silly regulations that regulated how much gas could be put in a miner's tank that drove 250 miles to a coal mine.

So, lack of faith is sort of inbred throughout the membership, and it is real, and it is there, and the statement that we presented here today reflects that degree of cynicism. It is, I think, quite reflective of the memberships attitude on these matters.

Senator STEVENSON. The antitrust laws

Mr. CALDWELL. They aren't enforced.

This is one of the reasons why if you are going to set up a corporation, an oil and gas corporation, we see no reason why the Government shouldn't also set up a coal mine, set up a number of them for that matter, and be able to test a number of safer methods of mining and run some kind of a yardstick on that.

Not that it would be perfect or necessarily competitive. I don't think it could be with the operations you have now. It coundn't compete now basically because the operations you have now in private hands are pushing for that production at the risk of miners' lives on all too many occasions.

Senator STEVENSON. This corporation is authorized to develop shale. I neglected to point that out to Mr. Biemiller earlier.

All of its developmental activities are confined in the public domain.

Mr. CALDWELL. There is an awful lot of coal in the public domain. Senator STEVENSON. That is what I was getting at. You are speaking of the coal in the public domain?

Mr. CALDWELL. Yes sir. We don't see anything wrong with that as a comparison.

Senator STEVENSON. One of the purposes of this corporation is the hope that it can, in addition to developing public resources for the benefit of the public providing a yardstick, and a number of other purposes, also develop environmentally sound ways of extracting these resources, ways that do no violence to the health of the individuals involved and to our national resources.

It could perform that function with respect to coal, too.

Mr. CALDWELL. We sometimes find ourselves in these questions, as they say in my old home state, which used to be Texas, "between a rock and a hard spot."

Our environmental friends on the one hand feel, like we may be selling out environmental points, because we are concerned about our members' jobs, but on the other hand, the operators view our positions and testimony with great alarm as being dangerous to the health of the industry. In the case of strip mining and that sort of thing however, one of the things operators seem to forget, is that these are our backyards. Our people live there for the rest of their lives and the coal companies come and go.

So these are questions that have to be judiciously approached, it seems to us, but certainly, the public interest hasn't been given enough weight. There is no doubt about that.

Senator STEVENSON. Well, you're representing the public interest today. Mr. Caldwell, as the interest of your miners. I apologize again for the long wait.

Mr. CALDWELL. It is quite all right, Senator. Any time.

Senator STEVENSON. Thank you.

Mr. CALDWELL. Thank you, sir.

Senator STEVENSON. I have a statement from Senator Hart which I will place in the record. [The statement follows:]

STATEMENT OF HON. PHILIP A. HART, U.S. SENATOR FROM MICHIGAN

Mr. Chairman: Although we all are bombarded from many directions with the claim that competition is exceedingly keen in the energy industry, this bill shows that you have not been deceived by the siren's wail.

Obviously, I sincerely wish that such a proposal were not necessary. It would be far better-in my opinion-if we could let market forces control the allocation of resources and prices in the energy area. Unfortunately, as the industry is now structured, free enterprise is only a dream. With the dominance of most energy resources by a handful of companies-and with the intricate interweaving of business arrangements and interests between them-competition is one of lip service only.

A perfect example of the lack of competition, I think, are the figures on increases in profits for major oil companies for this quarter over the first quarter of 1973. Figures of 70 percent-120 percent—and, almost inconceivably of more than 700 percent-are ringing out from radio, TV and newspaper reports this week.

Last year, when similar and equally startling profit increases were being announced, the companies attempted to explain it all away by saying that 1972 "had been a very bad year."

A few days ago, I put into the Congressional Record, a tabulation done by Dr. Walter Measday, economist for the Senate Antitrust and Monopoly Subcommittee, which demonstrated that from 1962 to 1972, the oil companies did very well.

With your permission, I would like to see that memorandum reprinted in this record.

