to do so. But it is a big job, it has to be done fast and the traditional ground rules of administrative procedure necessarily have only limited application in such a process.

I would now like to turn to the structure of the Economic Stabilization Program in Phase IV and describe for the Subcommittee our organization, proce dures and operating arrangements. My comments are directed to price stabilization policies, rather than to activities on the wage side, since this is where most of the recent attention has been focussed and, as I understand it, where the Subcommittee's principal interest lies.

PHASE IV OVERVIEW

We have made significant changes, both substantively and procedurally, from prior Phases and we had, in the forefront of our minds, as we deliberated-and as we continue to deliberate our obligation to reconcile the competing imperatives of, on the one hand, getting the job done and, on the other hand, ensuring that the process for doing so is as fair and as open as possible.

It is an axiom of stabilization that simplicity and equity are mutually ineonsistent. Equity presupposes a recognition of diverse circumstances which do not fit a simple rule, and accommodation of diversity necessitates rules that are more complicated. In Phase IV we opted for equity in that sense, and as a result our rules are somewhat more complicated than before. In particular, the program is far more sectoral in its approach than previous efforts. We have made a deliberate effort to accommodate the rules to the peculiarities of specific sectors of the economy in order to get at the specific inflationary problems of these sectors and to improve the workability of the rules as they apply in these different sectors.

The development of Phase IV rules was preceded by an extensive consultation process during which Council personnel met with over 400 individuals and groups to seek guidance on the design of the program. The regulations were published for comment in proposed form and the Council received nearly a thousand comments from members of the public. In addition, the Council staff personnel met with many interested groups and organizations during the comment period and received verbal advice, supplementing that which was submitted in written form. As a result of this public participation, the regulations were significantly altered when they were ultimately issued in their final form. I might add that the same notice and comment procedure is being used in connection with the Council's new executive compensation regulations.

Broadly stated, the basic price rules of Phase IV allow prices to increase over the levels prevailing during the last quarter of 1972 to reflect a dollar-for-dollar pass through of increased costs incurred since that time. A firm which increases its prices above base levels may not exceed its base period profit margin, which is defined as the average profit margin of the best two of the fiscal years ending after August 15, 1968, except the year for which compliance is being measured. Specialized rules are applicable in the insurance, health, and food sectors, although the basic principles are the same. Somewhat different rules apply in the construction and petroleum sectors. The retail and wholesale sectors are controlled, as they were in Phase II, on the basis of margin and markup constraints. Firms are divided into three categories according to size, with the largest firms, those with $100 million or more in annual sales and revenues, required to give the Council 30 days advance notice of proposed price increases. In response to a notice of proposed price increase, the Council may decide to hold hearings, or the Council may deny, modify, suspend, or defer a proposed price increase. A large portion of the Council's staff time is devoted to analyzing notices of proposed price increase, and the prenotification technique is one of the basic tools used in moderating price behavior.

Certain broad types of relief have been built into the basic pricing rules. A firm that has customarily priced an item in a manner immediately responsive to frequent and customary market price fluctuations of the raw materials or partially processed products which it uses in that item may apply to the Conneil to increase the price of that item to the extent of any market price increase of those raw materials or partially processed products without regard to the prenotification requirements. Such an authorization is known as volatile pricing authority.

Large firms which have operations totaling less than $100 million in annual sales and revenues within a particular industrial group may apply to the Council for a waiver of prenotification with respect to those operations. The requirements for obtaining this relief are spelled out in the prenotification regulations.

Firms with low profit margins or with losses may qualify for treatment to raise prices without regard to the general price rules in order to achieve a minimum profit margin set forth in the regulations.

In addition, there is a regular interplay between firms subject to regulations and staff personnel of both the Cost of Living Council and the Internal Revenue Service. It has been standard operating procedure since the inception of the program for analysts to communicate directly with the companies involved and seek from them additional information, fuller explanations and generally to obtain as full an understanding of the problems involved as possible. Meetings are held with company officials and there is extensive telephone contact between the Council and the firms.

