Appendix III DECISION AND ORDER OF THE COST OF LIVING COUNCIL Request for Reconsideration Name of Petitioner: Crown Zellerbach Corporation Date of Filing: January 22, 1974 Case Number: CR-0123 On January 22, 1974, Crown Zellerbach Corporation ("Crown") filed a Request for Reconsideration of the Council's Decision and Order issued on January 9, 1974. That Decision and Order granted Crown's request for exception to use a single weighted average selling price for newsprint based on the price of newsprint which it imports from Canada and sells to customers in the Western market area, and the allowable price for newsprint which it manufactures in the Pacific Northwest and sells to customers in the same Western market area. Specifically, that Decision and Order permitted Crown to determine the maximum allowable weighted average selling price that it may charge its customers for newsprint by: (1) determining the maximum allowable "transfer price" of newsprint sold or transferred to it by unrelated foreign and domestic firms based on the actual price to Crown of the newsprint purchased from each such unrelated firm during the prior month and computing the weighted average transfer price in effect on the last day of the prior month based on actual purchase volume in the prior month, (2) determining the maximum allowable selling price for covered newsprint manufactured in its own facilities that Crown charged its customers on the last day of the prior month in accordance with 6 CFR, Part 150, and (3) determining the maximum allowable "transfer price" for newsprint sold or transferred to it by related foreign and domestic entities on the basis of the higher of (a) the actual weighted average transfer price that existed on December 1, 1973, which is to be determined based on the actual transfer price from each such related entity that was in effect on December 1, 1973, and weighted based on the actual purchase volume in the prior month, or, (b) a weighted average transfer price to reflect on a dollar-for-dollar basis increases in direct material and direct labor costs that such related entities have incurred since December 1, 1973. In its Request for Reconsideration, Crown requests that the Council modify the January 9, 1974, Order to permit it to determine the maximum allowable weighted average selling price for newsprint by (1) determining the maximum allowable selling price for covered newsprint manufactured in its own facilities pursuant to 6 CFR, Part 150, and (2) determining the maximum allowable transfer price for newsprint sold or transferred to it by Crown Zellerbach, Canada, Ltd., on the basis of the actual weighted average transfer price which is to be determined based on the actual current transfer price and weighted based on the actual purchase volume in the prior month, provided that such transfer price shall not exceed the prevailing delivered price charged by Crown Canada to customers in British Columbia by more than $4.50 per ton for 30 pound newsprint and $4 per ton for 32 pound newsprint. Crown further requests that for the purposes of (2) above, the term "transfer price" include a markup by Crown not to exceed its existing markup of $1.25 per ton. In the alternative, Crown requests that such transfer price be limited to the prevailing delivered price charged by other Canadian newsprint manufacturers selling in the Western market area. In support of its Request for Reconsideration, Crown principally contends that the provisions of paragraph (3) of the Order which are set forth in (3) above are contrary to law in that they restrict Crown to a far greater degree than do the provisions of 6 CFR, Part 150, Subpart K, and that such a restriction is clearly contrary to the provisions of 6 CFR 150.54 (d) which exempt all imported items. Crown further contends that to require exposition of a firm's labor and material costs when that firm is a bona fide domicile in a foreign jurisdiction is clearly beyond the power of the Cost of Living Council. The Cost of Living Council, having considered such Request for Reconsideration, has concluded that: (a) The pricing restrictions set forth in paragraph (3) of the January 9, 1974, Order ("the Order") do not constitute an error in law inasmuch as such restrictions are applicable only if Crown chooses to charge a single weighted average selling price for newsprint imported from Canada and newsprint manufactured domestically by Crown. Crown during Phase IV has always had the alternative of pricing imported newsprint in accordance with the provisions of 6 CFR, Part 150, Subpart K. (b) Further, the requirement set forth in paragraph (5) of the Order that Crown file quarterly reports with the Internal Revenue Service describing all sales made pursuant to the Order and the financial backup material of costs and revenues used to determine that such sales conform to the requirements of the Order does not constitute an error in law inasmuch as the requirement is applicable only if Crown avails itself of the relief provided in the Order. (c) Although Crown has failed to make a prima facie showing that the Council's initial action was erroneous in fact or law, Crown has provided evidence of new circumstances which indicate that the relief provided in the Order is not sufficient to correct the gross inequity which resulted from the application of the provisions of 6 CFR, Part 150, to Crown. (d) Recently, several Canadian newsprint manufacturers have announced substantial increases in the price of newsprint sold to customers in the Western market area of the United States to be effective on March 1, 1974. In response to an announced price increase by its major competitor, Crown's Canadian subsidiary has announced a similar price increase. (e) Pursuant to paragraph (3)(b) of the Order, the maximum allowable transfer price for newsprint sold or transferred to Crown by related foreign entities may exceed the actual weighted average transfer price that existed on December 1, 1973, only to reflect on a dollar for dollar basis increases in direct material and direct labor costs incurred since December 1, 1973. (f) Therefore, if Crown chooses to charge a single weighted average price for newsprint imported from Canada and newsprint that it manufactures domestically, it may not pass through the full amount of the price increase announced by its Canadian subsidiary. (g) Crown has indicated that if it is not permitted to pass through the full amount of such price increase, which