controls. Domestic earnings also would be a function of Federal controls on prices and profits. Foreign earnings for international companies could be restricted as other consuming nations attempt to control imports and oil prices and supplies.

As for marketers, drastic mandatory import limits would mean a return to conditions experienced during the Arab embargo of last winter. Supplies will be tight, margins will be at maximum levels and growth will depend primarily on non-petroleum sales. Supplies will be especially tight for gasoline marketers, given the President's emphasis on reducing gasoline consumption. Price controls will again be a source of agitation and controversy.

An abrupt limit on imports means a limit on supplies plus higher prices for consumers. It would require long run shifts in consumption patterns and levels, with increased energy efficiency as one of the key factors to growth. Without well-developed mass transit systems to take up the slack, transportation industries would be most directly impacted, especially those dependent on gasoline availability. The leisure industries, hotel and motel trade would follow as transportation is immediately curtailed. The net effect would be serious economic disruption in these sectors with consequent impacts on lifestyle and mobility. The most persuasive argument against this alternative in my judgment has to do with the level of government involvement in the energy industry required to make it work. A massive bureaucracy governing all segments of the energy industry would effectively snuff out what is left of the free market forces in the energy marketplace for the long term. Nationalizing the industry in this way would have dire consequences for the economy as a whole and should be avoided at all costs.

OUR SUGGESTED PROGRAM

We believe that a program that is less extreme than either the President's plan to cut consumption through higher prices or the immediate imposition of stringent import controls and rationing can both move us in the right direction and leave us the flexibility to adjust to future changes in our energy supply/ demand situation. We have developed a program that is consistent with this belief. Our program has four primary elements. They are:

1. A system of graduated import quotas that would become gradually more restrictive over the next several years as determined by the need for tighter import controls in future.

2. Retention of the Mandatory Petroleum Allocation Program, which as an option appears to have widespread support, combined with a vigorous mandatory conservation program aimed at avoiding rationing and maximizing the interplay of free market forces to allocate supplies.

3. A system of quota offsets to maintain the viability of the oil industry by allowing prices to rise under the current oil price control system to recoup the revenues lost to them due to the decline in sales volumes forced by quota limitations. 4. The gradual phasing out of the two-tier system for crude oil prices, to minimize the inflationary impact of higher oil prices and to provide on a timely basis the additional capital essential for expanded exploration and production without the inequities, distortions and complexities of an "excess" profits tax.

1. A system of graduated import controls

We would recommend a goal to reduce imports by 3 to 5 percent, or about 250,000 b/d by the end of this year. The nation could probably achieve this goal as a result of demand reductions caused by the current recession. However, vigorous conservation measures could offset the expected decline in domestic oil production of roughly 400,000 to 500,000 b/d. The combination of these two actions could mean a decline in total consumption in the neighborhood of 750,000 barrels per day. Achieving the goal of 1 million b/d reduction in imports, however, would require a doubling of this reduction in total consumption and result in a cutback of about 1.5 million b/d.

By the end of 1976 a target of 5 to 7 percent reduction in imports could be set providing for review of the wisdom of such an additional cutback prior to its limitation. By the end of 1977, the nation might reach for a 10 percent reduction in imports, but again only after reviewing the wisdom and necessity of such a move based on conditions that exist at that time.

Such a program would not have the drawbacks of dramatically higher prices and associated inflation nor would it require immediate rationing. It could well be a means to avoid rationing altogether. However, it would be a direct step

to reduce imports and would demonstrate to our allies and world oil producers that this nation is moving to reduce its dependence on foreign oil and is prepared to go farther in the future. In addition, this approach is superior in that it provides energy producers and users alike with reasonable certainty as to the amount of energy that will be available to them for near-term planning purposes. The importance of this aspect cannot be overstated.

2. Retention of the Mandatory Oil Imports Program Combined with Mandatory Conservation Measures

A reduction in imports will require the allocation of available supplies. Combined with vigorous conservation, however, the primary purpose of an allocation program could be to assure reasonable equity and to support price stability rather than to spread the hardship of an enforced shortage.

Balancing import reductions against achievable levels of conservation would avoid rationing, or at least delay it until we have squeezed all the possible conservation out of the system. Further, gradually increasing conservation requirements is likely to produce greater conservation and far less economic distortion and dislocation than the immediate institution of rationing. Finally, it will give us time to reap at least the initial benefits of stimulative measures to increase domestic production as well as any efficiency gains we might achieve. 3. A System of Quota Offsets

Neither the President nor Congress has proposed to decontrol prices of oil products. As a consequence, any reduction in imports will reduce total industry revenues and thus reduce industry profits and opportunities for growth. The refining and marketing sectors of the industry would be hardest hit by such cutbacks since any reduction in the total supply of oil would result in a corresponding reduction in refiners and marketers' sales. These sectors are essential to the production and distribution of oil products and are normally the least profitable sectors of the industry. Any appreciable reduction in imports is certain to spell serious decline for them.

Maintenance of a healthy economy is heavily dependent on an adequate and reliable flow of oil. Therefore, any reduction in refining and marketing revenues forced by a reduction in oil imports should be offset by allowing the industry the opportunity to recoup those revenues through higher prices. Refiners and marketers should have the opportunity to raise prices and free market prices should be allowed to determine what levels of price will be sustained. Higher prices would be consistent with the President's approach to reducing consump tion, but in no way would such a system of quota offsets involve the substantial inflation or recessionary prospects of the President's program.