Aside from contacts which take place in the context of these more formal requirements, there is extensive informal contact between personnel of the program and firms subject to regulation. Innumerable telephone inquiries are received each week and the Council personnel respond to specific inquiries about the applicability and effects of particular regulations informally and expeditiously in this way. There are meetings with trade associations to deal with the problems of specific industries. The Council has an extensive schedule of public appearances where Council personnel address interested groups on general and specific subjects related to the program. In addition, questions are funnelled to the Council through Congressional offices as constituents contact their Congressman or Senator and request information which we are in turn asked to provide. Moreover, since early summer we have been meeting once or twice a week with members of the press who regularly cover our program to improve communications to members of the public through the media.

In short, the Council operates on the principles of easy access to members of the public. This premise is equally applicable to the Council's senior staff officials who spend very substantial portions of their time in meeting with individuals, companies and associations affected by the regulations. We are very sensitive to the need to communicate our programs and policies to those whom we are regulating and to respond to questions.

OPERATION OF THE PROGRAM

The basic operating principle which has been adopted for the Phase IV price stabilization program has been to delegate broad operating authority to the Internal Revenue Service to be exercised in a decentralized manner by key district offices. At the same time, the Council has retained authority to take action in certain areas, and, of course, the Council has the general responsibility to insure that the authority it has delegated is properly exercised. This system of decentralized authority is in marked contrast to the Phase II system under which most authority was concentrated in the Price Commission (with the exception of rent and certain Tier III matters) with the IRS acting primarily in an investigative and informational capacity. The aim of this Phase IV system is to speed up the decision making process and to provide for more ready contact between the decision makers and applicants.

The basic delegation of authority to the Internal Revenue Service is set forth in Council Order No. 37 (38 F.R. 21836. August 13, 1973). This basic delegation of authority is supplemented by a memorandum setting forth the working relationship between the IRS and the Council dated August 13, 1973, a copy of which has been furnished to the Committee.

Operating authority over all aspects of the price stabilization program has been placed in 29 key district offices, with key district directors exercising functional supervision over the stabilization activities of another 29 offices which perform primarily support functions. Key district offices are designated in IRS Delegation Order No. 140 (38 F.R. 22420, August 30, 1973). All filings, except in the area of health and insurance, are made with the appropriate key IRS district office. Insurance filings are made with the IRS national office, and all health filings are made with the Cost of Living Council.

IRS key district offices have authority to take actions on all filings subject to certain limitations established by the Council.

Prenotification

The Council has at the present time reserved authority to take action with respect to the following prenotifications:

(1) Those involving a price increase of $10 million or more;

(2) Those involving a price increase of $5 million or more which are also price increases of 5% or more;

(3) Those likely to have a substantial impact on the economy, e.g., ripple effect: (4) Those which represent a departure from usual operating procedure due to an anomaly in an industry;

(5) Those which present a special problem with respect to the Economic Stabilization Program regulations; and

(6) Such other prenotified price increases as the Council may direct. The Director has provided that prenotifications for key industries are to be processed by the Council and a list of those key (sensitive) industries has been provided to the Committee.

Special Filings

Special filings, such as applications for modifications of prenotification requirements are processed by the IRS district offices. Applications for volatile pricing authority, are prescreened by the IRS district offices and forwarded to the Council for decision.

Exceptions

The IRS district offices presently have the authority to take action on exception requests except for the following cases:

(1) Class exception requests;

(2) Exception applications involving key industries identified by the Council, or firms within the key industries identified by the Council;

(5) Exception applications have precedential effect or presenting major policy issues;

(4) Oil exceptions requests except those involving a retailer requesting a price adjustment of less than one cent per gallon; and

(5) Requests making a prima facie case showing that denial may create serious regional/national supply problems or series regional employment or economic viability problems.

Health exception filings are also made directly with the Council and insurance filings are made with the National IRS office.

Civil Penalties

The IRS district offices have authority to compromise and collect civil penalties for violations of price stabilization regulations and orders by price Category III firms and for late filings of required price stabilization reports by price Category I and Price Category II firms. The Council has retained authority to compromise and collect civil penalties in all other cases.

Interpretations

The IRS district offices have authority to issue to individuals and individual firms written interpretations of the price regulations subject to the guidance of the Cost of Living Council.