Other duties have made it impossible for me to follow all the testimony you have received this week on this bill. But newspaper reports on statements of one of the witnesses distress me and I would like to comment on that.

This was the testimony of John C. Sawhill, the new director of the Federal Energy Office.

According to the newspaper report, he suggested that recent price increases in gasoline and others soon to come-were "reasonable and necessary to encourage development of new energy sources."

This testimony-if it had come from the president of one of the major oil companies would not be surprising. But coming from the director of the FEOa body charged with protecting the public interest and not a group of stockholders-it is scary.

Mr. Sawhill suggested that we were apparently not in for much more “hurt" in the way of gasoline prices. Prices now are in the low 50s and he suggested they should level out at about 60 cents a gallon.

Mr. Chairman, let's say that Mr. Sawhill is right and we might see further price increases of 8 cents a gallon. Just pennies, right? Wrong. An eight cent price increase would mean $8 billion more out of consumers' pockets and into those of the major oil companies. That $8 billion would come on top of $15 billion in price increases which have already taken place over the past 15 months.

Already today many consumers are finding that when they pull into the station to buy a half tank of gas, they are paying about as much as they used to spend to fill up. On top of this, there are similar price increases for fuel oil, propane, diesel and other petroleum products. When you add it up it totals over $30 billion.

The irony is that Congress now is considering granting citizens some tax relief-via an increase of the deduction for each dependent. Nothing we are talking about-and labeling publicly as great tax relief-would come near replacing the money which has been transferred from consumers' pockets to those of the oil companies.

When we deal with such large figures, we tend to lose perspective. Let me reestablish this by pointing out that already consumers are spending more for

increases in prices of petroleum products than they spent any year for the war in Vietnam.

Worse, these price increases are multiplied in many cases in these inflationary times when they cause increases in products.

If we are to allow this type of "taxation" at the gas pump, and the fuel depot, it seems far more logical to me to do it as a tax and to use that money to fund something like the Federal Oil and Gas Corporation proposed in this bill. Otherwise, we are nriching private industry with no guarantee that that money will be put to use to alleviate the shortages.

Mr. Chairman, what this industry needs is not fatter profits, but a little competition.

This is why I endorse the Federal Oil and Gas Corporation-and why I urge you to reconsider my proposal for the government building new refineries to be sold off quickly to private enterprise.

We have learned over the years that the best way of getting a job done is to turn loose American businessmen-and let them compete in solving the problem. The dose of competition that would come from the new refineries, I think, would go far in controlling the spiraling prices of petroleum products. If you do not want to authorize the government to build the refineries-and sell them off-as I have proposed, then may I suggest that you change this bill to get more refinery capacity.

Presently, as the bill is drafted, the Federal Corporation "may" build refineries. May I respectfully suggest that the language be changed so as to "require" that a certain number of refineries be built.

This would deliver two benefits-additional refinery capacity which is seriously needed and inject some competition by establishing refineries not subject to the control of the major oil companies.

Mr. Chairman, let me comment on specific sections of the bill:

As I understand the theory behind the independent producer exemption from regulation, it is that the independent is really the one who is out looking for oil and natural gas and should therefore have an extra incentive. In 1972, the independent brought in more than five times as many new field gas wells than did the majors. But, it seems to me that the definition of independent producer now under consideration is too broad. Under the present proposal, it is my understanding that only the top 20 oil and gas companies out of more than 10,000 would be regulated.

Under the present structural definition of "independent", gas producers who are not integrated and oil producers who are not integrated in more than two stages and have less than 1% of domestic production would be exempt. Under this definition, Southern Louisiana Land & Exploration Co., which had natural gas production of 37 bef in 1971, according to the FPC, would not be regulated. Apparently, Pennzoil's recent action to spin off their pipeline would result in their being free of regulation on the natural gas side this company had 201 bef production in 1971.

General American Oil and Gas of Texas had 96 bef and since they are not integrated on the gas side would be deregulated.