it would be permitted to pass through pursuant to the provisions of 6 CFR, Part 150, Subpart K, it will change its historical distribution methods from supplying its inland customers with domestic newsprint and its coastal customers with Canadian newsprint to supplying proportionate shares of Canadian and domestic newsprint to each of its customers in order to avoid charging similar unrelated customers different prices for Canadian and domestic newsprint. (h) If Crown changes its historical distribution methods, it will incur substantial additional costs and will require substantial additional freight usage which will, in turn, impact on the rail transportation industry. (i) By permitting Crown to charge a single weighted average price for Canadian and domestic newsprint as set forth in the January 9, 1974, Order, the Council sought to avert the situation described in (g) and (h) above. (j) In its Request for Reconsideration, Crown contends that the provisions of paragraph (2)(c) of the Order which require Crown to determine the allowable selling price of domestically manufactured newsprint on the basis of prices charged on the last day of the prior month result in a gross inequity to Crown. (k) Inasmuch as Crown is a Price Category I firm, it is subject to the prenotification and cost justification requirements set forth in 6 CFR, Part 150, for its manufacturing activities. Requiring Crown to delay implementing price increases which have been approved by the Cost of Living Council in order to satisfy the provisions of paragraph (2) (c) of the Order would place restrictions on Crown which are not required of other Price Category I firms engaged in manufacturing or service activities. (1) Based on the considerations stated above, and the data submitted by Crown in support of its Request for Reconsideration, the Council has concluded that the application of the provisions of paragraphs (2) (c) and (3) of the January 9, 1974, Order, to Crown do not provide sufficient relief to alleviate the gross inequity to Crown. (m) Further, in defining the maximum allowable transfer price for newsprint sold or transferred to Crown by related foreign entities as set forth in paragraph (3) of the Order, the Council fully intended to permit Crown to utilize its customary markup of $1.25 per ton. IT IS THEREFORE ORDERED THAT: (1) Crown Zellerbach's Request for Reconsideration of the Council's January 9, 1974, Decision and Order is granted and that Decision and Order is modified as set forth below. (2) Crown shall determine the maximum allowable weighted average selling price that it may charge its customers for newsprint by: (a) Determining the maximum allowable "transfer price" of newsprint sold or transferred to it by related foreign entities in accordance with paragraph 3 below. (b) Determining the maximum allowable "transfer price" of newsprint sold or transferred to it by unrelated foreign and domestic firms based on the actual price to Crown of the newsprint purchased from each such unrelated firm during the prior month and computing the weighted average transfer price in effect on the last day of the prior month based on actual purchase volume in the prior month. (c) Determining the maximum allowable selling price for covered newsprint manufactured in its own domestic facilities that Crown charges its customers in accordance with 6 CFR, Part 150. (d) Determining the actual percentage of each type of newsprint discussed in (a) through (c) of this paragraph that comprised Crown's total sales of newsprint in the prior month. (e) Computing the maximum allowable weighted average selling price as follows: The maximum allowable transfer price from (a) above times the Total (maximum weighted average selling price) (3) Crown shall determine the maximum allowable "transfer price" for newsprint sold or transferred to it by related foreign entities for the purpose of paragraph (2) (a) above on the basis of the actual weighted average transfer price existing on March 1, 1974, which is to be determined based on the actual transfer price from each such related entity that was in effect on March 1, 1974, and weighted based on the actual purchase volume in the prior month. For purposes of this paragraph, the term "transfer price" shall include a markup not to exceed Crown's customary markup of $1.25 per ton. (4) If there is any decrease in the actual transfer price from related foreign entities to Crown, Crown shall reduce the maximum weighted average selling price in accordance with this Order. If there is any increase in the actual transfer price from related foreign entities to Crown, subsequent to March 1, 1974, Crown may reapply to the Council for review of this Order. (5) No later than 15 days after any price change pursuant to this Order, Crown shall file a report with the Internal Revenue Service (San Francisco District Office) of all calculations required by paragraphs (2), (3) and (4) above. (6) Within fifteen days after the end of each fiscal quarter, Crown shall file a report with the Internal Revenue Service (San Francisco District Office), which describes all sales made pursuant to this Decision and Order and the financial backup material used to determine that such sales conform to the requirements of this Order. Bert Concklin, Administrator, Office of Price Stabilization. Date: February 25, 1974. COMPLIANCE AND ENFORCEMENT By: Jack W. Duvall Assisted by: John B. Gussman The enforcement of price and wage regulations in Phases I through IV was predicated on the concept of "voluntary compliance," i.e., that most firms would comply with price or wage limits without the threat of enforcement. In keeping with this, violators were penalized primarily to establish the credibility of controls. This paper explores the philosophy of compliance, the succession of programs used to enforce the regulations, and evaluates the effectiveness of compliance management. The paper concentrates on price compliance, illustrating general themes and conclusions. Mr. DuVall is a native of California and a Phi Beta Kappa graduate of Colgate University. After three years as a Special Agent at the Air Force Office of Special Investigations, he joined the staff of the Price Commission in 1972, remaining with the Stabilization Program through Phase IV, when he was Chief of the Cost of Living Council's Industry Compliance Branch. Mr. Gussman, a 1974 graduate of Yale College is currently pursuing a Ph.D. in English at Princeton University. |