.

a change in the regulations. A ruling is an official interpretation by the General Counsel of the Cost of Living Council published in the Federal Register, which applies the regulations and guidelines of the Cost of Living Council to a specific set of facts. Cost of Living Council rulings are (a) of general applicability, (b) illustrative of a general principle, or (c) of assistance to the public in applying the Act, regulation, and guidelines to a specific situation. Finally, also as indicated above, the exception process is used to remove an industry or a unit thereof from the regulatory system of the Economic Stabilization Program. This process culminates in, or is ratified by, a regulation change.

Question 12. Are parties seeking exception requests and other relief from the Agency entitled to make their own presentation under current procedures? What is the forum at each stage of the process? Is it a formal hearing? Is a record kept?

Answer. Under the Council's procedural regulations governing Price Stabilization matters (6 CFR, Part 155) applicants for exceptions and other kinds of relief are required to initiate their request in writing providing specific relevant facts. The applicant may act in his own behalf or through his designated representative. The applicant or his representative who desires an oral discussion of this issue or issues involved may indicate that desire in writing when he files the request or as soon thereafter as possible (6 CFR 155.11(e)). Every attempt is made by the Council to schedule such a meeting at that stage of consideration of the request that will be most helpful in the expeditious disposition of the request. The meetings are informal and a written summary of each meeting is made part of the case file to which it pertains. In the case of requests for reconsideration the appellant may request a hearing or conference which is held before a Hearing Officer or conferee who has had no previous involvement in the case. This, too, is an informal meeting after which the Hearing Officer or conferee prepares a report including his recommendations as to the proper disposition of the issues (6 CFR 155.197). On the basis of that report together with all other relevant evidence in the case, the Council makes its final administrative decision (6 CFR 155.108).

Section 207 (b) of the Economic Stabilization Act of 1970, as amended, requires the Council to afford the parties the opportunity for a hearing before issuance of a final order "which has the effect of reducing wages or salaries." Thus, a request for a hearing is always granted before the issuance of such an order. Hearings in most instances are informal. The record will consist of the parties' submissions. staff analyses, and the Hearing Officer's notes in addition to any other relevant documents received or prepared by Office of Wage Stabilization. A transcript is not customarily made unless at the request and expense of one of the parties. One hearing on a case is usually granted. A request for reconsideration is viewed on the basis of the record and any new information submitted with the written request; it normally does not result in another hearing or another appearance by the parties.

Question 13. What is the status of regulations, requests for exceptions, and other procedures in the health care field. Are new regulations contemplated and when will they be issued? What procedures have been established for co-ordinat ing CLC requirements with existing HEW programs? How many exceptions re quests in the health care area are now pending before the Cost of Living Council? Answer. Proposed Phase IV regulations for the health care field were published in the Federal Register November 7, 1973. Comments on the proposed regulations must be submitted to the Cost of Living Council by December 1, 1973.

A substantial and continuing effort has been made to coordinate CLC regula tions with HEW health and health care financing programs. This has been aided by Secretary Weinberger's position as a member of the Committee on Health of CLC and by close relationships at the staff level between the two agencies. For example, the chief health planner of HEW serves also as Deputy Administrator of the Office of Health, CLC. The proposed new regulations will significantly reinforce HEW programs and policies:

(a) The treatment of capital projects in the CLC exceptions process will reinforce the recently enacted provisions of Section 1122 of the Social Security Act and the Comprehensive Health Planning initiatives currently underway in the States.

(b) The proposed long-term care regulations separate treatment of Medicaid reimbursement so as to facilitate the handling of exception on a Statewide basis where increases in State reimbursement levels are necessary to bring institutions up to State and Federal nursing home standards. There are 442 institutional and 157 non-institutional providers of health care exception requests in-house as of close of business November 2, 1973.

Question 14. How does the Cost of Living Council justify retroactive margin rules?-both profit margin and gross margin? The Act speaks in terms of control of wages, salaries, prices and rents. What is the authority for regulation of marzins? What is the authority for double and treble sanctions for year-end profit margin violations? What is the authority for complying such a sanction where the Act authorizes only a court to impose a penalty?

