or for prior approval of the increase, they would be forced to roll back such prices to their fourth quarter period levels. The weight and inequity of this technicality on both government and private resources as revealed in the comment process resulted in the addition of the adjusted freeze price concept. The adjusted freeze price concept allowed firms to charge their Freeze price (the price at which at least 10 percent of transactions occurred during the first eight days of June) without having to prenotify. Because it was possible that a firm's Freeze price was lower than its base price (e.g., if the firm had a temporary special deal during those eight days) numerous sections had the "whichever is higher" language added. Transaction Proposed, Effective, "Transaction" means an arms-length sale or lease between unrelated persons and is considered to occur at the time & place a binding contract is entered into between the parties. "Transaction" means an arms-length sale or lease between unrelated persons and is considered to occur at the time of shipment in the case of products and the time of performance in the case of services. Allowing the adjusted Freeze price to be charged without prenotification required, for consistency's sake, that the transaction definition concur with the Freeze definition. Thus, the definition was adapted to mean the date of shipment or the date of performance (the Freeze definition) rather than the date the contract was entered into (the Phase II definition). Another consideration of the Council, other than the difficulty of recomputing Freeze prices to reflect contract rather than shipment prices, was the desire for restrictive regulations. The "shipment" definition as used during the Freeze is more restrictive than the contract definition because it has the effect of disallowing anticipated costs, which were more commonly included in contract prices. Contracts Proposed, Effective, The price specified in a contract for the sale of an item entered into after 9:00 p.m., e.s.t., June 12, 1973, and before August 13, 1973, with respect to any delivery or performance occurring after August 12, 1973, shall be subject to this part except that no prenotification shall be required with respect to payments which fall due before September 12, 1973. The price or prices specified in a contract for the sale of an item entered into before 9:00 p.m., e.s.t., June 13, 1973, with respect to any delivery or performance occurring after August 12, 1973, and before January 1, 1974, shall be allowable notwithstanding 150.73 of this part. For reasons similar to those justifying the shift in the definition of transaction and the addition of the adjusted Freeze price concept the Council chose to alter the proposed contract rules. With the transaction rule based on contracts in the proposed regulations, there was no need for a clause allowing delivery on contracts entered into before the second Freeze. Recent contracts would have established the adjusted Freeze price and therefore the contract would have been legal. Switching to the "shipment" definition of transaction, however, did create prob lems with respect to legal contracts entered into during Phase III. To maintain the legality of such contracts and at the same time enable the Council to monitor them, the new regulation was developed. This regulation made it possible for the many short-term contracts entered into prior to the Freeze to be delivered upon without CLC interference. However, longer-term contracts and contracts entered into after June 13 would continue under the scrutiny of the Council. Base Price Originally, the base price was to be the average price charged during the last fiscal quarter before January 11, 1973. Because many in private industry complained about the difficulty in computing an average price, the Council agreed to add a provision allowing the use of an accepted sampling method for calculating the base price of an item. Another change was that special temporary deals or allowances could be excluded in computation of the base price of an item. However, because many senior staff members felt that the original definition of temporary deal (not to exceed 93 days) was unique to the Phase II situation where the Freeze had lasted 90 days and the base period for the Freeze had been three days prior to its enforcement, the length was shortened to 31 days. (It was believed that this was the customary length for most special deals.) With respect to the base price of a new item, the rule as it applied to wholesale and retail firms was modified to provide that the product be priced within its appropriate merchandise or customer category. As proposed, a new item could have been priced in its own category, with mark up determined after two quarters of sales. Finally, the planned prenotification requirement for new items was dropped. Instead, the Council required quarterly reporting when a firm's new items had projected annual sales greater than $10 million. When all new items were not projected to exceed $10 million, reporting was required for each new item itself with projected annual sales of $1 million or more. Base Cost Period After the Cost of Living Council established the base period for costs and prices, it had to determine how the costs and prices would be measured. The base price, as mentioned above, was to be determined by sampling prices during the quarter. The base cost, as proposed, was to be the costs incurred on the last day of the quarter. For those costs that could not be measured directly on the last day (e.g., general administrative costs), an average throughout the base period could be used. The Council believed that this scheme would most nearly match costs and prices during the base period. The private sector, however, did not think this approach was equitable. Many firms pointed out that rising costs during the fourth quarter would result in the highest costs on the last day. These highest costs would be compared to base prices that were averages. The firms objected to this cost absorption and recommended development of a formula that would allow higher base prices. The Council, wanting to be restrictive rejected this proposal and chose instead to adjust the method of base cost calculation. The primary adjustment to the cost calculation was the switching of the day on which costs would be measured from the last day of the fiscal quarter ending before January 11, 1973 to the first day of that quarter. This effectively resulted in firms acquiring an extra three months of cost justification from which to compute allowable price increases. Current Cost Period In an action to give firms the ability to pass through increased costs more quickly, the Council also changed the definition of the current cost period. As proposed, the current cost period was the last fiscal quarter preceding the prenotification. This meant that a firm with quarters ending on March 31, June 30, September 30, and December 31, that wished to raise a price on December 1 would have to use data from the quarter ending September 30 to justify the costs. Since many prices were rising rapidly, the inability to use the October and November cost data could significantly hurt the firm's ability to raise prices to cover the increased costs. In addition, firms opposed the proposed requirement to average steeply rising costs over a three month period. This also would result in less cost justification. As a consequence of the comments complaining that this was unfair, the Council changed the definition of the current cost period to be the last accounting period prior