If, however, we couple the present structural definition with the FPC's present small producer criteria of exempting those with less than 10 billion cubic feet per year production, we would up the number of regulated companies from 20 to about 60. This to me is necessary for consumer protection and certainly not unreasonable.

The other area of concern which I have is the method of establishing the area rates and the rates at the refinery. Under the proposal, the presently established litigative method is done away with and a rulemaking procedure is established. The argument is that this eliminates delay in ratemaking. However, rulemaking does not provide a good evidentiary forum and adequate record. Under this method, there is no cross examination, no opportunity to examine workpapers and no real evidentiary record made. I understand the concern for delay, but it seems to me that if the FPC were required to promulgate a decision within one year, or the rate would take effect, we would reduce delay while providing for due process.

Mr. Chairman, I close as I began by saying that the best possible solution to the problem in the energy area is restructuring. But, absent that, this bill is a responsible and necessary step.

FEBRUARY 27, 1974.

MEMORANDUM

To: Messrs. O'Leary and Bangert.

From: Walter S. Measday.

Subject: Financial Performance of Oil Companies.

The sharp increase in profits reported by major oil companies for the successive quarters and the year of 1973 has given rise to criticism. The standard rebuttal by the industry has been that the increases over 1972 are misleading, and that in fact oil companies have had a tough time for the past decade. The attached tables, it is hoped, will facilitate a comparison of the petroleum refining industry data from FTC's Quarterly Financial Reports with those from other manufacturing industries.

Two points should be noted. The refining industry is dominated by a group of major international companies, and the aggregate data largely reflect their operations. Firms which are pure crude producers, rather than refiners of integrated companies, are not included at all.

With these caveats in mind, several conclusions can be reached. First, on the 1962-1972 record-years which the industry generally considers depressed-the oil industry did at least as well as the average in other manufacturing, worse than some selected industries suggested in oil industry advertisements, but better than others which are not usually so cited.

Second, it is possible that the refining industry really turned in a much better than average financial performance. The capital structure of the oil industry may itself help to hold down rate of return figures. Finally, the industry was able to finance a much higher percentage of its growth through profits than the average manufacturing industry.

A. RATES OF RETURN, 1962-1972

Annual rates of return on stockholders' equity from 1962-72 are shown in appendix Table 1. It will be observed that the 11-year average for petroleum refining (11.22%) was somewhat above the average for all manufacturing (11.17%). This is also true of 7 of the 11 individual years; only in 1964-66 and 1972 were refining rates of return below the average for all manufacturing, and in the first three the difference was slight.

Rates of return are also shown for motor vehicles and equipment and for the iron and steel industry as examples of major industries which were more profitable than average in the one case and considerably less profitable in the other.

A noticeable characteristic of the latter industries is the variation in profits over the period shown. Leaving out 1970 (distorted by a fourth quarter GM strike), the automobile industry's rate of return varied from a low of 11.67% in 1967 to a high of 19.52% in 1965. While the steel industry was consistently below average, its rate of return fluctuated between 4.30% in 1970 and 10.25% in 1966.

In sharp contrast, petroleum industry profits from 1962 to 1971 (excluding 1972), fluctuated within a fairly narrow range. The low, 10.08%, occurred in 1962, a poor year for almost everyone but the automobile manufacturers. The high, 12.52%, came in 1967 when a reasonably good year for manufacturing generally was reinforced for the oil companies by the Arab-Israeli war.

This bears upon the petroleum industry argument that theirs is an exceedingly risky business. Even over an 11-year period, “risk” should show up in substantial variations in profitability. By this measure, both automobiles and steel face far more risks than petroleum.