Answer. There are substantial differences between the profit margin rule and the gross margin rules. Profit margin is defined as "the ratio that operating ncome (net sales less cost of goods sold and less normal and generally recurring costs of business operations, interest expense on long and short term debt determined before non-operating items, extraordinary items, and income taxes) bears to net sales as reported on the firm's financial statement or its financial statement as restated pursuant to Subpart I prepared in accordance with generally acceptable accounting principles consistently applied. . . ." (6 C.F.R. § 150.31.) The Economic Stabilization Program regulations employ this concept in a general rule which provides that a firm which charges a price for any item in excess of the base level for that item may not, for the fiscal year in which the price increase is charged, exceed its base period profit margin. (see 6 C.F.R. $ 150.11).

Under the gross margin rule, however, prices are controlled on the basis of total permissible revenues for the product line and not on the basis of authorized prices for individual items. Thus for wholesale/retailers gross margin is the total revenues realized from the sales of merchandise less returns and credits, minus the total invoice costs of all merchandise within a category plus transportation allocated to that merchandise divided by either total revenues or total costs (see 6 CFR § 150.303). The regulations further provide, that a firm which increases the price for any item above the adjusted freeze price for that item must control the prices it charges for the category in which the item falls so that the gross margin for that category does not exceed the gross margin realized for that category during the pricing base period.' (see 6 CFR § 150.304)

The gross margin concept is also employed in the price rules governing food manufacturing. (see 6 CFR § 150.606).

Profit margins and gross margins, although different, are both functions of price. In our view, profit margin and gross margin rules are techniques of price control, which is authorized by the Act. Further, these techniques provide much needed flexibility to the price control system, both from the standpoint of the regulations and those being regulated. As employed by the Council, the profit margin and gross margin rules are not retroactive but merely use past conduct as a measure of permissible present and future performance. Further, as a general matter, these rules do not come into play until a company raises a price above base price or adjusted free price, whatever is higher.

Economic Stabilization Program regulations have provided for double and treble sanctions for year-end profit margin violations since May 24, 1972. (See 6 CFR $300.54). The authority for applying these sanctions also derives from the Act, as fully stated in the preamble (copy attached) accompanying the original publication of this section.

[From the Federal Register, May 24, 1972]

CHAPTER III-PRICE COMMISSION

PART 300-PRICE STABILIZATION

Effect of Failure To File Certain Required Reports; Violations of Profit Margin Limitations

The purpose of this amendment is to add two new sections, § 300.53, relating to the effect of failure to file certain reports required by or under Part 300, and $ 300.54, relating to Price Commission actions with respect to violations of profit margin limitations.

The new $300.54 sets forth a variety of possible Commission actions, depending on when the violation is committed, against any person who charges a price above the base price, or charges a price pursuant to a contract entered into before August 15, 1971, if that person's profit margin does or will, as a result of the price increase, in the fiscal year in which the charge is made, exceed its base period profit margin. In the case of a prenotification or reporting firm, the penalties may

be applied if its profit margin for any quarter of the fiscal year, after the chara is made, is at a rate that would exceed its base period profit margin, and the per son fails to demonstrate that its base period profit margin will not be excee for that fiscal year.

Section 203 of the Economic Stabilization Act delegates to the Presid specific and exceptional authority to "prevent" and "eliminate" the accumulatio of "windfall profits" under the stabilization program. Pursuant to its delegate authority with respect to the stabilization of prices, the Price Commission 22 prohibited any profit margin in excess of the base period profit margin whe results from price increases. When such a profit margin excess results fr price increases, despite a reasonable effort by firms to abide by the profit marz limitations and other price control regulations, the increase in profit mar over the base period profit margin, attributable to the price increase, ne reasonably be considered to be a sudden and unexpected gain in profit an therefore a "windfall profit" within the meaning of the term as used in the Act. The Price Commission has authority on this ground to "prevent” an "eliminate" profit margin excesses by appropriate regulation.

The authority of the Price Commission to determine price levels resul from the delegation of authority in section 203 of the Act to the Presider: to stabilize prices, and further delegation of that authority through the Co of Living Council to the Price Commission. The authority to fix prices includes the authority to deny all price increases and to permit such price increas as, in the discretion of the Price Commission, appear necessary and proper It follows that where profit margin increases result from price increases the Price Commission has the authority on these grounds to prevent and eliminate resulting profit margin excesses by ordering appropriate refunds and pric reductions whenever the Price Commission, in its discretion, considers it nece sary and proper to do so in order to control inflation and fulfill the other purposes of the Economic Stabilization Act.

