STATEMENT OF GUY W. NICHOLS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NEW ENGLAND ELECTRIC SYSTEM

My name is Guy W. Nichols, and I am President and Chief Executive Officer of New England Electric System which, through its retail subsidiaries in Massachusetts, Rhode Island and New Hampshire, provides electric service to approximately one million electric customers. In addition, I am speaking for the New England Power Pool representing electric utilities serving some 97% of the electrical customers of New England.

Only four and one-half months ago, I testified before the Federal Energy Administration at rulemaking hearings on FEA's proposals for the allocation of old oil, two of which proposals offered both New England and other major regions of the country some short-run hopes of parity in regard to both price and supply of "fuels".

I pointed out in my testimony that the savings of such parity to New England could be several hundred million dollars and that any savings the New England electric companies incurred would automatically benefit all electric customers in our region through the operation of fuel adjustment clauses. I also indicated that a system of regulation was already in effect to assure this pass-through and that I was not sure that such a claim could be made as emphatically for any other segment of the energy industry.

The FEA apparently recognized the need for parity in price and supply of "fuels" by, in its final regulations on old oil allocation issued at the end of November, creating an entitlement program whereby some of the cost benefits of old crude oil flow to importers of certain products. While the program did not go as far as we might have wished to relieve the burden upon those regions of the country dependent on imported products, it nonetheless was a step in the right direction and exhibited an attempt by the FEA to comply with that provision of the Emergency Petroleum Allocation Act of 1973 which mandates

"Equitable distribution of crude oil, residual fuel oil, and refined petroleum products at equitable prices among all regions and areas of the United States and sectors of the petroleum industry and among all users." We have supported, and will continue to support, efforts by the Federal Energy Administration to carry out this equitable pricing mandate of the Emergency Petroleum Allocation Act of 1973.

In a little over two weeks, the FEA's effort to alleviate some of the economic burden borne by those regions of the country relying on imported oil, which culminated in the old oil entitlement program, has become past history. We are now back at square one, invited here today to comment upon amendments to the FEA regulations that will remove imports from the entitlement program and, by doing so, take away those benefits which were, only recently, much heralded as easing the economic burden for regions like New England. The impact of the elimination of old oil entitlements for imports, when combined with the remainder of the program for oil imports recently set forth by President Ford, will be devastating upon the economy and the people of New England. New England is almost twice as dependent upon oil for its energy needs than the United States as a whole. Annually, it uses appoximately 160 million barrels of residual fuel oil, nearly one-half of which is used in the production of electric energy, and almost all of which is imported. The President's program for oil imports means an increase in the amount of New England's annual residual fuel oil bill of over $280,000,000, $96.000.000 of which represents the loss of old oil entitlements, based on a value of 60 cents per entitlement.

The news media is replete with many other statements and statistics concerning and documenting the devastating impact which President Ford's oil import program will have upon New England. I will here only emphasize that behind the statistics are people, including electric customers, who will suffer as a result of the President's oil import program, of which the elimination of old oil entitlements for imports is but one part.

48

We hope that the Administration's statements concerning reducing the hardships of the program for oil imports on any geographic region are more than mere rhetoric. But, to date, those statements have not manifested themselves in any concrete form with regard to New England and other regions similarly situated. All we see is the imposition of a large supplemental fee on imports and a proposal to take away the benefits from importers of old oil entitlements. Both have a disasterous impact on New England. We ask that this concern manifest itself, that the mandate of the Emergency Petroleum Allocation Act of 1973 be carried out, and that, to address the subject of today's hearing, old oil entitlements for imports not be eliminated.