B. FINANCIAL STRUCTURE

Appendix Table 2 shows year-end balance sheet data for 1962 and 1972, from Quarterly Financial Reports. The comparison between petroleum refining and "other" manufacturing points up several important aspects of the industry. It will be noted that current liabilities are a much smaller proportion of total liabilities and net worth in the petroleum industry (15.9%) than for other manufacturing corporations (24.4%). Details in the QFR show that this is because of relatively low levels of short-term bank loans and accounts payable. Differences in types of business may be a factor. But at the least it can be said that the oil companies have a cash flow sufficient to meet trade accounts promptly and to rely much less than other businesses generally on short-term bank credit, an advantage at today's interest rates.

Something similar appears with respect to long-term debt. The oil industry's relative long-term debt to public and institutional holders other than banks was just about at the all-industry average (14.7% of liabilities) and net worth) at the end of 1972. On the other hand, long-term bank financing was less than half as important to the oil companies (2.2%) as to the average firm outside the industry (5.1%).

The most significant difference, however, lies in the much higher proportion of stockholders equity in petroleum (60.6%) than in other manufacturing (51.9%). The contributing factor here is earned surplus, the sum of historic profits retained in the business-which was 41.0% of total liabilities and net worth for petroleum refiners, compared to an average of 34.4% for other manufacturing. In other words, the ratio of stockholders equity to total liabilities in petroleum refining is about 61:39, compared to 52:48 for the average non-oil manufacturing firm.

A final bit of evidence is the ratio of total stockholders equity to debt reported in the QFR. At the end of 1972, the net worth/debt ratio for petroleum refiners stood at 3.39, compared to 2.32 for all manufacturing. Among the 30 industries reported or derivable from the FTC data, only three had more favorable ratios: motor vehicles (4.22), drugs (4.12), and instruments and related products (3.69).

The effect of this is to make the oil companies look somewhat poorer than they really are, measured by the standard profitability approach of rate of return on net worth. For example, based on the 1972 financial structure, if total assets employed both in petroleum and in other industries earned 7% of their value as profits for the owners, the rate of return in petroleum refining would be 11.5%, a full two percentage points below the 13.5% for other manufacturing. In short, when oil companies are showing the same rates of return as the average of other manufacturing enterprises, they are in a real sense more profitable than the average.

C. GROWTH IN INVESTMENT

Appendix Table 3 shows the growth in invested capital (long-term debt and stockholders equity) in petroleum refining and in other manufacturing over a 10-year period from the end of 1962 through 1972. The petroleum industry accounted for roughly 15% of the total increase in capital investment in manufacturing the same percentage as it held of total assets both in 1962 and 1972. In other words, the petroleum industry experienced no greater difficulty in generating new capital than did the average industry.

There are differences, however, between petroleum and other industries in the sources of this new capital.

The contribution of long-term debt clarifies the balance sheet changes. Longterm bank financing was less than a third as important a source of new capital to the oil industry as to the average of other industries, while the public acceptance of oil company debt securities was slightly greater than for other industries. Nevertheless, the total increase in debt provided only 29% of the refining industry's new capital, compared to manufacturing. more than 35% for other

Conversely, the contribution of expanded net worth was considerably greater for the oil companies (71%) than for other companies (65%). Even in this category there was a sharp difference. Pressure on the petroleum refiners to issue new stock, and dilute existing equities, was much less than on other industries. The growth in earned surplus-i.e., the retention of profits earned during the period-provided 57% of the oil industry's new capital, compared to less than 47% in other manufacturing.

According to the industry, the period covered was one of hopelessly inadequate profit performance, permeated by low crude prices, gasoline price wars, and intense competition in other products. Nevertheless, the oil industry was at least as successful as the average manufacturing industry in securing new capital for asset expansion. And it was far more successful than the average in generating these funds internally, from its own profits, rather than being forced to approach the outside capital markets.

The record of the industry, in other words, gives a picture which is far different from any industry self-portrait which emphasizes its mediocre profitability over the past decade.

D. UNDERCOVERAGE OF CRUDE PRODUCERS

As stated at the outset, the QFR series covers petroleum refining, with integrated and independent refiners. It does not include companies primarily e