In accordance with well-established rules of statutory interpretation, an doubt as to the scope of power granted in an enactment is to be resolved in such a way as to promote, and not to embarrass or defeat, the purposes of the enactment. The statement of purpose in the Economic Stabilization Art sets forth the following as objects or purposes of the Act: (1) To stabili the economy, (2) to reduce inflation, (3) to minimize unemployment, (4) t improve the Nation's competitive position in world trade, and (5) to protes the purchasing power of the dollar. The means by which these objects are te be fulfilled, according to that statement (section 202), are the stabilization of prices, rents, wages, salaries, dividends, and interest. Therefore, the authority delegated to the President to stabilize prices must be fully adequate to achieve fulfillment of the broad objects stated; and as the prevention and eliminatio of windfall or unwarranted profits is a specifically mentioned goal of the pris stabilization program, these administrative remedies are included within those powers delegated by Congress to the President as necessary to stabilize the economy, to reduce inflation, and to fulfill the other objects of the Economi Stabilization Act.

The new § 300.54 provides for the imposition, in certain cases, of a reductie: of revenues by an amount equal to two or three times the amount of the revenues derived from the illegal prices, as required for the purposes of the program. Such provisions are necessary because of the limited duration of the authority under the Economic Stabilization Act; the built-in time lag in dete? mining profit margin overages: the great importance to the Nation of effective implementation of the purposes of the Act without delay; and a need for a strong deterrent-in the absence of which persons could freely violate the limitations with the knowledge that, at worst, they would be ordered back oni to their former position with respect to an illegally increased price.

Because the purpose of this amendment is to advise persons concerned of actions which the Price Commission may take administratively with respect to failure to comply with certain requirements of the regulations, in lieu of of in addition to civil and criminal penalties already provided, it is hereby foutal that notice and public procedure thereon is impracticable and that good canse exists for making it effective less than 30 days after publication.

(Economic Stabilization Act of 1970, as amended, Public Law 91-379, 84 Stat. 7991 Public Law 91-558, 84 Stat 1468; Public Law 92-8, 85 Stat. 13: Public Law 92-15 85 Stat. 38, Economic Stabilization Act Amendments of 1971, Public Law 92-210 Executive Order No. 11640, 37 F.R. 1213, Jan. 27, 1972; Cost of Living Council Order No. 4, 36 F.R. 20202, Oct. 16, 1971)

In consideration of the foregoing, Part 300 of Title 6 of the Code of Federal Regulations is amended as set forth below, effective May 19, 1972. Issued in Washington, D.C., on May 19, 1972.

C. JACKSON GRAYSON, Jr.,
Chairman, Price Commission.

Question 15. What is the status of rulings and orders, such as relating to exceptions, issued in prior Phases of the Program? Are parties able to rely upon rulings and orders in their own cases? Are parties able to rely on rulings and orders in other cases?

Answer. Rulings issued in prior Phases of the Economic Stabilization Program have no continued relevance except where there have been no changes in the regulations. Therefore, for example, at the present time, rulings in the health sector have continued precedential value as the health regulations have remained substantially unchanged since Phase II. Additionally, rulings issued concerning the pay regulations have continued validity as guidelines for the present largely self-administered wage control program.

The Phase IV regulations (6 C.F.R. § 150.3) provide that adjustments to base period profit margins effected pursuant to an exception granted under the authority of the Economic Stabilization prior to August 13, 1973, have continued validity and applicability in Phase IV. Otherwise, because of changes in the regulatory system, exceptions granted in prior phases are of no effect in Phase IV. The Phase IV regulations (6 CFR § 150.1(d)) additionally provide that the Phase IV regulations shall not operate to permit a retroactive increase in prices or rents for goods or services sold or leased while these prices or rents where subject to past or present provisions of this title, or a prospective increase in prices or rents under the terms of a contract subject to a decision and order issued at any time pursuant to this title, except to the extent consistent with such decision and order.

Parties may rely on rulings and orders in their own cases to the extent that such rulings and orders have continued validity in Phase IV (as explained above). Parties may rely on published rulings and orders in other cases. Addi tionally, the published Questions and Answers provide a body of guidance.

Question 16. Was the memorandum of agreement between CLC and the IRS ever made public prior to these hearings? On page 4 of that memorandum, a number of criteria are listed under which decisions are to be transferred from key districts to the CLC. Please elaborate on those criteria.