Reconsiderations

(1) The IRS district offices have authority to take action on reconsiderations of prenotification decisions with respect to price increases of less than $3 million. (2) The IRS district offices have authority to take action on reconsideration requests relating to initial decisions taken by the IRS district offices on special filings, exceptions, remedial orders, and interpretations, except in such cases as the Director of the Council may otherwise direct. The Council has established an operating procedure under which the IRS key district offices forward copies of all reconsideration requests to the Council so that the Council can make a judgment as to whether to process the reconsideration request itself or to permit the IRS key district office to make the decision.

Training and Oversight

In any decentralized operational arrangement, there is bound to be some inconsistency and some unevenness in decision making. That is no less true here where the Internal Revenue Service conducts activities through 29 key district offices. each with significant operational authority. Consequently, the Council, together with the national office of the Internal Revenue Service, has undertaken a series of comprehensive efforts to insure consistency and efficiency of our efforts to the maximum extent possible.

Since the Internal Revenue Service has been involved in the Stabilization Program since its inception, it has a large number of personnel who are intimately familiar with the program in most of its facets. Nonetheless, even before Phase IV began, each regional IRS office conducted a two-day training session for IRS district office personnel. During the first two weeks of Phase IV, Cost of Living

Council analysts were detailed to 10 of the largest IRS district offices to provide technical assistance and further training. Six Council analysts were detailed to the Price Analysis Branch at the national office of the Internal Revenue Service for the first 30-days of the program for essentially the same purposes. During September, four regional conferences were held covering all 29 key district offices. These two day sessions involved personnel of the Council, the national office of IRS and IRS key district offices and were devoted to Phase IV price matters. In addition, the national office of IRS is conducting a series of training sessions in selected district offices on a continuing basis.

The national office of IRS has also undertaken a process of periodic audits of field activity. The so-called National Office Review Program involves an in depth review of substantive decisions and operational procedures. They are designed to assure a continuing review of the quality, timeliness and effectiveness of field activities. One such review has already been conducted in the North Atlantic region towards the end of September, another is scheduled for next week in the Southwest region and others are scheduled periodically for the balance of the calendar year and early into 1974.

In addition, the Council has established a communications center to which all IRS key district offices are linked by telephone and facsimile equipment to facilitate prompt exchange of information. Operating procedures governing the communications center call for 48 hour turn-around of all questions submitted to the center by IRS field personnel and, by and large, this schedule has been adhered to. The communications center represents the principle point of interface between the Council and the district offices, and through this network, there is regular and continuous communication between the Council and the field. In addition, each IRS district is connected to the central Cost of Living Council computer in Pittsburgh and elaborate instructions have been issued to each office for prompt posting of information into the computer which the Council can obtain on a prompt basis. A management information system has been developed based upon this computer arrangement which enables the Council to track and monitor filings, decisions and workload in the system.

EXCEPTIONS PROCESS AND PHASE IV

As I said at the outset, a necessity effect of a wage-price control program is to interfere with a person's normal way of doing business. Obviously, not every distortion merits treatment under the exception process and not every anomaly warrants relief. Otherwise the program would quickly dissipate. In the establishment of procedures and criteria for an exceptions process there is of necessity a tradeoff between the need to assure procedural fairness and to minimize the potential for bureaucratic abuse on the one hand, and the practical imperative to provide a prompt and efficient decision making process on the other hand.

Under the Economic Stabilization Act, the Congress has followed the precedent of the Defense Production Act and has excluded the Economic Stabilization Program from the requirements of the Administrative Procedure Act as they apply to adjudications in individual cases, except for the provisions of 5 U.S.C. 555(e) relating to notice of denial of a request and a statement of the grounds for a denial. The statutory requirements for procedures in individual adjudication cases are set forth in section 207 (b) of the Economic Stabilization Act as follows: "Any agency authorized by the President to issue rules, regulations, or orders under this title shall, in regulations prescribed by it, establish procedures which are available to any person for the purpose of seeking an interpretation, modification, rescission of, or seeking an exception or exemption from, such rules, regulations, and orders. If such person is aggrieved by the denial of a request for such action under the preceding sentence, he may request a review of such denial by the agency. The agency shall, in regulations prescribed by it, establish appropriate procedures, including hearing where deemed advisable, for considering such requests for action under this section."

