested and approved but the additional costs have still not been fully recovered. With air travel markets in a weakened condition as a result of the general economic downturn, the airlines understandably are reluctant to raise fares again in order to recover additional fuel costs.

At the request of administrator Zarb, the Air Transport Association's staff prepared estimates of the impact of the administration's energy proposals under several different fare and capacity assumptions. These preliminary estimates are being reviewed by administration officials. While the estimates are tentative in nature and do not necessarily represent what the aggregate of individual carrier decisions might actually be in dealing with the proposed fuel cost increases, they nevertheless reveal, I believe, the general extent of the problem. The principal points emerging from the tentative analysis are these: First, the airlines already face a difficult year in 1975 quite apart from the problem of the proposed fuel cost increase.

The added costs of the administration's energy proposals, amounting to approximately triple the total airline industry profits for 1974, could result in double-digit domestic fare increases as well as fewer flights, employee layoffs, and forced grounding of valuable airline equipment, all in the face of a troubled national economy.

If the domestic trunk airlines attempted to absorb these added costs without a fare increase at a load factor of 65 percent, as some administration analysts have suggested, it is estimated that capacity would have to be reduced by 25 percent, thereby denying air transportation to a large number of communities and individuals requiring it. In addition, between 450 and 500 aircraft would have to be grounded and between 45,000 and 50,000 airline employees, out of 30,000, would have to be furloughed.