Answer. The memorandum of agreement between the Cost of Living Council and the Internal Revenue Service had not been made public prior to the hearings. This memorandum provides for the transfer of certain prenotification of proposed price increases from the IRS Key Districts to the Cost of Living Council. The criteria contained in the memorandum are general criteria which reflect the Council's decision to reserve to itself the power to make determinations in all cases presenting issues of major importance to the operation of the Economic Stabilization Program.

These criteria are:

(a) Those likely to have a substantial impact on the economy—e.g., ripple effect.

(b) Those which represent a departure from usual operating procedure due to an anomaly in an industry.

(c) Those which present a special problem with respect to the ESP regulations. Thus, with respect to the first criterion, Cost of Living Council analysts have identified approximately sixty firms in sensitive industries in which price changes may have an impact on the economy as a whole. Because of the highly sensitive nature of these industries and the forward impact and complex price interrelationships, it is important, with respect to an effective economic stabilization program, that their economic activity be monitored by one organization which can develop a comprehensive view of price movements in these areas.

With respect to the second and third criteria listed, the Cost of Living Council has been structured to develop areas of expertise in various sectors of the economy and, therefore, is knowledgeable about and sensitive to operating problems and conditions which may have a specific and identifiable impact on the ability of a particular firm or industry to adhere to Economic Stabilization Program guidelines.

The purpose of the Cost of Living Council is to develop an equitable and effective program to stabilize the economy. The several criteria for the IRS to trans

fer certain prenotifications to the Cost of Living Council are consistent with and in fact, necessary for, the achievement of these goals.

Question 17. According to that same memorandum of agreement, CLC is the final authority on all questions of law. That memorandum notes that the Council will provide legal advice. How is this advice provided? Is it provided through the central information office? Are written records kept of such advice? To what do those CLC and IRS officials who provide such advice refer in reaching decisions about such advice?

Answer. Legal advice is provided in several different ways. Written records are available only on questions answered formally by published ruling, regulations, letters of interpretation and decisions and orders. Informal advice is given through telephone or personal contacts with the Communications Center or General Counsel's Office and through reports of questions presented to other offices of the Cost of Living Council. There is no central information office to which all questions are directed or where a record of every formal or informal rendering of legal advice is kept.

In reaching decision on legal questions, the written materials CLC officials refer to include the regulations of Phase IV and, if appropriate, Phases II & III and the freezes, published rules, published questions and answers, letters of interpretations, decisions and orders, and letter rulings. Background papers for prior decisions are sometimes employed along with documents presenting more current economic and policy analysis.

Question 18. The Council has reportedly increased the frequency of rule-mak ing hearings. I understand that hearings have been heard on steel, soap and auto price increases. In addition to supplying copies of notices of proposed rulemaking as you indicated in your testimony you would do, please include with such a list the following information: whether or not a hearing was held, the time of notice given prior to such hearings, and the time for opportunity to comment. What criteria do you use to determine whether or not to hold a hear ing? Is there a policy of attempting to concentrate hearings on sectors of the economy about which information is currently sparse? Would hearings be useful in industries about which comparatively less is known, such as food serv ices, health services, and legal services?

Answer. In addition to hearings on steel, soap, and auto price increases, the Council has held hearings on prenotified price increases for rubber tire and paper products and proposed postal rate increases. Further, the Conneï has again held public hearings on proposed increases in the automobile industry. The attached chart indicates the prior notices applicable to each hearing and the actual hearing dates.

Hearings are conducted under the authority of § 207 (c) of the Economie Stabilization Act of 1970 as amended, which specifies that to the maximum extent possible formal hearings be conducted to acquire information bearing on a change or proposed change in prices which have or may have a significantly large impact on the national economy.

Question 19. Do you employ different criteria for exceptions in different industries? If so, how are such criteria in conformance with Sect. 203 of the Act? Answer. The basic requirement to receive an exception is a showing of series hardship or gross inequity. The sectoral approach to controls embodied in the Phase IV regulations and the differing structures of various sectors of the el omy necessarily require that what constitutes serious hardship or gross inequity will differ from industry to industry. However, in all sectors, the ultimate ques tion is whether or not the particular applicant has demonstrated serious hardship or gross inequity.