The Council's regulations governing procedures for obtaining an exception from the price regulations are set forth in Part 155 of Title 6 of the Code of Federal Regulations. Those regulations provide that firms are to make all filings for an exception, except in the case of health and insurance, with the key IRS District Office which serves the district in which their corporate headquarters are domiciled. All insurance filings are made with the national headquarters of the IRS and all health filings are made with the Cost of Living Council.

Initial action on an exception request may be made either at the IRS district level or by the Cost of Living Council.

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Reconsideration requests are to be filed with the official issuing the initial decision. If the initial decision is issued by the Council, reconsideration action will be taken by the Council. If the initial decision is issued by IRS officials, the reconsideration might be handled either by the IRS district office or by the Council. The regulations provide for a hearing at the discretion of the Council or the IRS district office.

The Council has established a division of responsibility for deciding initial exceptions applications between the Council and IRS district and national offices which has been described earlier in my testimony. Until a body of precedent is established upon which the IRS districts may draw, all reconsideration requests from exceptions denials will be handled by the Council.

The Economic Stabilization Act provides some guidance as the criteria which are to be applied in administering individual exceptions to the regula tions. Section 203 (a) after setting out the general grant of authority to stabilize prices, rents, wages, salaries, interest rates and corporate dividends provides as follows. "Such orders and regulations shall provide for the making of such adjustments as may be necessary to prevent gross inequities, and shall be consistent with the standards issued pursuant to subsection (b)." Subsection (b) of seetion 203 describes the nature of the standards which must be issued to serve as a guide for determining levels of wages, salaries, prices, rents, interest rates, and corporate dividends. In specifying the nature of those standards, subsection (b) (2) speaks of making "such general exceptions and variations as are necessary to foster orderly economic growth and to prevent gross inequities, hardships, serious market disruptions, domestic shortages of raw materials, localized shortages of labor, and windfall profits." However, this subsection speaks in terms of general exceptions and does not appear to govern the handling of exceptions in individual cases.

In its regulations, the Council has adopted the standards for exceptions in individual cases used by the Price Commission, “serious hardship" or "gross inequity." As a practical matter, the Council in Phase IV has broadened the scope of "gross inequity" to encompass the factors set out in subsection (b) (2) of seetion 203 of the Act. The material set out below with respect to "serious hardship" and "gross inequity" is drawn from the Phase IV handbook prepared for the use of the IRS which has been made available to the Subcommittee.

"Serious hardship" is a test which looks to the impact of the Economic Stabilization Program on the financial situation of a particular firm. In analyzing whether or not a serious hardship is present in a particular case, the Council or the IRS will examine the relevant factors on a firm-wide, entity-wide, or product line basis. The items which are taken into account in determining whether a serious hardship, gross inequity or market dislocation is present are set out in Chapter 6 of the Phase IV handbook and in the health training manual which the Subcommittee also has. As you will note, the process calls for a detailed and elaborate analysis of each request.

Several questions raised by the Subcommittee in correspondence with the Council relate to hearings on exceptions, how often they are held, how valuable they are, how often the recommendation of the hearing officer is followed by the Council or the IRS. In the practice of the Price Commission, hearings in the formal sense with a hearing officer were very rarely used during Phase II in connection with exception requests. It is contemplated that the same will be true in Phase IV in the price area. As a practical matter, the analyst charged with preparing a case will have extensive telephone contact with the applicant for an exception to secure data and to clarify matters in the submission. In instances where it has determined that an oral presentation will develop material that cannot be submitted in writing, the Council has permitted representatives of applicants to make such presentations and will continue to do so. Informality is the rule, and every effort is made to secure all information relevant to an exception application without unduly delaying the decision-making process.

PROCEDURES

At this point, I think it would be useful to outline for you the internal procedures which are used to handle an exception request. In instances where a decision is made at the IRS district level, the case is first evaluated by an analyst. Then it is reviewed by a senior reviewer in the technical branch of the district office. The case is further reviewed by the chief of the technical branch who signs the decision in most cases. The chief of the technical branch may refer a matter to the stabilization manager at the district level for decision. Where decisions are made by the Council, the process is as follows.