4. Gradual Phasing Out of the Two-Tier System

From virtually the moment I completed the design of the two-tier system, I have steadfastly maintained that it should be done away with. However, I have also steadfastly maintained that it should be done away with gradually, at a rate that would avoid dangerous inflation in oil prices but at the same time would provide on a timely basis the additional capital essential to maintain a level of exploration and production sufficient to avoid irreversible foreign oil dependence. In his program the President has proposed to do much the same thing but through a cumbersome and complicated "excess" tax that phases out over five years. My recommendation is that the Congress simply avoid the tax and authorize the President to phase out the two-tier system.

This approach has the virtue of striking and maintaining a balance between price stability and timely incentives for increased exploration and production. There is no question that gradually higher prices for oil would be involved. That, again, is somewhat consistent with the President's program.

Mr. Chairman, those are the basis tenents of our recommended program. I look forward to discussing them with you and the other members of the Committee. This concludes my prepared testimony. Thank you.

[Whereupon, at 12:30 p.m. the hearing was recessed to reconvene at 2 p.m.]

AFTERNOON SESSION

Senator STONE [presiding]. The hearing will come to order.

The Chair is going to call Mr. Ben Fuqua, senior vice president of the Florida Power & Light Co., and Mr. Guy Nichols, president

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and chief executive officer of the New England Electric System for brief statements until the remaining Senators who are scheduled to come back return. Then we will continue with the panel which was testifying just before our luncheon recess.

STATEMENT OF BEN H. FUQUA, SENIOR VICE PRESIDENT, FLORIDA POWER & LIGHT CO.

Mr. FUQUA. Thank you, Mr. Chairman.

I appreciate the opportunity to appear before your committee, and I am particularly pleased that our distinguished junior Senator from Florida is presiding. I am here to tell Florida's story with regard to the fuel oil problem.

The electric service provided by Florida Power & Light Co. is highly dependent on imported residual fuel oil, and this statement is made on behalf of the company and its 1,700,000 customers.

The present unreasonably high price of imported residual fuel is wreaking havoc on Florida's economy, working a hardship on millions of electric customers and doing violence to the financial, social, and political fabric of our State.

Now, faced with even greater, and continuingly disproportionate burdens from actions taken by our own Government, the Congress and the executive branch must recognize Florida's circumstances and allow an exemption for our State from the proposed import levy on imported petroleum products.

There is consumed in the State of Florida upwards of 100 million barrels of residual oil per year, of which about 35 million barrels will be consumed by FPL. Nearly all of this residual fuel oil is imported. We testified and submitted a written statement at the hearing held by the Federal Energy Administration on the allocation of old oil last September. At that time, a graph of residual fuel costs showed that our costs per barrel had reached $11.96 in July 1974, up from $4.24 in 1 year.

[The graph referred to follows:]

$ 3

$2

$ 1

LOW SULPHUR OIL

REGULAR SULPHUR OIL

Mr. FUQUA. Since that time, there have been further increases, and we have just received notification that the cost of our imported residual fuel oil would be increased 30 cents per barrel effective January 25, 1975. This new increase is the result of action by the Government of Venezuela. The new delivered costs of imported residual fuel oil per barrel at various plants on our system are now at almost $13 per barrel, and are tabulated as follows:

At the hearing last September we stated that we had received information which we assumed to be reliable to the effect that the adoption of either alternative No. 3 or alternative No. 4 being considered at that time would result in lowering the price we would pay for imported residual fuel oil in amounts that were estimated from $2 upward per barrel. This was the so-called equalization or entitlements program. We had high hopes for some relief as a result of these proposals. However, as far as we know, there has been no relief up to this date. It is reported that our importer has received certain entitlements which it is further reported he has been unable so far to sell. Further activities are being taken to dispose of these entitlements, but the final result is unknown. It appears, however, that no relief even approaching the above estimate is in prospect. The entitlement program, as you know, was a development growing out of the congressional manadate that product prices across the Nation should be equalized.

We appeared at the briefing on the matter of import fees on residual fuel oil held at the Executive Office Building in Washington on January 16, 1975. At that time, we undertook to describe our unhappy and deteriorating situation in Florida in respect to imported residual fuel oil which is so vitally necessary to us.

In the proposed FEA rulemaking now under consideration pursuant to the President's Order No. 3279, import fees will be raised $1 per barrel in February, March, and April for a total increase of $3 per barrel. However, rebates or offsets are to be allowed so that the effective fee on imported residual oil will be zero for February, 60 cents per barrel for March, and $1.20 per barrel for April. It is stated these rebates are calculated to reduce product import fees by an amount equivalent to the benefit that would have been provided under the entitlements program. This is supposed to provide some equalization for those geographical areas of the country-of which Florida is perhaps the most notable example-which are unduly and disproportionately burdened by the present outrageous price of imported residual fuel oil. While we strongly support the intent of the President's proposals for energy independence, we have an obligation to our customers to protect actions that will further burden them with disproportionate fuel costs.