I now turn to the Federal Register notice dated January 22, 1975 concerning the proposed amendments to Parts 211 and 212. I was originally prepared to ask the Federal Energy Administration what, I believe, was a crucial question raised by that Federal Register notice relating to the "rebates" from oil import license fees. The White House fact sheet relating to the President's State of the Union Message, at page 33, spoke of these rebates being "approximately $1.00 in February, $1.40 in March, and $1.80 per barrel in April." Various other statements made by the Administration used these figures and led one to believe that the $1.80 rebate would continue beyond April. And, Presidential Proclamation No. 4341 used the rebate figure of $1.00 for February, $1.40 for March, and $1.80 per barrel for April, 1975 “and thereafter". However, the Presidential Proclamation also stated, and I should emphasize, that "the Administrator may by regulation reduce the fee payable by the following amounts, or by such other amounts as he may determine to be necessary to achieve the objectives of this Proclamation and the Emergency Petroleum Allocation Act of 1973". There was, therefore, at least an implication that the $1.00, $1.40, and $1.80 might very well not be the figures to be used by the Administrator of the FEA. And, the four full paragraphs contained in the second column of page 3468 of the January 22, 1975 Federal Register, I believe, confirmed the fact that not only might rebates not be these figures, but might be substantially less or nothing at all. The consequences of this was that the ultimate impact of the President's oil import program could have been the total amount of the license fee, or $3.63 per barrel, in addition to the value of the loss of any entitlements.

The four paragraphs I have referred to describe the manner in which the FEA was to compute the rebate. It was to be composed of two components, one of which was the current entitlements benefits and the other an amount that would equalize the impact of increased fees on products with the increased import fees on imported crude oil, taking into account also the corresponding increased price of uncontrolled domestic crude oil. If one runs through the figures, he quickly reaches the conclusion that if the price restriction was removed from old oil, the rebate would have shrunk or disappeared. The question I was going to ask of the Federal Energy Administration was this: Will the rebates be the fixed figures of $1.00 for February, $1.40 for March, and $1.80 for April and the ensuing month thereafter or will they, in fact, be determined by the language set forth in that Federal Register notice and, consequently, possible become zero. However, the FEA has hopefully clarified the matter by, in its amendments to the Oil Import Program, announced January 28, 1975, netted the $1.00, $2.00, and $3.00 fee with the aforementioned rebates to produce fixed supplemental fees of zero for February, $.60 for March, and $1.20 for April and months thereafter. I have used the word "fixed" describing these supplemental fees and, while not conceeding either their validity or their fairness as to amount, hope that the FEA also views them as fixed in the sense of being maximum fees for the term of the program and does not plan on employing the January 22, 1975 Federal Register formula, which I have mentioned, to increase their amount.

As to the proposed modifications relating to price regulations, we are pleased that the FEA has now recognized the severe economic inequity caused by the failure to accord "special product" treatment to residual fuel oil, with the result that increased costs can be and have been disproportionately allocated to this product. At the same time, we believe the proposed modifications to the price regulations fall short of providing the needed assurance that residual fuel oil will not continue to bear an unfair share of increased costs.

The present price regulations allow increased costs attributable to special products (gasoline, No. 2 heating oil, and No. 2-D diesel fuel) to be allocated to other products such as residual fuel oil. A brief look at the wholesale price index for the past two years shows that increased costs have indeed been loaded onto

Under the proposed modifications to the price regulations, refiners would no longer be allowed to allocate increased costs attributable to No. 2 oils or gasoline to residual fuel oil. However, in grouping residual fuel oil together with aviation fuel and such other products as kerosene, butane, benzene, naphtha, and propane in the new category of “general refinery products” and allowing the allocation of increased costs to any product within that category, the FEA is making it likely that residual fuel oil will continue to carry increased costs properly attributable to other products. Take aviation fuel as an example. Over the past 2 years, it has approximately doubled in price while residual fuel oil has more than tripled. Under the proposed modifications, refiners could continue to load increased costs attributable to aviation fuel on to residual fuel oil. In these times, the fact that there is a relatively inelastic demand for residual fuel oil, because voluntary conservation has already taken place, should not be the basis for unfairly loading increased costs onto this product while allowing other products with more elastic demands to carry less than their fair share of increased costs.

About 30% of each barrel of oil is used to produce the products in the "general refinery products" category-and of this 30% about one-quarter is used for residual fuel oil. Thus, there is considerable potential for loading increased costs from such other "general refinery products" as aviation fuel onto residual fuel oil, causing it a vastly disproportionate share of costs.

Accordingly, I urge that the proposed changes in the price regulations be modified so as to assure that residual fuel oil, like the No. 2 oils, will not have to bear increased costs attributable to any other product.

In conclusion, I urge that the electric consumers of New England not be asked to bear more than their fair share of the costs of any energy program and that the old oil entitlement program not be eliminated for importers of residual fuel oil.

On behalf of the New England Power Pool and New England Electric System, I thank you for the opportunity to comment on your proposed amendments and