to the prenotification. Since most firms have monthly accounting periods, the firms could use November costs to justify price increases, and thus not be forced to absorb so much cost. One final change with respect to the current cost period was the date on which costs were to be measured prior to the prenotification. Rather than taking the costs on the last day of the accounting period preceding the prenotification, firms were allowed to measure costs on the day preceding the prenotification. For most costs this adjustment would have little impact because the firm would choose, for administrative convenience, to prenotify at the end of accounting periods. However, if a labor contract was to become effective in the middle of an accounting period, this shift enabled the firm to immediately prenotify the cost increase and thus reduce the delay before the increase could be recovered in higher prices. Prenotification Two significant alterations were made to the prenotification requirements. The first change allowed a waiver of prenotification for a price Category I firm's products that met three criteria: (1) if annual sales or revenues of less than $100 million in the two-digit SIC industrial group for which waiver is sought; (2) if annual sales or revenues of the entity for which waiver is sought is less than $100 million and (3) if the firm has less than 5 percent of the market covered by a four digit SIC code within a two-digit group for which waiver is sought. This considerably reduced the administrative burden on some conglomerates. The other modification adjusted the 'start' of the thirty-day prenotification clock. As proposed, thirty days after the Council received notification of a price increase, a firm could implement the price increase unless otherwise instructed by the Council. In their comments, many firms feared that the Council would wait until it had already completed most of its review before acknowledging receipt of the application. The firm's view was that this was a breach of due process. To allay these fears, the Council amended the final regulations so that a prenotification would be considered to have been filed when it had literally been stamped and dated in the Council mail room. Reporting A significant alteration in the reporting requirements was that firms that did not increase any item prices above the higher of its base price or adjusted freeze price coud file a certificate of no price increase in lieu of the previously required quarterly report. Another action reducing the reporting burden was deletion of the requirement of annual reporting by price Category III firms. Both of these changes occurred because of the number of comments about the unnecessary administrative burden created by the two proposed reporting requirements. Retail and Wholesale Another change was in the retailers' and wholesalers' unique regulations. As proposed there was no provision for the use of customary initial percentage markups as a means of control; only gross margins could be used to control prices. Once again, public comments and meetings with the industry and accountants revealed the number of firms that used customary initial percentage markups rather than gross margins in their traditional business practice. This dictated that either method would have to be allowed for compliance and reporting purposes. De Minimus Activities In both the manufacturing and service and the wholesale and retail subparts, language was added in the final regulations to allow relatively minor activities in one area to be reported on the basis of the firm's major activities. If the minor activities comprised both (1) less than $50 million and (2) less than 10 percent of the firm's sales, then the firm could report all of its sales in accordance with the regulations that pertained to the bulk of its activities. The ability to lump those activities into the reporting of the firm's primary functions was expected to considerably reduce the administrative workload for the firms affected. Maximum Price Increase Proposed, Effective, In the case of a prenotified percentage price increase authorized under Subpart H of this part which is not more than 10 percent, the price charged for any one item in that line may not exceed 110 percent of the base price of that item. In the case of a prenotified percentage price increase authorized under Subpart H of this part which is more than 10 percent, the percentage price increase above the base price which may be charged for any one item may not exceed the prenotified percentage price increase authorized under Subpart H of this part. A firm which is authorized to charge a prenotified percentage price increase pursuant to Subpart H of this part, and any other firm which qualifies to charge a percentage price increase with respect to a product line or service line by virtue of cost justification determined in accordance with this part, shall apply that percentage price increase on a weighted average basis (in accordance with instructions which accompany forms issued pursuant to Subpart H of this part) so that, for any fiscal quarter the weighted average of all price increases and price decreases in that line does not exceed that percentage price increase. However, the maximum price which may be charged for any one item in that line may not exceed 110 percent of the base price or 110 percent of the adjusted freeze price of that item (whichever is greater) plus the amount which results from multiplying the base price or the adjusted freeze price of that item (whichever is greater) by the percentage of cost justification determined in accordance with this part with respect to the product line or service line. Another important change to the manufacturing and service subpart was the modification of the rule limiting the maximum price increase for any one item within a product or service line. Instead of allowing a maximum price increase of 10 percent over the base price, the maximum price increase for any product during any fiscal quarter was corrected to be 10 percent over the greater of the base price or adjusted freeze price of the item plus the percentage of cost justification times the greater of the adjusted freeze price or the base price. This alteration, it was thought, would accommodate those industries in which some specific product costs were expected to rise substantially in the fall of 1973. Exemptions Two exemptions were altered as a result of the comment process. Proposed, Effective, Prices charged for lumber or wood products described in the Stand- The exemption of certain coal contracts was altered because the scope of the proposed exemption did not reflect the structure and practice in the industry. The original provision required that a contract with a public utility be eight years or more in duration and be entered after August 1, 1973. The fact that this exempted very few coal contracts prompted the coal industry to respond en masse with suggestions about contract terms appropriate to achieve the intent of the exemption. Conclusion Having summarized the major changes that transpired in the regulations between their initial publication in July and their final promulgation on August 9, one sees that the changes demonstrate an effort on the part of the regulators to appreciate and reflect in the regulations the dilemmas of the regulatees. The process was unprecedented in the history of the Economic Stabilization Program. Its strength lay in the fact that the cooperation of businesses during the difficult period of late 1973 and early 1974, was improved because of this good faith effort. |